Trial Magazine

Despite recent unfavorable court decisions, challenging forced arbitration agreements that violate general contract principles is crucial to protect employees’ rights.

In May, Uber announced that it would no longer enforce its arbitration agreement when employees file individual sexual assault or sexual harassment claims against the ridesharing company.¹ Lyft immediately followed suit.² This change does not apply to any other type of claim or class action waiver, but this half-step in the right direction may represent an unforeseen but welcome development from the “#MeToo” movement: increased public scrutiny that is pressuring employers to scale back their forced arbitration policies.

Moreover, federal and state lawmakers recently have mounted new efforts to prohibit employers from forcing employees to sign arbitration agreements as a condition of employment and waive their rights to adjudicate employment claims in court.³ In March, Washington became the first state to outlaw forced arbitration for claims made under state or federal antidiscrimination laws.⁴ While the lasting impact of these efforts remains to be seen, the harm that forced arbitration has inflicted on the U.S. workforce over the last three decades is undeniable.

More than half of the country's non-union private-sector employees (or more than 60 million workers) are subject to forced arbitration

Epic Systems Corp. v. Lewis—which held that forced arbitration agreements containing class or collective action waivers do not violate federal labor law⁵—is the latest in a series of anti-workers’ rights rulings by the U.S. Supreme Court since 1991.⁶ More than half of the country’s non-union private-sector employees (or more than 60 million workers) are subject to forced arbitration, and nearly 25 million employees (or 23 percent of the U.S. non-union private-sector workforce) have been forced to give up their rights to bring any form of class or collective action.⁷ The Court’s decision is sure to enhance these numbers.

While the legal framework continues to prove challenging, the shift in public opinion against forced arbitration is encouraging. And it is important to continue fighting back against this curtailing of workers’ rights by finding other ways to challenge forced arbitration in court. You should critically examine clients’ employment agreements based on general contract law principles, with a close eye on the following recurring (but not exhaustive) issues.⁸

Challenging Formation

Formation is particularly relevant today: An increasing number of employers solicit employees’ signatures electronically by methods such as requiring employees to click a box labeled “I accept” before being permitted to log into company systems. Often, employees do not remember signing these documents and sometimes insist that they did not sign them.

In such circumstances, you need to challenge the alleged consent to arbitrate. Although an electronic signature has the same legal effect as a handwritten signature, in several jurisdictions, a party asserting that a document bears the plaintiff’s electronic signature must submit sufficient evidence—such as showing the efficacy of the security procedure—to authenticate that signature.⁹ This is typically done through affidavits, and plaintiffs may challenge this evidence by pointing to conclusory assertions that do not explain how the employer concluded that the electronic signature belonged to the plaintiff. You could also point to inconsistencies in the evidence (for example, a time stamp that does not match up with the plaintiff’s employment dates) or clues that the declarant lacks personal knowledge about the plaintiff’s circumstances.

When formation is disputed, seek limited discovery and an evidentiary hearing pursuant to federal and state law. For example, §4 of the Federal Arbitration Act (FAA) provides that “[i]f the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof” either by a jury or bench trial.¹⁰

Courts in several jurisdictions have also permitted parties to engage in some discovery such as limited document requests, interrogatories, or depositions of the declarants proffered by the defendant prior to such a trial.¹¹

Discovery and evidentiary hearings can be powerful tools to invalidate arbitration agreements—particularly when witnesses are unprepared or lack personal knowledge about a company’s arbitration procedures. For example, in a recent case our firm litigated, the court granted a limited deposition of the declarant put forth by the employer that revealed that he lacked personal knowledge about the company’s security mechanisms and had perjured himself in his affidavit.¹²

Challenging Enforceability

Even when formation is proper, some courts have held that certain minimum requirements must be met to ensure that arbitration does not curtail an employee’s rights. These requirements include neutral arbitrators, adequate discovery, a written award, the ability to seek all types of relief available in court (including attorney fees and punitive damages), and no additional costs for the employee beyond what would be incurred in court.¹³ Of course, not all jurisdictions require that these minimum requirements be met.¹⁴

These requirements often go hand in hand with an analysis of whether an arbitration agreement is procedurally and substantively unconscionable. Unconscionability generally refers to “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”¹⁵ Generally, elements of both procedural and substantive unconscionability must be present for an agreement to be unenforceable.¹⁶

Procedural unconscionability is based on oppression or surprise that results from unequal bargaining power between the parties. In the employment context, courts examine whether the arbitration agreement is an adhesion contract, whether the employee had an opportunity to negotiate its terms, and each party’s bargaining position.¹⁷ Most arbitration agreements in the employment context are adhesion (“take-it-or-leave-it”) contracts containing some element of procedural unconscionability. Procedural unconscionability is enhanced when additional elements of oppression or surprise exist, such as when the arbitration agreement is buried in a pile of new-hire documents, the font used in the agreement is extremely small or illegible, or the employer fails to attach or link to the applicable arbitration rules.¹⁸

A court’s analysis for substantive unconscionability evaluates whether the agreement’s terms are overly harsh, lack mutuality, or are unreasonably favorable to the more powerful party—here, the employer.¹⁹ Substantively unconscionable terms may include unreasonable and often one-sided limits on discovery, such as limiting an employee’s ability to talk to witnesses or the number of discovery requests, unfair arbitrator selection provisions, unreasonably shortened statute of limitations, limits on an employee’s ability to seek administrative or other types of remedies, and imposing unreasonable costs on an employee.²⁰

Retaining the Court’s Jurisdiction

As long as a good-faith argument can be made that an arbitration agreement is unenforceable, it is often advantageous to file your complaint in court and force the employer to move to compel arbitration. Doing so puts the plaintiff’s complaint in the public record and makes the proceedings at least temporarily unbound by the limitations of arbitration.

Even when an arbitration agreement is found to be enforceable, you should request that the court matter be stayed, not dismissed, pending arbitration.²¹ This strategy allows the court to retain jurisdiction over the case and may make it procedurally easier to challenge an arbitration award or decision. Note, however, that this decision should be made on a case-by-case basis as dismissal may facilitate an immediate appeal of the order to arbitrate.

Seeking injunctive relief, which is narrowly available, is another strategy that may allow an employee to remain in court. Even when the parties do not dispute the enforceability of an arbitration agreement, courts have found that a party can seek injunctive relief to prevent irreparable injury, so long as the court is not deciding the core issue that the parties have committed to arbitration.²² While this injunctive relief carve-out often benefits employers seeking to protect trade secrets or enforce restrictive covenants, employee advocates should also consider whether seeking such provisional remedies would be beneficial, particularly when an employee has reason to believe that an employer is destroying evidence or engaging in other fraudulent behavior.

Changes at the State Level

In California, practitioners have an additional and unique tool to overcome forced arbitration and class action waivers: the Private Attorneys General Act (PAGA) of 2004. PAGA authorizes aggrieved employees to stand in the state’s shoes and file lawsuits to recover civil penalties on behalf of themselves, other employees, and the state for violations of the California labor code.²³ In 2014, the state’s high court held that arbitration agreements precluding representative PAGA actions were invalid as a matter of law and that the FAA does not preempt the state’s public policy to enforce wage laws on behalf of the state since the dispute was not between the employee and the employer, but between the state and the employer.²⁴

More recently, it has been reported that the Center for Popular Democracy plans to campaign for PAGA-like bills in other states.²⁵ In New York, for example, the “Empowering People in Rights Enforcement (EMPIRE) Worker Protection Act” introduced in 2017 is pending before the state legislature. It would authorize an aggrieved employee or employees or a representative organization to initiate a public enforcement action on behalf of the state for violating any provision of the state’s labor law.²⁶

Until Congress finally acts to limit the FAA’s impact in the employment context, it is up to employee advocates to challenge forced arbitration provisions on behalf of their clients and to support legislative efforts that will limit an employer’s ability to silence workers through forced arbitration.

Menaka N. Fernando is an associate and Jennifer S. Schwartz is a partner at Outten & Golden in San Francisco. They can be reached at mfernando@outtengolden.com and  jschwartz@outtengolden.com.

Notes

1. See Tony West, Turning the Lights On, Uber Newsroom (May 15, 2018), www.uber.com/newsroom/turning-the-lights-on/. This includes Uber drivers and passengers.
2. Megan Rose Dickey, Lyft Also Ends Arbitration Policy for Sexual Assault Claims, TechCrunch (May 15, 2018), https://techcrunch.com/2018/05/15/lyft-also-ends-arbitration-policy-for-sexual-assault-claims/. 
3. Ending Forced Arbitration of Sexual Harassment Act of 2017, S.2203, 115th Cong. (2017); see also Assemb. 3080, 2017–2018 Leg., 2018 Reg. Sess. (Cal. 2018); S. 7848A, 2017–2018 Leg. Sess., 2018 Reg. Sess. (N.Y. 2018). 
4. See S. 6313, 65th Leg. (Wash. 2018). This and other similar state efforts are likely to be challenged under FAA preemption principles. 
5. See 138 S. Ct. 1612 (2018) (consolidated with Morris v. Ernst & Young LLP, 834 F.3d 975 (9th Cir. 2016) and Murphy Oil USA, Inc. v. Nat’l Labor Relations Bd., 808 F.3d 1013 (5th Cir. 2015)).
6. See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). 
7. Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Economic Policy Inst. (Apr. 6, 2018), www.epi.org/publication/the-growing-use-of-mandatory-arbitration-access-to-the-courts-is-now-barred-for-more-than-60-million-american-workers/
8. Contracts generally are governed by state law, so practitioners must analyze arbitration agreements under the laws of the applicable jurisdiction. 
9. See Ruiz v. Moss Bros. Auto Grp., 232 Cal. App. 4th 836, 843 (Cal. Ct. App. 2014) (citing Cal. Civ. Code §1633.9 (West 1999) (“An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.”); see also Conn. Gen. Stat. §1-274 (2002); N.J. Stat. Ann. §12A:12-9 (2001). 
10. 9 U.S.C. §4 (1947). 
11. See, e.g., Hick v. Citigroup, Inc., 2012 WL 254254, at *2 (W.D. Wash. Jan. 26, 2012); Arguelles-Romero v. Super. Court, 184 Cal. App. 4th 825 (Cal. Ct. App. 2010). 
12. Shumway v. Trinet Grp., Inc., No. RG15794677 (Cal. Super. Ct. Nov. 25, 2015). 
13. See, e.g., Booker v. Robert Half Int’l, Inc., 413 F.3d 77, 80 (D.C. Cir. 2005); Cole v. Burns Int’l Sec. Serv., 105 F.3d 1465, 1482 (D.C. Cir. 1997); Armendariz v. Found. Health Psychcare Serv., Inc., 24 Cal. 4th 83, 102 (Cal. 2000).
14. See, e.g., Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. 2001); Raasch v. NCR Corp., 254 F. Supp. 2d 847, 857–58 (S.D. Ohio 2003). 
15. Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965); see also U.C.C. §2-303. 
16. See, e.g., Higgins v. Super. Court, 140 Cal. App. 4th 1238, 1249 (Cal. Ct. App. 2006).
17. See Baxter v. Genworth N. Am. Corp., 16 Cal. App. 5th 713, 722–24 (Cal. Ct. App. 2017); see also Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377, 382–84 (S.D.N.Y. 2002). 
18. See, e.g., Fitz v. NCR Corp., 118 Cal. App. 4th 702, 721 (Cal. Ct. App. 2004); Sosa v. Paulos, 924 P.2d 357, 362 (Utah 1996).
19. See Baxter, 16 Cal. App. 5th at 724; see also Isaacs v. OCE Bus. Servs., Inc., 968 F. Supp. 2d 564, 569 (S.D.N.Y. 2013).
20. See, e.g., Shankle v. B-G Maint. Mgmt. of Col., Inc., 163 F.3d 1230, 1235 (10th Cir. 1999); Baxter, 16 Cal. App. 5th at 724–36
21. See, e.g., Cal. Code Civ. Proc. §1281.4 (West 1961) (requiring courts to stay an action if a material issue has been submitted to arbitration); see also Titan/Value Equities Grp., Inc. v. Super. Court, 29 Cal. App. 4th 482, 487–88 (Cal. Ct. App. 1994).
22. See, e.g., Merrill Lynch, Pierce, Fenner & Smith Inc. v. Bradley, 756 F.2d 1048, 1053 (4th Cir. 1985) (“[W]here a dispute is subject to mandatory arbitration under the Federal Arbitration Act, a district court has the discretion to grant a preliminary injunction to preserve the status quo pending the arbitration of the parties’ dispute if the enjoined conduct would render that process a ‘hollow formality.’”); Alliance Consulting Inc. v. Warrior Energy Res. LLC, 2017 WL 3485004 (S.D. W. Va. Aug. 14, 2017) (denying plaintiff’s motion for a preliminary injunction after finding that such relief was not justified).
23. Cal. Lab. Code §§2698 et seq. (West 2004). 
24. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014). 
25. Josh Eidelson, California Helps Workers Sue Their Bosses. New York Has Noticed, Bloomberg (Sept. 29, 2017), https://www.bloomberg.com/news/articles/2017-09-29/california-helps-workers-sue-their-bosses-new-york-has-noticed.
26. S. 6426, 2017–2018 Leg., 2017 Reg. Sess. (N.Y. 2017).