Sparks v. Vista Del Mar: Arbitration Agreement In Employee Handbook Found Unconscionable

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Defendants who believed that the U.S. Supreme Court’s AT&T Mobility v. Concepcion decision marked the beginning of a golden era for arbitration are finding it more difficult to enforce arbitration clauses than anticipated, particularly where state law unconscionability doctrines are implicated.  Most recently, California’s Court of Appeal (Second Appellate District) has affirmed a trial court ruling denying the defendant’s petition to compel the arbitration of wrongful termination claims based on an arbitration clause set forth in the defendant’s employee handbook.  See Sparks v. Vista Del Mar Child and Family Servs., __ Cal. App. 4th __ (Cal. Ct. App. 2012) (available here).

The opinion, certified for partial publication, noted that “the United States Supreme Court in Concepcion did not eliminate state law unconscionability as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act” (slip op. at 7), with a bulky string citation to multiple precedents also holding that Concepcion did not nullify California’s unconscionability doctrine as applied to contracts purporting to require arbitration.  In addition to the authorities cited in Sparks, the decision echoes the unconscionability analysis of a recent federal district court ruling, Trompeter v. Ally Financial Inc.  No. 12-00392 (N.D. Cal. June 1, 2012) (order denying motion to compel arbitration) (Wilken, J.) (“Multiple elements render the agreement procedurally and substantively unconscionable, such that the arbitration agreement is void under California law.”) (available here).

Applying California’s unconscionability doctrine, the Sparks panel found the at-issue arbitration clause to be both procedurally and substantively unconscionable.  Procedural problems identified by the court include the following: (1) the arbitration clause was included within a lengthy employee handbook and not specifically called to the attention of plaintiff; (2) the plaintiff did not acknowledge or agree to arbitration; (3) the handbook stated that it was not intended to create a contract; and (4) since the handbook could be amended unilaterally by defendant, any agreement therein would be illusory.  Slip op. at 12-14.  As to substantive issues, the court found that the arbitration clause required employees to relinquish administrative and judicial rights under federal and state statutes, and it made no provision for discovery.  Id. at 14.  In addition, the rules referred to in the arbitration clause that would govern the arbitration process were not provided to plaintiff.  Id. at 2.

Sparks is notable for deciding an issue of considerable practical importance: whether an employer’s placement of an arbitration clause in an employee handbook suffices to bind employees to arbitrate.  The court’s answer is unequivocal, and speaks to the broader issue of fairness in the imposition of mandatory arbitration agreements: “The increasing phenomenon of depriving employees of the right to a judicial forum should not be enlarged by imposing upon employees an obligation to arbitrate based on one obscure clause in a large employee handbook distributed to new employees for informational purposes.”  Id. at 12-13.