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Arbitration Clauses Are Not Always Enforceable

Two recent California Courts of Appeal decisions illustrate possible pitfalls in defendants’ attempts to compel arbitration of an employment dispute.

In Garcia v. Haralambos Beverage Co., 2021 DJDAR 118, the Second District Court of Appeal upheld the trial court’s order denying defendant’s motion to compel arbitration, despite arbitration agreements signed by the plaintiffs.  The Court found that defendant had waived its right to compel arbitration.

The Court noted that arbitration is not a matter of absolute right and can be waived, citing Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 991: “In determining waiver, a court can consider (1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party.”

In Garcia, defendant had initially asserted arbitration as an affirmative defense, but did not actually move to compel arbitration until almost two years into the class action litigation.   Defendant claimed it waited to make the motion to compel arbitration until it was able to locate the actual signed copies of the agreement to arbitrate.  The court found that explanation unreasonable, particularly given that defendant was aware of its own policy requiring arbitration and had checklists showing that plaintiffs had received a copy of the arbitration agreement.  The court also found that defendant acted in a manner inconsistent with its right to arbitrate by representing in two status conference statements that it did not intend to arbitrate. The court also noted that defendant’s delay, during which time discovery went forward, impaired plaintiffs’ ability to realize the benefits and efficiencies of arbitration.

In Ali v. Daylight Transport LLC, 2021 DJDAR 87, the First District Court of Appeal rejected defendant’s arbitration agreements as procedurally and substantively unconscionable.  Defendant, a trucking company, had contracts with independent truck drivers.  The drivers entered into agreements that included an identical arbitration provision. Defendant moved to compel arbitration of a class action filed by plaintiff drivers.  The court cited several aspects of the arbitration provision in finding it unconscionable under California law, including the facts that (1) defendant was in a superior bargaining position and presented the contracts on a take it or leave it basis; (2) the arbitration provision contained an unreasonably short 120-day limitations period; and (3) the parties were required to split the cost of arbitration, which would cost plaintiffs more than litigation filing fees.

While California courts continue to favor resolution of disputes through arbitration (see Alan Steinbrecher’s post of November 3, 2020), these cases demonstrate that the courts will scrutinize carefully both the content of the arbitration provision and the moving parties’ conduct before compelling arbitration.  It is especially important that a business hoping to rely on an arbitration clause in a contract review the language of that clause with an attorney before finalizing the contract.