News
Labor/Employment
Aug. 15, 2002
Including an Opt-Out Provision Can Make Arbitration Clause Enforceable
Focus Column - By Michele C. Coyle and Margery M. Fernald - Can a California employer successfully avoid litigating the enforceability of a mandatory arbitration provision? The answer appears to be yes. On March 22, the 9th U.S. Circuit Court of Appeals determined that an employee who failed to sign an opt-out provision must arbitrate his state law employment claims.
Focus Column
By Michele C. Coyle and Margery M. Fernald
Can a California employer successfully avoid litigating the enforceability of a mandatory arbitration provision? The answer appears to be yes. On March 22, the 9th U.S. Circuit Court of Appeals determined that an employee who failed to sign an opt-out provision must arbitrate his state law employment claims.
Circuit City v. Ahmed, 283 F.3d 1198 (9th Cir. 2002), and Circuit City v. Adams, 279 F.3d 889 (9th Cir. 2002), are two similar cases against Circuit City involving Circuit City's mandatory dispute-resolution program, which requires participants to resolve via arbitration any employment-related disputes.
In November 1999, the appeals court concluded that neither Mohammad Ahmed nor Saint Clair Adams need arbitrate their claims under California's Fair Employment and Housing Act (Government Code Section 12900 et seq.) because the Federal Arbitration Act (9 U.S.C. Section 1 et seq.) did not give courts authority to enforce arbitration provisions in employment contracts. Adams v. Circuit City Stores Inc., 194 F.3d 1070 (9th Cir. 1999); Ahmed v. Circuit City Stores Inc., 195 F.3d 1131 (9th Cir. 1999).
In March 2001, the U.S. Supreme Court agreed to review Adams' case. The court concluded in a 5-4 decision that the Federal Arbitration Act does cover employment contracts. Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001). In remanding both cases, the Supreme Court reversed the ruling in Adams and vacated the ruling in Ahmed.
Upon employment with Circuit City, each new employee receives an Issue Resolution Package. The package contains an Associate Issue Resolution Handbook, the Circuit City Dispute Resolution Rules and Procedures and a Circuit City "Opt-Out" Form. The employee has 30 days to mail the opt-out form to Circuit City.
The materials in the package explain that a failure to mail the opt-out form within the prescribed time frame will result in the employee's automatic participation in the arbitration program, thus requiring the employee to arbitrate all legal disputes stemming from employment with Circuit City.
When the employee receives the package, the employee receives and signs what is called the "Associate Receipt of Issue Resolution Package." This receipt verifies that the employee received the Associate Issue Resolution Handbook, the Circuit City Dispute Resolution Rules and Procedures and the Circuit City Arbitration Opt-Out Form.
The receipt includes the following language: "I will read the materials carefully and call the Associate Cool Line or consult with my local Personnel Manager if I have any questions. I understand that I may consult with an attorney if I have any questions regarding my legal rights.
"I understand that participation in the Issue Resolution is voluntary. If I do not wish to participate in the arbitration component of the Program, however, I must send a completed 'Circuit City Arbitration Opt-Out Form,' which is included with this package.
"I must send the Opt-Out Form via U.S. mail (do not use intercompany mail) to the above address within 30 calendar days of the date on which I signed below. I understand that if I do not mail the Form within 30 calendar days, I will be required to arbitrate all employment-related legal disputes I may have with Circuit City."
While the Associate Issue Resolution Handbook received by Ahmed included the opt-out form, Adams received no opt-out form.
Instead, Adams signed an employment application that included the following provision: "I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example, only, such claims include claims under federal, state, and local statutory common law ... ."
As it turns out, this language doomed Circuit City's efforts to arbitrate this employment dispute largely because it failed to incorporate an opt-out opportunity.
Adams was hired as a sales counselor in Circuit City's store in Santa Rosa. Two years later, Adams filed an employment discrimination lawsuit against Circuit City in state court asserting claims under California's Fair Employment and Housing Act.
In determining whether Adams must arbitrate his claim against Circuit City, the 9th Circuit relied on the California Supreme Court's ruling in Armendariz v. Foundation Health Psychcare Services Inc., 6 P.3d 699 (Cal. 2000), that an arbitration agreement was unconscionable only if it is both procedurally and substantively unconscionable.
Procedural unconscionability considers the relative bargaining power of the parties as well as how clearly the contract discloses its terms. Substantive unconscionability considers whether the terms of the contract itself are unduly harsh or oppressive. The court determined the Adams arbitration provision to be procedurally unconscionable because it was a contract of adhesion.
In other words, Circuit City's superior bargaining power as the employer that drafted the arbitration agreement and made arbitration a prerequisite to employment left employees with two options: sign the arbitration agreement or forfeit a position with Circuit City.
The arbitration agreement was substantively unconscionable because it limited the relief available to employees, required the employee to pay half the arbitration costs and did not require Circuit City to arbitrate its claims against employees.
In reversing the lower court's decision in Adams, the 9th Circuit explained: "Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City's side of the scale should an employee dispute ever arise between the company and one of its employees. We conclude that such an arrangement is unconscionable under California law."
California law grants courts discretion to either sever unconscionable portions of a contract or simply to refuse to enforce the contract. Civil Code Section 1670.5(a). Here, the court considered severing only the objectionable provisions of the contract. After determining that the court would essentially need to rewrite the entire contract, it concluded that the objectionable provisions were too numerous to be severed.
That the same three-judge panel heard both the Adams and Ahmed cases and arrived at opposite conclusions underscores the importance of the opt-out provision used by Circuit City. In ruling that Ahmed must arbitrate his claims, the 9th Circuit observed: "This case raises identical issues to those we addressed in Circuit City v. Adams ... with one important difference: in this case, Ahmed was given a meaningful opportunity to opt out of the arbitration."
The history of Ahmed's employment with Circuit City is very similar to Adams' history. Ahmed began working for Circuit City as a sales counselor in March 1995. In April 1995, Circuit City initiated a dispute-resolution program. Ahmed signed the receipt acknowledging receipt of the dispute-resolution program materials, including the opt-out form. He never signed or returned the opt-out form.
Under Circuit City policy, current employees could opt out of the dispute-resolution program and still keep their jobs. However, the materials stated in several places that failure to sign and return the opt-out form within 30 days would mean the employee was required to arbitrate "all employment related legal disputes" with the company. Ahmed filed his California Fair Employment and Housing Act suit against Circuit City and three co-workers in December 1997.
The same three-judge panel heard both the Adams and Ahmed cases on appeal. Circuit City's inclusion of the opt-out form in Ahmed's dispute-resolution program materials accounted for the divergent conclusions. In ruling that Ahmed had to arbitrate his claims, whereas Adams did not, the 9th Circuit stated: "[T]his case lacks the necessary element of procedural unconscionability. Ahmed was not presented with a contract of adhesion because he was given the opportunity to opt-out of the Circuit City arbitration program by mailing a simple one-page form."
The court found there were no other elements of procedural unconscionability because the arbitration agreement's terms were clearly explained in both the written materials and videotape. Employees were given an ample opportunity to question any aspect of the opt-out option.
Ahmed argued that he lacked the sophistication to understand the opt-out provision and that 30 days was an insufficient time in which to make his decision. The court rejected these arguments.
In the court's view, the facts of Ahmed's case failed to bring into play the first prong of its two-part test, the procedural unconscionability prong. The court therefore saw no need to address the second prong of the test, substantive unconscionability, and did not waste any further resources by doing so.
Employers desiring to implement a dispute-resolution program with mandatory arbitration provisions should consider incorporating into their program the elements analyzed and approved by the court in Ahmed. Those elements are:
• Materials clearly describing the dispute-resolution program.
• Materials clearly describing the rules and procedures.
• A simple opt-out form.
• A simple and clear explanation of applicable deadlines.
• A receipt using the language approved by the Ahmed court.
When presenting a new employee with such a package, one that includes an opt-out form - for which a receipt is signed - and clear instructions and deadlines that the employee must follow to opt-out, the employer will likely avoid subsequent arguments that the package is one-sided or coercive.
Employers that rely on existing mandatory arbitration provisions as a part of their dispute-resolution programs will want to review those provisions to make sure that they offer more than a take-it-or-leave-it option and otherwise avoid the contract-of-adhesion concerns addressed and condemned by the Ahmed court.
Ahmed provides overdue guidance on how to draft and enforce mandatory arbitration provisions in the employment context. Armed with this guidance, there is no time like the present to review existing dispute-resolution programs and, at a minimum, incorporate the opt-out and receipt provisions discussed in this article.
Michele C. Coyle is a partner in the Los Angeles office of Hogan & Hartson, where her active labor and employment practice focuses on representing management concerning workplace legal issues. Margery M. Fernald is a research analyst with the firm.
By Michele C. Coyle and Margery M. Fernald
Can a California employer successfully avoid litigating the enforceability of a mandatory arbitration provision? The answer appears to be yes. On March 22, the 9th U.S. Circuit Court of Appeals determined that an employee who failed to sign an opt-out provision must arbitrate his state law employment claims.
Circuit City v. Ahmed, 283 F.3d 1198 (9th Cir. 2002), and Circuit City v. Adams, 279 F.3d 889 (9th Cir. 2002), are two similar cases against Circuit City involving Circuit City's mandatory dispute-resolution program, which requires participants to resolve via arbitration any employment-related disputes.
In November 1999, the appeals court concluded that neither Mohammad Ahmed nor Saint Clair Adams need arbitrate their claims under California's Fair Employment and Housing Act (Government Code Section 12900 et seq.) because the Federal Arbitration Act (9 U.S.C. Section 1 et seq.) did not give courts authority to enforce arbitration provisions in employment contracts. Adams v. Circuit City Stores Inc., 194 F.3d 1070 (9th Cir. 1999); Ahmed v. Circuit City Stores Inc., 195 F.3d 1131 (9th Cir. 1999).
In March 2001, the U.S. Supreme Court agreed to review Adams' case. The court concluded in a 5-4 decision that the Federal Arbitration Act does cover employment contracts. Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001). In remanding both cases, the Supreme Court reversed the ruling in Adams and vacated the ruling in Ahmed.
Upon employment with Circuit City, each new employee receives an Issue Resolution Package. The package contains an Associate Issue Resolution Handbook, the Circuit City Dispute Resolution Rules and Procedures and a Circuit City "Opt-Out" Form. The employee has 30 days to mail the opt-out form to Circuit City.
The materials in the package explain that a failure to mail the opt-out form within the prescribed time frame will result in the employee's automatic participation in the arbitration program, thus requiring the employee to arbitrate all legal disputes stemming from employment with Circuit City.
When the employee receives the package, the employee receives and signs what is called the "Associate Receipt of Issue Resolution Package." This receipt verifies that the employee received the Associate Issue Resolution Handbook, the Circuit City Dispute Resolution Rules and Procedures and the Circuit City Arbitration Opt-Out Form.
The receipt includes the following language: "I will read the materials carefully and call the Associate Cool Line or consult with my local Personnel Manager if I have any questions. I understand that I may consult with an attorney if I have any questions regarding my legal rights.
"I understand that participation in the Issue Resolution is voluntary. If I do not wish to participate in the arbitration component of the Program, however, I must send a completed 'Circuit City Arbitration Opt-Out Form,' which is included with this package.
"I must send the Opt-Out Form via U.S. mail (do not use intercompany mail) to the above address within 30 calendar days of the date on which I signed below. I understand that if I do not mail the Form within 30 calendar days, I will be required to arbitrate all employment-related legal disputes I may have with Circuit City."
While the Associate Issue Resolution Handbook received by Ahmed included the opt-out form, Adams received no opt-out form.
Instead, Adams signed an employment application that included the following provision: "I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example, only, such claims include claims under federal, state, and local statutory common law ... ."
As it turns out, this language doomed Circuit City's efforts to arbitrate this employment dispute largely because it failed to incorporate an opt-out opportunity.
Adams was hired as a sales counselor in Circuit City's store in Santa Rosa. Two years later, Adams filed an employment discrimination lawsuit against Circuit City in state court asserting claims under California's Fair Employment and Housing Act.
In determining whether Adams must arbitrate his claim against Circuit City, the 9th Circuit relied on the California Supreme Court's ruling in Armendariz v. Foundation Health Psychcare Services Inc., 6 P.3d 699 (Cal. 2000), that an arbitration agreement was unconscionable only if it is both procedurally and substantively unconscionable.
Procedural unconscionability considers the relative bargaining power of the parties as well as how clearly the contract discloses its terms. Substantive unconscionability considers whether the terms of the contract itself are unduly harsh or oppressive. The court determined the Adams arbitration provision to be procedurally unconscionable because it was a contract of adhesion.
In other words, Circuit City's superior bargaining power as the employer that drafted the arbitration agreement and made arbitration a prerequisite to employment left employees with two options: sign the arbitration agreement or forfeit a position with Circuit City.
The arbitration agreement was substantively unconscionable because it limited the relief available to employees, required the employee to pay half the arbitration costs and did not require Circuit City to arbitrate its claims against employees.
In reversing the lower court's decision in Adams, the 9th Circuit explained: "Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City's side of the scale should an employee dispute ever arise between the company and one of its employees. We conclude that such an arrangement is unconscionable under California law."
California law grants courts discretion to either sever unconscionable portions of a contract or simply to refuse to enforce the contract. Civil Code Section 1670.5(a). Here, the court considered severing only the objectionable provisions of the contract. After determining that the court would essentially need to rewrite the entire contract, it concluded that the objectionable provisions were too numerous to be severed.
That the same three-judge panel heard both the Adams and Ahmed cases and arrived at opposite conclusions underscores the importance of the opt-out provision used by Circuit City. In ruling that Ahmed must arbitrate his claims, the 9th Circuit observed: "This case raises identical issues to those we addressed in Circuit City v. Adams ... with one important difference: in this case, Ahmed was given a meaningful opportunity to opt out of the arbitration."
The history of Ahmed's employment with Circuit City is very similar to Adams' history. Ahmed began working for Circuit City as a sales counselor in March 1995. In April 1995, Circuit City initiated a dispute-resolution program. Ahmed signed the receipt acknowledging receipt of the dispute-resolution program materials, including the opt-out form. He never signed or returned the opt-out form.
Under Circuit City policy, current employees could opt out of the dispute-resolution program and still keep their jobs. However, the materials stated in several places that failure to sign and return the opt-out form within 30 days would mean the employee was required to arbitrate "all employment related legal disputes" with the company. Ahmed filed his California Fair Employment and Housing Act suit against Circuit City and three co-workers in December 1997.
The same three-judge panel heard both the Adams and Ahmed cases on appeal. Circuit City's inclusion of the opt-out form in Ahmed's dispute-resolution program materials accounted for the divergent conclusions. In ruling that Ahmed had to arbitrate his claims, whereas Adams did not, the 9th Circuit stated: "[T]his case lacks the necessary element of procedural unconscionability. Ahmed was not presented with a contract of adhesion because he was given the opportunity to opt-out of the Circuit City arbitration program by mailing a simple one-page form."
The court found there were no other elements of procedural unconscionability because the arbitration agreement's terms were clearly explained in both the written materials and videotape. Employees were given an ample opportunity to question any aspect of the opt-out option.
Ahmed argued that he lacked the sophistication to understand the opt-out provision and that 30 days was an insufficient time in which to make his decision. The court rejected these arguments.
In the court's view, the facts of Ahmed's case failed to bring into play the first prong of its two-part test, the procedural unconscionability prong. The court therefore saw no need to address the second prong of the test, substantive unconscionability, and did not waste any further resources by doing so.
Employers desiring to implement a dispute-resolution program with mandatory arbitration provisions should consider incorporating into their program the elements analyzed and approved by the court in Ahmed. Those elements are:
• Materials clearly describing the dispute-resolution program.
• Materials clearly describing the rules and procedures.
• A simple opt-out form.
• A simple and clear explanation of applicable deadlines.
• A receipt using the language approved by the Ahmed court.
When presenting a new employee with such a package, one that includes an opt-out form - for which a receipt is signed - and clear instructions and deadlines that the employee must follow to opt-out, the employer will likely avoid subsequent arguments that the package is one-sided or coercive.
Employers that rely on existing mandatory arbitration provisions as a part of their dispute-resolution programs will want to review those provisions to make sure that they offer more than a take-it-or-leave-it option and otherwise avoid the contract-of-adhesion concerns addressed and condemned by the Ahmed court.
Ahmed provides overdue guidance on how to draft and enforce mandatory arbitration provisions in the employment context. Armed with this guidance, there is no time like the present to review existing dispute-resolution programs and, at a minimum, incorporate the opt-out and receipt provisions discussed in this article.
Michele C. Coyle is a partner in the Los Angeles office of Hogan & Hartson, where her active labor and employment practice focuses on representing management concerning workplace legal issues. Margery M. Fernald is a research analyst with the firm.
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