Former Restaurant Workers Must Arbitrate Because Pact Is Not Substantively Unfair

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By Kevin P. McGowan

Two former Darden Restaurants Inc. employees in California must arbitrate their sexual harassment, retaliation, and related state law claims because the arbitration agreements they signed when hired are enforceable under the California Arbitration Act, the state appeals court ruled June 4 (Leos v. Darden Rests. Inc., Cal. Ct. App., No. B241630, unpublished opinion 6/4/13).

After Alexis Leos and Jennifer Stucker sued Darden under the California Fair Employment and Housing Act and state common law, alleging harassment, retaliation, constructive discharge, and wrongful termination, Darden moved to compel arbitration under its dispute resolution process, which both plaintiffs had signed when they were hired.

But a state superior court denied the motion to compel, ruling the DRP's arbitration provision was unconscionable and therefore unenforceable under California law.

On appeal by Darden, the California Court of Appeal noted that in order to be held unenforceable under applicable state precedent, a mandatory arbitration agreement must be both procedurally and substantively unconscionable.

Procedural unconscionability focuses on “oppression” or “surprise” to the person signing the agreement because of unequal bargaining power while the substantive inquiry focuses on whether the agreement's terms cause “one-sided” or “overly harsh” results favoring the employer, the court said.

Since Leos and Stucker had to sign a DRP acknowledgement as a condition of employment, were unable to negotiate the DRP's terms, and had no meaningful choice in the matter, the arbitration pact was “oppressive and procedurally unconscionable,” the appeals court said.

But the plaintiffs cannot show the terms of the arbitration provision in the 14-page DRP were substantively unconscionable, the appeals court decided. The superior court therefore erred in holding the DRP unenforceable, and on remand, the court must grant Darden's motion to compel arbitration, the appeals court ruled.

Plaintiffs Cited Pact's Alleged Flaws
Leos and Stucker argued that since the DRP states it “may be updated from time to time as required by law,” Darden reserved the right to alter the DRP “at its sole discretion,” making it an illusory agreement that is substantively unconscionable.

The appeals court, however, said under California law, an employer's “unilateral” right to modify an arbitration pact is not unfettered but rather “subject to the limitation imposed by the covenant of good faith and fair dealing.” The DRP provision, which includes the phrase “as required by law,” indicates that Darden's ability to change the arbitration provision is constrained by such state law dictates, the court said.

“In our view, the modification clause is neither overly harsh [nor] so one-sided as to shock the conscience,” Justice Robert M. Mallano wrote for a three-judge panel. “We fail to understand how a clause permitting a modification as required by law can itself be unlawful.”

“If a particular modification is required by law, then the change is necessary to avoid the very result that plaintiffs seek here--the invalidation of the arbitration provision,” the court said. “An employer should not be bound in perpetuity by the terms of an existing arbitration provision if a judicial decision or statute renders the provision invalid in some respect.”

Leos and Stucker also argued that the modification clause allows Darden to require that only employee claims be submitted to arbitration, thereby exempting the company's own potential claims against employees from the arbitration process. That would subvert the mutuality of commitment required for an enforceable agreement, the plaintiffs argued.

But the court said that type of modification--an employer exempting its claims from the arbitration process--would not be “required by law” and also would be inconsistent with the covenant of good faith and fair dealing, which is read into every valid arbitration agreement.

“In sum, the clause granting Darden the right to modify the arbitration agreement in accordance with the law does not render arbitration illusory; employees and Darden are both required to submit DRP-eligible claims to arbitration,” Mallano wrote. “Nor is the modification clause substantively unconscionable.”

Arbitrator Can Ease Pact's Limits
Leos and Stucker argued that DRP provisions that limit discovery, require the arbitration hearing to start no later than 90 days after the arbitrator is selected, and limit the hearing to two days disadvantage employees and render the pact unconscionable.

But the court pointed out that the pact permits the arbitrator to grant additional discovery and to extend the hearing if needed to deal with more complex cases. The DRP also refers to American Arbitration Association rules for selection of the arbitrator and conducting the hearing, the court said.

“In short, because the DRP's limitations on discovery, the timing of the hearing, and the length of the hearing are subject to change upon the arbitrator's determination of good cause, the limitations do not render the arbitration agreement unconscionable,” the court said.

Leos and Stucker said a provision that employees must pay for a court reporter to transcribe the arbitration hearing if they choose to use one makes the agreement unconscionable. But the court said the cost of transcription is “not unique to arbitration” and employees who pursue their legal claims in court also would have to pay for a court reporter's transcript.

And a DRP cause allowing the parties in arbitration to pursue certain “provisional” remedies in court, such as temporary injunctions or restraining orders, does not unfairly tilt the agreement in Darden's favor, the court said.

The plaintiffs argued Darden could use the provisional proceedings clause to avoid arbitration on the employer's claims, while employees would be compelled always to arbitrate their disputes with the employer.

But the court said the California Arbitration Act contains a provisional proceedings section similar to the DRP provision. Even if the DRP provision were one-sided, Darden would have to comply with the state statute regarding permissible court remedies for employees otherwise compelled to arbitrate, the court said.

“Put another way, an arbitration agreement governed by the CAA permits a party to seek provisional remedies, such as a preliminary injunction, in court even if the arbitration provision does not expressly authorize the parties to seek such relief,” Mallano wrote. “We fail to see how the provisional relief clause in the DRP is unconscionable given that [the CAA section] would be read into the DRP in any event. We are aware of no authority for the proposition that a right conferred by the CAA may be unconscionable.”

Class Action Waiver Not Relevant
The DRP provides that the arbitrator has “no right or authority” to hear or rule on “any dispute brought by any person as a class action, collective action, or on behalf of any other person or entity” or to certify as a class any group of employees, former employees, or job applicants.

Leos and Stucker argued this provision conflicts with the National Labor Relations Act, as interpreted in D.R. Horton, 357 NLRB 184, 192 LRRM 1137 (2012) (5 DLR AA-1, 1/9/12), and therefore renders the arbitration pact unenforceable.

But the DRP's class arbitration prohibition has no effect on the plaintiffs, who are pursuing individual claims and not class or collective actions, the court said. In any event, the court agreed with other California state appeals court divisions that D.R. Horton does not invalidate class or collective action waivers in an arbitration agreement, Mallano wrote.

Justices Frances Rothschild and Victoria G. Chaney joined in the decision, which was designated as not for publication.

Douglas N. Silverstein of Kesluk & Silverstein in Los Angeles and Steven M. Rubin in Los Angeles represented Leos and Stucker. Beth A. Gunn and Jennifer L. Katz of Ogletree Deakins Nash Smoak & Stewart in Los Angeles represented Darden.



Text of the court opinion is available at /uploadedfiles/BNA_V2/Images/From_BNA_V1/News/leos(2).pdf.

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