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In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the California Supreme Court held that pre-dispute employment arbitration agreements were enforceable as to statutory discrimination claims provided the agreement contained procedural safeguards and was not otherwise unconscionable. The court’s decision raised a number of issues about the enforceability of pre- Armendariz agreements that contain arguably unconscionable provisions, as well as the scope of claims covered by Armendariz requirements. In February, 2 1/2 years after deciding Armendariz, the state Supreme Court sought to clarify some of these issues in Little v. Auto Stiegler, Inc., 29 Cal.4th 1064. In particular, Justice Carlos Moreno, writing for the majority, reaffirmed the court’s general commitment to enforceability of arbitration agreements, unless “the central purpose of the contract is tainted with illegality.” At the same time, the court expanded the scope of the Armendariz requirements to nonstatutory public policy claims and, in so doing, possibly ran afoul of the Federal Arbitration Act, 9 U.S.C. � � 1, et seq. In Little, a service manager at an auto dealership alleged that he was demoted, then terminated, for investigating and reporting warranty fraud. He filed an action against the dealership alleging claims for, among other things, tortious demotion and termination in violation of public policy –basically, for being a whistle-blower. Significantly, he sought no relief under the California Fair Employment and Housing Act or any other statute. The dealership moved to compel arbitration based on a standardized agreement that allowed either party to have any arbitration award exceeding $50,000 reviewed by another arbitrator. The reviewing arbitrator could reverse, remand, modify or reduce the award pursuant to the law and procedures applicable to a California court of appeal. Based on Armendariz, the trial court denied the employer’s motion to compel arbitration, but the court of appeal reversed, holding that Armendariz did not apply to nonstatutory claims, and that the arbitration agreement was not unconscionable insofar as both parties were bound to arbitrate their claims. The Supreme Court granted review. The Little court first took up the issue of whether the appellate provision in the arbitration agreement was unconscionable. Whether an agreement is unconscionable depends upon the degree to which it is both procedurally and substantively unconscionable. Since the court had no trouble in finding that the auto dealership’s standardized arbitration agreement was an adhesion contract, and hence nominally procedurally unconscionable, the court turned its focus on whether the agreement was substantively unconscionable. Substantive unconscionability concerns whether the terms of an agreement are “overly harsh” or unfairly “one-sided.” In Armendariz, the court identified one type of substantive unconscionability to be when an arbitration agreement lacked a “modicum of bilaterality.” Such would be the case where the employee was obligated to arbitrate his claims against the employer but the employer was not under the same obligation. In Little, the auto dealership argued that the appellate provision in the arbitration agreement was bilateral, and hence not substantively unconscionable, insofar as either side could appeal a decision over $50,000. The court found that, as a practical matter, only employers would be appealing decisions over $50,000, particularly since it would be unlikely that a reviewing arbitrator would increase an award. And while a unilateral provision can be justified by commercial need, the Little court found that the appellate provision in the auto dealership’s agreement was nothing more than an attempt to maximize the employer’s advantage at the expense of the employee and, for this reason, substantively unconscionable. This was the same conclusion reached by the court of appeal a month before Little in an auto dealership arbitration agreement in Fittante v. Palm Springs Motors, Inc., 105 Cal.App.4th 708 (2003). Having found the appellate provision in the arbitration agreement to be unconscionable, the court then turned its attention to whether the unconscionable provision should be severed or the entire agreement should be invalidated. The Supreme Court refused to enforce the arbitration agreement in Armendariz because it contained multiple unlawful provisions, indicating that the agreement was permeated by an unlawful purpose, and because there was no single provision in the agreement that could be severed. The Little court found that neither of these factors was present in the agreement before it. To the contrary, there was only a single stand-alone unconscionable provision that had to be severed in order to make the agreement enforceable. Nor was there any indication that the arbitration agreement was drafted in bad faith, since the law was unclear on this point at the time of drafting. The Little court accordingly severed the appellate provision in the arbitration agreement and enforced the remainder of it. By so doing, the court expressly endorsed a general policy of severing unconscionable provisions — rather than voiding the entire agreement — when possible, in order to conserve the contractual relationship of the parties and not to give one party an undeserved benefit or detriment. The Little court next addressed the question of whether the Armendariz procedural requirements — neutral arbitrator, no limitation on damages, adequate discovery, written arbitration decision, employer payment of costs unique to arbitration — applied to nonstatutory public-policy claims, otherwise known as Tameny claims. See Tameny v. Atlantic Richfield Co., 27 Cal.3d 167 (1980). A majority of four justices reasoned that, insofar as the Armendariz requirements were premised on the fact that certain statutory rights concerning public policy are unwaivable, common law public policy claims were, for the same reason, unwaivable. Consequently, just as an employer cannot impose procedural burdens on the arbitration of certain statutory claims to effect a waiver, the same would be true with respect to public policy claims. The Little court thus held that the Armendariz procedural requirements extended to non-statutory public policy claims. While the Little court’s reasoning might appear to be uncontroversial, it potentially runs afoul of the Federal Arbitration Act, 9 U.S.C. � � 1, et seq. Under the FAA, states are preempted from restricting the enforcement of arbitration agreements, except as would otherwise be the case under general contract law. Congress, however, can choose to limit the laws that it enacts, and the U.S. Supreme Court has held that the FAA does not govern if “Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991). However, the Gilmer court held that such an intention could be discerned only from the text of the federal law, its legislative history or an inherent conflict between arbitration and that statute’s underlying purposes. In dissent, Justice Brown argued that the court was careful in Armendariz to tether its procedural requirements to a reading of the FEHA that the Legislature, as with Congress with the Civil Rights Act, intended certain procedural protections for employees arbitrating claims. Yet, neither Congress nor the California Legislature ever expressed an intention to place restrictions on the arbitration of nonstatutory, common law public policy claims. If Justice Brown is correct, the crucial question is not whether common law public policy claims are waivable, but whether Congress intended to place additional restrictions on their arbitration. The Little decision thus risks being overturned by the U.S. Supreme Court. Finally, a divided court also reaffirmed the Armendariz requirement that the employer pay for all costs unique to arbitration. The Armendariz court drew this requirement from Cole v. Burns Intern. Security Services, 105 F.3d 1465 (D.C. Cir. 1997). In Cole, the D.C. Circuit held that the Supreme Court in Gilmer endorsed arbitration of statutory claims based on its assumption that the employer would pay for the arbitration. Subsequent to the Armendariz decision, the U.S. Supreme Court, in Green Tree Financial Corp.-ALA v. Randolph, 531 U.S. 79 (2000), held that an arbitration agreement’s silence on who would pay for the arbitration was not grounds for invalidating the agreement, and that the person challenging the agreement had the burden of demonstrating that he or she would not be able to afford the arbitration. In dissent, Justice Baxter argued that since the basis of the Cole decision was negated by Green Tree, the California Supreme Court should likewise place the burden on the party challenging the arbitration agreement to demonstrate an inability to pay for the arbitration. Again, insofar as the Armendariz requirement finds no authority in federal law, it risks running into conflict with the FAA. In Little the California Supreme Court provided further clarification as to its definition of unconscionability, while at the same time affirming that arbitration agreements, if not permeated by an unlawful intent, should be enforced, even if that means severing an unconscionable provision. More significantly, a very divided court expanded the Armendariz requirements to nonstatutory public policy claims and, in so doing, may have violated the FAA. Nevertheless, until such time as the U.S. Supreme Court says otherwise, employers should expect to arbitrate both statutory and nonstatutory public policy claims under the Armendariz requirements. Richard Rahm is of counsel in the labor and employment law practice group of Allen Matkins Leck Gamble & Mallory in San Francisco.

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