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Take it or leave it. That was the message that Foundation Health sent when it told two prospective employees to agree to binding arbitration of any disputes — or look for work elsewhere. Like millions of other job seekers, Marybeth Armendariz and Dolores Olague-Rodgers went ahead and signed on the dotted line. But as Armendariz and Olague-Rodgers would later learn, Foundation’s agreement put severe restrictions on the types of remedies available to them. In fact, the restrictions were so severe that lawyers for the two women convinced a Marin County trial judge to junk the HMO’s arbitration pact, saying it was too one-sided. The California Supreme Court will wrestle on May 30 with the fate of Foundation’s mandatory arbitration agreement in a case that is being closely watched by employment lawyers as well as foes of mandatory arbitration contracts. Armendariz v. Foundation Health Psychcare Services Inc., S075942, has also drawn the attention of the California attorney general’s office. An amicus curiae brief signed by Deputy Attorney General Kathleen Mikkelson warns the court that a decision in Foundation’s favor could “undermine” state laws that target employment discrimination. But state employers, in an amicus brief filed by the California Employment Law Council, argue that since public policy favors arbitration, courts should enforce the agreements after excising the unfair portions. Paul Cane Jr., who co-authored the CELC’s brief, says the “core promise to arbitrate shouldn’t be undone” because of disagreements about “peripheral issues.” While no one knows which direction the court will go, employment law attorneys agree any ruling will likely have a lasting impact on arbitration and its role in settling civil rights claims. “As far as I can tell, this will have a major impact,” says Glenn Clark, one of the attorneys representing the two women. Because the Supreme Court has put several cases on hold awaiting the outcome in Armendariz, “the indication is they are going to say something broad,” figures Clark, of Berkeley’s Miller, Clark, Calvert and Raimondi. The two women say they were harassed and fired from Foundation Health in June 1996 because they were heterosexual. Armendariz and Olague-Rodgers had been promoted a few months earlier to supervisor positions at the health maintenance organization and were earning $38,000 a year when they were told that their jobs were being eliminated due to a reorganization. Their complaint sought general damages, punitive damages, injunctive relief and recovery of attorneys fees. But the employment contract they signed as a condition of being hired included a provision limiting any award on a claim to wages lost between the time they were terminated and the date of an arbitration award. After the trial judge found the limits so “unconscionable” that it refused to enforce arbitration, the First District Court of Appeal reversed the trial court’s ruling and ordered the women to settle the claim through arbitration. However, the panel agreed that the contract contained illegal provisions “drastically” reducing the women’s remedies, so it ordered those parts removed. “The solution here is to sever the remedy’s restrictions, which we have found to be unconscionable and not within the reasonable expectations of the plaintiffs,” wrote First District Justice Douglas Swager, who was joined by Justices Gary Strankman and William Stein. Clark, who will argue the case with co-counsel Allan Miller, says the First District’s decision to change the agreement “encourages employers to write bad agreements — if the courts fix them.” And Cliff Palefsky, who will be arguing May 30 on behalf of plaintiffs amicus curiae the California Employment Lawyers Association, said “it is an invitation to overreach.” But in Foundation’s brief to the Supreme Court, its attorneys wrote that there is “no such incentive” for employers to routinely put unconscionable provisions in agreements, because no employer would want “their arbitration demands routinely resisted by employees.” Foundation Health attorney William Gaus, of Pillsbury Madison & Sutro, said he could not comment on the case. The HMO’s public relations director, Lisa Haines, said its policy is not to comment on pending litigation. In its amicus brief supporting the defendant, the California Employment Law Council says the First District acted within its powers. “A more draconian remedy — tossing out the entire agreement — is inconsistent with sound principles of contractual jurisprudence,” wrote Cane. “We contend that a court should not throw the baby out with the bathwater,” says Cane, of Paul, Hastings, Janofsky & Walker. Apart from whether courts may rewrite arbitration agreements to make them enforceable, the plaintiffs and their amici hope to convince the high court to decide that statutory job discrimination claims can never be the subject of a pre-employment arbitration agreement. The First District concluded that state statutory claims are arbitrable by relying on a 1991 U.S. Supreme Court decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, and several other cases since Gilmer where courts have favored arbitration. In Foundation’s brief to the court, Gaus argues that Gilmer “squarely held that the Federal Arbitration Act has made arbitration a favored means of resolving claims of employment discrimination.” Foes of mandatory arbitration agree Gilmer allows statutory claims to be arbitrated, but say the ruling shouldn’t apply in Armendariz. “It said a court may enforce arbitration clauses for discrimination claims,” Palefsky says. “It did not say an employer could [do so] as a condition of employment.” Furthermore, says Palefsky, much of what was said in Gilmer was superseded by the 1991 Civil Rights Act, which he says gave employees a right to a jury trial on discrimination claims. The state Supreme Court may also consider the Ninth Circuit U.S. Court of Appeals ruling in Duffield v. Robertson Stephens, 144 F.3d 1182, which the First District appellate court found unpersuasive. Ninth Circuit Judge Stephen Reinhardt’s opinion in Duffield allowed for arbitration of discrimination claims under Title VII, but said the agreement must be voluntary. Since the decision, seven federal courts have elected not to follow Duffield, and the First District referred to it as a “minority view.” Instead, the First District emphasized Suess v. John Nuveen & Co., 146 F.3d 175, a Third Circuit opinion criticizing Duffield. “Duffield has no application in the present case, which is not based on Title VII or its 1991 amendments,” wrote Gaus, “but rather involves the claims under state law and statues accompanied by no similar expression of intent by the California Legislature.” Deputy AG Mikkelson’s amicus brief on behalf of the plaintiffs says the Legislature intended to protect employees through the Fair Employment and Housing Act administrative and court remedies. She says Foundation’s agreement gives its employees rights that are “substantially inferior” to those conferred by FEHA. “If you arbitrate these things the law doesn’t progress,” Mikkelson says. “You lose a lot of the public policy objectives by going through arbitration.”

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