The California Supreme Court surprisingly upheld an arbitration agreement in a pre-printed, non-negotiable employment agreement which broadly required the employee to arbitrate any employment-related disputes with the company in the case of Baltazar v. Forever 21 (S208345, March 28, 2016). Although the employee, Maribel Baltazar, at first refused to sign the agreement as she did not want to be bound to arbitrate, she begrudgingly relented, signed and was hired. She later resigned and sued the company for sexual harassment, sex discrimination, and retaliation.

The trial court denied a motion to compel arbitration, finding procedural unconscionability because the employee was required to sign a pre-printed, non-negotiable agreement as a condition of employment and she was not provided with a copy of the arbitration rules. The trial court also found substantive unconscionability because the agreement gave the employer greater protections with the right to seek injunctive relief to protect trade secrets and required arbitration under the rules of the American Arbitration Association even if the court found the agreement unenforceable. This was an expected result in a state trial court based upon the existing body of appellate decisions which are hostile to forced arbitration in employment and consumer settings.

However, the Court of Appeal reversed the trial court. Although agreeing that the employee did not have meaningful choice in signing the employment agreement, the appellate court disagreed with the trial court’s conclusion that the agreement was substantively unconscionable because it permitted either party to seek injunctive relief, even if such relief more often served the interests of the employer rather than the employee.  Further, even if the AAA rules were found unenforceable, they could still could arbitrate under the California Arbitration Act.

Ms. Baltazar filed a petition with the California Supreme Court but lost when that court affirmed the Court of Appeal’s opinion. The Supreme Court agreed that her lack of bargaining position would typically render the agreement procedurally unconscionable but held that more is needed than proof of the adhesive nature to refuse to enforce the obligation to arbitrate, such as surprise, sharp practices or oppression.  Such surprise practices or oppression were not present as Ms. Baltazar knew the arbitration clause was there and objected to it.  In addition, when she was unable to negotiate it out of the employment agreement, she signed anyway.

Equally important was how the Supreme Court dealt with the incorporation of the AAA Rules that had not been furnished to plaintiff, an omission that has routinely justified a court in finding unconscionability. The Supreme Court recognized this existing body of law but still upheld the obligation to arbitrate because here the plaintiff did not allege unfairness from some specific element of the rules under which she was obligated to arbitrate that she was unaware of.

The high court also refused to invalidate the agreement to arbitrate merely because the clause recited the parties’ rights to seek injunctive relief under Code of Civil Procedure section 1284.2, even if the employer was more likely to benefit from this remedy than the employer. In doing so, the court disapproved of Trivedi v. Curexo Tech. Corp.  (2010) 189 CalApp.4th 387 and the cases relied upon there which had found such “one sided” protection to the employer rendered the cause substantively one-sided even though it was merely a restatement of the law.

This opinion could provide a roadmap for drafting an enforceable arbitration clause in an employment agreement if the cautions suggested by the Court are followed. The problem is there are so many decisions that are still good law that strike down the provisions discussed in Baltazar as unconscionable. The likely outcome of a court challenge may not be known until the Supreme Court speaks again.