Arbitration is intended to provide a quick, efficient, confidential, and lower-cost alternative to litigation. In the employment context, an arbitration agreement must provide essential fairness to an employee, so if an employer overreaches in drafting an arbitration agreement, the employer will forfeit the right to arbitrate.

That’s what happened in a case recently decided by the California Court of Appeal, which found that unconscionability "permeated" an employment arbitration agreement (Mills v Facility Solutions Group.)  Simply put, the agreement contained too many provisions which were overly favorable to the employer, so it couldn't be enforced.

Chris Mills was hired by Facility Solutions Group (FSG) as an apprentice electrician in 2018. As part of the hiring process, he signed an arbitration agreement which required that any employment-related dispute had to be arbitrated. The agreement was only two pages long, but contained 60 lines of small type on its first page alone.

Among other provisions, the agreement required Mills to pay $250 to initiate an arbitration, and possible fees in the thousands or tens of thousands of dollars per day if an arbitrator decided against him and he wanted to appeal the arbitrator's decision.

The agreement also severely restricted Mills' ability to require FSG to provide information and documents – known as “discovery” – in the arbitration.  It also contained a provision awarding attorneys' fees to the prevailing party, when employers can rarely recover their fees in arbitration when they prevail, and a provision which would bar Mills' employment claims if the statute of limitations on those claims expired between the time he filed a lawsuit and the time a court ordered arbitration.

It even included a provision prohibiting Mills from bringing a representative lawsuit under the Private Attorneys' General Act (PAGA), which allows "aggrieved employees" to sue on behalf of other employees in order to recover penalties for wage and hour violations. 

In November of 2020, Mills filed an administrative complaint against FSG with the California Department of Fair Employment and Housing, alleging disability discrimination, wrongful termination, and other violations of state labor laws, and he filed a class action lawsuit against the company, containing similar allegations and a PAGA claim.

FSG argued that Mills' lawsuit should be handled according to the terms of the arbitration agreement Mills had signed. FSG initially prevailed in a hearing in the Los Angeles Superior Court, but in a second hearing, a judge rejected its request for arbitration, because so many key provisions were unfairly tilted in FSG’s favor.

Even FSG acknowledged that some of the provisions of the agreement might be questionable, but argued that the court could remedy any problems by “severing” these clauses – that is, reading them out of existence, and only implementing the clauses which weren't problematic.

The trial court rejected this approach, and so did the Court of Appeal. While some of the offending provisions of the FSG document could have been severed, selective removal of unconscionable clauses in an agreement full of them “would incentivize employers to impose multiple unlawful arbitration provisions on employees,” in the hope that courts would remedy the deficiencies and include the terms that employers should have included in the first place.  And other provisions would have to be completely re-written, leading to an agreement so different from the original that it would have effectively been a new agreement – one that neither party had ever agreed to.

While California law favors arbitration, the courts have an obligation “to ensure that private arbitration systems resolve disputes not only with speed and economy but also with fairness,” the justices said. After denying FSG’s request to compel arbitration, they awarded Mills his costs on appeal.

By David Krol