Employers in a wide range of industries routinely ask employees to sign agreements requiring any work-related disputes to be resolved through arbitration rather than via litigation. They argue that arbitration is less costly, faster, and more private than going to court, thus benefitting workers and companies.

Yet it is not uncommon for employees who have complaints against their employers to argue that the terms of these arbitration agreements are unfair – and for judges to agree with them. A recent example is a case decided by the California Court of Appeal (Velarde v Monroe Operations).

In March of 2020, Karla Velarde was offered a job as a care coordinator by Newport Healthcare, which operated residential mental health treatment facilities from California to Connecticut. These were owned by its parent company, Monroe Operations, LLC.

Velarde had been out of work for nine months when she received the job offer. She had been laid off from a customer service position with a regional airline at a time when companies across the nation were struggling with the economic impacts of the COVID-19 pandemic.

Upon arriving to start work at Newport Healthcare, according to court documents, Velarde was directed to an orientation session in a conference room where a human resources manager presented her with a stack of 31 documents. Telling Velarde she was required to complete and sign them before she could start work, the HR manager said “we gotta get through (these to) get you onboard…we’ll try to get through them as fast as possible.”

Velarde told the manager she was reluctant to sign the arbitration agreement because she “did not understand what it was.” The manager responded that “if there are ever any issues,” the agreement “will allow us to resolve them for you…without having to pay lawyers.”

Velarde testified that she signed the agreement because she “knew that [she] had to sign it to begin working.”

There was more to the five-page arbitration agreement than the HR manager had indicated.

It contained 15 sections and referenced the Federal Arbitration Act (FAA), the American Arbitration Association Employment Arbitration Rules, the Federal Rules of Civil Procedure, and the Federal Rules of Evidence.

The parties agreed the FAA would govern the arbitration, that each party had a right to conduct discovery in accordance with the Federal Rules of Civil Procedure, and that the Federal Rules of Evidence would guide the admissibility of evidence.

Contrary to the manager’s statement about not having to pay attorneys, the document stated that each party would bear its own attorney fees unless the arbitrator ordered otherwise.

When Velarde was later terminated by Newport Healthcare, she sued the company in the Superior Court of Orange County, alleging discrimination, retaliation and other claims. Citing the agreement Velarde had signed, the company asked the court to order that the dispute be handled through arbitration.

The court declined, ruling that the arbitration agreement was both substantively and procedurally unconscionable. The company then appealed the trial court’s decision.

As the appellate court explained, courts must review an arbitration agreement to determine whether there are reasons to conclude that it is unconscionable – that is, it is so unfair or unjust that it shocks the conscience.

Courts look at the substance of the agreement – its terms and conditions – as well as at the procedures of its execution, meaning the circumstances in which the contract was negotiated and formed, with particular attention to whether these circumstances included oppression, surprise or unequal bargaining power of the parties.

An agreement can be enforceable if it is deemed to be unconscionable on either procedural or substantive grounds. But if it is determined to be both procedurally and substantively unconscionable, the agreement is void.

The appellate court found that Newport Healthcare, the party with greater bargaining power, acted in a procedurally unfair manner when it presented Velarde with an agreement they told her she had to sign to begin working, while its HR manager stood and waited.

The agreement contained technical legal terms she and most other lay people would not understand, the justices said, and the time pressure deprived her of a meaningful opportunity to talk to an attorney do conduct her own research before signing.

In addition, the company “misrepresented the terms and nature of the agreement,” telling her that neither side would have to pay for lawyers when the agreement actually required each party to bear its own attorney fees in an arbitration.

This may have been the result of an innocent misunderstanding by the manager, the justices said, but “we focus on the effect, not the intent.”

While the company’s statements to Velarde led her to expect that disputes would be resolved in “an inexpensive, speedy and informal” process, in fact the agreement required her to “navigate the procedural complexities of the Federal Rules of Civil Procedure” and “then journey through the Federal Rules of Evidence.”

As a result, “the terms of the agreement are so one-sided as to benefit only Newport Healthcare,” supporting the conclusion that it was substantively unconscionable.

The terms of the arbitration agreement “might pass muster under less coercive circumstances,” the justices said – for example, if Newport Healthcare had explained them correctly, or not explained them at all but had given Velarde time to consult an attorney or do her own research rather than pressuring her to sign immediately. “But that is not what happened here.”

The appellate court affirmed the trial court’s decision to allow the dispute to be litigated in court rather than arbitrated, and awarded Velarde her costs on appeal.

This case provides a warning to California employers who may require new employers to sign a barrage of documents on their first day of work – a not uncommon practice. If an arbitration clause is buried in the pile, it may not be enforceable.

By Laurie Murphy