Quick Hits
- The California Court of Appeal, Second Appellate District, held that ambiguities in three arbitration documents did not defeat the parties’ mutual intent to arbitrate. The ambiguities involved Federal Arbitration Act (FAA) applicability, arbitrator selection, and Private Attorneys General Act (PAGA) waivers.
- The court found only a low level of procedural unconscionability, typical of adhesive employment agreements, and no substantive unconscionability.
- The agreement’s severability clause allowed the court to sever one invalid wholesale PAGA waiver. That waiver did not render the entire agreement unenforceable.
- The court held that the confidentiality agreement’s injunctive relief provision was not substantively unconscionable. It did not require the employee to consent to an immediate injunction.
In Santana v. Studebaker Health Care Center, LLC, the California Court of Appeal, Second Appellate District, reversed a trial court’s denial of an employer’s motion to compel arbitration. The trial court had found that the multiple documents showed a lack of mutual assent. It also found the arbitration agreement procedurally and substantively unconscionable. The appellate court’s decision offers important guidance for employers using multiple arbitration documents during onboarding.
Background
The case involved an employee who began working at a skilled nursing facility in 2020. The defendant-employer purchased the facility in January 2023. During onboarding, the employer required the employee to sign three arbitration-related documents. These documents covered different types of employment claims. The court called them, collectively, the “agreement to arbitrate.” The employee also signed a confidentiality agreement prohibiting disclosure of confidential information and trade secrets.
In May 2024, the employee filed a wage-and-hour class action against the employer. She alleged California Labor Code violations, a PAGA cause of action, and unfair business practices under Business and Professions Code section 17200.
The employer moved to compel arbitration of the employee’s individual claims, including her individual PAGA claim. It also sought to enforce the class action waiver. The trial court denied the motion on two grounds. First, inconsistencies among the documents showed a lack of mutual assent. Second, even if a valid agreement existed, it was unconscionable. The court found procedural unconscionability from unequal bargaining power and conflicting terms. It found substantive unconscionability from the PAGA waiver and the confidentiality agreement’s injunctive relief and mutuality provisions. The employer appealed.
Key Holdings on Appeal
Valid Agreement to Arbitrate
The Second Appellate District rejected the trial court’s finding that conflicting terms regarding FAA applicability and arbitrator selection made the agreement unenforceable. The court held the agreement plainly provided that the FAA applied. The documents contained different arbitrator selection provisions. But both assumed the parties agreed to arbitrate and allowed mutual selection of an arbitrator. They differed only on the fallback process if the parties could not agree.
Individual PAGA Claims Are Arbitrable
The appellate court found the agreement reflected the parties’ intent to arbitrate individual PAGA and Labor Code claims. Wholesale PAGA waivers remain prohibited. But the FAA requires enforcement of agreements to arbitrate individual PAGA claims.
Three of four PAGA provisions validly carved out non-individual PAGA claims. One document contained a wholesale PAGA waiver inconsistent with the others. The court held that the trial court should have resolved this conflict through contract interpretation. If necessary, it should have severed the invalid provision under the severability clause.
Agreement to Arbitrate Was Not Unconscionable
The appellate court found only a low level of procedural unconscionability. The employer presented the agreements on a “take it or leave it” basis. But adhesion alone does not establish a high degree of procedural unconscionability. The trial court relied on a case involving deceptive practices. In that case, the employer distributed a bilingual summary describing only mediation in Spanish. The actual English policy required binding arbitration. The appellate court found no such deception here.
The appellate court also found no substantive unconscionability. The agreement’s severability clause allowed the court to sever the single invalid wholesale PAGA waiver.
Confidentiality Agreement Did Not Exempt Employer From Arbitration
The Second Appellate District rejected the argument that the confidentiality agreement exempted the employer from arbitration. The court harmonized the two agreements: the employer must arbitrate its employment claims, but may also seek injunctive relief in court.
The court held that the confidentiality agreement did not relieve the employer of the burden of proving the likelihood of success at trial or interim harm for preliminary injunctive relief. The agreement stated only that a breach “may” give rise to unfair competition. It did not concede any element needed to obtain an injunction.
Key Takeaways
The Santana decision offers key takeaways for employers structuring arbitration agreements in California.
- Consistency across onboarding documents matters, but ambiguities are not fatal. Minor ambiguities across multiple arbitration documents will not necessarily defeat the parties’ intent to arbitrate.
- PAGA waivers can be severed. Wholesale PAGA waivers remain unenforceable. But agreements requiring arbitration of individual PAGA claims, while carving out non-individual claims, may be enforced under the FAA. Employers will want to ensure consistent PAGA waiver language across their arbitration documents.
- Severability clauses are important. The court relied on the severability clause to sever one invalid wholesale PAGA waiver rather than striking the entire agreement. A well-drafted severability clause can preserve the overall agreement’s enforceability.
- Confidentiality agreement remedies matter. Courts will scrutinize whether a confidentiality agreement’s remedies effectively exempt the employer from arbitrating its own claims.
- Presentation of arbitration agreements still matters. A “take it or leave it” presentation alone does not establish a high degree of procedural unconscionability. But adhesive contracts carry some procedural unconscionability, and deceptive practices or a high degree of surprise may tip the balance toward unconscionability.
Ogletree Deakins’ California offices and California Class Action and PAGA Practice Group will continue to monitor developments and will provide updates on the Arbitration and Alternative Dispute Resolution, California, and Class Action blogs as additional information becomes available.
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