Article contributed by Eric Landau and Amy Markel Scotto, Ellenoff Grossman & Schole LLP
California courts presume that mandatory arbitration provisions contained within employment agreements are “contracts of adhesion,” essentially a “take it or leave it” contract offered by one with superior bargaining power to a counterparty with inferior bargaining power. Scrutiny becomes more exacting if the arbitration provision delegates to the arbitrator the power to decide if the arbitration provision is enforceable. A well-drafted delegation clause, however, can withstand challenges by an employee seeking to avoid arbitration.
Two recent appellate decisions provide valuable insight to employers in drafting arbitration agreements. In December 2023, the Ninth Circuit considered “as a matter of first impression what a party must do to specifically challenge a delegation provision and what a court may consider when evaluating this challenge” in Bielski v. Coinbase, Inc., 87 F.4th 1003, 1007 (9th Cir. 2023). In Bielski, the Court held that the challenging party must attack the delegation clause specifically and not just the arbitration clause as a whole. Any attacks on the validity of the arbitration clause will be heard by the arbitrator, not by the court, if the delegation clause is clear, properly drafted, and the delegation clause is readily apparent and understood by the employee. An unsophisticated employee who has no meaningful choice but to accept the delegation clause, or is unaware of this provision, may be able to mount a successful challenge.
In Bielski, the plaintiff signed a user agreement when he joined Coinbase in 2021. The agreement included an arbitration provision and delegation clause. Bielski later alleged that Coinbase failed to properly investigate after a hacker stole more than $30,000 from his account. Bielski sued Coinbase and Coinbase moved to compel arbitration. In doing so, Bielski specifically challenged the delegation clause in the user agreement. The court held that the challenge, directed specifically at the delegation clause, allowed the court to consider the challenge. The court then analyzed the arbitration agreement as a whole in order to view the delegation clause in context. While the court found that the one-sided user agreement was to some extent unconscionable, it ultimately held that a small amount of unconscionability is not sufficient to nullify the delegation provision. The Ninth Circuit reversed the lower court’s decision denying the motion to compel arbitration.
In February, the California Court of Appeal for the Second District, handed down a decision in Minkovich v. Corbett, No. B324319, 2024 WL 805111 (Cal. Ct. App. Feb. 27, 2024). Although “not for publication,” this decision provides much needed guidance to employers. In Minkovich, the employee, an alleged former corporate vice-president, brought his claims in a California Superior Court despite an explicit mandatory arbitration clause in his employment contract. The arbitration clause incorporated by reference the rules of the American Arbitration Association (“AAA”) which, in turn, contained a delegation provision. A copy of these rules were not attached or provided to the employee.
The employers in Minkovich, represented by Ellenoff Grossman and Schole LLP, moved to compel arbitration. The trial court denied the employer’s motion to compel even though the employee did not challenge the delegation clause. The Court of Appeal reversed the trial court’s decision and ordered the case to arbitration. The Minkovich court held that, where the parties to a contract are relatively sophisticated and the agreement itself is not a contract of adhesion, the parties’ agreement to delegate will be honored if the intent to delegate is clear and unmistakable. This analysis will not necessarily hold true for employment contracts where the employee is relatively unsophisticated, has no meaningful choice, or is unaware of this clause.
In the context of the California hospitality industry, the Bielski and Minkovich decisions provide a roadmap for drafting strong arbitration provisions. The key takeaways to consider when drafting employment agreements are:
(1) The employment agreement should include clearly labeled arbitration and delegation clauses that the employee initials;
(2) The arbitration and delegation clauses should be preceded by a one-page cover sheet that advises the employee that the employment agreement contains an arbitration clause that requires the arbitrator to determine arbitrability, not a court;
(3) The arbitration provision should note that the Federal Arbitration Act applies, and a copy of the arbitration rules should be provided to the employee;
(4) The rules provided and relied on should be employment arbitration rules, which are updated more frequently than the commercial rules to reflect the current state of the law; and
(5) Finally, the employee should be advised in writing to take sufficient time to review and understand the terms and to consult an attorney, if necessary.
At the moment, these decisions apply only to California employers, but all employers would do well to keep abreast of trends in litigation. So, what should California hospitality employers do moving forward? Resist the temptation to stick with outdated standard employment agreements that have been used by the human resources department for years and consider updating them to reflect the current state of the law. If done properly, the risk of invalidating an arbitration clause will be reduced significantly, and so will the money spent on outside counsel defending them against challenge.
Eric Landau is a Partner at Ellenoff Grossman & Schole LLP in New York City. As Chair of Securities Litigation Department, Mr. Landau has been a trusted legal advisor and trial attorney for four decades. He represents public and private companies, directors, officers, shareholders and business leaders in a variety of industries. As a securities litigator, he has defended directors, officers and issuers against securities class and derivative actions before state and federal trial and appellate courts throughout the country. Taking on the toughest of issues, Mr. Landau has been at the forefront of pivotal decisions in state law-based merger challenges and the anti-fraud provisions of the federal securities laws.
Amy Markel Scotto is an Associate in the Litigation Practice Group at Ellenoff Grossman & Schole LLP in New York City. Prior to joining the firm Ms. Scotto served as an Assistant District Attorney in the office of the Queens County District Attorney for 8 years. During her time as an Assistant District Attorney, Ms. Scotto served as lead counsel on complex investigations and trials. Ms. Scotto is also an experienced appellate attorney, having practiced in the New York State Court of Appeals, the Appellate Division, Second Department, and the Appellate Term, Second, Eleventh, & Thirteenth Judicial District.
Eric Landau (elandau@egsllp.com) and Amy Markel Scotto (ascotto@egsllp.com) can be reached via phone at 212-370-1300.
