Memo
From:
To: Vice President, Big Brain Solution
Date: 26th July, 2018.
Subject: Validity and Enforceability of Arbitration Provision under Contract
Questions Presented
1. What are the general procedures or rules governing a typical Arbitration Proceeding? What effects
do claims based on specific Federal or State laws have on Arbitration Provision in Employment Contract?
2. Can a Company force an employee to use Arbitration (Instead of a Lawsuit) to settle an
employment-related dispute because of a contract provision?
3. Are there some instances when the Arbitration Clause might be invalid or unenforceable against an
employee?
Brief Answers
1. Since the United States of America is considered to be a Federal System, Arbitration Rules exists at
both the State and Federal Level. One of the primary Federal Legislation or Statute that govern the
Arbitration Proceedings is the Federal Arbitration Act (FAA). According to the United States Supreme
Court, it was held that Section 2 of the Federal Arbitration Act (9 U.S.C. § 2), which provides for the
irrevocability, validity, and enforceability of Arbitration Contracts, is a substantive Federal Law that applies
in the States Courts and that the “supplants inconsistent State Laws” regarding all the transactions affecting
interstate commerce (Cornell University Law School, 1995). Also, other Federal Statutes contain provisions
such as, for instance, The Foreign Sovereign Immunities Act and Patent Act.
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When it comes to the State Level, California Arbitration Act (CAA) is considered to be a
comprehensive statutory plan, which is responsible for regulating and controlling the Private Arbitration
Proceedings in California (Lexis, 2018). According to California Arbitration Act, if the court finds that the
party subject to an arbitration agreement is also the party subject to the pending court trial or action, mainly
arising from the same transaction and there are possibilities of conflicting decisions on the issue of fact or
law, the court can, among other court actions, refuse to enforce such Arbitration Contract. In such a
scenario, it may order joinder or intervention of all the parties involved in a particular action, or affirm the
Arbitration Proceeding pending the results of the court action (Lexis, 2018). The CAA is considered to
coexist under the Federal Arbitration Act; the latter applies to all the Arbitration Contracts that involve
interstate commerce.
2. Yes. The Supreme Court of United States in 2001 decided that the Federal Arbitration Act applies
mostly in the employment agreements. Most rulings before the decision restricted the ability of a company
to force an employee to comply with Arbitration Provision under the Act. Therefore, it is possible for the
Company Employer to use Forced Arbitration since the court ruling enforcing such contracts was entered
against the employees. However, it is wise to note that such a policy that enforces the Forced Arbitration
has some restrictions (Federal Register, 2015).
3.Yes. There are various scenarios where the court may find an Arbitration Clause might be
unenforceable against the employee. According to Flores v. Nature’s Best Distribution, The Court of
Appeals in California held that the written Arbitration Provision that was agreed between the employer and
the employee could not be enforced and was invalid since the document failed to correctly identify the
claims that were covered and to adequately specify the rules and procedures that needed to be followed
(Deschenaux, 2017). The Court of Appeals affirmed the trial court’s decision and refusal to compel the
Arbitration under the claims of the employee, under the California Fair Employment and Housing Act
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(Deschenaux, 2017). The court argued that the contract was ambiguous, mainly regarding the employer
covered, whether the Arbitration Clause of the agreement and Arbitration procedures of Collective Bargain
Contract applied to any or all of the plaintiff’s claims and which process and rules that governed the
Arbitration (Deschenaux, 2017).
Controlling Statutes/Rules
According to Federal Arbitration Act (9 U.S.C. § 2), section 1 to 16 of this Act provides that
Arbitration Provision in an agreement or contract is generally enforceable and valid, and “save upon such
grounds as exist at law or in equity for the revocation of any contract.” (Cornell Law School, 1947). The
Federal Statutory Provision states that “A written provision in any maritime transaction or a contract
evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of
such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in
writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal,
shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.” (Cornell Law School, 1947). Rules and Procedures of Arbitration need to be
followed. According to the courts ruling, it provides that:
Any dispute regarding whether Founder/Creative manager [, i.e., Heyman,] breached his
warranties . . . Shall be determined by binding arbitration in accordance with the following terms
and provisions. First, an authorized representative of the Company and [Heyman] shall meet in an
attempt to resolve such dispute. If the dispute is not resolved by such representatives, then either
the Company or [Heyman] may make a written demand for formal dispute resolution, at which time
the dispute will be resolved by binding arbitration in Los Angeles, California pursuant to the
Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration
Association (the 'Rules'), subject to the following: [P] (a) There shall be one arbitrator, who shall
be selected under the normal procedures prescribed in the Rules. [P] (b) Subject to legal
privileges, each party shall be entitled to discovery in accordance with the Federal Rules of Civil
Procedure. [P] (c) At the arbitration hearing, each party may make written and oral presentations
to the arbitrator, present testimony and written evidence and examine witnesses. [P] (d) The
arbitrator's decision shall be in writing, shall be binding and final and may be entered and
enforced in any court of competent jurisdiction. [P] (e) Each party to the arbitration shall pay one-
half of the fees and expenses of the arbitrator and the American Arbitration Association, and the
non-prevailing party shall pay the attorneys' fees of the prevailing party. (Broome, 2006).
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Petition to compel the Arbitration Provision is a lawsuit in equity to compel particular performance of
the agreement (LawLink, 2002). In a judgment on the lawsuit to compel arbitration, “factual issues are
resolved by the trial court based on conflicting affidavits or declarations and, at the court's discretion, even
oral testimony. 'The determination of standing to arbitrate as a party to the contractual arbitration agreement
is a question of law for the trial court in the first instance.'” (LawLink, 2002). According to the court ruling
in Metalclad Corp. v. Ventana Environmental Organization Partnership (2003), it is clear that “Arbitration
is a matter of contract.” Therefore, only those who are considered signatories to the agreement containing
an Arbitration clause can enforce the Arbitration Provision.
The party or individual employee opposing the Arbitration Clause has the burden, before the court, to
prove that the provision was unconscionable (Justia US Law, 2002). Also, the court is required to review
the resolution from the trial court, mainly on the facts disputed for substantial evidence and decide de novo,
whether those facts constitute of unconscionability (Justia US Law, 2002). The unconscionability needs the
party to show both the substantive and procedural unconscionability (LexisNexis, 1997). According to the
court argument, it provides that both elements have to be present, “but not in the same degree; by the use of
a sliding scale, a greater showing of procedural or substantive unconscionability will require less of a
showing of the other to invalidate the claim.” (LexisNexis, 1997).
According to AT&T Mobility LLC v Vincent Conception et ux, it provides that the court should take
Arbitration agreements on the equal footing with other contracts and enforce them in accordance with the
terms and conditions of the contract. In fact, it states that “courts must place arbitration agreements on an
equal footing with other contracts and enforce them according to their terms.” (Moritz College of Law,
2011). In line with this rule, The Federal Arbitration Act has been explained as one component that reflects
both the Liberal Federal Policy that favor Arbitration Clauses and “the fundamental principle that
arbitration is a matter of contract.” (Cornell Law School, 1947). The issue of whether a company can force
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an employee to use arbitration in solving disputes, since it is a requirement of the provision, under the
contract is one of agreement interpretation. Indeed, the court uses the “ordinary state law contract principles
to decide whether parties have agreed to arbitrate a particular matter,' giving 'healthy regard for the federal
policy favoring arbitration.” (FindLaw, 2001).
Statements of Fact
Big Brain Solutions is a Colossal subsidiary in the consulting industry, located in Silicon Valley,
California, CA. In 2014, Liz Bennett and Ralph Nickleby applied for a job to become administrative
assistants at Big Brain Solutions. After completing the interview process, both were hired and asked to sign
contracts that contained the following provision: "If there is any dispute as to employment practices or
employee/employer actions, this dispute will be decided via binding arbitration." Both Liz and Ralph signed
their contracts after being given ample time to review them and to consult an attorney if they wished to do
so.
Several months after he was hired, Ralph became addicted to cocaine. Around the same time, Liz
became pregnant with her first child. When Liz experienced complications during her pregnancy, Big Brain
initially agreed to grant her medical leave; but shortly after that, the company informed Liz that her position
had been eliminated due to a "reorganization." Fearing that Ralph might have trouble picking up the slack
for the recently released Liz, Big Brain asked him to take a surprise drug test. Ralph was confused and
alarmed and refused to take the test. Big Brain informed him that he was fired because of his refusal to take
the test. Liz decided to file a lawsuit in state court under the state and federal Family and Medical Leave
Acts, which guarantee pregnant women a set number of weeks off for pregnancy. Ralph, on the other hand,
submitted his case to an arbitrator.
Discussion/Analysis
When we consider the case of Liz, she filed a lawsuit in the State Court, on the foundation of both
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Federal and State Family and Medical Leave Acts, which is wrong and the court may not grant her a
hearing. However, if she filed a lawsuit on the ground of Arbitration Unconscionability, the court could
give her motion and hearing. According to the rule, Petition to compel the Arbitration Provision are the
lawsuit in equity to force particular performance of the agreement (LawLink, 2002). 'The determination of
standing to arbitrate as a party to the contractual arbitration agreement is a question of law for the trial court
in the first instance.'” (LawLink, 2002). It is clear that Liz was supposed to use the contractual Arbitration
and argue in accordance with the arbitration. Liz needs to seek the Arbitration proceedings before the court
accepts her arguments or claims. If the Arbitration process does not resolve the conflict between Liz and
Big Brains Solutions Company, she will demand a written letter to seek formal resolution from any
California court. However, given that she had already filed a lawsuit against the company in court, the court
will reject her motion, and she will lose her job because of breaching the contract.
Also, proving that the Arbitration Provision from Big Brain Solution is unconscionable is another
element that may affect the Liz’s Court proceedings. According to AT&T Mobility LLC v Vincent
Conception et ux, it provides that the court should take Arbitration agreements on the equal footing with
other agreements and enforce them in accordance with the terms and conditions of the contract. In fact, it
states that “courts must place arbitration agreements on an equal footing with other contracts and enforce
them according to their terms.” (Moritz College of Law, 2011). Therefore, the court will consider the
provisions provided under the agreement between Liz and Big Brain Solution. The language used under the
Contract is not ambiguous. The provision provides that “If there is any dispute as to employment practices
or employee/employer actions, this dispute will be decided via binding arbitration." Once the court realizes
that Liz signed this contract, it will not grant her a motion. According to the court ruling in Metalclad Corp.
v. Ventana Environmental Organization Partnership (2003), it is clear that “Arbitration is a matter of
contract.” Therefore, only those who are considered signatories to the agreement containing an Arbitration
clause can enforce the Arbitration Provision. Since Liz accepted and signed the agreement, and of course,
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according to the Statements of Fact, was given ample time to review them and to consult an attorney if she
wished to do so, she will not get the court hearing on his case. The court will reject his case since she is a
signatory of the contract and she is trying not to perform as agreed.
In the case of Ralph, he considered an arbitrator, which followed the Big Brains Procedures and rules in
case of disputes. However, Ralph will be required to follow the rules or procedures of Arbitration. Any
arguments in this case, especially regarding whether the founder-manager (Big Brain Solution) breached its
warranties shall be determined by binding arbitration, which will focus on the terms and rules of the
agreement. Both parties shall meet in an attempt to resolve the dispute. If those representatives do not
resolve the issue, then either party can seek a written demand for formal dispute resolution in court
proceedings, under the California Commercial Arbitration Rules (Broome, 2006).
According to the courts ruling in Estate of Auerbach v. Heyman (2005), it provides that “(a) There shall
be one arbitrator, who shall be selected under the normal procedures prescribed in the Rules. [P] (b) Subject
to legal privileges, each party shall be entitled to discovery in accordance with the Federal Rules of Civil
Procedure. [P] (c) At the arbitration hearing, each party may make written and oral presentations to the
arbitrator, present testimony and written evidence and examine witnesses. [P] (d) The arbitrator's decision
shall be in writing, shall be binding and final and may be entered and enforced in any court of competent
jurisdiction. [P] (e) Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator
and the American Arbitration Association and the non-prevailing party shall pay the attorneys' fees of the
prevailing party." (Broome, 2006). Therefore, in such a case, since Ralph used the Arbitration process, the
company will have time to listen to his grievances. If no provision requires every employee to go through
the Drug Test in the contract signed between Big Brains Solution and Ralph, the arbitrator will order the
company to restore his employment. However, if Ralph did not perform his obligation under the agreement,
he will lose his job.
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Conclusion
There is a high chance that Liz will lose her job. One of the primary reason that will make Liz lose her
job is that she breached the contract between her and the company. The company advocated for Arbitration
Proceedings, in case of dispute, but Liz has filed a lawsuit. Arbitration Provision provided in the
Employment Agreement is enforceable and valid. The court will reject Liz’s motion to challenge the
company on the ground of both Federal and State Family and Medical Leave Acts because Liz did not
follow the rules or procedures required or articulated by the company for enforcement. The court will
consider whether the Arbitration Provision is available in the contract. On the other hand, in the case of
Ralph, it is a bit easy since he followed the articulated procedures. Ralph will, therefore, be subjected to the
Arbitration process, where the arbitrator will consider whether the provision on Drug Use, as provided by
the Company’s Agreement, submit him to Drug Test. If the Arbitrator finds not Contractual Text that
subject Ralph to Drug Test, Ralph will probably secure back her job or demand compensation. However, if
there is such a provision, he will lose his job but can seek further dispute resolution by demanding a letter to
the formal declaration if the Arbitration Proceedings fails.
References
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Broome, S. A. (2006). An Unconscionable Application of the Unconscionability Doctrine: How the
California Courts Are Circumventing the Federal Arbitration Act. Hastings Business Law Journal,
3(1), 46.
Cornell University Law School., (1995). Allied-Bruce Terminix Cos. v. Dobson (93-1001), 513 U.S. 265.
Retrieve From: https://www.law.cornell.edu/supct/html/93-1001.ZO.html
Cornell Law School. (1947). 9 U.S. Code § 2 - Validity, Irrevocability, and enforcement of Agreements to
Arbitrate. Retrieved From: https://www.law.cornell.edu/uscode/text/9/2
Deschenaux, J. (2017). Arbitration Agreement Not Enforceable, California Court Rules. Retrieved From:
https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/ca-
arbitration-agreement-not-enforceable.aspx
Federal Register. (2015). Federal Acquisition Regulation; Fair Pay and Safe Workplaces. Retrieved From:
https://www.federalregister.gov/documents/2015/05/28/2015-12560/federal-acquisition-regulation-
fair-pay-and-safe-workplaces
FindLaw, (2001). Aggrow Oils v. National Union Fire Insurance Company of Pittsburgh, PA., 242 F.3d
777. Retrieved From: https://caselaw.findlaw.com/us-8th-circuit/1209883.html
Justia US Law, (2002). Szetela v. Discover Bank, 97 Cal.App.4th 1099. Retrieved From:
https://law.justia.com/cases/california/court-of-appeal/4th/97/1094.html
LawLink., (2002). City of Hope v. Bryan Cave LLP, 102 Cal.App.4th 1356. Retrieved From:
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http://www.lawlink.com/research/CaseLevel3/79583
Lexis Nexis. (2018). Cal. Code Civ. Proc § 1280. Retrieve from: https://www.advance-lexis-
com.ezproxy.liberty.edu/search/Cal-Code-Civ-proc§1280.html
LexisNexis., (1997). Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519. Retrieved From:
https://resolvingdiscoverydisputes.lexblogplatform.com/wp-content/uploads/sites/95/2012/06/
Stirlen-v.-Supercuts-Inc.-1997-51-Cal.App_.4th-1.pdf
Moritz College of Law, (2011). AT&T Mobility LLC v. Vincent Conception et ux, 563 U.S. 333. Retrieved
From: http://moritzlaw.osu.edu/students/groups/osjdr/files/2011/12/Barsalona.pdf
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