According to a California appellate court, the inclusion of a non-mutual scope provision exempting intellectual property claims from arbitration in the face of clear precedent invalidating such provisions constitutes bad faith by the drafting employer and warrants invalidation of the entire arbitration agreement.
In Kalmbach v. Sportsmobile West, Inc., No. F054648, 2008 WL 4988663 (Cal. Ct. App. Nov. 25, 2008), Kalmbach was employed by SWI as a manager. Upon joining the company in 2003, Kalmbach signed an employee handbook acknowledgment. The handbook contained a binding arbitration agreement. In 2007, Kalmbach signed an amendment to the handbook, again acknowledging the arbitration agreement and indicating assent was a condition of employment.
A dispute later arose regarding wage payments and certain stock options. Kalmbach sued SWI under a California statute for overdue wages and stock withheld. SWI moved to compel arbitration of the claims under the terms of the agreement in the handbook. The trial court denied the motion, finding that the cost provisions in the agreement violated the minimal requirements for employment arbitration agreements articulated in Armendariz v. Foundation Psychcare Services, Inc., 24 Cal.4th 83 (Cal. 2000).
The Court agreed that the cost provision probably violated Armendariz, but found, in the alternative, that the agreement failed due to general principles of unconscionability. First, the Court found “strong” procedural unconscionability in the agreement because it was imposed as a condition of employment, both in 2003 and 2007.
Next, the Court examined the agreement for substantive unconscionability. The Court found a lack of mutuality based on the agreement’s exemption of intellectual property claims. Because “[n]umerous cases have concluded that arbitration provisions in which the employer reserves for itself litigation of intellectual property claims but requires employees to arbitrate claims they are most likely to assert against the employer lack mutuality,” the Court found SWI’s similar agreement substantively unconscionable. See, e.g., Fitz v. NCR Corp., 118 Cal.App.4th 702, 725 (Cal. Ct. App. 2004); Martinez v. Master Protection Corp., 118 Cal.App.4th 107, 114-115 (Cal. Ct. App. 2004); Mercuro v. Superior Court, 96 Cal.App.4th 167, 174-175 (Cal. Ct. App. 2002).
The Court thus held that the trial court was well within its authority to invalidate the entire agreement and refuse to sever the offending provision. The Court pointed to the series of aforementioned appellate cases as evidence that SWI drafted the agreement in 2007 in bad faith, knowing that such non-mutual agreements were unconscionable and unenforceable. According to the Court, under Armendariz, the trial court was within its authority to invalidate the entire agreement based on the presence of one offending provision.