On July 15, 2024, the California Supreme Court issued its decision in Ramirez v. Charter Communications, Inc., clarifying California law on the enforceability of several common arbitration provisions and the standards by which courts must review arbitration agreements. The decision is a helpful reminder for employers to work with experienced employment counsel to regularly review and update existing arbitration agreements.

The Court’s Holdings

In Ramirez, the defendant Charter Communications required the plaintiff to sign an arbitration agreement as a condition of her employment. Last week, the California Supreme Court weighed in and held that three of the four provisions identified by the lower courts could not be enforced because they were substantively unconscionable.

• First, the Supreme Court held that the arbitration agreement’s definition of covered and excluded claims was substantively unconscionable because it lacked mutuality. The agreement excluded from arbitration certain claims more likely to be brought by an employer, like claims related to intellectual property rights, noncompete agreements, theft, and disclosure of trade secrets. The Court reinforced the rule that an agreement may not compel arbitration of claims more likely to be brought by an employee but exclude from arbitration those claims more likely to be brought by an employer.
• Second, the Supreme Court held that the arbitration agreement’s provision shortening the statute of limitations for claims filed under California’s Fair Employment and Housing Act (“FEHA”) was unconscionable. The agreement required an employee to initiate an arbitration claim within the applicable deadline for filing an administrative claim; but this is a shorter period of time than a litigant has to bring a FEHA lawsuit and could require an employee to arbitrate a claim before the Department of Fair Employment and Housing (which is now called the California Civil Rights Department) had completed its investigation and issued a “right to sue” letter. Although the Ramirez court agreed that this provision shortening the statute of limitations for filing FEHA claims was substantively unconscionable, it did clarify that arbitration agreements may shorten the statute of limitations for filing claims so long as the shortened limitation period is “reasonable.” It is unclear from the opinion what such a “reasonable” shortened statute of limitations would be for a FEHA claim.
• Third, the Supreme Court found that the agreement’s provision allowing the employer to recover attorneys’ fees for prevailing on a motion to compel arbitration was substantively unconscionable. The Court concluded this provision imposed a potential expense on the employee that the employee would not have otherwise faced if this case was in a court. That is because California law prohibits an arbitration agreement from imposing expenses (e.g., paying for the arbitrator’s time) on an employee that the employee would not have if the case stayed in court.
• Finally, the Court considered a challenge to the arbitration agreement’s discovery limits. The agreement required the parties to exchange information and take depositions within a 90-day period; limited each party to four depositions; and limited each party to 20 interrogatories and 15 requests for documents. However, the arbitration agreement allowed the arbitrator to decide disputes related to arbitration and allowed a full and equal opportunity to all parties to present evidence that the arbitrator deemed material and relevant. The Court did not find this provision to be unconscionable, emphasizing that the agreement could be construed to give the arbitrator authority to grant additional discovery if needed, and thus provided “adequate” discovery to the employee.

Ultimately, the California Supreme Court remanded the matter for the lower court to determine if it could sever the unconscionable provisions. In so doing, the Court instructed that the test for severability is qualitative, not quantitative. The key question is whether “the central purpose of the contract is tainted with illegality,” not whether the number of substantively unconscionable provisions exceeds a certain numerical limit. The Court also ruled that an arbitration agreement can only be cured by severing or limiting unlawful provisions, not through a court reforming, augmenting, or rewriting the agreement. Finally, the Court ruled that courts must consider whether severing the unconscionable provisions and enforcing the agreement furthers the interests of justice.

What This Means for California’s Employers

This ruling provides welcome clarification about whether courts will enforce arbitration agreements with the common provisions discussed earlier in this Alert. The opinion is also a reminder that California law on arbitration agreements is constantly evolving and that arbitration agreements should be regularly reviewed and updated if they are going to be enforced by a court. Employers are strongly encouraged to use this case as an opportunity to review existing arbitration agreements with experienced employment counsel.

Please contact us if you have questions about how this new case will affect your arbitration agreement or need advice about how to proceed.

• Erik T. Johnson (ejohnson@wilsonturnerkosmo.com)
• Katherine M. McCray (kmccray@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.