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California Appellate Decision Clarifies Standard for Injunctive Relief Carve-Outs Within California Arbitration Agreements

Posted in Practice & Procedure, Restrictive Covenants, Trade Secrets

By Robert Milligan and Grace Chuchla

Arbitration agreements with carve-outs for provisional remedies are again the topic du jour, particularly in California courts which apply a stringent unconscionability analysis to employee arbitration agreements.

As we previously discussed on this blog, in October 2012, a federal district court for the Eastern District of California upheld an arbitration agreement even though it excluded suits seeking injunctive relief for unfair competition and/or disclosure of trade secrets (Steele, et. al v. American Mortgage Solutions d/b/a Pinnacle, 2012 WL 5349511 (E.D. Cal., Oct. 26, 2012)). In doing so, the district court made clear that such carve-outs for trade secret protection do not necessarily inspire the same level of suspicion that other types of exclusions do. As the district court saw it, Pinnacle had “valid reasons, entirely independent from any intent to place the employees at a relative disadvantage or to generate one sided results, for excluding claims of unfair competition or trade secret violations from the mandatory arbitration agreement provisions of the Agreement.”

Such common sense reasoning regarding the relationship between arbitration agreements and provisional remedies has now also found a voice in the California Court of Appeals. Specifically, in its December 20, 2012 decision in Maribel Baltazar v. Forever 21, Inc., the Court of Appeal for Second District, Division One, upheld an arbitration agreement despite plaintiff’s claims that the agreement’s incorporation of California Code of Civil Procedure Section 1281.8 rendered it substantively unconscionable.

Following Baltazar’s complaint filed in California state court asserting nine causes of action under both the FEHA and the Ralph Civil Rights Act of 1976, Forever 21 filed a Motion to Compel Arbitration in September 2011. After hearing arguments from both sides, the trial court sided with the plaintiff, finding that the agreement was unconscionable because it: 1) required arbitration of only claims likely to be brought by the employer; 2) gave Forever 21 the right to take “all necessary steps” to protect its confidential or trade secret information; and 3) mandated arbitration even if the agreement was found unenforceable.

Forever 21 appealed, and the Court of Appeal began its analysis of the arbitration agreement by first clarifying that the California Arbitration Act (“CAA”), rather than the Federal Arbitration Act (“FAA”), governed. The agreement was silent on this matter, and although plaintiff claimed that the FAA should prevail unless the parties expressly “opted out,” the lack of any evidence of interstate commerce led the Court to hold that the CAA governed.

Looking next at procedural and substantive unconscionability, the Court easily found the agreement to be procedurally unconscionable, for Baltazar was forced to sign it as a condition to employment. Substantive unconscionability, however, inspired a much lengthier discussion, as the Court addressed individually each of the four areas of the arbitration agreement that the plaintiff claimed to be substantively unconscionable.

1) Unilateral arbitration – Citing to a list in the agreement of disputes that must be arbitrated, Baltazar argued that the agreement was set up to force only claims brought by employees into arbitration. However, despite the fact that this list did consist of claims that employees would most likely bring against their employer, the Court recognized that adjacent language in the agreement destroyed plaintiff’s argument. Specifically, the fact that the list was prefaced by the phrase “include but are not limited to” and the fact that the paragraph immediately following stated that “each of the parties voluntarily and irrevocably waives any and all rights to have any Dispute heard or resolved in any forum other than through arbitration” led the Court to recognize that the agreement was bilateral, rather than unilateral.

2) Availability of provisional relief – This analysis was the core of the Court’s ruling. Plaintiff’s argument rested on the claim that the agreement’s specific incorporation of California Code of Civil Procedure Section 1281.8 rendered it unconscionable.

In relevant part, section 1281.8 states that:

“A party to an arbitration agreement may file in the court in the county in which an arbitration proceeding is pending, or if an arbitration proceeding has not commenced, in any proper court, an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.”

While many non-California attorneys may be puzzled as to why plaintiff’s argument was not patently frivolous, we are in California after all.

The relationship between section 1281.8 and arbitration agreements had previously been examined by the court of appeals in Trivedi v. Curexo Technology Corp., 189 Cal. App. 4th 387. In this case, the court found a carve-out for provisional remedies within an arbitration agreement to be unconscionable even though it also recognized that the language in the agreement was coextensive with section 1281.8. The Court in Baltazar thankfully took issue with this contradictory logic for three reasons.

First, the cases that the Court of Appeal relied on in Trivedi (Mercuro v. Superior Court, 96 Cal. App. 4th 174, and Fitz v. NCR Corp., 118 Cal. App. 4th 172) “do not suggest that the incorporation of section 1281.8 is unconscionable.” Rather, Mercuro and Fitz dealt with carve-outs in arbitration agreements that were cherry picked by the employer and were clearly unilateral. Second, the Court could not “say that Forever 21 is more likely to seek injunctive relief than an employee.” As the Court astutely pointed out, seven of Baltazar’s nine claims were brought under statutes that allow her to seek injunctive relief. Finally, the Court made the common sense observation that, because the agreement is subject to the CAA, not the FAA, “section 1281.8 would apply even if it were not expressly mentioned in the agreement.”

“[B]ecause the Agreement is subject to the CAA, not the FAA, [CCP] section 1281.8 would apply even if it were not expressly mentioned in the Agreement. Put another way, an arbitration agreement governed by the CAA permits a party to seek provisional remedies, such as injunctive relief, in court regardless of whether section 1281.8 is mentioned in the agreement.”

Expressly incorporating what would otherwise be automatically read into the agreement cannot create substantive unconscionability. In other words, expressly referencing procedural mechanisms in your arbitration agreement permitted under California state law is not unconscionable!!!!

3) Forever 21’s Protected Information – Plaintiff also took issue with the provision of the agreement which stated that, during arbitration, “all necessary steps” would be taken to protect Forever 21’s trade secret and confidential information as unconscionable. The Court held otherwise, finding that this provision was sufficiently narrow and consistent with both the Uniform Trade Secrets Act and general confidentiality and non-disclosure agreements.

4) Arbitration Notwithstanding the Agreement’s Unenforceability – Within the arbitration agreement, there is a section which states that arbitration will be conducted pursuant to the rules of the American Arbitration Association (“AAA”) or the rules of the CAA if the AAA rules are found to be unenforceable. Plaintiff claimed that this section has the effect of continuing to force arbitration even if the agreement is declared unenforceable. However, such an interpretation is, according to the Court, “without merit.” As the Court recognized, this section of the agreement “refers only to the invalidation of AAA rules, not the validity of the Agreement” (italics in original). There is nothing unconscionable about providing an alternate forum in the unlikely event that that the AAA rules are declared unfair.

In sum, the Court’ s ruling in Baltazar v. Forever 21 is a refreshing moment of cogent common sense analysis much like what we saw from the district court in Steele v. Pinnacle. Not only did the Court pay no heed to Plaintiff’s selective reading of her arbitration agreement, but it also undertook a careful analysis of existing case law and declined to follow the contradictory logic of Trivedi. For employers looking to shore up their arbitration agreements governed by the CAA, this decision suggests that, as long as an agreement’s carve-outs for the provisional remedies stem directly from the language of section 1281.8, the agreement will be enforceable. Remember, however, that this decision is not carte blanche to start excluding a variety of claims from arbitration agreements at least under agreements governed by the CAA. Mercuro and Fitz are apparently still good law pending determination of whether the U.S. Supreme Court’s decision in Concepcion renders the unconscionability analysis moot, and the Court’s decision here rests in large part on the fact that section 1281.8 would be incorporated into Forever 21 arbitration agreement even without specific mention in the agreement. That said, despite the Court’s narrowly tailored ruling, there is no denying that Baltazar brings some clarity for employers looking to both enforce their arbitration agreements and protect their trade secrets while doing business in the great state of California.