Arbitration agreement guidance from the Ninth Circuit
California courts and the California Legislature have long been skeptical about mandatory arbitration agreements in employment contracts. In a recent example, the legislature in 2019 enacted AB 51, which makes it unlawful for employers to condition employment or a benefit of employment on the employee waiving their right to trial and arbitrating their disputes with their employer, among other things. In a case arguing the Federal Arbitration Act preempts AB 51, the Ninth Circuit upheld most of the law, finding that mandatory arbitration agreements are enforceable, but only if both parties have a choice when entering into such an agreement. Questions remained, though, as to what conditions reflect choice on the part of the employee.
On November 3, 2021, the Ninth Circuit examined this issue in a case involving a seasonal farm laborer’s employment contract that contained an arbitration agreement. The question before the Court was whether the laborer experienced sufficient economic duress to render his agreement to the arbitration provision unenforceable. Martinez-Gonzalez v. Elkhorn Packing Co. LLC (9th Cir. 2021) D.C. No. 3:18-cv-05226, at 5. Unlike the district court, which held that the totality of circumstances of the employment contract and its signing amounted to undue influence, the Ninth Circuit found that Plaintiff had reasonable alternatives to signing the arbitration agreement and that Elkhorn did not commit a wrongful act, thereby reversing and remanding case. Id. at 9.
Importantly, the Ninth Circuit made careful distinctions between economic duress and “simple hard bargaining,” noting that the doctrine of economic duress was meant to “preclude the wrongful exploitation of business exigencies to obtain disproportionate exchanges of value.” Id. at 8. In so doing, the Ninth Circuit examined the factual circumstances of Plaintiff’s employment contract and the associated arbitration contract. Plaintiff, who was a native Spanish speaker, received an employment contract and arbitration agreement written in Spanish, but Elkhorn did not explain the agreement, provide Plaintiff a copy, or allow Plaintiff to obtain counsel prior to signing the agreement. Id. at 6. Plaintiff contended that he had already made the journey from Mexico to California and was depending on Elkhorn for housing when he was presented with the arbitration agreement, which amounted to a wrongful act under California law because the circumstances exploited him and coerced him to sign the document. Id. at 12.
The Ninth Circuit disagreed with Plaintiff. It found that Elkhorn did not (1) commit an unlawful or tortious act in asking Plaintiff to sign an arbitration agreement, (2) did not make a bad-faith threat or withhold wages, and (3) did not have a coercive purpose in asking Plaintiff to sign the arbitration agreements after arriving in the United States. The Court concluded that the circumstances, though not ideal for Plaintiff, did not unlawfully “make a mockery of the freedom of contract or undermine the proper functioning of our economic system.” Id. at 11. Furthermore, it found that Plaintiff failed to demonstrate a lack of reasonable alternatives, which a “reasonably prudent person would follow” to avoid a coerced agreement. Id., at 13. Because Plaintiff merely needed a job and the money offered from that job, the Ninth Circuit reasoned that Plaintiff could have asked whether his employment with Elkhorn was conditioned about signing the arbitration agreement, especially because nobody at Elkhorn indicated that failure to sign the agreement would result in termination. Id. at 14-15. The Court concluded that no “reasonably prudent person” would assume the agreement was mandatory without the employer indicating it was. Id. at 15. Accordingly, the panel reversed the district court in favor of Elkhorn and remanded to the district court to determine whether Plaintiff’s claims fell within the arbitration agreement’s scope. Id. at 25.
The analysis used by the Ninth Circuit helps clarify that arbitration agreements signed in 2020 in employment contracts are lawful, provided that the employee had the choice to sign it. Employers will need to ensure that their onboarding process is clear of indicators of economic duress or undue influence, and should work with counsel to draft employment contracts and a process that can avoid misunderstandings and future litigation.