Warning To Employers: Overbroad Arbitration Agreement Is Likely To Be Unenforceable in California

A recent California appellate decision serves as an important reminder that an arbitration agreement that is drafted too broadly may not simply be narrowed by a court—it may be found entirely unenforceable, redirecting that dispute to court. In Phan v. Knight Sacramento SU, Inc., the California Court of Appeal for the Third Appellate District examined an arbitration agreement that extended far beyond ordinary employment-related disputes. The agreement purported to require arbitration not only of employment claims, but essentially any claims whatsoever between the employee and employer arising from events occurring before, during, or after the employee's employment. The court concluded that this sweeping language was substantively unconscionable because it reached disputes having little or no connection to the employment relationship. 

Many employers understandably want the broadest protection possible in their arbitration agreements. However,  an arbitration agreement that attempts to cover every conceivable dispute can have the opposite effect as the above case shows.  Problematic language often includes provisions stating that arbitration applies to:

• Any claims whatsoever between the employee and employer;
• Claims arising before employment begins;
• Claims arising after employment ends;
• Disputes unrelated to the employment relationship; or
• Any dispute of any kind between the parties regardless of its connection to employment.

California courts carefully scrutinize arbitration agreements for unconscionability. When an agreement reaches far beyond legitimate employment disputes, a court may conclude that it unfairly favors the employer or exceeds what employees could reasonably expect when accepting employment.

Employers should periodically review their arbitration agreements to ensure they comply with current California law. Because arbitration law continues to evolve, agreements that were drafted years ago may no longer withstand judicial scrutiny. A carefully drafted arbitration agreement can provide significant benefits. An overreaching one, however, may provide none at all.

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