FAA Does Not Save All Arbitration Agreements

Arbitration agreements are not a tool for taking advantage of employees. Employers who think they are should think again. This lesson comes from the case of OTO, LLC v Kho.

OTO, a California Toyota dealership, required its employees, including Mr. Kho, to sign an arbitration agreement. When Kho went to the Labor Commissioner to complain about the company’s pay practices, OTO took the position that Kho’s complaints could only be resolved through the arbitration agreement and did not participate in the administrative hearing. Kho was awarded a handsome sum by the Labor Commissioner and OTO appealed. Ultimately, the case ended up in the California Supreme Court where the court ruled that the arbitration agreement was not valid and that Kho was entitled to the administrative procedure and the money he obtained out of it.

The court ruled that the agreement could not be enforced because it was unconscionable (extremely unfair). The agreement had both procedural and substantive elements that were unfair, but significant for HR managers and teams were the procedural elements. OTO’s arbitration provision was buried in a document with information on several other topics. It was written in typeface that was 8.5 point or smaller. It contained complex sentences filled with statutory references and legal jargon. In fact, the second sentence of the provision was 12 lines long! The document was delivered to Kho along with other employment-related documents by a porter, not someone from HR and not someone who had any knowledge about the documents. This process for obtaining Kho’s signature afforded no opportunity for education about arbitration and the impression that Kho needed to sign the documents quickly in the porter’s presence. The court viewed all of this as sufficiently procedural unfairness to invalidate the agreement.

OTO appealed the decision to the United States Supreme Court on the basis that the Federal Arbitration Act (FAA) should save the agreement. Yesterday, the Supreme Court refused to take up the employer’s appeal. Thus, California employers should know that not all arbitration agreements will be saved by the FAA and agreements should not be used as a tool to take advantage of employees. Rather, employers should carefully explain the motives for requiring arbitration, should use agreements that are easy to understand and should give employees sufficient time to review and consider the agreement. Both employees and employers will benefit in the long run.