Limitations on discovery and unconscionability in employment arbitration contracts

With arbitration clauses increasingly common in employment contracts, and employee's strong preference to litigate employment disputes in court, there is renewed effort by employees to find ways to avoid such contracts. One popular approach for challenging the validity of employment arbitration contracts is to characterize the discovery limitations that such contracts typically contain as unconscionable. This article discusses unconscionability of limitations on discovery in employment arbitration contracts and the criteria courts typically use for determining unconscionability.

Unconscionability Defined

The California Supreme Court has broadly defined unconscionability as an "absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83. Unconscionability includes a procedural and a substantive aspect and invalidating an arbitration contract based on unconscionability requires establishing both procedural and substantive unconscionability. Procedural unconscionability has been interpreted as a condition of oppression or unfair surprise usually caused by unequal position and bargaining power that is typically present in employee arbitration contracts. Although courts have often found some degree of unconscionability in employment arbitration agreements which are typically required as a condition of employment, the adhesiveness of such contracts alone is normally not enough to conclude procedural unconscionability. Other factors bearing on a determination of procedural unconscionability include whether the agreement is stand-alone and not hidden in another agreement, whether the agreement was prominently identified an arbitration agreement, whether the employee understood the agreement, and whether the employee felt pressured to sign the agreement.

Substantive unconscionability inquiry, on the other hand, inquires on excessive harshness or one-sidedness of the substantive provisions in a manner that "shocks the conscience." Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2021) 55 Cal.App.4th 223, 246. The California Supreme Court has set forth the following minimum requirements that an employment arbitration contract must include: (1) provide for neutral arbitrators, (2) provide for more than minimal discovery, (3) require a written award that permits limited judicial review, (4) provide for all of the types of relief that would otherwise be available in court, and (5) require the employer to pay the arbitrator's fees and all costs unique to arbitration. Armendariz, Supra, 24 Cal.4th at 102. Factors bearing on a determination of substantive unconscionability include shortening of the statute of limitations, limitations on discovery, selection of arbitrators, finality of the arbitration ruling, and contribution by the employee to the cost of arbitration. Of these, the most common provision present in employment arbitration contracts is limitations on discovery. The reason is clear. Employers are wary of abuses of unlimited discovery, and the resulting runaway costs, which they must bear.

Courts therefore recognize that some limitations on discovery are warranted to allow arbitration to meet its goal of providing for a streamlined procedure to resolve disputes. As described on the California courts' website, the benefits of ADR - depending on the process used and the circumstances of the particular case - may include: saving time and saving money. (http://www.courts.ca.gov/3074.htm#tab4538.) Therefore, courts assess the discovery permitted under the arbitration agreement, the standard for obtaining additional discovery, and whether the plaintiffs have demonstrated that the discovery limitations will prevent them from adequately arbitrating their statutory claims.

In the recent case of Contreras v. Goodwill Industries of Orange County (Cal. Ct. App., Sept. 27, 2022, No. G060457) 2022 WL 4481498, at *3-9, the plaintiff complained that the arbitration agreement in issue, which incorporated the JAMS rules, was insufficient and therefore unconscionable. In rejecting that argument, the court noted that JAMS rules require voluntary exchange of documents and witnesses and allow each party at least one deposition, with further discovery available based upon the reasonable need. The court concluded that the plaintiff had failed to present any evidence that the JAMS rules were insufficient for the particular requirements of its case.

In another case including discovery limitations claimed to be unconscionable, the employment arbitration agreement restricted discovery to the deposition of one individual and any expert witnesses and document requests, absent a showing of need. Dotson v. Amgen, Inc. (2010) 181 Cal.App.4th 975, 982-985. Once again, the court found this provision was not unconscionable given the arbitrator's broad discretion to authorize additional discovery based on demonstrated need.

Likewise, in Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107, the employment arbitration agreement included a more stringent provision limiting discovery to one deposition and a single document request, absent a showing of "substantial need". The court nevertheless rejected the plaintiff's contention that this clause was unconscionable, finding that it did not prevent the employee from seeking additional discovery from the arbitrator.

On the other hand, courts frown on limitations on discovery that are coupled with limitations on the authority of the arbitrator to allow additional discovery. In one such case, Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, the arbitration agreement limited discovery to two depositions, expert depositions, and an exchange of exhibits and witnesses two weeks before the arbitration. The agreement also prohibited additional discovery unless the arbitrator found that a fair hearing would be impossible without it. In finding the discovery provision was unconscionable, the court emphasized that the limitations on arbitrator's discretion resulted in an "inadequate safety valve" given the "impossibility" standard needed to justify more discovery.

Likewise, in Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, the arbitration agreement limited the parties to one deposition, expert depositions, and requests for production of documents. Additional discovery was allowed but only upon a showing of "substantial need." The plaintiff represented that it needed at least 15 to 20 depositions. The court found the gap between needed and permitted discovery too high and the burden for showing a need for more discovery too high and found the clause to be unconscionable.

Conclusion:

Courts uniformly recognize the validity of some limitation on discovery in employee arbitration contracts but are conscious of the need for adequate discovery on the part of the plaintiff. Therefore, even fairly stringent restrictions, such as a single document request, one fact witness deposition and expert depositions have withstood unconscionability challenges so long as the arbitrator maintains the discretion to allow more discovery upon a showing of need.