California Supreme Court upholds limits on arbitration discovery

On July 15, in Ramirez v. Charter Communications, Inc., the California Supreme Court upheld the validity of discovery limitations in an employment arbitration agreement and also held that the lower courts applied the wrong legal test in determining whether to sever legally invalid provisions from the agreement instead of declining to enforce the agreement altogether. Although the opinion struck down certain other provisions in the arbitration agreement as unconscionable, the court's decision is likely to make it easier for defendants to enforce reasonable arbitration agreements.

The California Supreme Court's decision in Ramirez

In Ramirez, the plaintiff sued the defendant employer in the Los Angeles County Superior Court, alleging claims for discrimination, harassment, and retaliation under California's Fair Employment and Housing Act. The defendant moved to compel arbitration, invoking an arbitration agreement the plaintiff signed when she was first hired. The trial court declined to compel arbitration and the California Court of Appeal affirmed, holding that the arbitration agreement was unconscionable because it contained provisions: (1) requiring arbitration of certain claims, while exempting others from coverage; (2) shortening the time period to bring certain employment-related claims; (3) limiting the parties to four depositions, 20 interrogatories, and 15 document requests each; and (4) permitting a party that successfully moved to compel arbitration to recover its interim attorneys' fees. The court further held that because the agreement contained multiple invalid terms, the court would not sever the offending provisions and enforce the rest of the agreement, despite language in the contract requiring severance.

The California Supreme Court granted review and reversed. The court first analyzed each of the provisions the Court of Appeal held invalid. Most significantly, the court held that the agreement's provisions limiting discovery were not unconscionable. Disapproving seven lower court cases to the contrary, the California Supreme Court reasoned that courts must assess whether discovery limits are reasonable based on what the parties knew at the time they entered into the arbitration agreement, not based on what discovery the plaintiff claims to need after she files her claims. The court further held that discovery limits are not unconscionable as long as the arbitrator retains authority to exceed them, and that courts should err on the side of construing agreements as preserving that authority for the arbitrator. The court agreed with the lower courts that the arbitration agreement's claim coverage, time limit and interim fee award provisions were unconscionable on the facts of this case, largely endorsing past cases analyzing similar provisions.

The court next analyzed the correct legal standard for determining whether invalid provisions can be severed from an arbitration agreement. The court held "that no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term," overturning three prior lower court cases. Instead, the court held that "courts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract's main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice." The court also held that the lower courts should have analyzed how the arbitration agreement's provision requiring severance of clauses held to be invalid weighs into the severance analysis. The court thus reversed the lower court's judgment and remanded to reassess the severability question under the correct legal standard.

Implications for future cases

Although the California Supreme Court struck down some aspects of the defendant's arbitration agreement, its holdings on the agreement's discovery limitation provision and the proper severability analysis are likely to have the biggest impact on future cases. Those latter holdings should make it easier for defendants to draft and enforce arbitration agreements.

The most significant aspect of the court's decision is its analysis on discovery limitations. One of the chief reasons many defendants prefer arbitration to litigation in court is that arbitration typically involves more targeted discovery than court litigation, which is designed to reduce the litigation's overall cost and leads to a faster resolution on the merits. After Ramirez, courts will likely uphold most contractual discovery limitations as long as they are not overly aggressive, and the agreement gives the arbitrator authority to exceed them as necessary. The latter provision is not a substantial concession. Arbitrators are accustomed to relatively limited discovery and are unlikely to exceed contractually specified discovery limits without good reason. Moreover, even if an arbitrator does decide to exceed contractual limits, those limits are likely to represent a sort of "starting point" for the scope of discovery, making it less likely that an arbitrator would substantially exceed them. Parties drafting arbitration agreements in California-based contracts should thus strongly consider adding specified discovery limits, along with language preserving the arbitrator's authority to exceed those limits, although the case suggests this latter provision should be presumed.

The court's severability analysis is also likely to help defendants enforce arbitration agreements. Before Ramirez, many lower courts in California had embraced a rule that if the court found more than one provision to be invalid, it could decline to enforce the entire agreement even if the invalid provisions were easily severable. Ramirez makes clear that courts cannot rely on that quantitative approach, but must instead evaluate the arbitration agreement holistically, including contractual language specifying that invalid provisions should be severed. The court's qualitative approach increases the odds that defendants will be able to successfully enforce arbitration agreements, because it means that a plaintiff cannot escape her arbitration obligations by merely picking off a couple of provisions that a court might find too aggressive or restrictive.

Conclusion

On the whole, Ramirez is beneficial to contracting parties that wish to maximize their chances that disputes will be heard in arbitration, rather than in Superior Court. After Ramirez, parties drafting arbitration agreements should strongly consider adding discovery limitations and severability language to make arbitration (and pre-arbitration enforcement) less expensive and more predictable.