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Class Action Defense Cases-Davis v. O’Melveny & Myers: Ninth Circuit Reverses Order Dismissing Labor Law Class Action And Compelling Arbitration Holding Arbitration Clause Unconscionable

District Court Erred in Dismissing Employment Class Action and Compelling Arbitration Because “Take it or Leave it” Option was Procedurally Unconscionable Despite 3-Months’ Notice of Arbitration Clause and Limitations Period for Asserting Claims Against Employer was Substantively Unconscionable Ninth Circuit Holds

In February 2004, plaintiff, a paralegal at O’Melveny & Myers until July 2003, filed a class action against her former employer alleging violations of the federal Fair Labor Standards Act (FLSA) and California state laws for failing to pay overtime and failing to provide meal and rest periods. Davis v. O’Melveny & Myers, ___ F.3d ___ (9th Cir. May 14, 2007) [Slip Opn., at 5605-07]. The district court granted the defense motion to dismiss the class action and compel arbitration based on a Dispute Resolution Program that had been distributed to employees via interoffice mail and via the office intranet site. Id., at 5606. The class action alleged, in part, that the DRP was unconscionable and enforceable, id., at 5607. On appeal, the Ninth Circuit stated that whether the class action claims fell within the scope of the DRP was not in dispute; the issue, rather, was whether the arbitration provision was enforceable. Id., at 5608.

Preliminarily, the Ninth Circuit held that “the question of whether O’Melveny’s arbitration agreement is unconscionable is for a court to decide” rather than an arbitrator. Davis, at 5610 (citations omitted). It then addressed whether the arbitration clause was procedurally and substantively unconscionable, as required under California law, id., at 5611 (citations omitted). The Court of Appeals had little difficulty finding the provision procedurally unconscionable, holding that it was prepared by a “sophisticated employer – a national and international law firm, no less” and that, even though the arbitration clause was not hidden and employees were not taken by surprise, “in a very real sense the DRP was ‘take it or leave it.’” Id., at 5611-12. The only way for an employee to “opt out” of the arbitration provision was to leave the company, and California and Ninth Circuit decisional law disapproves of such provisions in employment agreements. Id., at 5612-13 (citations omitted).

Defense attorneys argued that by providing employees with three months within which to agree to the DRP or seek alternate employment, procedural unconscionability was averted. Davis, at 5613. The Ninth Circuit rejected this argument, noting that the California case relied on by the defense was outside the employment context. Id., at 5614. The Circuit Court also rejected defense efforts to distinguish Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) – which expressly rejected a “take it or leave it” clause where employees had been given 3 days to consider the arbitration provision. Even though O’Melveny gave employees three months to consider their options, the Ninth Circuit held that procedural unconscionability must be decided without reference to the amount of notice provided to employees or the availability of other options. Id., at 5614-16.

Turning to substantive unconscionability – that is, whether the terms of the arbitration clause “‘are so one-sided as to shock the conscience,’” Davis, at 5616 (citation omitted, italics in original) – the Ninth Circuit held that requiring employees to initiate arbitration within one year satisfies this requirement even though O’Melveny, too, was limited to the one-year time limit, id., at 5618. The Circuit Court explained that while “mutual” on its face, in application the provision was one-sided because it was unlikely that O’Melveny would bring any claims against employees, id. The Court of Appeals distinguished Soltani v. W. & S. Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001), which upheld a six-month time limitation on employee claims against an employer, explaining that Soltani’s limitations period did not begin to run until the employee left the company such that “[a] three-year old claim could still be filed, as long as it was within six-months from when the employee stopped working.” Id., at 5620.

Accordingly, the Ninth Circuit reversed the district court order dismissing the class action and compelling arbitration, and remanded the action for further proceedings in the district court. Davis, at 5632.

NOTE: The Ninth Circuit also held that the “confidentiality provision” in the DRP, which prohibited parties from discussing employee-employer disputes with anyone “not directly involved in the mediation or arbitration,” was substantively unconscionable and thus unenforceable. Davis, at 5620-23. The Circuit Court stopped short of holding that confidentiality provisions are per se unconscionable, id., at 5623-24.

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