Why it matters

A California appellate panel determined that a law firm’s arbitration agreement with a partner was unconscionable, reversing a trial court’s grant of a motion to compel arbitration in an employment dispute. An experienced litigator and patent practitioner, Constance Ramos, was hired by Winston & Strawn as a partner. She sued after a few years of employment, claiming that she was denied recognition for her work and excluded from opportunities for career advancement, asserting claims of discrimination, retaliation and wrongful termination. The law firm moved to compel arbitration, and a trial court granted the motion. But the appellate panel reversed. The arbitration provision in the employment agreement signed by Ramos failed to meet the standard of Armendariz v. Foundation Health Psychcare Services, Inc., the court said, and was unconscionable. Further, the taint of illegality could not be removed by severing the unlawful provisions without altering the nature of the parties’ agreement, leading the panel to void the entire agreement and send the case back to Superior Court.

Detailed discussion

Constance Ramos was hired as an income partner at Winston & Strawn in May 2014. An experienced litigator and patent practitioner with a doctorate in biophysics, Ramos signed a copy of the firm’s partnership agreement when she began work. Section 13.11 of the agreement was a mandatory arbitration clause, which outlined procedures for selection of the arbitration panel, set the venue for arbitration in Chicago and provided that each party would bear its own fees.

The arbitration provision also stated that “Except to the extent necessary to enter judgment on any arbitral award, all aspects of the arbitration shall be maintained by the parties and the arbitrators in strict confidence,” and “The panel of arbitrators shall have no authority to add to, detract from or otherwise modify this Agreement nor will the panel of arbitrators have authority to substitute its judgment for, or otherwise override the determinations of, the Partnership, or the Executive Committee or officers authorized to act in its behalf, with respect to any determination made or action committed to by such parties, unless such action or determination violates a provision of this Agreement.”

Ramos felt firm leaders showed little interest in her business development or her efforts to contribute to the firm’s intellectual property work. When the two partners that joined the firm with Ramos left in January 2016, she was told that Winston wanted her to leave too. The firm significantly reduced her salary in spite of an almost complete victory on an active litigation matter and the fact that she was the highest-billing income partner in the office in 2016.

While Ramos continued to generate business, she was left out of pitch meetings and left off cases in favor of less-qualified, less-experienced male attorneys, she alleged. She also complained repeatedly to firm management. In 2017, her salary was cut again. She submitted a letter of resignation under protest and filed suit against the law firm.

The firm moved to compel arbitration. Not only had Ramos signed the partnership agreement including the arbitration provision, but she was a “partner” and not an “employee,” so the requirements for arbitration clauses in mandatory employment agreements as set forth in Armendariz v. Foundation Health Psychcare Services, Inc. did not apply, the defendant argued.

Over Ramos’ objections that she was an “employee” for purposes of the antidiscrimination protections afforded by state law, the trial court granted the motion to compel arbitration. However, the court did find that the provisions related to venue and cost sharing were unconscionable and severed them from the agreement.

The plaintiff appealed, contending that the arbitration agreement was both procedurally and substantively unconscionable. The appellate panel agreed.

As an initial matter, the court found that the arbitration agreement encompassed the claims made in Ramos’ complaint. While none of her claims alleged a violation of any term of the partnership agreement, her allegation that her compensation was improperly reduced by 56 percent “arguably relates to the provisions of the Partnership Agreement regarding compensation for income partners,” the court said. “It also relates to the partnership in that Ramos was an income partner and alleges she was denied compensation and opportunities by other partners of the firm.”

“Thus, the controversy between the parties appears to ‘touch matters’ covered by the Partnership Agreement,” the panel wrote. “Because her statutory claims have their ‘roots in the relationship’ created by the Partnership Agreement, her claims are subject to arbitration.”

However, the court found the agreement was not enforceable under California law. In Armendariz, the California Supreme Court considered the enforceability of a mandatory employment agreement with respect to the employees’ statutory discrimination and wrongful termination in violation of public policy claims. The state’s highest court held that such claims are arbitrable if the arbitration agreement meets certain minimum requirements and is not so one-sided as to be unconscionable.

The appellate panel rejected the law firm’s argument that Armendariz is no longer good law after the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, where the justices ruled that the Federal Arbitration Act pre-empted a California rule that class action waivers in arbitration clauses were substantively unconscionable as a matter of law.

Since Concepcion was decided, the California Supreme Court has reaffirmed the validity of Armendariz multiple times, the panel noted, and as it remains controlling law, the court is bound by it.

The parties disputed whether Ramos was an “employee” or a “partner,” and accordingly whether Armendariz applied at all. But the court found it unnecessary to resolve the question. According to the court, even if Ramos was a “partner” (a question the court did not decide), Armendariz applied because the claims Ramos asserted in her lawsuit encompassed unwaivable statutory rights, and the law firm was in a superior bargaining position, with no evidence that Ramos had an opportunity to negotiate the arbitration provision.

“Whether or not a finder of fact ultimately agrees with Ramos’ allegation that she was an employee within the meaning of FEHA, the relationship between Winston and Ramos was characterized by a power imbalance analogous to that of an employer-employee relationship,” the court wrote.

The panel then applied the Armendariz requirements, including that the agreement (1) must provide for neutral arbitrators; (2) may not limit remedies provided under the statute; (3) must offer sufficient discovery to adequately arbitrate the employee’s statutory claim; (4) must provide a written arbitration decision and judicial review sufficient to ensure the arbitrator complied with the statutory requirements; and (5) must provide that the employer pays all costs unique to arbitration.

The court agreed with Ramos that the arbitration agreement improperly limited her statutory remedies and required her to pay fees she would not otherwise have to pay in court. The last sentence of the arbitration provision “does preclude the arbitrators from providing remedies that would otherwise be available in a court of law,” the court said.

For example, Ramos alleged that her compensation was reduced by 56 percent and she was denied bonuses in 2016 and 2017. If she prevailed on these claims, she would be entitled to a variety of remedies including back pay, front pay, or both, as well as reinstatement or punitive damages.

“To award such relief, the arbitrators would have to ‘substitute their judgment’ for that of the decision makers and ‘override’ the determination of the executive committee and those authorized to act on its behalf that Ramos was not entitled to compensation, reinstatement or equivalent relief,” the panel explained. “As the express language of the agreement prevents Ramos from obtaining remedies available under her statutory claims, the provision is unenforceable.”

In addition to these problems, the panel agreed with the plaintiff that the provision’s mandate of “strict confidence” increased the unconscionability of the agreement. “[T]he language of the confidentiality clause in this arbitration agreement is very broad, as it covers ‘all aspects of the arbitration,’ including presumably, the allegations of Ramos’s complaint, the nature of the claims she is arbitrating and the discovery process itself,” the court wrote. “It is hard to see how she could engage in informal discovery or contact witnesses without violating the prohibition against revealing an ‘aspect of the arbitration.’”

“In sum, the arbitration agreement as applied to Ramos’s statutory and wrongful termination claims contains four unconscionable terms,” the court said. “The provision requiring Ramos to pay half the costs of arbitration, pay her own attorney fees, restricting the ability of the panel of arbitrators to ‘override’ or ‘substitute its judgment’ for that of the partnership, and the confidentiality clause, are unconscionable and significantly inhibit Ramos’s ability to pursue her unwaivable statutory claims.”

Having found that the agreement was both substantively and procedurally unconscionable (given that the contract was adhesive), the panel considered whether severance could remedy the situation. As the agreement contained more than one unlawful provision, the court found itself unable to strike the problematic provisions without fundamentally altering the parties’ agreement.

“Because we are not permitted to cure the deficiencies by reforming or augmenting the contract’s terms, we must void the entire agreement,” the panel wrote, reversing the order granting the motion to compel arbitration and remanding the case to the Superior Court.

To read the opinion in Ramos v. Superior Court, click here.