New Legal Guidance For Modifying Arbitration Agreements

Employers have had some reluctance to expressly reserve the right to modify employment arbitration agreements in light of arguments that the agreements might be found illusory and unenforceable.  Last week, the Second Appellate District Court of Appeals declined to apply such a bar, and provided guidance on how to unilaterally modify arbitration agreements after they have been executed by an employee or applicant.  In Casas v. CarMax Auto Superstores California LLC, the court held that a provision in an arbitration agreement permitting an employer to make annual modifications unilaterally did not render the agreement invalid where the agreement required that changes be announced and posted with 30 days’ notice.  The decision also distinguished an earlier California court of appeal opinion that had invalidated a modification clause where the clause was buried in the employee handbook and did not provide for such notice.  

Background
Plaintiff Mario Casas had worked at CarMax as a service consultant.  As part of his 2008 employment application, Casas had signed an arbitration agreement in which Casas had acknowledged receipt of the CarMax Dispute Resolution Rules and Procedures governing arbitration (DRRP).  The DRRP gave CarMax the right to “alter or terminate the Agreement and these [DRRP]” once annually upon giving 30-days written notice, by posting the notice at all CarMax locations and publishing the text of any modification in the Applicant Packet. 

Casas sued CarMax challenging his 2010 termination.  CarMax filed a motion to compel arbitration under the DRRP.  Casas opposed the motion on the grounds that the arbitration agreement was not a valid contract and was unconscionable.  The trial court, relying on the 2012 case Sparks v. Vista Del Mar Child & Family Services, denied CarMax’s motion to compel arbitration, concluding that the arbitration agreement was “illusory” because the DRRP gave CarMax the freedom to alter or terminate the agreement and DRRP.  CarMax appealed.

What the Court Held
The Court of Appeal reversed the trial court’s decision.  It distinguished Sparks on the ground that the employee handbook in that case contained a brief, un-highlighted dispute resolution policy requiring the employee and employer to arbitrate all claims, and permitting the employer to amend the handbook at any time without notice.  By contrast, the CarMax DRRP required notice on a specific date each year with advance notice in all CarMax locations. 

The court noted that even modification clauses not providing for advance notice do not render an agreement illusory because California’s implied covenant of good faith and fair dealing limits the employer’s authority to modify the arbitration agreement unilaterally.  The court did find invalid one part of the DRRP purporting to apply the modified version of the agreement even to claims arising before modification.  But, the court concluded that the DRRP’s rule 18 stating that mandatory provisions of California law automatically take precedence over conflicting DRRP provisions saved the agreement. 

What Casas Means for Mandatory Arbitration Agreements
The upshot of Casas is that, if employers incorporate modification clauses in mandatory pre-dispute arbitration agreements, they will want to abide by the following guidelines outlined in CarMax:

1. Limit modifications to once annually on the same day each year.
2. Notice of no less than 30 calendar days for each modification.
3. The notice should be posted in writing at all business locations employing anyone subject to the arbitration agreement and in the employee handbook.
4. The modification should only apply to claims arising after the above notice.
5. Include a savings clause stating that if any of the arbitration rules is held to be in conflict with a mandatory provision of applicable law, the conflicting Rule or Procedure shall be modified automatically to comply with the mandatory provision until the rules can be formally modified to comply with the law.

In addition, be sure to highlight the dispute resolution provision within the employee handbook or application and have each employee or applicant sign an express acknowledgment of the dispute resolution clause separately from the rest of the materials. These steps will help prevent disputes later on about whether the employee was made aware of dispute resolution requirements when he or she completed the often-lengthy application paperwork.