For the better part of a decade, employers have been required to continually revise their arbitration agreements to reduce the risk of unconscionability challenges that were the focus of numerous appellate court decisions. Throughout this process the clause defining the claims to which the arbitration agreement applied was often ignored, carrying over unchanged from one version to the next. The Fourth District’s decision in Morales v. Superior Court is a reminder that a carefully drafted arbitration agreement is of little use if it does not cover the claims the employee alleges. The court held that an arbitration provision limited to disputes regarding “any aspect of” an employment agreement, or acts that allegedly violate that agreement, did not apply to the plaintiff’s claims under the Fair Employment and Housing Act (FEHA), the California Family Rights Act (CFRA), or wrongful termination, because those claims rested on statutory and public policy rights that exist independently of the employment contract.

Silvia Morales was hired by San Diego Gas & Electric Company in September 2005 as a human resources coordinator. Her offer letter described her employment as at-will and called for arbitration of any dispute regarding any aspect of that letter or any action violating it, "including any action with respect to termination of employment." A little more than a week later, she signed a nine-page Employment, Confidential Information, and Invention Assignment Agreement (the “Agreement”), which also described her employment as at-will and contained an integration clause. The arbitration provision contained in that agreement was narrower, reaching only "[a]ny dispute regarding any aspect of this Agreement or any act which allegedly has or would violate any provision of this Agreement." Nearly 20 years later, SDG&E terminated Morales. She sued for disability discrimination, failure to accommodate, failure to engage in the interactive process, retaliation, and wrongful termination in violation of public policy. SDG&E moved to compel arbitration. The trial court granted the motion, reasoning that because the Agreement described the relationship as at-will, claims resting on exceptions to at-will employment concerned an aspect of the Agreement. Morales sought writ review, and the Court of Appeal overturned the trial court’s decision.

Because the Agreement stated that it was the entire agreement “relating to the subject matter herein,” and because it addressed arbitration, it superseded the offer letter on that subject. However, that clause did not specifically include a reference to Morales’s claims. Arbitration provisions in California tend to fall into two categories. Some are specific to the employment relationship and cover any dispute arising out of, related to, or connected with the employee’s employment. Others arbitration clauses are tied to the employment contract and cover disputes over the meaning or breach of the agreement. SDG&E’s arbitration clause was the latter. Morales’s claims required no interpretation of any term of the Agreement, and no one alleged the Agreement had been breached. She did not contest that she was at-will. Her claims rested on statutory protections and public policies that exist independently of the contract, which placed her lawsuit outside a clause tied to the Agreement. Notably, the court never determined whether the arbitration provision was otherwise enforceable because there was no agreement to arbitrate Morales’ claims.

The takeaway is a familiar one. An arbitration provision that covers only the agreement will not reach the claims employees bring under the FEHA, CFRA, or Labor Code, so such a clause applies to little more than breach of contract and confidentiality disputes. A clause defining the scope of an arbitration agreement should instead cover disputes arising out of, relating to, or in connection with the employee’s employment or its termination, and should name those claim types expressly on a non-exhaustive basis. Overbreadth carries its own risks, as the Cook and Stoker decisions illustrate, so the middle ground is to focus on the employment relationship and nothing beyond it. Further, employers should be aware that a later agreement with a merger clause can displace broader arbitration language in an earlier document, which suggests that confidentiality and invention assignment forms should either stay silent on arbitration or expressly incorporate the operative provision by reference.

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