Cross Country Healthcare, Inc., a healthcare staffing company, believed that it had a “squeaky clean” Arbitration Agreement with its employees.  Indeed, the Arbitration Agreement seemed unimpeachable by current California standards: it included: (1) a mutual acknowledgement that arbitration would be the exclusive method of resolving claims between the employer and employee in connection with the employment relationship; (2) a clause that the employer would pay arbitration fees not normally incurred if the action was brought in a court of law; (3) a statement that the agreement was subject to the Federal Arbitration Act. (“FAA”); and (4) a severance clause, which would permit a court to sever any procedurally or substantively unconscionable provision in the agreement.

At the same time that employees signed the Arbitration Agreement, they were also provided with, and were required to sign, an Employment Agreement that included restrictions on the employee’s use of confidential and trade secret information.  Among other things, the Employment Agreement stated that the employee agreed that any breach of these confidentiality provisions “would cause irreparable harm” to Cross Country Staffing, that Cross Country Staffing would be entitled to injunctive relief “without having to post bond”, and that the Cross Country Staffing would have the right to litigate these claims in state or federal court, of its choosing.  Moreover, these provisions provided that if Cross Country Staffing was successful in its pursuit of these claims, it would be entitled to all costs, expenses, and reasonable attorneys’ fees as the prevailing party.

Subsequently, when two of Cross Country Staffing’s former employees challenged the enforcement of the Arbitration Agreement in Silva v. Cross Country Healthcare, Inc., both the trial court and Court of Appeals found that the Arbitration Agreement was substantively unconscionable because it had to be read together with the Employment Agreement as they were separate aspects of a single primary transaction of the employees’ hiring.  More specifically, the restrictive covenants regarding trade secrets, confidential information, and limitations on competition and solicitation were governed by a one-sided provision that favored the employer and thus destroyed the mutuality contemplated by the arbitration agreement. 

In other words, Cross Country Staffing’s employees were obligated to arbitrate the claims more likely to be brought by them (e.g., violations of employment and labor law), but Cross Country Staffing was exempted from arbitration of the claims that it was more likely to bring (actions to enforce the confidentiality, non-compete and non-solicitation restrictions).  In addition, “the agreements set up nonmutual attorney fees provisions, with Cross Country Staffing enjoying full access to ‘costs, expenses, and reasonable attorney fees’ in court for its claims under the Employment Agreement, while the employee plaintiffs generally must bear their own costs and fees under the Arbitration Agreement” which was further determined to be unconscionable as written. 

Consistent with other recent decisions, the Court of Appeal upheld the trial court’s refusal to sever the unconscionable provisions because “‘an employer will not be deterred from routinely inserting such a deliberately illegal clause into the arbitration agreements it mandates for its employees if it knows that the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter.’”

As a result of the decision in Silva, employers must take immediate steps to update any confidentiality agreements signed by employees, as well as to examine the relationship between any such agreement and any arbitration agreement governing employment disputes, to make sure that the agreements, if read together, are both substantively fair.