The California Court of Appeal's ruling in Gurganus v. IGS Solutions LLC reinforces a critical lesson for California employers: courts will meticulously examine the cumulative effect of all related employment agreements when determining if an arbitration agreement is truly mutual. The court affirmed the trial court's decision to deny IGS’ motion to compel arbitration, concluding that the company's Arbitration Agreement, when read together with the concurrent Confidentiality and Non-Disclosure Agreement (the “Confidentiality Agreement”), was permeated with unconscionability.

The court analyzed the “net effect” of the Arbitration Agreement and the Confidentiality Agreement together because both were executed by the employee on the same day during onboarding as part of the same primary transaction and ultimately governed how disputes arising from her employment would be resolved. The court reasoned that failing to read the documents together would have "artificially segment[ed] the parties contractual relationship" and failed to account for the overall dispute resolution process IGS imposed. Viewed through this combined lens, the agreements revealed a high degree of substantive unconscionability, showing a systemic effort to create a dispute resolution forum that worked primarily to the employer’s advantage.

Specifically, the Arbitration Agreement compelled the employee to arbitrate virtually all claims an employee would typically bring, such as those for discrimination, retaliation, wrongful termination, and unpaid wages. However, the same agreement expressly excluded from arbitration claims that an employer, like IGS, was most likely to bring, such as those seeking injunctive or declaratory relief regarding confidential information. The Confidentiality Agreement went further, permitting IGS to bring any claims related to confidential information and trade secrets directly to court. This had the “net effect” of destroying the mutuality of arbitration, forcing the employee’s claims into private arbitration while preserving the employer’s right to litigate its most probable claims in court. Compounding the lack of mutuality, the Confidentiality Agreement specifically allowed IGS to seek injunctive relief “without the posting of any bond and without proof of actual damages,” a provision the court found unconscionable because it lacked any corresponding benefit or right for the employee.

Finally, the Arbitration Agreement’s overly broad confidentiality clause also contributed to the substantive unconscionability by prohibiting the disclosure of “any information to any other party not involved in the arbitration hearing” without written approval. The court found that the practical impact of this clause would be to restrict the employee’s ability to conduct informal discovery, such as interviewing potential witnesses, which would unfairly increase the employee’s costs and thereby work to the employer’s advantage.

Because the Arbitration Agreement already demonstrated a modest degree of procedural unconscionability (as a contract of adhesion imposed after five months of employment without new consideration), the court determined that the “net effect” these various one-sided provisions in both the Arbitration Agreement and Confidentiality Agreement permeated the agreement to arbitrate with an unlawful purpose. Given the multiple, interconnected defects, the court of appeal did not disturb the trial court’s refusal to sever the offending provisions and its resulting denial of the motion to compel arbitration.

Gurganus serves as yet another warning for employers: California courts will analyze the totality of related onboarding documents to ensure arbitration provisions are genuinely mutual; a dispute resolution process tucked into other onboarding documents that systematically advantages one side will render the otherwise “squeaky clean” arbitration agreement unenforceable.

This publication is published by the law firm of Ervin Cohen & Jessup LLP. The publication is intended to present an overview of current legal trends; no article should be construed as representing advice on specific, individual legal matters. Articles may be reprinted with permission and acknowledgment. ECJ is a registered service mark of Ervin Cohen & Jessup LLP. All rights reserved.