The U.S. Court of Appeals ruled that an employer's alternate dispute resolution (ADR) program was unconscionable under California law and thus was unenforceable. Davis v. O'Melveny & Myers (9th Cir. May 14, 2007).

The employer, a law firm, adopted an ADR program in 2002. The plan was distributed through interoffice mail and posted on the firm's intranet site. It applied to all employees who were hired by, or who continued to work for, the employer after its adoption. The ADR program covered most employment-related claims, other than EEOC and similar state administrative charges. It provided for final and binding arbitration to resolve employment-related matters, including claims regarding compensation or wages.

The plaintiff, a paralegal who was subject to ADR program, filed a lawsuit under the Fair Labor Standards Act and California state law alleging that the employer failed to pay overtime and denied her rest and meal periods.

The Court determined that the ADR program was a "take it or leave it program." Employees did not have the opportunity to "opt out" of the ADR program and preserve their job. The only option available to employees was to leave and work elsewhere. The court concluded this requirement was procedurally unconscionable.

The Court concluded that the one year notice provision was unconscionable because it shortened the statute of limitations for employment-related claims, and, in particular, barred "continuing violation" claims. The Court also found that the confidentiality provision stifled employees' ability to investigate their claims and placed the employer in a superior legal position. The Court concluded that the confidentiality clause was overbroad.

Regarding the employer's exemption from the arbitration provision, the court noted that it permitted the employer to seek equitable relief not only to preserve attorney-client privilege and work product, but also to prevent disclosure of any confidential material.

The Court also concluded that the agreement's bar to most administrative actions, except EEOC and similar state charges, was overly broad because it precluded complaints to the California Labor Commissioner or the U.S. Department of Labor.

In light of the number of provisions that were unconscionable, the Court declared the entire ADR program void. This case demonstrates that even sophisticated employers may have difficulty in enforcing an ADR program. Employers should develop ADR programs consistent with those needs and not attempt to impose more expansive terms.