As a result of action by the state Supreme Court, California Realtor® brokers and agents can no longer rely on a mandatory arbitration clause in their standard form Independent Contractor Agreement (ICA).

Let us be clear: this is not about the purchase contract arbitration agreement between buyers and sellers. This is about the employment agreement between brokers and agents.

The standard California ICA – produced by the California Association of Realtors® (CAR) – includes an arbitration clause that says, among other things, "All disputes or claims between Associate-Licensee and other licensee(s) associated with Broker, or between Associate-Licensee and Broker, arising from or connected in any way with this Agreement, which cannot be adjusted between the parties involved, shall be submitted to the Association of REALTORS® of which all such disputing parties are members …"

This clause was challenged in the case of Karena Wherry et al. v Award, Inc. et al., which was heard by California’s Fourth Appellate District Court of Appeal. The facts are as follows.

Karena Wherry and Rocelyn Traich were both employed by Award, Inc. (C-21 Award, C-21 Superstars). In mid-2006, each of them entered into an Independent Contractor Agreement (ICA) with Award. Both agreements contained the arbitration language quoted above.

The employment relationships between the parties were terminated in the spring and summer of 2007. The agents filed a complaint for gender discrimination, sexual harassment, and retaliation. Award then filed a motion to compel arbitration, which was granted by the trial court. The plaintiffs appealed and the Appellate Court ordered the trial court to reverse its ruling. Upon another appeal – this time by Award – the Appellate Court issued an opinion that the arbitration provision was unconscionable and, therefore, unenforceable.

The Appellate Court’s ruling required a showing that the ICA arbitration provision was both procedurally and substantively unconscionable.

The former is shown by demonstrating that "a party has no meaningful opportunity to negotiate terms or the contract is presented to them on a take it or leave it basis." The court said that this is what occurred here. Plaintiffs testified that they "were told they were required to sign it if they wanted to work for [Award]." They stated that they were given practically no time to review it before signing. No evidence was introduced that contradicted this. The fact that they "initialed every page and signed the document does not vitiate plaintiffs’ lack of time to review the agreement or have a lawyer look at it."

The substantive unconscionability of the agreement "addresses the fairness of the term in dispute. It ‘traditionally involves contract terms that are so one-sided as to "shock the conscience" or that impose harsh or oppressive terms.’" Here, the court found fault largely on the grounds that the ICA arbitration provisions violated rules set out in an earlier case (Armendariz v. Foundation Health Psychcare Services, Inc.). The essential element of that case was that an "arbitration agreement cannot be made to serve as a vehicle for the waiver of statutory rights created by FEHA [Fair Employment and Housing Act]". The Appellate Court went on to show that the arbitration provision of the Independent Contractor Agreement did in fact violate FEHA in a variety of ways.

Award asked the Appellate Court to sever the unconscionable provisions from the rest of the arbitration agreement, but the court said that it was "so ‘permeated’ by unconscionability [it] could only be saved, if at all, by a reformation beyond our authority."

The California Association of Realtors® joined in requests that this ruling be reviewed by the state Supreme Court, but the requests were rejected. Hence the ruling prevails in the state. Until fixed, brokers and agents cannot rely on the arbitration provision in the standard ICA.

Published: May 3, 2011

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .