From the Los Angeles Daily Journal

"Short Fuse--
'Soltani' Allows Employers to Reduce Statute of Limitations"
by Richard S. Rosenberg and Maurice E. Harrison III

The normally employee-friendly Ninth Circuit recently issued a remarkably pro-employer opinion, Soltani, et al., vs. Western and Southern Life Insurance Company , 2001 Daily Journal D.A.R. 8213 (9^th Cir. 8/7/01), approving the right of an employer to contract with employees for a shorter statute of limitations for employee lawsuits. The case involved an appeal by three life insurance agents who sued their employer Western and Southern Life Insurance Company for various employment claims. Western defended the claims by asserting that the lawsuits were time barred, relying upon a provision in each of the employees' sales agreements requiring that such claims to be brought within six months. Both the trial court and the Ninth Circuit agreed with Western that the contractual limitations period was enforceable. Soltani is must reading for every employment lawyer.

Background. At the commencement of their employment, the three plaintiffs were required to sign employment contracts which stated that any suit which they might bring thereunder must be filed within six months of termination, and that prior to suit, the employee must provide ten days written notice of the claim. The agreements contained the following explicit waiver of any longer statute of limitations: "[Employee agrees] not to commence any action or suit relating to his employment with Western Southern more than six months after the date of termination of such employment, and to waive any statute of limitations to the contrary." Western removed the case to federal court, invoked the six month limitation provision and moved for summary judgment on the ground the suit was time barred. Two of the three plaintiffs argued that the contractual provisions shortening the statute of limitations was unenforceable because the shortened period to sue was unconscionable. The other (who had filed suit within six months) argued that the advance notice clause was unenforceable. The District Court rejected both arguments, upheld the two clauses and granted summary judgment in favor of defendant.

The Ninth Circuit affirmed as to the shorter statute of limitations, but reversed on the notice clause. On the limitations period, the Court relied heavily on the California Supreme Court's analysis of unconscionability in Armendariz v. Foundation Health Psych. Care Services, Inc. 24 Cal 4^th 83 (2000), dealing with the enforceability of a mandatory employment dispute arbitration clause. The Ninth Circuit described Armendariz as setting forth a well-accepted analysis for determining whether a contractual provision is unconscionable under Civil Code Section 1670.5(a). Armendariz teaches that when considering claims of procedural and substantive unconscionability, "a sliding scale is invoked. . . . the more substantively oppressive the contractual term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." Id. at 690 (quoting Stirlen vs. Supercuts 51 Cal.App 4^th 1519,1533.)

Procedural Unconscionability. The Ninth Circuit focused on whether the contract was one of adhesion, analyzing the manner in which the contract was negotiated and the circumstances of the parties at that time. The Soltani Court especially focused on the factors of oppression and surprise. See Kinney vs. United Health Care Services 83 Cal.Rptr. 2d 348, 352-353 (Cal.App 4^th 1999) The appellants contended that they were presented with the documents, were not allowed to review them and were required to sign prior to their employment. Western Southern did not contest that characterization. On the "surprise" factor, the District Court noted that the clauses were in normal sized font and were either italicized, uppercase or boldface. In other words, one reviewing the contracts would not be surprised by the presence of those provisions. However, in light of the evidence that these were "form" contracts required to be signed by the employees without negotiation, the Ninth Circuit determined that appellants sustained their burden of establishing procedural unconscionability. Applying its "sliding scale", the Court next examined substantive unconscionability.

Substantive Unconscionability. The Court reviewed the terms of the agreement to determine whether the agreement was so one sided as to "shock the conscience." Kinney, id, 83 Cal.Rptr. 2d at 353. The Court found that a review of California case law supports the fact that a privately negotiated six month limitation provision is not substantively unconscionable. See Hahn vs. Mobil Oil Corp. 73 F.3d 872, 877 (9^th Cir. 1995), Hambrecht & Quist 46 Cal.Rptr. at 43. The Court also noted that California courts have allowed shortened limitations periods in insurance contracts, which the Court characterized as "quintessential adhesion contracts." See C & H Foods vs. Hartford Insurance Company 211 Cal.Rptr. 765, 769 (Cal.App 1984). The Ninth Circuit further noted that the U.S. Supreme Court has upheld such limitations. See Order of United Commercial Travelers vs. Wolf 331 U.S. 586, 608 (1947) wherein "in the absence of a controlling statute to the contrary, a provision in the contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations provided that the shorter period itself shall be a reasonable period." Finally, the Court noted that a six month period, in and of itself, was reasonable because this is precisely the same period for bringing suit under other federal employment laws such as Title VII of the Civil Rights Act of 1964 and the National Labor Relations Act. Thus, applying the sliding scale, the Court upheld the clause and ruled that the clause should be enforced as written.

The Notice Provision. The contract also had an unusual clause requiring employees to provide Western with ten days written notice of a claim before filing suit. The Court was asked to review this clause as to the one plaintiff who timely filed suit (within the six month period), but had not provided the requisite written notice. The Court first noted that this clause presented a legal issue of first impression under California law. Once again, the Court turned to a portion of Armendariz which focused upon whether the employer had a reasonable justification for the contractual arrangement. The Ninth Circuit concluded that the ten day period was not enforceable because it was not reasonably justified by the employer. According to the Court, ten days was simply not enough time for a company to investigate the factual basis of a claim and attempt to settle claims without litigation or corrective action. The Court concluded therefore that the ten day provision did not pass the "smell test" applied by the California Supreme Court in the Armendariz decision and reversed the District Court's grant of summary judgment for the employer on that one claim.

Soltani allows employers to shorten the statute of limitations considerably with a properly worded employment agreement. The Court did not specify whether it would approve an even shorter period, but it is safe to say that a six month limitations period will be enforceable. As a result, many employers will want to consider the value of express agreements which provide for this.