The California Court of Appeals, First Appellate District, Division Three, affirmed the trial court’s refusal to enforce the arbitration provision, finding it to be unconscionable.
As the Court explained, “unconscionability” consists of two elements:
procedural unconscionability (i.e., the absence of meaningful choice on the part of one of the parties or surprise), and
substantive unconscionability (i.e., contract terms that are unreasonably favorable to the other party).
Both elements need to be present for a term to be unconscionable; both were present here.
The arbitration provision was procedurally unconscionable, the Court held, since the agreement consisted of densely-worded legal prose, the arbitration provision was hidden within text and not highlighted, the agreement was in English and Plaintiffs did not understand English well, and Empire failed to provide Plaintiffs a copy of the relevant arbitration rules.
The arbitration provision was also substantively unconscionable, since the agreement provided one-sided benefits to Empire only. It purported to shorten the statute of limitations for actions from three or four years to six months; it required Plaintiffs to pay any attorneys’ fees incurred by Empire, with no reciprocal obligation on Empire; and it exempted from arbitration only those claims typically brought by employers, while restricting to arbitration any and all claims Plaintiffs might bring.
The Court also ruled that California law applied, rather than Illinois law (as the contract had provided) finding that the same factors that rendered the arbitration provision unconscionable also warranted application of California law.
Finally, the Court ruled that the arbitration provision was not severable from its various substantively unconscionable elements, since, when an arbitration provision is “permeated” by unconscionability the decision whether to sever the objectionable clauses is within the trial court’s exercise of discretion. Here, at any rate, Empire had never asked the trial court for severance, and the record supports the non-severability of the provision, since the arbitration provision was permeated with unscionability.
What we learn from this case is that employers seeking to enforce arbitration provisions must carefully reevaluate the provisions that currently exist in their form contracts. Here are some important take-way points:
Set the arbitration provision out clearly: The arbitration provision should be clearly set out in the contract, not hidden in the fine print. Here, the Court of Appeal pointed with approval to Roman v. Superior Court, 172 Cal. App. 4th 1462 (2009), which provided an enforceable arbitration provision. In Roman, the arbitration provision in the employment contract was contained on the last page of a seven-page employment application, underneath a heading “Please Read Carefully, Initial Each Paragraph and Sign Below,” and was set forth in a separate, succinct paragraph that the plaintiff had initialed, affirming she had seen it.
Provide employees with a copy of the relevant arbitration rules: As the Court of Appeal notes, failure to provide a copy of the arbitration rules at the time the contract is entered into can support a finding of procedural unconscionability.
Don’t draft an arbitration provision that gives you all the advantages: There is a temptation in drafting a form contract to provide contractual benefits in a one-sided fashion, since you have control over the terms, and the other side can’t really negotiate. But that is precisely why you should not give in to that temptation, as this case demonstrates. If the drafting party creates a document that is obviously one-sided or unfair, courts may simply refuse to enforce it. This could jeopardize the enforceability of the entire arbitration provision, not merely its “unfair” parts. In short, strive to provide terms that seem objectively fair to both sides.
Please email the author if you have any further questions or comments regarding the above post.