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This page contains entries under the topic: "Unconscionability" | Main
July 29, 2005
Armendariz doesn't apply to common-law claims
California's Supreme Court threw cold water on the notion that Armendariz v. Foundation Health Psychcare Services (California 2002) should be applied across-the-board to all common-law claims such as breach of contract and intentional infliction of emotional distress. Boghos v. Certain Underwriters (California 07/18/2005).
In Armendariz an employee claimed that his employer violated California's Fair Employment and Housing Act (FEHA). The parties had signed an agreement to arbitrate, but the California Supreme Court said that employer-mandated agreements to arbitrate FEHA claims would be enforced only if they
provide for neutral arbitrators, more than minimal discovery, a written award, and all of the types of relief that would otherwise be available in court and, in addition, “ ‘do[] not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.’ ”
Armendariz was extended in Little v. Auto Steigler (California 2003) to apply the same requirements to employer-mandated agreements to arbitrate tort claims for wrongful discharge in violation of public policy.
Antone Boghos sued his insurance company for ceasing to pay benefits under his disability insurance policy. The policy contained an arbitration provision, so the company moved to compel arbitration. Boghos resisted arbitration on the ground that the arbitration agreement required that the arbitration costs be split among the parties. The cost-splitting provision was one of the items forbidden by Armendariz.
The California Supreme Court made an important distinction between Armendariz-Little claims and the claims brought by Boghos.
- In Armendariz the plaintiff was suing on a statutory claim, and the FEHA statute was one that created rights for the benefit of individuals and also for the benefit of the public.
- In Little the plaintiff sought to enforce public policies that are carefully tethered to fundamental policies delineated in constitutional or statutory provisions.
- Boghos' case, on the other hand, raised claims of plain old garden-variety common-law breach of contract and intentional infliction of emotional distress. These claims clearly are not "unwaivable claims based on or tethered to statutes."
In sending the case back to the lower courts, the California Supreme Court invited inquiry into
(1) whether the clause of the arbitration provision requiring Boghos to share the costs of arbitration and the arbitrator’s (or arbitrators’) fees is is unenforceable under the general law of unconscionability, (2) whether Boghos’s ability to pay his share of the costs and fees is relevant to the question of unconscionability and, if so, whether he must prove he is factually unable to pay, (3) whether the clause of the arbitration provision selecting the venue of arbitration (“Los Angeles County or at another location if agreed by all parties”) is unconscionable, and (4) whether, if the cost-sharing clause, the venue-selection clause or both are unconscionable, the offending clause or clauses should be severed and the matter nevertheless referred to arbitration (see Civ. Code, § 1670.5).
Posted July 29, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
July 05, 2005
Court severs anti-punitive damages clause
An arbitration agreement was unenforceable as written because it precluded an award of punitive damages, which is available under state (D.C.) statute. What should a court do now?
- Sever the offensive clause and order arbitration?
- Disallow arbitration and send the case to court litigation?
The District of Columbia Circuit says to sever the offensive clause and compel arbitration. Booker v. Robert Half Intl (DC Cir 07/01/2005).
Timothy Booker had signed an agreement to arbitrate his employment disputes, but when he had a claim of racial discrimination and wrongful discharge he filed suit. When the employer moved to compel arbitration, Booker pointed out that the arbitration agreement contained a clause that was unlawful: a ban on punitive damages. So the trial court excised the punitive damages clause and enforced the agreement to arbitrate.
The DC Circuit approved. Although the court identified other Circuit decisions that seemed to go both ways on this issue, there were two factors that prevailed. (1) The agreement had only one flaw, and was not riddled with unlawful clauses. (2) The agreement had an express severability clause in it.
My view:
- On the facts of this case, a proper outcome. By analogy to the law of unconsionability, it seems proper, if possible, to cut out the offensive portion(s) of an agreement and preserve the remainder. Easily done here.
- I do remain sympathetic to one of Booker's arguments: Employers who know that courts will "prune" the illegality out of arbitration agreements will be encouraged to overreach and include improper clauses. Employees will be required to go to court to get the thing fixed. This adds another hurdle for the employee, and adds costs to the process, all of which is contrary to the spirit of arbitration as a dispute-resolution method.
Posted July 05, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
June 29, 2005
En banc hearing on who decides unconsionability
The 9th Circuit will rehear en banc (11 judges!) the issue of whether it was for an arbitrator, rather than a court, to decide whether a contact is unconscionable. Nagrampa v. MailCoups, Inc (9th Cir 03/21/2005) was the original 3-judge panel decision holding that the arbitrator decides this question. The order for a rehearing, issued June 29, 2005, is [here].
I'll repeat a little of what I said earlier [here]. In Nagrampa there was a francise agreement which contained an arbitration agreement within it. Nagrampa claimed that both the arbitration agreement and the whole agreement were unconscionable. The 9th Circuit panel applied Prima Paint v. Flood & Conklin, 388 US 395 (1967), and made its own decision on the unconsionability of the arbitration agreement, but held that it was for the arbitrator to decide whether the contract as a whole was unconscionable.
My view:
- As I said before [here], the 9th Circuit panel got it right.
- So why a rehearing en banc? Probably because the US Supreme Court has granted certiorari to review a Florida case, Cardegna v. Buckeye Check Cashing, Inc. (Florida 01/20/2005) which held that it is for the court to decide whether an entire contract is void due to a violation of state usury laws. Previously blogged [here].
Posted June 29, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
June 27, 2005
Anti-class-action clause was unconscionable
A bank-customer agreement's arbitration provision had a clause forbidding classwide arbitrations. The California Supreme Court (4-3) says that was unconscionable and unenforceable. Discover Bank v. Superior Court (California 06/27/2005).
Basic facts: Discover Bank amended its agreement with credit cardholders by sending them a notice that added a requirement that disputes be resolved through arbitration, and that prohibited class action arbitrations. Cardholders accepted the new arbitration provision by continuing to use their cards. The contract provided that it was "governed by federal law and the law of Delaware."
Cardholders' suit claimed that the bank charged late fees (about $29) when payment was received after 1:00 p.m. on the due date, resulting in damages that were small as to individuals but large in the aggregate.
The bank sought an order compelling arbitration on an individual basis.
Basic holding of the California Supreme Court:
- The anti-class-action clause was unconscionable under California law.
- The Federal Arbitration Act (FAA) does not preempt California law on the unconsionability of class-action waivers.
- The whole case might be governed by Delaware law, so the court remanded for a lower court decision on that aspect.
The dissent (by three of the seven judges) agreed that the FAA did not preempt, but argued that the case should be decided under Delaware law which allows class action waivers. They saw no need to decide anything about unconsionability under California law.
My view:
- The unconsionability reasoning was quite narrow. The court said:
We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party “from responsibility for [its] own fraud, or willful injury to the person or property of another.” (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
Questions:- What is a "consumer contract"?
- What are "small amounts of damages"?
- What is "a scheme to deliberately cheat large numbers of consumers"?
- Will a choice of law clause (e.g., providing that Delaware law applies) result in enforcement of a clause that is lawful in the other state but unconscionable in California?
- Pre-dispute arbitration clauses in employment agreements are left up in the air by this case.
- Most such cases will involve much more than $29 in damages.
- How many employment disputes can be characterized as "a scheme to deliberately cheat large numbers of consumers" or employees?
Posted June 27, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
June 09, 2005
Class action waivers
For a useful discussion of arbitration agreements containing waivers of class actions, see today's Labor & Employment Law Blog - New Decision About Class Action Waivers In Arbitration Agreements.
The question of whether such waivers are unconscionable is pending in the California Supreme Court.
Posted June 09, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
May 19, 2005
Circuit City Stores avoids sanctions
Circuit City's latest appeal in Ingle v. Circuit City Stores (9th Cir 05/18/2005) was frivolous, but was not motivated by bad faith, so the 9th Circuit did not impose sanctions.
In the first appeal [here] the 9th Circuit ruled that the employer's arbitration agreement was unconscionable under California law, and therefore not enforceable.
Later, the 9th Circuit decided EEOC v. Luce, Forward, Hamilton & Scripps (9th Cir 2003) reversing the circuit's previous refusal to enforce agreements to arbitrate Title VII cases.
For some reason, Circuit City thought Luce, Forward changed the landscape, so they again asked for an order to arbitrate, again the trial court denied it, and again Circuit City appealed.
As the 9th Circuit pointed out, again, the underlying agreement was unconscionable under the law of California. Luce, Forward dealt solely with a federal issue which had nothing to do with the state law issue at hand. Hence, the appeal was frivolous ("wholly without merit"). But, without evidence of any bad faith motivation, the court did not impose sanctions.
My view: Yes, the appeal was without merit. I'm left wondering why anybody thought Luce, Forward had any impact on the law of unconsionability in California.
Posted May 19, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
March 30, 2005
Arbitrator, not court, decides unconscionability issue - sometimes
A franchise agreement contains an arbitration clause. The franchisee claims that both the arbitration clause and the whole agreement are unconscionable. Who decides these two issues? The court or the arbitrator?
The better rule is that the court decides whether the arbitration clause is a valid agreement, including issues of unconscionability. And the arbitrator decides whether the whole contract, in which the arbitration clause is embedded, is unconscionable.
So the 9th Circuit got it right in Nagrampa v. MailCoups, Inc (9th Cir 03/21/2005).
It all goes back to Prima Paint v. Flood & Conklin, 388 US 395 (1967), where Prima Paint claimed it was not bound by an agreement because it had been fraudulently induced. The US Supreme Court drew a clear line between (1) claims that the arbitration clause was fraudulently induced and (2) claims that the whole agreement was fraudulently induced.
Citing Federal Arbitration Act Section 4, the Supreme Court said "a federal court may consider only issues relating to the making and performance of the agreement to arbitrate," and must leave for an arbitrator the question of whether the agreement as a whole was unlawfully obtained.
So the 9th Circuit steered away from the question of whether the franchise agreement as a whole was unconscionable, and left that for the arbitrator.
As for the unconscionability of the arbitration clause, the court did decide that issue. The clause was on page 25 of a 30 page agreement and nobody told the franchisee it was there. But the franchisee was experienced in business and had ample opportunity to read the clause and consider its implications. Conclusion: the arbitration clause was valid.
Employees trying to escape from arbitration agreements can get the court to resolve unconscionability issues if they are dealing with a stand-alone arbitration agreement. If the agreement to arbitrate is embedded in a larger agreement (such as an employment agreement), then the employee needs to focus on the issue of whether the arbitration clause is unconscionable. They better argue and present proof on both, however, because if the arbitration clause is unlawful then the court will decide the whole case.
Posted March 30, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
January 17, 2005
Arbitration agreement unconscionable under Washington law
Courts continue to police individual arbitration agreements to see whether they are unconscionable. Unconscionability is a question of state law, not federal law. Although a huge amount of state law is preempted by the Federal Arbitration Act (FAA), general state rules on unconscionability are not preempted.
Case in point: Al-Safin v. Circuit City Stores (9th Cir 01/14/2005) [Text pdf]. When Al-Safin applied to work at Circuit City, he signed an arbitration agreement. He later sued Circuit City, asserting state and federal discrimination claims, and the employer moved to compel arbitration. The trial court and the 9th Circuit (2-1) concluded that the arbitration agreement was unenforceable because it was unconscionable under Washington state law.
There were seven provisions that the 9th Circuit previously had held unconscionable under California law. The court concluded that they were also unconscionable under Washington law. (1) forcing employees to arbitrate claims against Circuit City, but not requiring Circuit City to arbitrate claims against employees; (2) limiting remedies; (3) splitting costs and fees; (4) imposing a one-year statute of limitations; (5) prohibiting class actions; (6) regarding the filing fee and waiver of the fee; and (7) giving Circuit City the unilateral right to terminate or modify the agreement.
We may see different results in different states, especially if we take each of the seven items one-at-a-time. However, employers take notice. If you really want the advantages of arbitration (the main one being staying out of court), then draft your arbitration agreement with care.
Posted January 17, 2005 by Ross Runkel, Editor at LawMemo, publisher of Employment Law Memo. Try it.
