Topic: "Unconscionability" | Main
Federal Arbitration Act preempts state law that made class action waiver unconscionable (5-4)
April 27, 2011 by Ross Runkel at LawMemo
Today's decision in AT&T Mobility v. Concepcion (US Supreme Ct 04/27/2011):
In Discover Bank v. Superior Court, 36 Cal4th 148, 113 P3d 1100 (2005), the California Supreme Court held that class action waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud.
The US Supreme Court (5-4) held that California's Discover Bank rule is preempted by the Federal Arbitration Act (FAA) because it "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."
The cell phone contract between the Concepcions and AT&T provided for arbitration of all disputes, but required that claims be brought in the parties' "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding." The Concepcions sued AT&T for charging $30.22 in sales tax for a "free" phone. The trial court denied AT&T's motion to compel arbitration. Relying on Discover Bank, it found the arbitration provision unconscionable because it disallowed classwide proceedings. The 9th Circuit agreed, and held that the FAA, which makes arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract," did not preempt its ruling. The US Supreme Court (5-4) reversed.
The FAA's overarching purpose is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate informal, streamlined proceedings. Parties may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom they will arbitrate.
Class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, interferes with fundamental attributes of arbitration. The switch from bilateral to class arbitration sacrifices arbitration's informality and makes the process slower, more costly, and more likely to generate procedural morass than final judgment. And class arbitration greatly increases risks to defendants. The absence of multilayered review makes it more likely that errors will go uncorrected. That risk of error may become unacceptable when damages allegedly owed to thousands of claimants are aggregated and decided at once. Arbitration is poorly suited to these higher stakes. In litigation, a defendant may appeal a certification decision and a final judgment, but 9 USC. §10 limits the grounds on which courts can vacate arbitral awards.
SCOTUS: Arbitrator, not court, decides whether arbitration agreement is unconscionable (5-4)
June 21, 2010 by Ross Runkel at LawMemo
The US Supreme Court decided Rent-A-Center West v. Jackson (US Supreme Ct 06/21/2010) this morning.
When he was hired, Jackson signed an agreement to arbitrate all future disputes. That agreement provided: "The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable."
Jackson sued under 42 USC Section 1981, claiming race discrimination and retaliation. The trial court granted the employer's motion to dismiss and to compel arbitration. The 9th Circuit (2-1) reversed.
Jackson argued that the arbitration agreement was unconscionable, and that the issue of unconscionability must be decided by a court rather than an arbitrator.
The US Supreme Court held (5-4) that under the Federal Arbitration Act, where an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement, if a party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator.
The agreement contained two arbitration provisions, one to arbitrate employment disputes, and a second to give the arbitrator exclusive authority to resolve the "gateway" question of whether the agreement is enforceable. The employer sought enforcement of the second provision, which is severable from the rest of the contract. Jackson did not challenge this second provision specifically, so the Court treated his challenge as a challenge to the whole contract. It is well settled that a challenge to the whole contract is an issue to be resolved by the arbitrator rather than the court.
The DISSENT argued that the majority improperly applied the rule of severability. Jackson did challenge the validity of the arbitration agreement and should not have to object to "the particular line in the agreement" that purports to assign the validity issue to the arbitrator.
AT&T Mobility LLC v. Concepcion: Cert granted
May 24, 2010 by Ross Runkel at LawMemo
The US Supreme Court today granted certiorari in AT&T Mobility LLC v. Concepcion, which will test whether the Federal Arbitration Act preempts state unconscionability law.
Plaintiffs brought a class action claim that a telephone company’s offer of a “free” phone to anyone who signs up for its service is fraudulent to the extent the phone company charges the new subscriber sales tax on the retail value of each “free” phone. The phone company demanded the plaintiffs’ claims be submitted to individual arbitration, pointing to the arbitration clause of the written agreement, which arbitration clause requires arbitration, but bars class actions.
The 9th Circuit held that (1) the phone company's class action waiver clause is unconscionable under California law, and (2) The Federal Arbitration Act does not preempt California unconscionability law.
Case below: Laster v. AT&T Mobility LLC (9th Cir 10/27/2009)
Official docket sheet
Certiorari granted May 24, 2010.
Oral argument: To be scheduled, probably Fall 2010.
Question presented:
Whether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures - here, class-wide arbitration - when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.
Certiorari Documents:
- Petition for a writ of certiorari
- Brief of respondents Vincent Concepcion, and Liza Concepcion in opposition
- Reply of petitioner AT&T Mobility LLC
- Supplemental brief of respondents
- Brief amici curiae of Pacific Legal Foundation, et al.
- Brief amicus curiae of Chamber of Commerce of the United States of America
- Brief amicus curiae of CTIA - The Wireless Association
- Brief amicus curiae of DRI - Voice of the Defense Bar
Counsel:
- For Petitioner: Kenneth S. Geller; Mayer Brown LLP; 1909 K Street, N.W.; Washington, DC 20006; kgeller@mayerbrown.com; (202) 263-3000.
- For Respondents: Deepak Gupta;Public Citizen Litigation Group; 1600 20th Street, NW; Washington, DC 20009; dgupta@citizen.org; (202)-588-1000.
Rent-A-Center West v. Jackson: Details and briefs
April 19, 2010 by Ross Runkel at LawMemo
On Monday, April 26, the US Supreme Court will hear oral arguments in Rent-A-Center West v. Jackson.
Here is the question presented:
Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act ("FAA") is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this "gateway" issue to the arbitrator for decision?
Here are the briefs that have been filed:
- Brief for Petitioner Rent-A-Center, West, Inc.
- Brief for Respondent Antonio Jackson
- Reply Brief for Petitioner Rent-A-Center, West, Inc.
- Brief for the Equal Employment Advisory Council in Support of Petitioner
- Brief for the Chamber of Commerce of the United States of America in Support of Petitioner
- Brief for American Federation of Labor and Congress of Industrial Organizations in Support of Respondent
- Brief for Professional Arbitrators and Arbitration Scholars in Support of Respondent
- Brief for Lawyers' Committee for Civil Rights Under Law, Alliance for Justice, Asian American Justice Center, Constitutional Accountability Center, National Partnership for Women & Families, and National Women’s Law Center in Support of Respondent
- Brief for National Association of Consumer Advocates in Support of Respondent
- Brief for American Association for Justice and AARP in Support of Respondent
- Brief for National Consumer Law Center and Consumer Action in Support of Respondent
- Brief for Service Employees International Union, Legal Aid Society - Employment Law Center, National Employment Lawyers Association, National Employment Law Project, Women’s Employment Rights Clinic, and The Employee Rights Advocacy Institute for Law & Policy in Support of Respondent
Case-by-case determination of ability to pay arbitration fees and costs
March 31, 2010 by Ross Runkel at LawMemo
Brady v. The Williams Capital Group (New York 03/25/2010)
Brady brought an Article 78 proceeding to compel the employer to pay the arbitrator's fee with respect to her Title VII wrongful discharge claim based on sex and race discrimination. The trial court dismissed the petition holding the fee-sharing provision of the arbitration agreement, rather than the American Arbitration Association's (AAA) "employer-pays" rule, governed. The New York Appellate Division reversed. The New York Court of Appeals remitted the matter to the trial court for a hearing on Brady's financial ability to share the costs of arbitration.
The court was mindful of the strong state policy favoring arbitration agreements and the equally strong policy requiring the invalidation of such agreements when they contain terms that could preclude a litigant from vindicating her statutory rights in the arbitral forum.
The court held that in this context, the issue of a litigant's financial ability is to be resolved on a case-by-case basis and that the inquiry should at minimum consider the following questions:
(1) whether the litigant can pay the arbitration fees and costs;
(2) what is the expected cost differential between arbitration and litigation in court; and
(3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.
My view: This is the right way to do it, although some other courts seem to be confused by all of this.
Supreme Court fast-tracks arbitration case
January 19, 2010 by Ross Runkel at LawMemo
The US Supreme Court has placed Rent-A-Center West v. Jackson on a "fast track," meaning that briefing will be expedited so the Court can hear the case this term - probably in April.
Petitioner's brief is due February 25.
Respondent's brief is due March 25.
Question presented:
Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act ("FAA") is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this "gateway" issue to the arbitrator for decision?
[Details]
Does arbitrator decide whether arbitration agreement is unconscionable?
January 18, 2010 by Ross Runkel at LawMemo
The US Supreme Court has agreed to hear another employment arbitration case. The issue is whether it is for the court, or an arbitrator, to decide whether agreement to arbitrate is unconscionable.
Jackson sued under 42 USC Section 1981, claiming race discrimination and retaliation. The trial court granted the employer's motion to dismiss and to compel arbitration. The 9th Circuit (2-1) reversed.
When he was hired, Jackson signed an agreement to arbitrate all future disputes. That agreement provided:
"The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable."
Jackson argued that the arbitration agreement was unconscionable, and that the issue of unconscionability must be decided by a court rather than an arbitrator.
The 9th Circuit held that "where, as here, a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court."
Case below: Jackson v. Rent-A-Center West (9th Cir 09/09/2009)
Official docket sheet
Certiorari granted January 15, 2010.
Oral argument: Not yet scheduled.
Question presented:
Is the district court required in all cases to determine claims that an arbitration agreement subject to the Federal Arbitration Act ("FAA") is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this "gateway" issue to the arbitrator for decision?
Certiorari Documents:
- Petition for certiorari
- Brief in opposition
- Brief for Amicus Curiae of Pacific Legal Foundation in Support of Petitioner
Counsel:
- For Petitioner: Robert F. Friedman; Littler Mendelson, P.C.; 2001 Ross Avenue, Suite 1500; Dallas, TX 75201; (214) 880-8100.
- For Respondent: Ian E. Silverberg; Hardy Law Group; 96 Winter Street; Reno, NV 89503; (775)-322-7422.
The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law
March 11, 2009 by Ross Runkel at LawMemo
Here is an interesting article by Professor Aaron-Andrew P. Bruhl at the University of Houston Law Center:
The Unconscionability Game: Strategic Judging and the Evolution of Federal Arbitration Law, 83 New York University Law Review 1420 (2008). [PDF, 71 pages]
We are seeing a lot of court cases in which individual employees resist having their claims sent to arbitration. One of the doctrines used by employees is unconscionability. For example, just yesterday a California Court of Appeal held that an arbitration agreement waiving class-wide arbitration was unconscionable as to meal and rest period claims. Franco v. Athens Disposal (California Ct App 03/10/2009).
Here is the abstract of the article:
This Article uses recent developments in the enforcement of arbitration agreements to illustrate one way in which strategic dynamics can drive doctrinal change. In a fairly short period of time, arbitration has grown from a method of resolving disputes between sophisticated business entities into a phenomenon that pervades the contemporary economy. The United States Supreme Court has encouraged this transformation through expansive interpretations of the Federal Arbitration Act. But not all courts have embraced arbitration so fervently, and therefore case law in this area is marked by tension and conflict.
The thesis of this Article is that we can better understand developments in arbitration doctrine by viewing the case law as the product of an ongoing strategic interaction between courts with differing preferences regarding the spread of arbitration. As the Supreme Court has shut off most other means of resisting arbitration, the state law doctrine of unconscionability has in the last several years become a surprisingly attractive and successful tool for striking down arbitration agreements. The nature of unconscionability analysis is that it is flexible, which provides opportunities for courts skeptical of arbitration to use the doctrine to evade the Supreme Court's pro-arbitration directives while simultaneously insulating their rulings from Supreme Court review. Sophisticated resistance to arbitration is just one side of the story, however.
The approach employed in this Article examines the judicial system as a whole, including the ways pro-arbitration courts respond, sometimes indirectly, to what they perceive as manipulation of unconscionability. The suspicion that some courts are disfavoring arbitration drives pro-arbitration courts to change their strategies, such as by establishing new doctrine that facilitates monitoring and shifts decisionmaking authority. This strategic framework can help us make sense of otherwise puzzling trends in arbitration doctrine and can help us predict what moves will be next. Although the specific subject matter is arbitration, this analysis is also aimed at those interested in more general problems of judicial federalism.
Gentry: Cert denied
March 31, 2008 by Ross Runkel at LawMemo
The US Supreme Court denied certiorari in Circuit City Stores, Inc. v. Gentry on March 31. (This case was Gentry v. Superior Court (Supreme Court of California 08/30/2007) (4-3 vote)).
Robert Gentry brought a class action suit claiming that the employer had misclassified salaried customer service managers as exempt from the overtime provisions of the California Labor Code. Because Gentry had signed an agreement to arbitrate, and the agreement contained a class action waiver, the trial court ordered arbitration on an individual basis. The California Court of Appeal affirmed; the California Supreme Court (4-3) reversed.
The California Supreme Court held that in some cases a class arbitration action waiver may be contrary to public policy.
Rather than relying on the unconscionability doctrine, the court focused on the fact that Gentry's claim dealt with the "unwaivable" statutory right to receive overtime pay.
The California Supreme Court concluded that:
"under some circumstances such a provision would lead to a de facto waiver and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce the overtime laws.""[W]hen it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can 'vindicate [their] unwaivable rights in an arbitration forum.'" The California court remanded for findings on these issues.
(Oh my. I predicted [here] that the US Supreme Court would deny cert in this case.)
Gentry at the US Supreme Court
March 15, 2008 by Ross Runkel at LawMemo
Circuit City Stores has filed a petition for a writ of certiorari in Circuit City Stores, Inc. v. Gentry, known previously as Gentry v. Superior Court (California Supreme Court 08/30/2007) (4-3 vote)
Briefs filed at the US Supreme Court are available at LawMemo and at SCOTUSblog.
The Court will consider the petition at its March 28 private conference, and should announce its decision (to grant or deny the petition) March 31. If the petition is granted, oral arguments will be scheduled for the fall. If denied, then the California judgment will remain undisturbed.
Facts:
Robert Gentry brought a class action suit claiming that the employer had misclassified salaried customer service managers as exempt from the overtime provisions of the California Labor Code. Because Gentry had signed an agreement to arbitrate, and the agreement contained a class action waiver, the trial court ordered arbitration on an individual basis. The California Court of Appeal affirmed; the California Supreme Court (4-3) reversed.
California Supreme Court's decision:
The California Supreme Court held that in some cases a class arbitration action waiver may be contrary to public policy.
Rather than relying on the unconscionability doctrine, the California court focused on the fact that Gentry's claim dealt with the "unwaivable" statutory right to receive overtime pay.
Circuit City Stores' petition states two "Questions Presented"
- Whether the Federal Arbitration Act permits a court to refuse to enforce an agreement calling for individual arbitration based on state labor law policies that do not apply generally to "any contract." 9 U.S.C. § 2.
- Whether the Federal Arbitration Act permits a state court to refuse to enforce an agreement to arbitrate based upon an unconscionability analysis "that takes its meaning precisely from the fact that a contract to arbitrate is at issue." Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).
Gentry's reply brief argues:
- The Supreme Court lacks jurisdiction because there is no final judgment.
- The questions presented were not raised in the lower courts.
- There are no conflicting decisions on the first question presented.
- The second question is based on a mischaracterization of the California decision.
My view:
The Court should deny the petition for certiorari. Tom Goldstein at SCOTUSblog has it on his list of probable grants, but I think the Court will pass on this one.
Even if the SCt has jurisdiction, it's smarter for them to let the case go back and percolate some more. If the ultimate decision is that the class action waiver gets thrown out, then the Court can take another look at it. But that's quite a ways in the future.
Also, I don't think the California court was "picking on" arbitration. Their theory applies equally to litigation; so it's hard to see an important federal question here.
This California case has sparked a great deal of interest, mainly because the California Court split 4 to 3 on a controversial theory of state law. But the US Supreme Court is not in the business of correcting state law. The federal law question being raised is not of great significance, and the attempt to get to the US Supreme Court is really premature.
GENTRYfication of class action waivers
October 24, 2007 by Ross Runkel at LawMemo
"Gentryfication" - A new word for a new legal theory. Or an old theory used in a new way.
California has adopted a new, perhaps easier, way to attack class action waivers.
The standard attack has been on the ground of unconscionability.
The new attack is on the ground of public policy.
Why does it matter?
Unconscionability: A theory in search of predictability.
In order to get a court to throw out a "nasty" contract clause under the theory of unconscionability, the attacker must demonstrate both procedural and substantive unconscionability. The fact that the clause is "nasty" (unfair, overly burdensome to one side, etc.) establishes the substantive unconscionability. The procedural unconscionability requires a showing of unequal bargaining power, a take-it-or-leave-it offer, abuse of the bargaining process, some trickery, or some other "unfairness" in the negotiation of the contract. Some courts use a sliding scale: The worse the substantive clause, the less bad the procedural unconscionability has to be. This obviously results in lack of predictability, and lots of litigation.
Public policy: A simpler theory.
The public policy theory has its focus on the allegedly "nasty" clause. There is no need to inquire into the "procedural" aspects such as unequal bargaining power. A simple rule: If a contract clause violates public policy, the a court will not enforce the clause.
In Gentry v. Superior Court [Circuit City] (California 08/30/2007) (4-3) the California Supreme Court held that in some cases a class arbitration action waiver may be contrary to public policy.
The employee (Gentry) was claiming a violation of California's statutory overtime rules. The court said that Gentry had an "unwaivable" statutory right to overtime pay. Then the court said that in some cases a class action waiver "would lead to a de facto waiver [of the statutory right] and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce the overtime laws."
True, the court said there are a number of other factors to be examined. But my point is that Gentry did not have to demonstrate any "procedural unconscionability" in order to prevail.
Gentry - Opt-out clause is not a safe harbor for unconscionability
August 30, 2007 by Ross Runkel at LawMemo
Giving an employee a 30 day period in which to opt out of an arbitration agreement will not automatically insulate an arbitration agreement from unconscionability analysis.
Gentry v. Superior Court [Circuit City] (California 08/30/2007) (4-3)
Gentry brought a class action suit claiming that the employer had misclassified salaried customer service managers as exempt from the overtime provisions of the California Labor Code. Because Gentry had signed an agreement to arbitrate, the trial court ordered arbitration and the California Court of Appeal affirmed.
The California Supreme Court (4-3) reversed and remanded.
Lower courts rejected Gentry's claim that the entire arbitration agreement was unconscionable, basing their decision on the fact that Gentry was given a 30 day period in which he could opt out of arbitration. The idea was that this eliminated any "procedural" unconscionability.
The California Supreme Court held that this opt-out provision did not insulate the arbitration agreement from unconscionability analysis.
The court found that there was still some procedural unconscionability because (a) the employer's explanation of the benefits of arbitration was "markedly one-sided"; and (b) it was "not clear that someone in Gentry's position would have felt free to opt out."
The court remanded for further unconscionability analysis of clauses that shortened the statute of limitations, limited backpay remedies, capped punitive damages, and provided that "generally" each party is liable for their own attorney fees.
[For the court's analysis of class arbitration waivers, go here.]
Gentry - New attack on class action waivers
August 30, 2007 by Ross Runkel at LawMemo
Shifting away from "unconscionability" doctrine, the California Supreme Court relied on "public policy" to say that some class arbitration waivers will be illegal.
Gentry v. Superior Court [Circuit City] (California 08/30/2007) (4-3)
Gentry brought a class action suit claiming that the employer had misclassified salaried customer service managers as exempt from the overtime provisions of the California Labor Code. Because Gentry had signed an agreement to arbitrate, and the agreement contained a class action waiver, the trial court ordered arbitration on an individual basis. The California Court of Appeal affirmed; the California Supreme Court (4-3) reversed.
The California Supreme Court held that in some cases a class arbitration action waiver may be contrary to public policy.
Rather than relying on the unconscionability doctrine, the court focused on the fact that Gentry's claim dealt with the "unwaivable" statutory right to receive overtime pay.
The court concluded that
"under some circumstances such a provision would lead to a de facto waiver and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce the overtime laws."
"[W]hen it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can 'vindicate [their] unwaivable rights in an arbitration forum.'" The court remanded for findings on these issues.
[For the court's analysis of unconscionability, go here.]
Law firm arbitration agreement is unconscionable
May 27, 2007 by Ross Runkel at LawMemo
An arbitration agreement between the O’Melveny & Myers law firm and former employee Jacquelin Davis was unconscionable according to Davis v. O’Melveny & Myers (9th Cir 05/14/2007).
Davis sued claiming violation of the federal Fair Labor Standards Act (FLSA) and various other state and federal labor statutes.
O’Melveny & Myers wanted the case sent to arbitration because Davis had signed an agreement to arbitrate such disputes.
The 9th Circuit said she could stay in court because the agreement could not be enforced. Reason: unconscionable agreement under California law.
To be unconscionable, an agreement must be both procedurally and substantively unconscionable. According to the court:
- The agreement was procedurally unconscionable because
- The agreement was drafted by a sophisticated employer.
- It was a "take it or leave it" situation. There was no undue pressure, no concealment, no fine print, no surprise. The employee had three months to consider whether to sign. However, the employee had to either agree or go work somewhere else.
- The agreement was substantively unconscionable ("unduly harsh or oppressive") because
- Notice of a claim had to filed within one year of when it became “known to the employee or with reasonable effort ... should have been known to him or her.”
- The confidentiality clause unconscionably favors O’Melveny. The clause precludes even mention to anyone “not directly involved in the mediation or arbitration” of “the content of the pleadings, papers, orders, hearings, trials, or awards in the arbitration” or even “the existence of a controversy and the fact that there is a mediation or an arbitration proceeding.”
- The agreement contained a "non-mutual provision" exempting O’Melveny from arbitration for “claims by the Firm for injunctive and/or other equitable relief for violations of the attorney-client privilege or work product doctrine or the disclosure of other confidential information.”
In addition, the court held that it was a violation of public policy to include the following:
neither you nor the Firm will initiate or pursue any lawsuit or administrative action (other than filing an administrative charge of discrimination with the Equal Employment Opportunity Commission, the California Department of Fair Employment and Housing, the New York Human Rights Commission or any similar fair employment practices agency) in any way related to or arising from any Claim covered by this Program. (Emphasis added.)
My view: California is tough on employers when it comes to unconscionability. The 9th Circuit (applying California law) is sometimes tougher. Employers should pay attention; otherwise they spend a lot of time and money finding out that their arbitration agreements are worthless.
Nonmutual arbitration clause is OK
April 06, 2007 by Ross Runkel at LawMemo
An arbitration clause requires an employee to arbitrate her claims, but does not require the employer to arbitrate its claims. Does this make the agreement unconscionable?
The Oregon Court of Appeals took on this question in Motsinger v. Lithia Rose-FT (Oregon Ct App 04/04/2007), and decided that the agreement was not unconscionable. Motsinger will have to arbitrate her sex harassment claim.
Motsinger argued that the arbitration clause was substantively unconscionable because it required her to submit all of her potential claims to arbitration while imposing no similar requirement on the employer.
Courts around the country have been divided on this question. Most notably, the California Supreme Court has said that such an arrangement is presumptively unconscionable because arbitration agreements must have a "modicum of mutuality."
The Oregon court concluded that "an approach that focuses on the one-sided effect of an arbitration clause - rather than on its one-sided application - to evaluate substantive unconscionability is most consistent with the common law in Oregon regarding unconscionability of other kinds of contractual provisions and with state and federal policies regarding arbitration."
The court thus declined to dwell on the non-mutuality of the arbitration agreement - opting instead to focus on the effects of its provisions on the parties. Applying that analysis, the court declined to invalidate the arbitration agreement as unconscionable.
My view: This case treats arbitration agreements the same way other agreements are treated. "Mutuality" is a ghost from the past under the heading of consideration, and every sensible court has rejected the idea that a contract must have "mutuality of obligation." Look at any contract and you'll see that almost every clause favors one side or the other. It makes little sense to resurrect "mutuality" and put it under the heading of unconscionability. The Oregon court did not, although many courts do.
How Bad Are Mandatory Arbitration Terms?
March 02, 2007 by Ross Runkel at LawMemo
"How Bad Are Mandatory Arbitration Terms?" is the topic for the Association of American Law Schools Section on Contracts panel discussion next January.
The presenters' papers will be published by the Michigan Journal of Law Reform in 2008.
Details for speakers: Contracts Section Call for Papers - AALS Annual Meeting 2008 from ContractsProf Blog.
A quote: "The presentations in the panel are intended to move beyond myth, conjecture, and assumption, and to shed a more concrete and empirical light on these questions. Speakers will present and debate insights and findings regarding the reality of mandatory contract arbitration."
Farmer on food stamps must pay $27,000 to arbitrate
August 24, 2006 by Ross Runkel at LawMemo
Ouch. A farmer contracted to grow chickens, and then sued for fraud and wrongful termination of contract.
The contract had an arbitration clause.
The farmer said the arbitration clause was unconscionable under Georgia law because it would be too expensive for her to arbitrate.
Specifically, the farmer showed that she and her husband own no land, have no cash savings, are on Medicaid, get less than $1,000 per month from social security, and are on food stamps. Her share (one-half) of the cost of arbitration would be between $27,500 and $29,000.
One problem: As all first year law students know, the question of unconscionability is based on the situation at the time the contract was made - not later on. And the farmer put on no evidence of her financial situation at the time the contract was made.
Result: Not unconscionable. Ordered to proceed to arbitration.
Overstreet v. Contigroup Companies (5th Cir 08/23/2006).
I learned about this from Disputing: Fifth Circuit Rules on Cost as a Basis for Not Arbitrating.
Consumer can't be forced to pay for arbitration
August 09, 2006 by Ross Runkel at LawMemo
A consumer mortgage loan contract has an arbitration clause. That clause will be unconscionable if:
- It requires the consumer to pay the costs of arbitration.
- It strips the arbitrator of power to award attorney fees and costs to the prevailing party.
- It requires that a party who appeals from the arbitration must bear the costs of the appeal "regardless of the outcome of the appeal."
So says the New Jersey Supreme Court today in Delta Funding Corp v. Harris (New Jersey 08/09/2006).
These provisions can be severed from the agreement, and the agreement can be enforced without them.
On another point [see Class action waiver unconscionable in consumer contract] the court found that an anti-class-action clause would not be unconscionable because the case involved a substantial amount of damages and that would give the plaintiff enough incentive to bring the claim as an individual action.
Class action waiver unconscionable in consumer contract
August 09, 2006 by Ross Runkel at LawMemo
New Jersey's Supreme Court today ruled that an anti-class-action clause in an arbitration agreement was unconscionable.
The clause was in a payday loan agreement. The case involved a consumer bringing a fraud claim that involved a small amount of money.
The court found that because the case involved a small amount of money, individual enforcement of the plaintiff's claim would be difficult if not impossible. A bar on class-arbitration would preclude any realistic challenge to the statutory loan agreement.
The court severed the unconscionable provision from the contract, and then enforced the agreement to arbitrate.
Muhammad v. County Bank of Rehoboth Beach (New Jersey 08/09/2006).
But hey, look at this. In a companion case involving a mortgage loan, the court said an anti-class-action clause would be OK because the case involved a substantial amount of damages and that would give the plaintiff enough incentive to bring the claim as an individual action. Delta Funding Corp v. Harris (New Jersey 08/09/2006).
Class action waiver goes to California Supreme Court
May 18, 2006 by Ross Runkel at LawMemo
Will a court enforce an arbitration class-action waiver in a case arising under wage and hour statutes? The California Supreme Court will decide that question.
In Gentry v. Superior Court (California Ct App 01/19/2006) a lower court held that a class action waiver could be enforced. The California Supreme Court said it would review the Gentry case. [Press release]
The uncertainty arises because the decision in Discover Bank v. Superior Court 36 Cal. 4th 148 (2005), which held such a clause to be unconscionable in a case involving credit card holders whose individual claims involved small amounts of money.
Gentry sued the employer in a putative class action, asserting claims for violations of state statutes. The claims arose from the employer's alleged misclassification of Gentry and others as "exempt" managerial or executive employees not entitled to overtime pay. The trial court granted the employer's petition to compel arbitration pursuant to the employer's arbitration agreement. Since the agreement contained a provision waiving Gentry's right to pursue a class action, the trial court ordered Gentry to arbitrate on an individual basis.
On remand from the California Supreme Court for reconsideration in light of Discover Bank v. Superior Court 36 Cal. 4th 148 (2005), the court concluded that the class action waiver was enforceable.
The court determined that the class action provision was
- not procedurally unconscionable because Gentry was given 30 days within which to opt out of the arbitration agreement
- not substantively unconscionable because it didn't fit the type of facts involved in the Discover Bank case. In Discover Bank the waiver clause was "found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages," and it was "alleged that the party with the superior bargaining power as carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money ...."
The reasoning in Discover Bank was extremely narrow. It would need to be expanded in order for the Gentry case to fit.
"Procedural" unconscionability is now the battleground
January 28, 2006 by Ross Runkel at LawMemo
In California (and many other states) a court will find a contract clause unconscionable only if it is both "procedurally" and "substantively" unconscionable. A consumer or employee must show both in order to get the clause thrown out.
A class-action waiver clause in an arbitration agreement creates a classic situation. In Discover Bank v. Superior Court (2005), a bank included an arbitration agreement (complete with a class-action waiver) in a bill stuffer. The California Supreme Court found the waiver clause unconscionable - both procedurally and substantively.
Banks that want their customers bound by such clauses will likely focus on the procedural aspect. (To focus on the substantive aspect would probably mean they would need to completely exclude the waiver clause.)
When it comes to bill-stuffers, there are two examples that illustrate the opposite ends of the spectrum.
1. The banks says that you have to either agree to the waiver or close out your account. That is what was happening in Discover Bank. Procedurally unconscionable.
2. The bank says you have 30 days to decide whether to opt out, and you can keep your account either way. That eliminates the "take-it-or-leave-it" nature of the transaction.
How about something in between? In Jones v. Citigroup (California Ct App 01/26/2006) the bank's bill-stuffer allowed customers 26 days to opt out. Those who opted out could keep their credit card accounts until the end of the current membership year or until the expiration date on the card, whichever was longer. Then the account would be closed.
The California court held (2-1) that there was no procedural unconscionability. The primary reasoning was that the case did not involve an "adhesion" contract because the consumer was able to opt out. Therefore, no procedural unconscionability. Therefore, the waiver clause was enforceable.
The dissent would hold that procedural unconscionability existed because the customer had to either accept the waiver clause or forfeit the use of the credit card within a relatively short amount of time. The dissent did not see much difference between this case and the Discover Bank case. In addition, the dissent went beyond unconscionability analysis to say that the waiver clause violated public policy.
There is another way to view unconscionability analysis, which is followed in several states. Although the court continues to examine both the "substantive" and "procedural" aspects, neither one is considered on an all-or-nothing basis. It is a sort of balancing approach. Under that view, a clause that is "very" unconscionable substantively need not have as much procedural unconscionability.
Class action waiver in arbitration agreement was enforceable
January 23, 2006 by Ross Runkel at LawMemo
Arbitration agreements that contain class-action waiver clauses can be unconscionable, but they are not always so. The big case from the California Supreme Court was Discover Bank v. Superior Court (2005), which involved an arbitration class-action waiver in a bank's cardholder agreement. The court found the clause unconscionable.
What about such a clause in an employment agreement?
The California Court of Appeal has held that such a clause is not unconscionable under the facts of the particular case. Gentry v. Superior Court (California Ct App 01/19/2006).
The agreement was not procedurally unconscionable because the employee was allowed a 30 day period within which to decide whether to opt out. The employee did not opt out. Signing the agreement was not a condition of employment.
The agreement was not substantively unconscionable because it didn't fit the type of facts involved in the Discover Bank case. In Discover Bank the waiver clause was "found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages," and it was "alleged that the party with the superior bargaining power as carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money . . . ."
The Court of Appeal noted that "[t]he infirmities that plagued the Discover Bank class action waiver are not present here."
Anti-class-action clause was unconscionable
October 21, 2005 by Ross Runkel at LawMemo
A franchise agreement contained an agreement to arbitrate disputes, and specifically barred class action arbitrations. The California Court of Appeal now says such a ban on class actions is unconscionable. Not only that, the court ordered that the individual claims be consolidated. Independent Association of Mailbox Center Owners v. Superior Court (Mail Boxes Etc., USA) (California Ct App; decided 09/16/2005; ordered published 10/13/2005).
I thought the opinion was bit cavalier in its unconscionability analysis. Typically this is a fact-specific inquiry. However, the court's reasoning seemed to be that franchisees are similar to employees and consumers, so they sort of automatically qualify for unconscionability protection. Just a bit too patronizing for my taste.
Cost-shifting clause is severed
October 07, 2005 by Ross Runkel at LawMemo
(1) When will a cost-shifting clause in an arbitration agreement be unlawful? (2) If unlawful, does the whole agreement go down in flames?
Federal circuit courts handle the first question a number of ways. One way is to consider whether such a provision is unconscionable as a matter of state law. Another way, quite popular among federal courts, is to apply federal law - interpreting what the US Supreme Court has said about the Federal Arbitration Act (FAA). Courts split three ways on the federal law question. Here are my shorthand versions of these three ways:
- If the cost to the employee would include either unreasonable costs or any of the arbitrator's fees or expenses, then the clause is unlawful. Example: Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997); Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000).
My view on this: Cannot be supported either by the text of the FAA or the language of Supreme Court cases. The California case is based on California law.
- If the employee can prove that the actual costs, in the context of the employee's actual income and savings, will be a substantial hurdle, then the clause is unlawful. Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549 (4th Cir. 2001), and cases collected.
- If the clause would deter a substantial number of similarly situated litigants, then the clause is unlawful. Example: Morrison v. Circuit City Stores, 317 F3d 646 (6th Cir en banc 01/30/2003).
Scovill v. WSYX/ABC (6th Cir 10/06/2005) is an example of the third method. However, the court ruled that the whole arbitration agreement does not get thrown out. It gets severed (the agreement had a severance clause), and then the employee is ordered to arbitrate without the cost-shifting clause.
- The trial court estimated the arbitration costs would be at least $15,310, based on a filing fee of $3,250, a service fee of $1,250, arbitrator's fees ($1,260 per day) for a four-day hearing plus another 4 1/2 days of motions, discovery, and decision-making.
- The cost was weighed against the individual's situation: recently lost his job, uncertain future income, children to support, no large savings.
My view: The 6th Circuit is pretending to analyze "similarly situated litigants," but it really simply looks at the specific facts for the litigant at hand, and assumes they are typical.
Armendariz doesn't apply to common-law claims
July 29, 2005 by Ross Runkel at LawMemo
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).
Court severs anti-punitive damages clause
July 05, 2005 by Ross Runkel at LawMemo
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.
En banc hearing on who decides unconsionability
June 29, 2005 by Ross Runkel at LawMemo
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].
Anti-class-action clause was unconscionable
June 27, 2005 by Ross Runkel at LawMemo
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?
Class action waivers
June 09, 2005 by Ross Runkel at LawMemo
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.
Circuit City Stores avoids sanctions
May 19, 2005 by Ross Runkel at LawMemo
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.
Arbitrator, not court, decides unconscionability issue - sometimes
March 30, 2005 by Ross Runkel at LawMemo
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.
Arbitration agreement unconscionable under Washington law
January 17, 2005 by Ross Runkel at LawMemo
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.
