Unconscionable Employment Arbitration Agreement Held Unenforceable

Provisions in employment applications that require mandatory and binding arbitration of all disputes are commonplace and are generally enforced as written by courts. Additionally, the Federal Arbitration Act frequently preempts (overrides) contradictory state arbitration statutes. Consequently, the recent federal Ninth Circuit decision in Chavarria v. Ralphs Grocery Company, applying California's procedural unconscionability rules to an employment arbitration agreement, is noteworthy.

"Unconscionable" is an ancient common law exception to freedom of contract. Courts may refuse to enforce a harshly one sided, grossly unfair contract that "shocks the conscience," hence is deemed by the court to be unconscionable. The Ninth Circuit affirmed a District Court's decision that refused to enforce the employment arbitration agreement in question on the basis of unconscionability. The Ninth Circuit upheld the decision that the Federal Arbitration Act preemption standards did not apply because California's unconscionability rules apply equally to all contracts and do not disproportionally impact arbitration agreements.

What did the Court find objectionable? The Court was concerned that the agreement was presented on a "take it or leave it basis" as a condition of employment. The exact provisions were not made available to the employee until three weeks after the employee agreed to be bound by them. The arbitrator selection process would always produce an arbitrator proposed by the employer. Institutional arbitration administrators, including the American Arbitration Association or the Judicial Arbitration and Mediation Service with established rules to select a neutral arbitrator, were excluded. The arbitrator-fee-apportionment provisions would, in the view of the Court, place "prohibitive costs" on the employee. Furthermore, the arbitration policy could be unilaterally modified by the employer at any time without notice to the employee. The Court rejected the employer's argument that the employment application language, "please sign and date," meant that the employee did not have to agree to arbitration.

Especially troubling to the Court was the requirement that the selected arbitrator apportion the costs of arbitration before considering the merits of the claims. There was evidence that an arbitrator would cost between $7,000 and $14,000 per day. Not only would having to pay half of this cost be expensive to the employee, the arbitration cost would likely exceed the dollar amount of this employee's claim for pay during rest and meal breaks as required by California law. The Court in conclusion expressed concern that if state law could not require a measure of fairness, an employer could even "make its own president the arbitrator of all claims brought by its employees." The U.S. Supreme Court might agree to review the Ninth Circuit's decision.

The lesson from this decision for employers is to be careful in preparing and presenting an employment arbitration agreement. Make the agreement immediately available to the employee without delay. Give thought to the overall appearance of fairness. Create a process that will provide a neutral arbitrator. Be particularly sensitive to cost issues and be willing to pay a significant portion of them.