Unconscionable Employment Arbitration Agreement Held Unenforceable

Author Brad Reid, Senior Scholar, Dean Institute for Corporate Governance and Integrity, Lipscomb University


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.
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