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CA Supreme Court clarifies analysis of unconscionable terms in employment arbitration agreements

8/8/24

By Mandy D. Hexom and Daniel Parker Jett

In Ramirez v. Charter Communications, Inc., Case No. S273802, (https://www.courts.ca.gov/opinions/documents/S273802.PDF), the California Supreme Court addressed the following question: Under what circumstances should a trial court sever substantively unconscionable terms and enforce the rest of an employment arbitration agreement, rather than refusing to enforce the entire agreement? The arbitration agreement at issue in this case required a party resisting arbitration to pay the other party’s attorney’s fees (for unsuccessfully opposing a motion to compel arbitration), required arbitration of claims commonly brought by employees but not those commonly brought by employers, unreasonably shortened a statute of limitations, and limited the number of depositions. Both the trial court and the Court of Appeal concluded the arbitration agreement was permeated with unconscionable terms and refused to enforce it. The Supreme Court remanded the case to the trial court to determine whether the unconscionable provisions could be severed from the agreement in light of this decision. The Supreme Court clarified how trial courts should review employment arbitration agreements for substantive unconscionability. 

Summary of California Supreme Court’s Test for Substantive Unconscionability of Arbitration Agreement Provisions: 

Trial courts should turn to reviewing the substantive unconscionability only after determining that the agreement is procedurally unconscionable. In doing so, courts should consider the following factors: 

Totality of the Circumstances: The trial court is required to determine whether unconscionable provisions in an arbitration agreement may be severed and the remaining agreement enforced, requiring the trial court to make a “qualitative” decision “based on the totality of the circumstances” known at the time the agreement was made. Therefore, even if there is more than one unconscionable provision in the arbitration agreement, that in and of itself does not render the agreement unenforceable. 

Mutuality of Terms: Employment arbitration agreements must exude bilaterality—that is, mutuality in the obligation to arbitrate. An agreement may not, for example, compel arbitration of claims more likely to be brought by an employee while excluding from arbitration claims that are more likely to be brought by an employer. 

Limitations Periods: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” (Cal. Civ. Code, § 3513.) Accordingly, parties may agree to shortened limitations periods, but it must be reasonable and not violate public policy. For example, a six-month limitation period to bring a FEHA claim (which normally has a two-year period to bring a lawsuit) would “effectively eliminate any meaningful participation by [the DFEH].” 

Limits On Discovery: The trial court should evaluate limitations on discovery for unconscionability based upon: (i) the types of claims covered by the agreement; (ii) the amount of discovery allowed; (iii) the degree to which that amount may differ from the amount available in conventional litigation; (iv) any asymmetries between the parties with regard to discovery; and (v) the arbitrator’s authority to order additional discovery. When an arbitrator has the authority to resolve all discovery disputes, the discovery provision is likely to be upheld. 

Award of Fees on Motion to Compel Arbitration: A provision permitting the party resisting arbitration to pay attorney’s fees to the party who successfully compels arbitration is substantively unconscionable because “it violates FEHA’s asymmetric rule regarding awards of costs and fees.” FEHA explicitly provides, “a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” Cal. Gov. Code, § 12965, subd. (c)(6). The Supreme Court reasoned that a challenging party may make some successful arguments in challenging arbitration where the trial court finds parts of the agreement unconscionable, severs those parts, and enforces the remainder by compelling arbitration. 

More than One Unconscionable Provision: There is no bright line rule prohibiting severance when an arbitration agreement contains more than one unconscionable provision. Regardless of how many unconscionable provisions an agreement contains, courts must conduct a qualitative analysis to determine whether the agreement’s unconscionability can be cured by severing the unconscionable provisions. “[C]ourts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract’s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice.” [Citing, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 124; Marathon Entertainment, Inc. v. Blasi (2008) 42 Cal.4th 974, 991; Adair v. Stockton Unified School Dist. (2008) 162 Cal.App.4th 1436, 1450.] 

Rules of Unconscionability and FAA: The Supreme Court also concluded that enforcing the rules of unconscionability does not violate the Federal Arbitration Act. The question now becomes whether a door has been opened to seek certiorari from the Supreme Court of the United States on this last question. 

For more information, please contact Mandy D. Hexom at mandy.hexom@fmglaw.com, Daniel Parker Jett at djett@fmglaw.com, or your local FMG attorney.