Courts routinely enforce arbitration agreements in a wide variety of disputes. But this common practice recently took a new turn when the California Court of Appeal for the First District struck an employer’s arbitration agreement as void on “unconscionable” grounds. In Baxter v. Genworth North America Corporation, et al., A144744, 2017 WL 4837702 (October 26, 2017), employee Maya Baxter brought a wrongful termination lawsuit against her company employer, Genworth North America Corporation. The company attempted to dismiss the case from the trial court and move it to arbitration, claiming that employee Baxter signed an arbitration agreement. The trial court (Hon. Joyce Cram), however, denied the request, finding that the arbitration agreement was “procedurally and substantively unconscionable.” The company appealed, but the Court of Appeal agreed with the trial court that the company’s arbitration agreement was unenforceable because it was unconscionable.
The Court of Appeal began its analysis with the well-established principle in California that arbitration agreements are generally favored, except when they contain provisions that are grossly unfair or “unconscionable.”
“California law, like federal law, favors enforcement of valid arbitration agreements. Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97. Nevertheless, courts may invalidate an arbitration agreement if it contains provisions that are unconscionable or contrary to public policy. (Id. at pp. 113–114; accord, Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 711.
“Unconscionability” refers to “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” As that formulation implicitly recognizes, the doctrine of unconscionability has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.” Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243.
Both procedural and substantive unconscionability must be present for a court to invalidate an arbitration agreement, although they need not be present in the same degree. (Baltazar, supra, 62 Cal.4th at p. 1243.) In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz, supra, 24 Cal.4th at p. 114.)
Procedural unconscionability focuses on “oppression” or “surprise” “due to unequal bargaining power.” (Armendariz, supra, 24 Cal.4th at p. 114.) “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice. Surprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” (Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 853.)
Substantive unconscionability analysis focuses on overly harsh or one-sided results. (Little v. Auto Stiegler, supra, 29 Cal.4th at p. 1071.) The unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as “overly harsh,” “unduly oppressive,” “so one-sided as to ‘shock the conscience’ ” or “unfairly one-sided.”
All of these formulations point to the central idea that the unconscionability doctrine is concerned not with “a simple old-fashioned bad bargain,” but with terms that are “unreasonably favorable to the more powerful party.” (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145.)
Moreover, in an employment context, an arbitration agreement must meet five minimum requirements to be enforceable: (1) neutral arbitrators, (2) more than minimal discovery, (3) a written award, (4) all types of relief that would otherwise be available in court, and (5) no additional costs for the employee beyond what the employee would incur if he or she were bringing the claim in court.” (Fitz, supra, at pp. 712–713.) This requirement is to ensure that a mandatory arbitration agreement does not curtail an employee’s public rights derived from statutory and common law. Fitz, supra, 118 Cal.App.4th at p. 712; Armendariz, supra, 24 Cal.4th at pp. 102, 110–111.
Applying the foregoing principle, the Court of Appeal agreed with the trial court that the company’s arbitration agreement was procedurally and substantively unconscionable because employee Baxter (1) had no opportunity to negotiate the terms of the arbitration agreement, (2) had no meaningful choice in the matter, (3) had to quit her job of over five years or agree to the arbitration terms that were a condition of her continued employment, (4) was presented with a take-it or leave-it agreement, depriving her of equal bargaining power, and (5) was forced to agree to litigation provisions that were unfairly one-sided. These facts pointed to a “high degree of oppressiveness” supporting a finding of procedural and substantive unconscionability.
Thus, it would be prudent for companies to carefully review and draft (or re-draft) arbitration agreements that will pass the Armendariz test of unconscionability, as the Baxter court has eloquently articulated.
By Susan Yu
© 2017 Susan Yu Law Group, APC