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Arbitration Clause Found Invalid

Zenia Chavarria started work as many other employees across the State of California do.  She went through an interview and when hired, was brought back to fill out stacks of paperwork.  Located in the pile of paper she was asked to sign was a signature page.  It was not attached to an actual agreement, but alluded to, among other things, an ‘Arbitration Agreement.’

Ms. Chavarria signed the document without question, understanding that to refuse to sign any of the paperwork could result in loss of her new job.  She was provided with the actual terms of the agreement several weeks later in a packet of information that it is likely she never even read.

After working for Ralph’s in the deli department for 6 months, Ms. Chavarria filed a class action against the grocery chain alleging that it had violated various provisions of the California Labor Code and the Unfair Competition Law, relating to meal and rest periods.

Ralph’s filed a Motion to Compel Arbitration, as they had a signed agreement from Ms. Chavarria stating she agreed to it.  Ms. Chavarria’s counsel opposed the motion for several reasons.  The arbitration agreement was both procedurally and substantively unconscionable, according to her attorney.

The Arbitration Agreement stated in pertinent part, that unless the parties agreed otherwise, the arbitrator must be a retired federal or state judge. If the parties could not agree on an arbitrator, they would propose a list of three names and alternately strike one name from the other party’s list until only one name remained. The party who did not demand arbitration would strike first. Consequently, the last remaining arbitrator would be one selected by the party not demanding arbitration.

The fee provision provided, among other things, that the arbitrator’s fees would be apportioned at the outset of the arbitration and split evenly between the company and the employee unless a decision of the U.S. Supreme Court directly addressing the issue required that the fees be apportioned differently. The arbitration policy also limited the arbitrator’s authority to award costs.

California Courts have set a precedence regarding the test of whether an arbitration clause is to be considered unconscionable. They have laid out a two prong analysis regarding ‘procedural unconscionability and substantive unconscionability.’

Procedural unconscionability will be found in cases where there is a standardized contract, drafted by the party of superior bargaining strength that relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

In Ms. Chavarria’s case, this is clearly true.  She was not even provided with the terms of the agreement until well after she had signed it.

Ralph’s argued that she was not required to sign the agreement, as evidenced by the fact that the signature line clearly stated “Please sign here,” the ‘please’ being an obvious indicator that it was acceptable for her to refuse.

The Court found that argument disingenuous, stating that it was apparent from the terms of the Agreement itself that it would be binding whether the employee signed it or not.  In addition, it was presented to Ms. Chavarria on a ‘take it or leave it’ basis and it was clear that if she wanted the job, she had to sign the paperwork…this Agreement included.

A finding of procedural unconscionability is not the death of an Arbitration Agreement, however. Substantive unconscionability must also be found, though California has adopted a sliding scale approach to the test.

The more procedurally unconscionable an agreement is, the less substantive unconscionability must be found and vice versa.

In this case however, both types of unconscionability existed.

The Court went on to analyze the substantive unconscionability of the Agreement by stating that both the arbitrator selection process and the fees provisions were troubling.  The company conceded the selection procedure disadvantaged the party demanding arbitration. However, it maintained the procedure would not always disadvantage the employee because, in cases involving motions to compel arbitration, the company would be the one demanding arbitration. The Court did not agree, calling the argument a “fanciful interpretation” of the arbitration policy. It pointed out the policy required that a demand for arbitration follow the pleading requirements in the Federal Rules of Civil Procedure and a motion to compel did not satisfy those requirements. Even after filing a court action, the policy required the employee to file a demand for arbitration, and, as a result, the Court said, the company would get “to pick the pool of potential arbitrators every time an employee brings a claim.”

Addressing the fee provision, the company argued that it was not unconscionable because it followed the “American rule,” requiring each party to bear its costs. The Court disagreed because the policy required Chavarria to pay one-half of the arbitrator costs up front, regardless of the merits of her claims and any potential state law contradicting this allocation. Also, the arbitration policy limited the arbitrator’s authority to award costs. The costs that Chavarria would bear likely would dwarf the amount of her claims, the Court stated. Thus, the Court ruled this provision acted as a “prohibitive obstacle to having her claim heard.” Accordingly, the Court concluded the arbitration agreement was substantively unconscionable.

The Court concluded its unconscionability analysis by stating, “Ralphs has tilted the scale so far in its favor, both in the circumstances of entering the agreement and its substantive terms, that it shocks the conscience.  Accordingly, Ralphs’ arbitration policy cannot be enforced against Chavarria under California law”

In previous blogs, we’ve talked about the seminal case of Armendirez vs. Foundation Psychiatric Health, a 2000 California decision, which requires a showing of both procedural and substantive unconscionability. Today’s case is consistent with the ruling and spirit of Armendirez and reflects a return to a rational review of arbitration agreements that truly shock the conscience.

If you are an employee in California and have been wrongfully terminated or discriminated against by your employer, you need immediate legal representation from an experienced employment law attorney. Stephen Danz has been defending the rights of California employees for decades and is one of the most well respected employment law attorneys in the State.  He regularly travels throughout the country and around the globe teaching seminars on various aspects of employment law cases and has often been hired by other employment law attorneys as an expert on their own cases.

Contact Stephen Danz & Associates today on our toll free number, (877) 789-9707 or use the Contact form on this website to request a free consultation.  Stephen and one of his associates will sit down with you at one of their offices located anywhere in California, or at a location that is convenient for you.

We look forward to defending your rights.