A recent decision by the Ninth Circuit could have a huge impact on how the Second Circuit interprets arbitration clauses in employment law cases. The Court in Chavarria v. Ralphs Grocery Co., No. 2:11 Civ. 02109 (DDP)(VBK) (9th Cir. October 28, 2013), held that Ralphs’, the defendant/employer, arbitration policy is unconscionable under California state law and that the state law supporting that conclusion is not preempted by the Federal Arbitration Act (“FAA”).
In affirming the lower court’s decision to deny the defendant’s motion to compel arbitration, the Court found that the defendant’s arbitration agreement was both procedurally and substantively unconscionable. Under California law, procedural unconscionability deals with the manner in which the contract was negotiated and the respective circumstances to the parties at that time, focusing on the level of oppression (i.e., weaker party’s absence of choice) and surprise (i.e., extent to which contract clearly discloses its terms) involved in the agreement. According to the Court, the arbitration agreement was procedurally unconscionable because agreeing to the arbitration clause was a condition of applying for employment with the defendant and it was presented on a “take it or leave it” basis, giving no opportunity for the plaintiff to negotiate its terms. Additionally, the complete terms of the arbitration clause were presented to the plaintiff three weeks after she had agreed to be bound by it which gave more support for finding the arbitration agreement more unconscionable.
Also under California law, a contract is substantively unconscionable when it is unjustifiably one-sided to such an extent that it “shocks the conscience.” The Court found that several terms made the defendant’s arbitration agreement substantively unconscionable. For instance, the defendant’s provisions regarding arbitrator selection would always produce an arbitrator proposed by the defendant in employee-initiated arbitration proceedings. Another term that made the arbitration agreement substantively unconscionable was the preclusion of institutional arbitration administrators. The agreement provided that only a former federal judge can be chosen as an arbitrator. Moreover, the policy requiring the arbitrator to apportion the arbitrator’s fees at the outset of the proceeding, regardless of the merits of the claim, was determined to be unconscionable. This term imposes significant costs on the employee and prevents the employee from recovering those costs, therefore, making their claims impracticable. For example, the fees for a qualified arbitrator under the defendant’s arbitration agreement would range from $7,000 to $14,000 per day, which means the plaintiff would be required to pay half ($3,500 to $7,000 per day). Since the plaintiff’s claims were for unpaid rest and meal breaks, her monetary claims would likely not approach the costs of the arbitrator fees and thus be impracticable.
Furthermore, the California procedural unconscionability rules did not disproportionately affect the arbitration agreement because they focused on the parties and the circumstances of the agreement and applied them equally to the formation of all contracts. Only state laws that would have a disproportionate impact on arbitration would be preempted by the FAA. However, the Court discussed, in more detail, the application of California’s general substantive unconscionability rules to the arbitration agreement and whether the case American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), is distinguishable. In Italian Colors Restaurant the U.S. Supreme Court held that a class waiver provision in an arbitration agreement did not prevent the plaintiffs from pursuing their rights. The U.S. Supreme Court reasoned that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute an elimination of the right to pursue that remedy.” Id. at 2311. The U.S. Supreme Court further elaborated that the result might be different if the arbitration clause required a plaintiff to pay “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at 2310-11. This is the precise situation which occurred in the present case. Ralphs’ arbitration agreement imposed non-recoverable filing and administrative costs on the plaintiff which effectively foreclosed her pursuit of the claim. These were not costs in proving the merits of her claims but were costs just to have her case heard.
“The Supreme Court’s holdings that the FAA preempts state laws having a ‘disproportionate impact’ on arbitration cannot be read to immunize all arbitration agreements from invalidation no matter how unconscionable they may be, so long as they invoke the shield of arbitration.” The Ninth Circuit also reaffirmed that their interpretation of the AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), “Concepcion outlaws discrimination in state policy that is unfavorable to arbitration.”
If the Second Circuit adopts the Ninth Circuit’s interpretation, employees would have more ammunition to fight their employer’s arbitration schemes. Therefore, allowing employees to pursue their claims as a class and not individually. If you would like a lawyer to evaluate your arbitration clause, please call the New York City employment lawyers of Fitapelli & Schaffer for a free consultation.