California Appeals Court Finds Employer’s Arbitration Agreement With Cost-Sharing and Out-of-State Law Provisions Unconscionable 

From JDSupra, Matthew Craig discusses a recent case in which an arbitration agreement was not enforced because it was both procedurally and substantively unconscionable. This case offers guidance as to types of provisions to avoid in an arbitration agreement. Matthew writes:

In a recent ruling, a California appeals court found an arbitration agreement with an eyewear store employee that was presented on a take-it-or-leave-it basis required an arbitrator to apply the laws of another state, required that arbitration be conducted in another state, and forced the employee to share arbitration or mediation costs with the employer was unconscionable, and thus unenforceable.

Quick Hits

  • A California appellate court found an employer’s arbitration agreement with an eyewear store employee to be unenforceable for being both procedurally and substantively unconscionable.
  • The appellate court noted several issues with the arbitration agreement—including finding that it was a contract of adhesion—that placed it “high on the scale of substantive unconscionability.”
  • Employers may want to scrutinize their arbitration agreements for provisions that may tip the scale in favor of unconscionability.

On May 20, 2024, a panel for California’s Fourth Appellate District issued a unanimous, unpublished decision in Dopp v. Now Optics, LLC, affirming a lower court’s decision that found several of the provisions in the arbitration agreement made it both procedurally and substantively unconscionable, and thus unenforceable. The ruling highlights how courts, at least in California, are scrutinizing employers’ arbitration agreements and declining to enforce such agreements when they contain substantively unconscionable provisions that go beyond merely requiring that disputes between employers and employees be resolved through binding arbitration—such as choice-of-law clauses, forum-selection clauses, confidentiality provisions, and provisions requiring sharing of costs and fees.

Factual Overview

Allison Dopp, who previously worked at Now Optics, LLC’s, retail stores in San Diego County, California, from 2019 to 2021, brought a lawsuit against the company and related entity Vision Precision Holdings, LLC, as well as two supervisorial employees, asserting class action claims for meal and rest period violations and overtime violations, as well as various individual claims, including wrongful discharge and violations of the California Fair Employment and Housing Act (FEHA).

The defendants moved to compel arbitration relying on an arbitration agreement that Dopp electronically signed along with other onboarding documents when she was hired. Dopp opposed the motion, arguing that the arbitration agreement was procedurally and substantively unconscionable. The trial court agreed with Dopp and denied the defendants’ motion. The defendants appealed.

Procedural Unconscionability

The Fourth Appellate District held that the arbitration agreement with Dopp was procedurally unconscionable for two reasons:

  • Contract of Adhesion. The arbitration agreement was a contract of adhesion because the agreement was a prewritten agreement presented to Dopp on a “take it or leave it” basis.
  • Sharing of Unspecified Fees and Costs. The agreement was procedurally unconscionable because it required Dopp to share in the costs of both mediation and arbitration—despite not providing her with any way of determining what those costs might be.

Substantive Unconscionability

The Fourth Appellate District Court agreed with the ruling by the trial court that six provisions of the arbitration agreement were substantively unconscionable:

  • Florida choice-of-law provision. The court held that requiring an arbitrator to apply Florida law would undermine Dopp’s claims and would violate the California Labor Code because applying Florida law would “deprive the employee of substantive protections of California law for a controversy arising in California.”
  • Florida forum-selection clause. The panel stated that the forum-selection clause would violate a provision of the California Labor Code which “prohibits an employer from imposing such a forum-selection clause on California employees as a condition of employment,” and further, that even in the absence of such a statute, the provision was unconscionable because it was not within Dopp’s “reasonable expectations to be compelled to resolve employment disputes in a distant forum on the other side of the country.”
  • Required sharing of arbitration fees and expenses. Noting that prior precedent provides that “[w]hen an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement … cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court,” the court held that a provision requiring the parties to share in arbitration fees and expenses was substantively unconscionable.
  • Required sharing of mediation fees and expenses. Applying a similar analysis as with respect to the sharing of arbitration fees and expenses, the panel held that the provision requiring the parties to share mediation fees and expenses was substantively unconscionable because mediation fees and expenses were not an expense the employee would bear if she had litigated the matter in court.
  • Requirement that each party pay their own attorneys’ fees. The court found that the provision depriving Dopp of her potential right to recover attorneys’ fees available under California law was substantively unconscionable because it had the effect of “denying [her] the rights and remedies … she would have if … she were litigating … her claims in court.”
  • Confidentiality requirement. The court found that the confidentiality provision requiring that disputes be resolved “by final binding confidential arbitration” was substantively unconscionable.

Based on the six substantively unconscionable provisions in the agreement, the court found that the arbitration agreement “register[ed] high on the scale of substantive unconscionability.”

Severance

The appellate court further found that the trial court had not abused its discretion in declining to sever the unconscionable provisions and enforce the remainder of the agreement. In reaching that conclusion, the appellate panel noted the six substantively unconscionable provisions “systematically operated to deprive Dopp of valuable rights and remedies as a California employee” and that the agreement was “permeated with too high a degree of unconscionability for severance to rehabilitate.”

Key Takeaways

Recognizing that courts are likely to characterize arbitration agreements between employers and employees as contracts of adhesion, employers may want to consider avoiding provisions that could tip the scale in favor of unconscionability.

Such provisions may include those that require employees to share in costs and fees of arbitration or pre-arbitration mediation. Moreover, employers may want to exercise caution before including choice-of-law and forum-selection clauses in arbitration agreements that would apply the law of, or require arbitration in, a jurisdiction other than the jurisdiction where the employee is employed, or provisions mandating that arbitration remain confidential.

Source: California Appeals Court Finds Employer’s Arbitration Agreement With Cost-Sharing and Out-of-State Law Provisions Unconscionable | Ogletree, Deakins, Nash, Smoak & Stewart, P.C. – JDSupra

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