Arbitration Agreement Enforceable Despite Claims of Unconscionability

​Two mechanics who worked for a truck rental company were unsuccessful in challenging an arbitration agreement they had signed, and the trial court was correct in ordering the mechanics to arbitrate their claims of discrimination, harassment and retaliation against the company and their former manager, a California appeals court ruled. The court rejected the mechanics' claims that the arbitration agreement was both procedurally and substantively unconscionable.  

The mechanics, who were brothers, both signed arbitration agreements as conditions of continued employment with the company.

The agreement is a three-page document. The first two pages explain the company's employment dispute resolution policy and outline the procedures that will be followed.

The final page requires the electronic signature of the employee.

Each of the brothers submitted his electronic signature on the arbitration agreement.

After the brothers filed suit against the company, the employer moved to compel arbitration, and the trial court granted the motion. The brothers appealed.

Arguments on Appeal Rejected

The brothers argued on appeal that the arbitration agreement is unconscionable and thus unenforceable. The court first noted that, under California law and the Federal Arbitration Act (FAA), unconscionability of an arbitration agreement is a basis for denying a motion to compel arbitration.

Unconscionability has procedural and substantive aspects, and both procedural and substantive unconscionability must be present before a contract or term will be deemed unconscionable, the court said.

Substantive unconscionability focuses on the actual terms of the agreement, while procedural unconscionability focuses on the manner in which the contract was negotiated and the circumstances of the parties. The analysis uses a sliding scale, where the more substantively oppressive the contract terms, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa.

Procedural unconscionability focuses on the elements of oppression and surprise, the court said. Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.

Arbitration agreements imposed as a mandatory condition of employment are not per se unlawful or unconscionable under the FAA or California law, the court said. Instead, the unilateral, "take-it-or-leave-it" nature of such agreements is just one factor courts consider in assessing procedural unconscionability.  

Further, where the arbitration provisions, even if presented on a take-it-or-leave-it basis, are highlighted for the employee, any procedural unconscionability is limited, the court said.

The agreement here creates only limited procedural unconscionability, the court concluded.

The arbitration agreement is a stand-alone document, not buried in a lengthy employment agreement, and the signature page bears the heading, in all capital letters, "EMPLOYEE AGREEMENT TO ARBITRATE." At the outset, the agreement flags for the signatory the importance of reviewing the document by including the following language: "Please take the time to read this material. IT APPLIES TO YOU"—and clearly discloses, in an underlined portion on the first page, that the employer is requiring the employee to sign the agreement as a term of continued employment.  

Substantive unconscionability results from provisions that are overly harsh or one-sided.

The brothers argued that the agreement is substantively unconscionable because it:

• Prevents an employee from bringing any claim against other company employees in any forum, including arbitration.
• Denies employees the right to appeal.
• Prohibits employees from seeking relief through governmental agencies.
• Requires employees to waive their right to relief under the Private Attorneys General Act (PAGA).

The court first noted that it did not have to decide whether the PAGA waiver provision is unconscionable because that provision can be severed from the agreement, and so, under California law, does not make the entire arbitration agreement unenforceable.

It then addressed the other allegations, one by one, finding none to have merit. 

As to the claim that the brothers could not bring claims against other company employees, such as their former manager, the language of the agreement does not support such a reading, the court said. Although it does provide that the parties to any arbitration are limited to the complaining employees and the company, the company is defined to include company employees.  

The brothers' argument that the agreement is unconscionable because it denies them the right to appeal from an arbitration award is an inaccurate characterization of the agreement, the court said. The arbitration agreement states it is governed by the FAA, which provides for appellate review of arbitration orders. The arbitration agreement's reference to the decision of the arbitrator being "final and binding" is not inconsistent with the right to appeal. Nor is an arbitration agreement unconscionable for failure to explicitly reference judicial review.

Finally, the court said, the agreement does not prevent the brothers from filing a claim or complaint with an administrative agency that will prosecute a claim on their behalf. To the contrary, the agreement expressly states it affects only the ability of the parties to prosecute or defend claims. It therefore has no effect on the ability of a government agency to pursue a prosecutorial role, as opposed to an adjudicative role, the court said. 

Rocha v. U-Haul Co. of California, Calif. Ct. App., No. B322599 (Feb. 2, 2023).

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.