Poorly Written Arbitration Agreement Was Not Enforceable

Takeaway: An arbitration agreement imposed as a condition of employment, written in a small font with paragraphs filled with statutory references and legal jargon and containing several unfair provisions, was not enforceable.

A trial court in California correctly found that an arbitration agreement was both procedurally and substantively unconscionable and did not err in refusing to enforce the agreement, a California appeals court recently ruled.

A contract is unfair or “unconscionable” if one of the parties lacked a meaningful choice in deciding whether to agree, and the contract contains terms that are unreasonably favorable to the other party, the appeals court said. The unconscionability doctrine has both a procedural and a substantive element, the court explained.

The employee worked in northern California as an insurance sales agent for a national association from March 4, 2019, to approximately mid-December 2020. In 2021, she sued the association for race discrimination, disability discrimination, retaliation, harassment and wrongful discharge.

The association sought to compel the employee to bring her claims in arbitration. The employee argued that the arbitration agreement was unconscionable and therefore unenforceable.

The association required all employees to agree to arbitrate all workplace claims as a condition of their employment. The arbitration agreement consisted of two letter-size pages, consisting of seven single-spaced paragraphs in a small font size. There was no mention of an arbitration agreement during the employee’s interview or when she accepted the verbal employment offer. She received an employment offer by email, which contained links to various documents that she was to read and sign. At the time she received the offer, she did not own a personal computer or tablet and relied exclusively on her smartphone for internet access. Although the written employment offer indicated the employee would sign an arbitration agreement on the first day of her employment, she did not physically or electronically sign an arbitration agreement on the first day.

The trial court found the arbitration agreement unenforceable, and the association appealed. The appeals court affirmed the trial court’s decision refusing to order arbitration.

Unconscionability Doctrine

The appeals court noted that procedural unconscionability addresses the circumstances of contract negotiation and formation, focusing on surprise or oppression due to unequal bargaining power. Substantive unconscionability relates to the fairness of an agreement’s actual terms and whether they are overly harsh or one-sided.

Both elements must be present for a court to refuse to enforce an arbitration agreement, the court said, but the elements do not need to be present in the same degree and are evaluated on a sliding scale. The more substantively oppressive the agreement, the less evidence of procedural unconscionability is necessary to find the agreement unenforceable, and vice versa, the court explained.

It concluded that the employee had established a high degree of procedural unconscionability. The employee’s consent to the arbitration agreement was imposed as a condition of employment. The agreement was written in a small font with paragraphs filled with statutory references and legal jargon. The association gave the employee only one option to review and sign the agreement. She had to sign it electronically, even though her offer letter stated that she would review and sign the agreement on her first day of employment. The association did not inquire into whether the employee had the ability to view the documents electronically and did not appear to provide any alternative, such as viewing the documents at an office on a computer or picking up the physical documents for review before signature.

The employee did not have a computer when she electronically viewed and signed her employment paperwork, including the arbitration agreement, on her phone, which had a small screen.

The court then turned to the substantive terms of the arbitration provision, noting that because of the high degree of procedural unconscionability, a relatively low degree of substantive unconscionability would be enough to render the agreement unenforceable.

The arbitration agreement provided that, while an employee could file a charge or complaint with an appropriate governmental administrative agency, the employee waived her right to any remedy or relief as a result of such charges or complaints brought by the agency. That provision had nothing to do with arbitration, the court said. Rather, it was simply a waiver of the right to compensation or relief in the administrative context, which certainly seemed one-sided.

In addition, the court said, the agreement’s provision that all aspects of the arbitration were to be kept confidential would limit the employee’s ability to investigate the events forming the basis of her claims.  While a confidentiality provision in an arbitration agreement is not necessarily unconscionable when it is based on a legitimate commercial need, such as to protect trade secrets or proprietary information, the association identified no commercial need for requiring employment-related proceedings to remain confidential, the court said, finding this provision unduly harsh.  

Finally, the court said, the arbitration agreement was further one-sided because it required the parties to bring their claims “in an individual capacity,” and prohibited class, representative, or private attorney general proceedings. Such a waiver of representative claims under the state labor code is not permissible under California law.   

Hasty v. American Automobile Assn. of Northern Cal., Nev. & Utah, Calif. Ct. App., No. C097674 (Jan. 16, 2024).

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