Co-authored by Tim Rusche and Adam Vergne

Sound advice that the world has lived with since 1512…until recently flushed by the Ninth Circuit. Not so quick to discard 500 years of wisdom, however, the Supreme Court has agreed to consider whether this idiom will rest in peace or be given new life. It recently accepted review of Zaborowski v. Managed Health Network Inc., in which the Ninth Circuit refused to compel arbitration of a putative class and collective action alleging that the defendant avoided paying overtime by improperly classifying counselors as independent contractors.

In 2013, U.S. District Judge Susan Illston found the underlying arbitration agreement so permeated with unconscionability that the entire agreement should be thrown out with the dirty water. The court held that the agreement was procedurally unconscionable because it was a condition of employment not subject to negotiation and buried in the employment contract, thereby creating “unfair surprise.” The court also pointed to the agreement’s six month limitations period, arbitrator selection process, fee shifting provision, prohibition on punitive damages, and the fees associated with filing an arbitration to find it substantively unconscionable. Ultimately, the district court denied arbitration and refused to sever the agreement’s bad provisions from the good because the dirty water “so permeated” it.

This refusal to parse the bathwater will take center stage when the Supreme Court hears oral argument during the upcoming term.

Notably, the Ninth Circuit panel affirming the decision split on that issue. The majority noted, “the Federal Arbitration Act expresses a strong preference for the enforcement of arbitration agreements” and “we may have reached a different conclusion” but ultimately concluded the district court did not abuse its discretion.

The dissent, authored by Judge Ronald Gould, concluded the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion mandated that courts not reflexively dump the entire tub by “creat[ing] a presumption in favor of severance” so long as the agreement could still be enforced after severing the unconscionable provisions. Judge Gould even included a blackline of the arbitration provision—pictured below—striking the unconscionable provisions that could be thrown out with the bathwater while saving the remainder. 

Should the Supreme Court provide new life to our favorite German idiom, it will have a profound effect on the extent to which employers can use waivers in arbitration agreements to avoid class and collective actions and provide guidance about whether employers may include novel or more favorable language in agreements. In the meantime, the case provides an important reminder that employers must take great care when crafting arbitration agreements to avoid provisions that will taint the entire bath.