Authored by Arthur J. Rooney
It seems like every few months we’re writing about another pro-arbitration decision. A few months ago, for example, we wrote about the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant, which held that class action waivers in arbitration agreements are enforceable under the Federal Arbitration Act (FAA) even if individual arbitration is economically unfeasible. (See discussion here.) This and other decisions build on AT&T Mobility LLC v. Conception, where the Supreme Court held that the FAA preempts a California rule that invalidated class action waivers in arbitration agreements as unconscionable.
So, should companies read these pro-arbitration decisions as giving them carte blanche to draft their arbitration agreements? Can they say goodbye to class and collective actions? Not necessarily.
Earlier this week, in Chavarria v. Ralphs Grocery Company, the Ninth Circuit refused to enforce a company’s arbitration agreement because, in the court’s eyes, it was unfair. There, a deli clerk filed a putative wage-hour class action under California law. Her employer moved to compel individual arbitration pursuant to its arbitration policy, which was part of the company’s job application. The district court, however, denied the motion because it concluded that the policy was both procedurally and substantively unconscionable under California law. The company appealed, arguing that its policy was not unconscionable and, in any event, the FAA preempts California law. The Ninth Circuit rejected both arguments and affirmed the denial of the company’s motion to compel arbitration.
First, the court agreed that the arbitration policy was procedurally unconscionable because it was presented to employees on a “take it or leave it” basis as part of their job application and the terms of the policy were not provided to the plaintiff until three weeks after she had agreed to be bound by it. The court also concluded that the policy was substantively unconscionable because it was unjustifiably one-sided. Under the policy, the company would always select the arbitrator in employee-initiated arbitrations and the parties would split the arbitration fees regardless of the merits of the claim. According to the court, the company’s “policy imposes great costs on the employee and precludes the employee from recovering those costs, making many claims impracticable.”
Next, the Ninth Circuit rejected the company’s argument that the FAA preempts California’s unconscionability doctrine because it applies to contracts generally and does not disproportionally affect arbitration agreements. The court also opined that the Supreme Court’s AmEx decision does not preclude it from considering the cost that an arbitration policy imposes on employees in order for them to pursue a claim, as opposed to proving it. In conclusion, the court reiterated that there needs to be “some level of fairness in an arbitration agreement,” and that “[f]ederal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.”
In light of some of the uncertainty that remains post-Concepcion and the availability of generally applicable contract defenses, which are expressly preserved by the FAA, companies that want the benefits of arbitration should carefully consider the provisions in their agreements to ensure that they do not arguably prevent the claimant from vindicating his or her rights. More details about the state of the law and drafting considerations can be found in this Strategy & Insights memorandum.