Mandatory Employment Arbitration Agreements: The Key To Avoiding A Charge of Unconscionability


by Alyssa Shenk

Honorable Mention in the Law Student Category
2002 James Boskey ADR Writing Competition. The competition is Sponsored by the ABA Section of Dispute Resolution and the Association for Conflict Resolution.

November 2002

Introduction

The current growth of employment litigation is greatly impacting the American workplace.1 Employees are no longer in the dark about their rights and their ability to assert those rights in a court of law. Employees’ increased knowledge coupled with the rise in the use of the judicial forum as a means of receiving compensation for an employer’s wrongdoing, brings with it a need to create alternatives to litigation.2

A fast growing approach employers have utilized to counter the vast amount of litigation has been to implement mandatory arbitration agreements.3 In recent years, however, mandatory arbitration agreements themselves have become problematic, thereby creating their own source of litigation. This increased use of employment arbitration resulted in three generations of cases specifically involving individual employment arbitration.4

In 1991, the Supreme Court decided Gilmer v. Interstate Johnson/Lane, Corp.5 In Gilmer, the Supreme Court noted that parties may agree to arbitrate statutory claims via an enforceable agreement, thereby explicitly holding that pre-dispute agreements to arbitrate were both legitimate and enforceable.6

The next generation of cases extended Gilmer to reach other types of statutory claims, employers and other sources of arbitration agreements.7 The seminal case of this generation was Cole v. Burns International Security Services.8 Cases in this era dealt primarily with issues concerning consent.9

The third generation of cases focuses on a plethora of employment issues still outstanding.10 The main inquiry in this generation of cases, primarily revolving around matters of justice, has been to discern the substantive and procedural elements necessary to justify a mandatory arbitration agreement as enforceable and exclusive.11 This Article specifically focuses on this third generation of cases by concentrating on the ways in which unconscionability evades justice, making for an unenforceable mandatory arbitration agreement.

Since the Supreme Court’s decision in Gilmer, the use of arbitration agreements in the employment field has accelerated dramatically.12 This continued growth has led to new issues in the second and third generations. This third bracket of cases is still in the process of developing, with much still left to be resolved concerning issues of justice.13 Although Gilmer represents a strong precedent favoring pre-dispute arbitration agreements, many courts in this third generation of cases have been reluctant to follow the holding in Gilmer regarding the determination of issues of unconscionability. The charge of unconscionability has made courts skeptical about enforcing arbitration agreements;14 therefore, this third generation of cases signifies that the courts are paying greater attention to the substantive and procedural elements defining an agreement to arbitrate to maintain justice.

This Article examines mandatory arbitration agreements as they are utilized in an employment context. Part II of this Article discusses the increase in employment disputes in general and why this has led to the emergence of mandatory arbitration agreements as alternatives to litigation in the employment field. Part III identifies the roots of unconscionability in the American legal system and the ever increasing popularity of charges of unconscionability as the use of mandatory arbitration agreements becomes more widespread. Part IV examines the judicially developed standard that courts are applying for determining whether mandatory arbitration agreements are unconscionable. Part V offers drafting recommendations to employers who want to create a mandatory arbitration agreement as a means of resolving workplace disputes. Part VI summarizes the proliferated use of mandatory arbitration agreements and the impact they will continue to have on findings of unconscionability, unless some uniform criteria are established and utilized by employers when drafting these agreements.

Mandatory Employment Arbitration Agreements As Alternatives To Litigation

The recent boom in employment related suits has been the driving force behind the emergence of mandatory arbitration agreements in the employment field. This rise in workplace disputes has prompted employers to seek alternative ways of handling these cases other than proceeding in a traditional judicial forum. For many employers, the answer lies in the implementation of mandatory/compulsory arbitration agreements.15

A mandatory arbitration agreement is “a prospective agreement between employer and employee to resolve future employment disputes by binding arbitration.”16 Employers create these arbitration agreements as part of a condition of employment, tailoring them as they see fit. For instance, an arbitration agreement can stand alone or may be included in the written employment agreement.17 Also, the arbitration agreement can be designed to cover a broad range or a limited range of employment disputes.18 In addition, an employer may choose to include its own rules for arbitration proceedings or it may adopt those of a neutral agency, such as the American Arbitration Association.19

There are four reasons why employers have chosen to implement mandatory arbitration agreements as an alternative to litigation. First, work place disputes cost a great deal of time and money to litigate.20 Many employers believe that arbitration is faster and will cost less than litigating the dispute.21 One study on employment arbitration found “that over 75% of the employers surveyed adopted the plans to reduce litigation costs.”22 Second, jury awards tend to be unpredictable23 and juries tend to be biased against employers.24 Third, employers are implementing mandatory arbitration agreements because they recognize that it may be difficult for employees to pay costs associated with traditional litigation.25 Fourth, arbitration provides an excellent means of preserving an amicable relationship between employer and employee.26 In the aforementioned study, it was found, however, that “only 15% of employers [implemented arbitration agreements] to improve employee relations or give employees a voice.”27 Whatever the reason, it is clear that the overall use of arbitration agreements by employers is rapidly rising.28 However, with increased implementation comes the concern that employers may be implementing these arbitration agreements for unjust reasons, hence giving rise to the charge of unconscionability.29

The Charge Of Unconscionability

The notion of unconscionability has a long history in the American legal system.30 In the past, unconscionability was extensively utilized in areas of equity, having little to no applicability to law.31 It was a rarity for a court of law to overtly find a contract unenforceable on the basis of unconscionability.32 Today’s courts, however, seem more open to challenges on unconscionability grounds, resulting in a reemergence of this relatively old, but well-known concept. The rise in unconscionability findings has been particularly evident in cases involving mandatory arbitration agreements.

Courts assessing the unconscionability of a mandatory arbitration agreement, apply the same principles as adhered to in contract law.33 The basic test for unconscionability is “whether, in the light of the general background and the needs of the particular case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”34 Therefore, unconscionability is determined at the moment both parties enter into the contract, not in light of subsequent events.35

Unconscionability is generally referred to as “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”36 In determining whether the terms of a mandatory arbitration agreement deprive one party of a meaningful choice, it is necessary to examine both the procedural and substantive elements of unconscionability. Under the prevailing view of contracts, both elements must be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.37

Procedural Unconscionability

An inquiry into the existence of procedural unconscionability involves examining the manner in which the contract was negotiated, as well as the circumstances of both parties. The procedural elements specifically focus on two factors, oppression and surprise.38 Oppression arises when there is “an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice.”39 Surprise signifies the degree to which the terms, which were supposedly agreed upon, are found hidden in the wordy form drafted by the party who wants to enforce the terms in dispute.40

There are several factors which many courts have taken into consideration when determining the issue of procedural unconscionability. The two most important factors are “(1) whether the relatively weaker party has an alternative source with which it could contract, and (2) whether the contract term in question was in fact negotiable.”41 Other aspects for the court to consider are whether the parties “had a reasonable opportunity to understand the terms and conditions of the agreement;” 42 whether the stronger party utilized deceptive practices so as to obscure key provisions; and whether the weaker party received an appropriate explanation of the terms of the agreement.43 All of these factors do have a bearing on whether or not procedural unconscionability is found to exist, however, none of these factors alone is dispositive.44

Substantive Unconscionability

Substantive unconscionability is generally referred to as “overly harsh” or “one-sided” results.45 The traditional standard for substantive unconscionability is when the terms of the agreement “are so one-sided that they shock the conscience.”46 Examining substantive unconscionability requires focusing on the actual terms of the agreement. An agreement becomes substantively suspect when it “reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.”47

The concern when evaluating whether an agreement is substantively unconscionable is whether the agreement imposes harsh or oppressive terms on a party who has freely assented to those terms.48 Therefore, when determining whether an agreement is substantively unconscionable, it is necessary to take several factors into consideration. These include justifications for the one-sided results, an overall imbalance in the obligations imposed by the bargain, and contractual provisions which are extremely unfavorable to one party and to which that party does not assent.49 Courts have consistently found mandatory employment arbitration agreements substantively unconscionable as a result of inadequate discovery rules, lack of mutuality and for placing the burden of paying the arbitration costs entirely on the employee.50

Judicially Developed Standard For Determining Whether Mandatory Employment Arbitration Agreements Are Unconscionable

In Graham v. Scissor-Tail,51 the Supreme Court of California set forth a two-part test “for determining whether an arbitration [agreement] is unconscionable and therefore unenforceable.”52 First, a court must consider whether the agreement to arbitrate is a contract of adhesion.53 In other words, the court examines whether an employee who is subject to a mandatory arbitration agreement had an appropriate opportunity to negotiate the terms of the arbitration agreement.54 Only if the agreement to arbitrate is an adhesive contract, then a court should turn to the second part of the test.

The second prong of this test examines whether there are other factors that render the agreement unenforceable.55 First, if a contract of adhesion does not meet “the reasonable expectations of the weaker or ‘adhering’ party [it] will not be enforced against him.”56 Second, even if a contract of adhesion is in accord with the reasonable expectations of the adhering party, it may still be found unenforceable if under principles of equity it is deemed “unduly oppressive or ‘unconscionable.’”57 In essence, if an arbitration agreement is found to be adhesive, then it will be fully enforceable unless either of the aforementioned limitations is violated.

A myriad of jurisdictions have adopted the Graham standard. In Stirlen, for example, an employer sought to compel arbitration as provided for by the mandatory arbitration agreement in the employment contract.58 The court found the arbitration agreement unenforceable in its entirety because it was unconscionably one-sided.59

In analyzing the arbitration agreement, the Stirlen court found that it was both procedurally and substantively unconscionable. Procedurally, Stirlen was not provided a reasonable chance to modify the terms of the agreement.60 The arbitration agreement was unmistakably adhesive, as it was offered to Stirlen on a take it or leave it basis.61 Substantively, the court found the terms of the arbitration agreement to be unduly oppressive.62 Most significantly, Supercuts curtailed Stirlen’s rights when it came to remedies without adhering to these same restrictions itself.63

In contrast to Stirlen, the court in Farrell v. Convergent Communications, Inc., was unwilling to find the arbitration agreement unconscionable. Upon employment, Farrell signed an arbitration agreement.64 Farrell brought suit against Convergent claiming that the agreement was unenforceable because it was unconscionable, and in turn Convergent field a motion to compel binding arbitration.65 Procedurally, the court found no signs of unconscionability.66 The court noted that not only was there no evidence of oppression, it was unconvinced by Farrell’s claim of surprise.67

Furthermore, the court was not convinced by any of Farrell’s claims for substantive unconscionability. Farrell’s main contention was that Convergent had no justification for the “unreasonable allocation of contractual rights and risks” contained in the agreement.68 The court acknowledged the multitude of differences between this case and Stirlen. In particular, the court found this case was “distinguishable from Stirlen in that [Farrell] is entitled to a host of remedies [including back pay, compensation for damages and injunctive relief] should he be able to establish liability…”69 For this reason and various others alluded to by the court, the arbitration agreement was not found unconscionable.70

The rationale Stirlen adopted may establish an acceptable medium for determining whether or not an arbitration agreement is in fact unconscionable. The Stirlen reasoning extends to a wide array of cases in which arbitration agreements may be found to be more or less egregious. The arbitration agreement in Farrell certainly did not come as close to “shocking the conscience” as did the arbitration agreement in Stirlen. Therefore, it seems that as long as courts are convinced that both procedural and substantive unconscionability exist, at least enough so to resemble a Stirlen, then under the Graham standard they undoubtedly have the power to find that arbitration agreement unconscionable.

Considerations For Drafting Mandatory Employment Arbitration Agreements

Upon considering a charge of unconscionability, courts carefully scrutinize both the substantive and procedural elements of an arbitration agreement in order to determine its validity. Courts have continuously relied upon a similar set of criteria when assessing both the substantive and procedural aspects of an arbitration agreement. In Cole, the court devised five minimum requirements for the lawful arbitration of rights pursuant to mandatory employment arbitration. These five requirements consider whether the disputed arbitration agreement

[1] Provides for neutral arbitrators [2] Provides for more than minimal discovery [3] Requires a written award [4] Provides for all the types of relief that would otherwise be available in court and [5] Does not require employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum.71

Many courts have followed the Cole precedent.72 The importance placed on these five criteria suggests that employers should carefully consider each of these when drafting a mandatory arbitration agreement. By utilizing these criteria as guidelines for establishing a mandatory arbitration agreement, employers who design these agreements are providing reassurance to themselves that their agreements will unlikely be found unconscionable in a court of law. Not only do these criteria provide incentives to the employer, but they also ensure that the mandatory arbitration agreement is not being used to curtail the rights of employees. Therefore, it is essential that employers take these five requirements into consideration in order to establish a just and conscionable mandatory arbitration agreement.

Selection of an Impartial Decision-Maker

Employees often criticize mandatory arbitration agreements that lack appointment of a neutral arbitrator.73 Often arbitrators are selected by a representative of the employer without regard to whom the employee may be interested in having serve as the decision-maker.74 It is important that the arbitrator be impartial, well versed on the issue at stake and properly trained so that he/she can reach a resolution.75

In order to obtain arbitrators who are unbiased, it is necessary to establish in the mandatory arbitration agreement an impartial method for selecting arbitrators. In Hooters of America v. Phillips,76 for example, the Fourth Circuit identified what it considered a poorly crafted mechanism for selecting arbitrators. In Hooters, the selection method was such that the employee and Hooters were each permitted to select an arbitrator.77 In turn, these two arbitrators were to select a third arbitrator.78 The catch, however, was that both the employee’s arbitrator and the third arbitrator had to be selected from a list of arbitrators devised exclusively by Hooters.79 The Fourth Circuit found this system to be a “sham,” a way to circumvent the neutrality of the selection process and ensure that a biased decision maker was chosen.80 The court said this method placed too much control in the hands of Hooters by providing no limits as to who could be placed on the list.81

To avoid an impartiality problem like the one in Hooters, employers have two viable solutions when drafting mandatory arbitration agreements. One option is similar to labor arbitration in that the parties could reach mutual agreement as to the selection of an arbitrator.82 For instance, they could jointly select an arbitrator from a panel provided by the American Arbitration Association.83 Another solution is to instill in an independent arbitration agency the ability to choose the arbitrator itself.84 These are just two solutions, which could be worked into the language of the mandatory arbitration agreement to ensure the selection of a well-trained and truly impartial decision maker.

Establishing a Fair Fact-Finding Procedure

Although arbitration is utilized as an alternative to litigation, it is still viewed as a fact-finding procedure and therefore should provide for some adequate form of discovery.85 Mandatory arbitration agreements are often criticized for providing more limited discovery than is allowed for in an ordinary judicial proceeding.86

Limiting how much discovery can be conducted in an arbitration proceeding in effect compromises an employee’s ability to prove discrimination and other such statutory claims.87 It is imperative that an arbitration agreement establish a procedure which allows for accurate fact-finding. However, there seems to be great disparity when it comes to determining how much discovery is sufficient, as it varies from case to case.88 Therefore, it is suggested that when employers draft the procedure section of their arbitration agreement that they “err on the side of openness” so as to “assure a fair result and to minimize judicial concern. They should also empower the arbitrator to direct greater discovery when necessary to reach the truth.”89

Through various decisions, courts have established what at a minimum seems necessary to ensure a fair arbitration procedure. For instance, in Hooters the Fourth Circuit found that the discovery method provided for in the arbitration agreement was not acceptable.90 The court noted that only allowing the grievant to take one deposition when in reality the grievant feasibly had statutory claims against all three defendants was an inadequate form of discovery.91 Most often courts find preferable those forms of discovery approved by the Supreme Court in Gilmer, which includes “document production, information requests, depositions and subpoenas.”92

Several courts in following the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc., have noted that adequate discovery is necessary for the vindication of statutory claims.93 In Armendariz the court inferred that “when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim.”94 The key point to recognize from cases like Gilmer and Armendariz is that it is important to establish arbitration procedures that are similar and fairly equal to those available under statutes.

Given the various approaches courts have taken on the discovery issue, the ideal procedure for an employer to write into a mandatory arbitration agreement would consist of at least those types of discovery referred to in Gilmer.95 For alternative solutions employers can refer to the American Arbitration Association’s Employment Dispute Resolution for discovery issues.96

Awarding Full Remedies

Mandatory arbitration agreements often fail when it comes to providing appropriate remedies because there is a recurring tendency for these agreements to restrict the types of remedies available.97 Arbitrators are often afforded limited authority to award relief.98 The ideal alluded to by many courts is an arbitration system in which employer and employee are afforded equal rights and remedies.99 Courts have consistently scrutinized employment arbitration agreements for their deficiency in awarding appropriate relief.100 How courts have dealt with this issue is best illustrated by examining two recent cases.

In Paladino v. Avnet Computer Technologies, Paladino signed an arbitration agreement when hired by Avnet.101 What appeared to be an ordinary mandatory arbitration agreement requiring all workplace disputes to be subject to arbitration, also contained a specific clause relating to damages.102 This section of the agreement authorized the arbitrator to award damages only for breach of contract, providing no authority to give other types of relief.103 Paladino was fired and brought suit, while Avnet responded with a motion to compel arbitration.104 On appeal, the Eleventh Circuit found it was appropriate to deny the motion to compel arbitration because the arbitration agreement was deficient in its coverage of statutory claims.105 By not granting the arbitrator the authority to award Title VII damages, the language of the arbitration agreement was contrary to the purpose of Title VII.106 By depriving Paladino of meaningful relief, Avnet created what the Eleventh Circuit found to be an unenforceable arbitration agreement.

Similarly, in Armendariz the damages were also limited. The employee signed an arbitration agreement providing that her exclusive remedies would be limited to back pay and that she would not be entitled to any other remedy.107 The court, therefore, concluded, “this damages limitation [was] contrary to public policy and unlawful.”108 In addition, the court noted the unconscionability of the arbitration agreement was further compounded by the fact that while limits are placed on employee’s ability to obtain relief, no such restriction exists for the employer.109

These cases illustrate that mandatory arbitration agreements which place limits on employees’ remedies have consistently been found unconscionable. Similarly, courts do not treat arbitration agreements favorably when they restrict an employee’s ability to obtain appropriate relief but not an employer’s.110 To avoid a charge of unconscionability stemming from failure to provide relief when drafting an arbitration agreement, employers should “state explicitly that when resolving a statutory claim, the arbitrator may award any remedy a judge could provide under the statute.”111

Payment of Arbitrator’s Fees

Adopting the traditional arrangement established in labor arbitration, the standard in employment arbitration has been for both parties to pay an equal amount of the arbitrator’s fees.112 While this concept of fee splitting is excellent for avoiding the appearance of bias toward one party or the other, it is problematic in the sense that it has proven in many instances to be “an insurmountable barrier to the putative grievant.”113

Many courts have duly noted the problems surrounding fee splitting.114 For instance, in Cole, Judge Edwards’ discussion of the payment of the arbitrator’s fees focused on the unjust nature of requiring the employee to pay these costs.115 Holding that “it was unlawful to require an employee who is the subject of a mandatory employment arbitration agreement to have to pay the costs of arbitration”116 Judge Edwards reasoned that it would undermine Congress’s intent [under Title VII of the Civil Rights Act of 1964] to prevent employees who are seeking to vindicate statutory rights from gaining access to a judicial forum and then require them to pay for the services of an arbitrator when they would never be required to pay for a judge in court.117

To avoid any problems that may be presented by fee-splitting, employers should consider the following ideas when drafting a mandatory arbitration agreement. One possible solution would be to include language in the agreement providing that the employer will be held responsible for paying any costs beyond a nominal filing fee.118 Another way to handle payment of arbitrator’s fees would be to provide language that permits the arbitrator to waive the employee’s monetary obligation upon a showing of financial hardship.119 In addition, any concerns about arbitral bias can ultimately be eliminated by designating an agency such as the American Arbitration Association to pay the arbitrator’s bill without revealing where the funds came from.120

Written Arbitration Award and Judicial Review

Of the five requirements mentioned in Cole, the issue of written opinions and judicial review seems to come up the least when dealing with charges of unconscionability in mandatory arbitration agreements. In addressing the issue of judicial review, the United States Supreme Court has stated that “‘[a]lthough judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute’ at issue.”121

In terms of written opinions, although they may not be required by state code, it may be useful to require a written decision be issued for the sake of increasing enforceability.122 In Armendariz the court held that “in order for judicial review to be successfully accomplished, an arbitrator in a FEHA case must issue a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based.”123

Requiring a written opinion as the court did in Armendariz, however brief it might be, would seem to greatly increase enforceability of the decision, while at the same time aid in the defeat of an unconscionability charge. Therefore, employers drafting mandatory arbitration agreements are encouraged to require an arbitrator to issue a written opinion explaining the arbitration award.124

VI. Conclusion

The use of the arbitral forum as an alternative form of litigation for handling the enormous increase in employment related disputes has been moderately well received by both employers and employees. Although arbitration does present a viable alternative to litigation, it too is laden with problems. In recent years, employees have attempted to bring suits in a court of law despite pre-dispute agreements. These issues are reaching the courts either because employees are unaware that they have signed a pre-dispute agreement to arbitrate as a condition of employment or that they believe the mandatory arbitration agreement is somehow unconscionable. Regardless, these disputes are ultimately returning to the courts. This directly contradicts two of the main reasons why employers have implemented mandatory arbitration agreements; to keep costs down and resolve the disputes in a more timely manner.

In order for mandatory arbitration agreements to work appropriately, it is necessary to establish a uniform set of guidelines upon which employers can rely when creating mandatory arbitration agreements. Developing these guidelines will not only create uniformity among mandatory arbitration agreements, but they will also help employers avoid findings of unconscionability by aiding them in creating a just arbitration procedure. The five requirements alluded to by the court in Cole are the initial steps in developing a blanket rule concerning mandatory arbitration agreements. The need to establish a set of guidelines will only become more urgent as the number of mandatory arbitration agreements being found unenforceable on the grounds of unconscionability continues to rise.

1 In recent years, “the number of employment related lawsuits has exploded.” Michele L. Giovagnoli, To Be Or Not To Be? Recent Resistance To Mandatory Arbitration Agreements In The Employment Arena, 64 UMKC L. Rev. 547, 556 (1996).

2 Id. at 556.

3 Id.

4 Dennis Nolan, Labor And Employment Arbitration: What’s Justice Got To Do With It?, 53-Nov Disp. Resol. J. 40, 42 (1998).

5 500 U.S. 20 (1991) (involving a suit brought by an employee alleging age discrimination on behalf of the employer in which the employer moved to compel arbitration on the basis of a pre-dispute agreement to arbitrate).

6 Id.

7 Nolan, supra note 4, at 42.

8 Cole v. Burns Int’l Sec. Serv., Inc., 105 F.3d 1465 (D.C. Cir. 1997)(holding an employment contract with a mandatory arbitration clause enforceable as long as employee was not required to pay all or part of the arbitrator’s fees and expenses).

9 Nolan, supra note 4, at 42.

10 Id.

11 Id.

12 Id.

13 Id.

14 Id. at 45.

15 Giovagnoli, supra note 1 at 556. One study “found that most employment arbitration procedures were developed recently (1994-96).” Lisa B. Bingham, On Repeat Players, Adhesive Contracts, And The Use Of Statistics In Judicial Review Of Employment Arbitration Awards, 29 McGeorge L. Rev. 223, 232 (1998).

16 Richard A. Bales, Compulsory Arbitration of Employment Claims: A Practical Guide to Designing and Implementing Enforceable Agreements, 47 Baylor L. Rev. 591, 594 (1995).

17 Id.

18 Id. at 595.

19 Id.

20 Giovagnoli, supra note 1, at 556.

21 Andrea Fitz, The Debate Over Mandatory Arbitration in Employment Disputes, 54-FEB Disp. Resol. J. 35, 78 (1999).

22 Bingham, supra note 15, at 233.

23 Giovagnoli, supra note 1, at 556.

24 Fitz, supra note 21, at 78.

25 Giovagnoli, supra note 1, at 556.

26 Fitz, supra note 21, at 78.

27 Bingham, supra note 15, at 233.

28 Giovagnoli, supra note 1, at 556.

29 There seems to be a growing concern that employers implement these agreements unjustly as a means of curtailing employees’ rights. The increased number of suits being brought by employees challenging their pre-dispute agreements to arbitrate is evidence of this growing concern.

30 John D. Calamari & Joseph M. Perillo, Contracts §9-38 (3rd ed. 1987).

31 Id.

32 Id.

33 See Restatement (second) of contracts §2-302. In contract law the court relies on the U.C.C. determine unconscionability. Uniform Commercial Code §2-302 states:

(a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

Restatement (second) of contracts §2-302.

34 American Software, Inc. v. Ali, 46 Cal. App. 4th 1386, 1390 (1996).

35 A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982).

36 Uniform Commercial Code §2-303; Ryan v. Dan’s Food Stores, Inc., 972 P.2d 395 (Utah 1998) (quoting Resource Management Co. v. Weston Ranch, 706 P.2d 1028, 1043).

37 Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1533 (1997).

38 Stirlen, 51 Cal. App. 4th at 1532. See generally John D. Calamari & Joseph M. Perillo, Contracts 331(3rd ed. 1999) (“Analytically, the surprise and oppression cases can be distinguished. However, where unconscionability has been found, the facts generally contain a mix of lack of knowledgeable assent and a clause that unduly benefits the party who has drafted the contract.”).

39 Stirlen, 51 Cal. App. 4th at 1532.

40 Id.

41 Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308 (6th Cir. 1998)

42 Ryan v. Dan’s Food Stores, Inc., 972 P.2d 395, 403 (Utah 1998).

43 See id. The court also lists additional factors bearing on procedural unconscionability.

44 Id. Although inequality of bargaining power is a rather important element of unconscionability, it alone is not grounds for finding a contract unconscionable. Additional elements are necessary, such as a lack of meaningful choice as in the case of an industry wide form contract heavily weighted in favor of one party and offered on a take it or leave it basis, or a situation where freedom of contract is exploited by a stronger party who has control of the negotiations due to the weaker party’s ignorance, feebleness, unsophistication as to interest rates or similar business concepts or general naiveté.

Calamari & Perillo, supra note 30, at 407. See generally Ellis v. McKinnon Broad. Co., 18 Cal. App. 4th 1796 (1993) (finding procedural unconscionability because the employee was never warned that the contract contained a forfeiture provision and the employee had no opportunity to negotiate the terms of the contract); American Software, Inc. v. Ali, 46 Cal. App. 4th 1386 (1996) (finding no procedural unconscionability, the court noted that not only was employee aware of the contract terms and had voluntarily consented to them, but that she had bargaining clout and was therefore presented with meaningful choice).

45 Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (1997).

46 Id. at 1532. A substantively unconscionable bargain is “one that ‘no man in his senses and not under delusion would make on the one hand, and no honest and fair man would accept on the other.’” Farrell v. Convergent Communications, Inc., No. C98-2613 MJJ, 1998 WL 774626, at *4 (N.D. Cal. Oct. 29, 1998) (quoting Siemens Credit Corp. v. Newlands, 905 F. Supp. 757, 764 (N.D. Cal. 1994)).

47 Stirlen, 51 Cal. App. 4th at 1532.

48 Id.

49 Id. See Ellis v. McKinnon Broad. Co., 18 Cal. App. 4th 1796 (1993) (finding substantive unconscionability, the court said that no reasonable justification was offered for inserting a forfeiture provision into the contract, particularly when the provision created a penalty far greater than any detriment to be suffered by the employer).

50 See e.g., Shubin v. William Lyon Homes, Inc., 2000 Cal. App. LEXIS 871 (2000); Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (Cal. 2000).

51 Graham v. Scissor Tail, Inc., 28 Cal. 3d 807 (Cal. 1981) (holding that an arbitration provision in a union form contract was unconscionable and therefore unenforceable). Graham is viewed as the seminal case when examining unconscionability in light of arbitration agreements.

52 Stirlen, 51 Cal. App. 4th at 1530.

53 Graham, 28 Cal. 3d 807 at 819. A contract of adhesion is a standardized contract “which, imposed and drafted by the party of superior bargaining strength relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Id. at 817.

54 Id. at 819-20.

55 Id.

56 Id.

57 Id.

58 Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1525 (1997).

59 Id. at 1542. The court found that the arbitration clause provided “the employer more rights and greater remedies than would otherwise be available and concomitantly deprives employees of significant rights and remedies they would normally enjoy.” Id. In addition, “the court noted that an adhesion contract or provision thereof will be denied enforcement if unduly oppressive, ‘even if consistent with the reasonable expectations of the parties.’” Id. at 1535 (quoting Graham, 29 Cal. 3d 807 at 820). Similarly, the court in Gonzalez v. Hughes found the arbitration agreement both procedurally and substantively unconscionable. Gonzalez v. Hughes Aircraft Employees Federal Credit Union, 83 Cal. Rptr. 2d 763 (1999). The Gonzalez court noted that on the one hand the arbitration agreement may not be as oppressive as the one in Stirlen because it does not restrict the employee’s relief like the Stirlen agreement did. Id. at 767. However, on the other hand, the arbitration agreement in `this case can be viewed as “more oppressive in that it severely curtails the employee’s discovery rights, which are already limited in arbitration.” Id.

60 Stirlen, 51 Cal. App. 4th at 1534.

61 Id.

62 See id. at 1535 -43. Supercuts argued the arbitration agreement was not unconscionable for the very reason that Stirlen was a well-experienced businessman who would know better than to sign an unduly oppressive arbitration agreement. Id. at 1535. The court noted, however, that Graham “shows that are Supreme Court is among the many courts has begun to recognize that experienced but legally unsophisticated businessmen may be unfairly surprised by unconscionable contract terms.” Id.

63 Id. at 1539-43. Other problems with the arbitration agreement, aside from depriving employees of adequate relief, were that the agreement denied employees reasonable attorney’s fees and costs they would normally obtain under the statute if they prevailed in court. Id. In addition, the agreement permitted Supercuts, but not its employees to chose where claims could be brought. Id.

64 No. C98-2613 MJJ, 1998 WL 774626, at *1 (N.D. Cal. Oct. 29, 1998).

65 Id. at 1.

66 Id. at 4.

67 Id. Farrell said that he was surprised that he had to sign the arbitration agreement as a condition of his employment, yet he did so before even signing Convergent’s offer letter. Also, the offer was not given to him on a take it or leave it basis. Furthermore, if Farrell had disagreed with the terms of the arbitration agreement he could have rejected the offer because he was still employed at his then current job.

68 Id.

69 Id. at 5. Moreover, the court said that limits placed on relief “does not render an agreement to arbitrate per se unconscionable.” Id.

70 Id.

71 Cole v. Burns Int’l Sec. Serv., Inc., 105 F.3d 1465, 1482 (D.C. Cir. 1997).

72 For instance, in Armendariz v. Foundation Health Psychcare Services, Inc., the California Supreme Court endorsed these same five requirements, finding that “a mandatory arbitration agreement in an employment contract is valid if it encompasses expressly or impliedly, all of these requirements.” Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 102 (Cal. 2000).

73 Bales, supra note 16, at 605.

74 Id. at 606.

75 Nolan, supra note 4, at 47.

76 Hooters of Am., Inc. v. Phillips, 173 F.2d 933 (4th Cir. 1999).

77 Id. at 938, 939.

78 Id.

79 Id.

80 Id. at 940.

81 Id. at 939.

82 Nolan, supra note 4, at 46.

83 Id.

84 Id.

85 Id. at 47.

86 Id.

87 Bales, supra note 16, at 608.

88 Nolan, supra note 4, at 47.

89 Id.

90 Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir. 1999).

91 Nolan, supra note 4, at 47.

92 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31 (1991).

93 Armendariz v. Foundation Health Psychcare Serv., Inc., 24 cal. 4th 83 (Cal. 2000). For example, in Shubin v. William Lyon Homes, Inc., the court applied the reasoning of Armendariz, inferring that when Shubin’s “employer agreed to arbitrate the FEHA claim, it implicitly consented to discovery sufficient for Shubin to adequately arbitrate her statutory claim.” Shubin v. William Lyon Homes, Inc., 2000 Cal. App. LEXIS 871 (2000) at *23.

94 Armendariz, 24 Cal. 4th at 83.

95 Bales, supra note 16, at 609.

96 Id.

97 Nolan, supra note 4, at 47.

98 Bales, supra note 16, at 612.

99 See e.g., Stirlen v. Supercuts, Inc. 51 Cal. App. 4th 1519 (1997).

100 Nolan, supra note 4, at 47.

101 134 F.3d 1054, 1056 (11th Cir. 1998).

102 Id. at 1057.

103 Id.

104 Id. at 1056.

105 Id. at 1062.

106 Id. at 1060.

107 Armendariz v. Foundation Health Psychcare Serv., Inc., 24 cal. 4th 83, 104 (Cal. 2000).

108 Id.

109 Id.

110 See e.g., Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519 (1997).

111 Nolan, supra note, at 47.

112 Id.

113 Id.

114 See e.g., Cole v. Burns Int’l Sec. Serv., Inc., 105 F.3d 1465 (D.C. Cir. 1997); Shankle v. B-G Maint. Mgmt. of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999); Paladino v. Avnet Computer Technologies, 134 F.3d 1054 (11th Cir. 1998).

115 See Cole v. Burns Int’l Sec. Serv., Inc., 105 F.3d 1465 (D.C. Cir. 1997).

116 Armendariz v. Foundation Health Psychcare Serv., Inc., 24 cal. 4th 83, 107 (Cal. 2000).

117 Nolan, supra note 4, at 48.

118 Nolan, supra note 4, at 48.

119 Id.

120 Id.

121 Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 232 (1987).

122 See Armendariz v. Foundation Health Psychcare Serv., Inc., 24 cal. 4th 83, 107 (Cal. 2000).

123 Id.

124 Giovagnoli, supra note 1, at 578.



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Alyssa Shenk, Ohio State University College of Law

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