When is an Employer Arbitration Agreement So Unfair that it is Unenforceable?

Unconscionable Contract

Angelica Ramirez and her former employer, Charter Communications, were parties to an arbitration agreement. After Charter fired her, she filed a lawsuit alleging claims under the California Fair Employment and Housing Act (FEHA) against Charter. In turn, Charter filed a motion to compel arbitration pursuant to her employment contract. Could Charter enforce their arbitration agreement or did it go too far in protecting only the employer?

Employer’s “Solution Channel” Designed to Resolve Employment Disputes

Charter created a program for resolving and ultimately arbitrating employment-related disputes in 2017 called “Solution Channel.” Everyone applying for a position with the company was required to agree to participate in Solution Channel as well as agree to Charter's mutual arbitration agreement. Those who applied and received an offer had to review and accept various policies and agreements, including the arbitration agreement and the Solution Channel program guidelines. After agreeing to submit all employment-related disputes with Charter to arbitration, Ms. Ramirez was hired as an employee in July 2019. A year later, Charter fired her, and she sued.

Charter filed a motion to enforce the arbitration agreement and sought attorney fees in connection with its motion pursuant to the arbitration agreement. Ms. Ramirez argued that the arbitration agreement was procedurally unconscionable because it was a contract of adhesion—meaning “take it or leave it.” The trial court denied Charter's motion, finding that it was undisputed the arbitration agreement was an adhesion contract as a mandatory condition of employment. The trial court found the agreement to be substantively unconscionable because it:

  • Shortened the statute of limitations for FEHA claims;
  • Failed to restrict attorney fee recovery to only frivolous or bad faith FEHA claims (contrary to FEHA); and
  • Impermissibly provided for an interim fee award for a party successfully compelling arbitration.

The trial court didn’t find some terms in the agreement substantially unconscionable but concluded it was “permeated with unconscionability” and therefore, severance was improper. Charter appealed.

On Appeal, Charter Said Its Arbitration Agreement Was Valid

Charter argued that the trial court erred in denying its motion to compel because the arbitration agreement is neither procedurally nor substantively unconscionable. And even if it was, the trial court should’ve severed the substantively unconscionable provisions, upheld the agreement, and ordered the parties to arbitration. Ms. Ramirez argued that the trial court's decision to find the entire agreement unconscionable should not be disturbed on appeal.

Judge Thomas Willhite of the Court of Appeal of California concluded that the arbitration agreement was a contract of adhesion, which establishes a minimal degree of procedural unconscionability. The judge further found the agreement had a high degree of substantive unconscionability based on the restriction of the statute of limitations for FEHA claims, the provision granting an award of attorney fees for a prevailing party in compelling arbitration, the lack of mutuality, and the limitation on discovery. Therefore, the Court of Appeal held the arbitration agreement was “permeated by unconscionability and cannot be enforced.”

Judge Willhite explained that a written agreement to submit a controversy to arbitration is valid and enforceable, absent a reason under state law — like unconscionability — that would render any contract revocable. The party seeking to compel arbitration (Charter in this case) bears the burden of proving the existence of an arbitration agreement, while the party opposing the petition (Ms. Ramirez) bears the burden of establishing a defense to the agreement's enforcement.

How was the Arbitration Agreement Unconscionable?

Judge Willhite explained that the doctrine of unconscionability has both a procedural and a substantive element. The procedural focuses on “‘oppression’” or “‘surprise’” due to unequal bargaining power, and the substantive looks at “‘overly harsh’” or “‘one-sided’” results. However, the two elements need not exist to the same degree, he said. “The more one is present, the less the other is required.” Unconscionability is measured on a sliding scale in which greater procedural unconscionability requires less substantive unconscionability, and vice versa.

If a court finds a clause within a contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or instead sever the unconscionable clause and enforce the remainder of the contract. Judge Willhite examined a number of the terms in the arbitration agreement, and found most, if not all, to be unconscionable.

Statute of Limitations

For example, as far as the applicable limitations period for bringing an action, Judge Willhite said that parties to an arbitration agreement may agree to shorten them, a shortened limitations period must be reasonable. Here, when the arbitration agreement was executed, a FEHA administrative claim had to be filed with the Department of Fair Employment and Housing (DFEH) within a year of the employer's discriminatory act. (as of January 1, 2020, the Legislature enlarged the time for filing a FEHA claim from one to three years from the date of the challenged conduct.) Also, under the law as it existed at the time of execution of the agreement (as now), DFEH had up to a year from the filing of the administrative claim to complete its investigation and issue a “right-to-sue” letter and a lawsuit alleging FEHA claims had to be filed within one year of the issuance of the “right-to-sue” letter. Thus, factoring in the time limit for an employee to file a claim with DFEH and for DFEH to investigate and respond to the claim, Judge Willhite said the outside limit to file a FEHA lawsuit under the law as it existed when the arbitration agreement was executed could have been as long as three years. But here, section E of the arbitration agreement provided:

< The aggrieved party must give written notice of the claim, in the manner required by this Agreement, within the time limit established by the applicable statute of limitations for each legal claim being asserted. To be timely, any claim that must be filed with an administrative agency or body as a precondition or prerequisite to filing the claim in court, must be filed with Solution Channel within the time period by which the charge, complaint or other similar document would have had to be filed with the agency or other administrative body. >

Under this provision of the arbitration agreement, the period within which an employee must make a FEHA claim is one year, the applicable statutory period under FEHA for filing an administrative claim with DFEH. But FEHA grants DFEH up to one year to investigate and issue a “right-to-sue” letter and grants the employee one year after the “right-to-sue” letter to file an action in court.

The Court of Appeal held that the arbitration agreement in effect cut the period that would otherwise apply to file a FEHA action in court by as much as two years, and it made it possible that the employee would be compelled to arbitrate before DFEH completed its investigation and issued a “right-to-sue” letter. As such, reducing the period within which a FEHA claim may be brought from three years to one was “substantively unconscionable,” the Court said, because it substantially conflicts with the statutorily sanctioned period for vindicating statutory rights under FEHA.

Mutuality

Ms. Ramirez argued that the trial court erred in rejecting her argument that the arbitration agreement lacked mutuality by excluding claims likely to be brought by an employer. Judge Willhite said that an agreement may be unfairly one-sided if it compels arbitration of the claims more likely to be brought by the weaker party but exempts from arbitration the types of claims that are more likely to be brought by the stronger party. In fact, in this case, the arbitration agreement covered claims “related to pre-employment, employment, employment termination or post-employment-related claims, whether the claims are dominated as tort, contract, common law, or statutory claims,” including without limitation claims for:

  • Collection of overpaid wages and commissions;
  • Damage to or loss of charter property;
  • Recovery of unauthorized charges on company credit card;
  • Whistleblowers; unlawful termination; unlawful failure to hire or failure to promote;
  • Violations of wage and hour laws;
  • Unlawful discrimination or harassment;
  • Unlawful retaliation;
  • Violations under FMLA, the ADA, Sarbanes-Oxley, and OSHA.

The arbitration agreement also covered “all disputes, claims, and controversies set forth … above, whether made against Charter, or any of its subsidiaries, parent, or affiliated entities, or its individual officers, directors, shareholders, agents, managers, or employees. However, the arbitration agreement specifically excluded “claims for injunctive or other equitable relief related to unfair competition and the taking, use or unauthorized disclosure of trade secrets or confidential information.” The agreement further excluded claims:

  • Arising under separate or severance agreements or noncompete agreements;
  • For theft or embezzlement or any other criminal conduct; and
  • Over the validity of any party's intellectual property rights.

The Court of Appeals agreed with Ms. Ramirez and concluded that the arbitration agreement was unfairly one-sided because it compelled arbitration of the claims more likely to be brought by an employee, the weaker party… but it exempted from arbitration the types of claims that are more likely to be brought by an employer, the stronger party.

While Charter argued that none of the excluded claims were at issue in Ms. Ramirez's case, the Court said the unconscionability analysis evaluates whether the agreement is bilateral “at the time it was made” rather than as applied to a specific plaintiff. The trial court's order denying Charter's motion to compel arbitration was affirmed. Ramirez v. Charter Communications, Inc. (California Court of Appeal, 2nd Appellate District, 2/18/22).

Bottom Line

An employer’s arbitration agreement that’s permeated by unconscionability is unenforceable. The arbitration agreement here was a contract of adhesion, which established a minimal degree of procedural unconscionability and a high degree of substantive unconscionability. The Court of Appeals said this was due to restrictions, such as on discovery and the statute of limitations for claims under the Fair Employment and Housing Act, including a provision granting an award of attorney fees for a prevailing party in compelling arbitration, and a lack of mutuality.

Ask an experienced California employment law attorney to review your employee contracts.

Danielle G. Eanet can be reached at Eanet, PC in Los Angeles, CA at danielle@eanetpc.com.

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