In an attempt to avoid litigating before a jury, employers routinely include arbitration provisions in employment agreements. But courts will not enforce an arbitration agreement that does not provide essential fairness to employees – such agreements are called “unconscionable.”
As this blog has noted in the past, both “procedural” and “substantive” unconscionability must exist before a court will refuse to enforce an arbitration agreement.
Procedural unconscionability focuses on the inherently unequal bargaining power between employers and employees, and on the fact that most employees must accept arbitration agreements on a “take it or leave it” basis, with no opportunity to negotiate terms. Generally, some degree of procedural unconscionability will exist in pre-dispute employment arbitration agreements.
Substantive unconscionability focuses on whether any provisions in the agreement improperly favor the employer.
But how many one-sided provisions must be present before a court will invalidate an agreement to arbitrate? Can a court sever the one-sided provisions and leave intact the requirement to arbitrate? And if a court can do that, should it do that?
The California Supreme Court recently provided guidance on these issues (Ramirez v. Charter Communications).
Charter Communications, a national telecommunications company that operates under the Spectrum brand in Southern California, uses an electronic system to communicate with its employees that it calls “Solution Channel.”
Applicants are required to read and electronically sign several documents, including “Solution Channel Guidelines” and a “Mutual Arbitration Agreement,” which it describes as a way to “efficiently and privately resolve covered employment-based legal disputes.”
Charter’s arbitration agreement contained several potentially problematic provisions.
Disputes about unlawful termination, discrimination, harassment, retaliation, wages, safety and disability accommodations – claims which employees would be more likely to bring – had to be resolved through arbitration.
But disputes about overpaid wages and commissions, tuition reimbursements, relocation expenses, charges to company credit cards, and damage to or loss of Charter property – claims which Charter would be more likely to bring – were excluded from arbitration.
Another provision required employees to file Fair Employment and Housing Act (FEHA) claims in the Solution Channel system within one year, but a three-year statute of limitations applies to FEHA claims. Still another provision allowed Charter to recover attorneys’ fees as a prevailing party, when FEHA only allows employers to recover legal fees if the employee’s claim is found to be frivolous or in bad faith.
A further provision allowed Charter to recover legal fees if an employee unsuccessfully opposed Charter’s efforts compel arbitration, when FEHA permits an employer to recover legal fees only at the conclusion of the case, and only based upon a finding that the employee's case was frivolous or brought in bad faith. Yet another provision limited, but did not eliminate, the parties’ right to obtain discovery in arbitration.
Charter hired Angelica Ramirez in July of 2019. Using Solution Channel, she signed the arbitration agreement and the guidelines document. She was fired in May of 2020, and sued Charter two months later in Los Angeles Superior Court, alleging claims for discrimination, harassment, and retaliation under FEHA, and for wrongful discharge.
Charter moved to compel arbitration, but the trial court refused to enforce the arbitration agreement. Although it found that the provisions limiting discovery and excluding certain claims from arbitration were enforceable, the trial court refused to enforce the arbitration agreement because it was “permeated with unconscionability.”
It cited as unfair to employees the provisions shortening employees’ time to file claims, allowing Charter to recover fees even without a determination that an employee’s case was frivolous or in bad faith, and allowing interim awards of legal fees.
Charter appealed. The Court of Appeal agreed that the agreement was substantively unconscionable, but unlike the trial court determined that the provision limiting discovery was unenforceable.
The Supreme Court granted review, and agreed that the covered and excluded claims provision, the filing time limits provision, and the attorneys’ fees provisions were unenforceable. But it ruled that the provision limiting discovery could be enforced.
The Court then turned to the question of remedy. It noted that, under California law, unenforceable provisions which are “collateral to the main purpose of the agreement” can be severed, and that Charter’s arbitration agreement contained a provision authorizing a court to sever any unenforceable provisions.
Although the trial court and the Court of Appeal seemed to focus on the number of unconscionable provisions in the agreement, the Supreme Court noted that no “bright line rule” prohibits enforcement of an arbitration agreement if it has more than one unconscionable term, and that a court is not required to sever an unconscionable term even if only one such term exists.
Instead, the justices said, a court should first ask whether “the central purpose of the contract is tainted with illegality.” If so, the arbitration agreement cannot be enforced; if not, the court should determine whether the unconscionability could be cured purely through severance or restriction of its terms, or whether reforming the agreement by adding terms would be necessary; and then determine whether the unconscionability should be cured in order to further the interests of justice.
The Supreme Court remanded the case to the Court of Appeal for further proceedings.
By David Krol