Can Your Company’s Arbitration Agreement Survive an Unconscionability Inquiry?

Concluding that TWC Dealer Group, Inc.’s arbitration agreements were both procedurally and substantively unconscionable, California’s First Appellate District’s recent decision highlights certain contractual terms and elements that can invalidate an employment arbitration agreement. Davis, et al. v. TWC Dealer Group, Inc., et al. (2019) WL 5586867.

The decision arose from three separate agreements containing arbitration clauses TWC employees (the “Davises”) were required to sign at the start of their employment. When the Davises filed a complaint against TWC, the company petitioned to compel arbitration and stay the proceedings. The Superior Court denied the petition, finding TWC’s arbitration agreements unconscionable. The First Appellate District agreed.

In determining whether an employment arbitration agreement is valid, California courts scrutinize agreements for both procedural and substantive unfairness. For an agreement to be unenforceable based on unconscionability, the agreement must be both procedurally and substantively unfair; however, “they need not be present in the same degree.”  Using this sliding analysis, the more evidence of procedural unfairness allows a finding of unconscionability despite less substantive unfairness, and vice versa.

Procedural unconscionability refers to the circumstances under which an agreement was entered. The threshold question is whether the agreement is one of adhesion, which is simply a “take-it-or-leave-it” contract “imposed and drafted by the party of superior bargaining strength.”  If the contract is adhesive, courts look to other factors that may render it unenforceable, such as inequality of bargaining power and the extent to which the terms are hidden by the drafting party.

Substantive unconscionability examines the fairness of specific terms of the agreement – whether the terms are so one-sided as to be overly harsh or unduly oppressive to the party with less bargaining power.

Here, TWC presented three agreements the Davises were required to sign at the start of their employment. None of the three contracts were standalone arbitration agreements; rather, the arbitration provision in each consisted of one paragraph among other terms unrelated to arbitration. The three agreements also contained inconsistent terms and ambiguous language. The Court determined that the small font size, absence of indentation and labeling, and needless legalese were among the characteristics that rendered the agreements difficult to navigate and comprehend.

In concluding that TWC’s arbitration agreements were procedurally unconscionable, the Court cited several examples: the Davises’ employment was conditioned on agreeing to binding arbitration; the agreements were “visually impenetrable” and overly legalistic; and the terms were physically so small as to “challenge the limits of legibility.” 

The Court determined that the lack of mutuality between the parties also rendered the agreements substantively unfair. For example, the Court found the agreements lacked mutuality because they were only signed by the Davises and not TWC and gave TWC the unilateral right to change or modify the agreements at any time, without notice, to the Davises.

That TWC utilized three separate agreements to arbitrate also proved problematic. These differing, and at times contradictory agreements, contained ambiguities and other critical issues. For example, the Court found that the agreements bore provisions that were so vague as to be read to preclude actions under the Private Attorneys General Act, which cannot be waived under California law.

Davis is an important reminder that employers should seek legal counsel to periodically review their arbitration agreements for compliance with California law.

Nicholas Kanter is a Shareholder in our Employment Practice Group.