ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, November 11, 2013

Ninth Circuit Finds Arbitration Agreement Unconscionable

In Chavarria v. Ralphs Grocery Company, the Ninth Circuit found an arbitration agreement unconscionable and therefore affirmed the District Court's order denying Ralphs' motion to compel arbitration and remanded the class action case back to the District Court for further proceedings.  In so doing, it rejected Ralphs' contentions that its arbitration clause was not unconscionable and that California's law on unconscionability is preempted by the Federal Arbitration Act (FAA).

9th CircuitPlaintiff worked at Ralphs for six months as a deli clerk.  Plaintiff's employment application included an agreement to be bound by Ralphs' aribtration policy.  The policy provided for arbitration by a retired state or federal judge to be agreed upon by the parties or selected through a process of elimination -- that is, each party would get to strike one of the other party's three proposed aribtrators until only one name was left, and that person would be the arbitrator.   The process guarantees that the arbitrator chosen would be one of the three proposed by the party that did not seek arbitration. The Ninth Circuit described the arbitration agreement's promvision for allocation of costs of as arbitration "a little convoluted," but the basic default is that the parties split the costs of arbitration.  

The District Court identified several aspects of Ralphs' arbitration policy that, taken cumulatively, rendered it procedurally unconscionable.  The policy was offered to Chavarria on a "take it or leave it" basis, and the specifics of the policy were not shared with Chavarria until three weeks after she agreed to be bound by it.  Quoting an earlier decision, the Ninth Circuit noted that “a contract is procedurally unconscionable under California law if it is ‘a standardized contract, drafted by the party of superior bargaining strength, that relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’”  That standard was clearly met in this case (and in almost all other cases involving form contracts), and the problem was exacerbated here because, while Chavarria recieved a one-paragraph notice of the arbitration policy, it actual terms, which were in a complex, four-page document, were provided later.  

As to substantive unconscionability, the Ninth Circuit agreed with the District Court's finding that substantive unconscionability is satisfied here because the arbitration policy shocks the conscience.  It does so because the arbitrator selection process is designed so that Ralphs will always choose the arbitrator in a claim brought by an employee.  Moreover, the allocation of arbitrator's fees is unfair, imposing costs on employees and precluding them from recovering those costs so as to render many claims "impracticable."  The fees for a "qualified arbitrator" as defined in the policy would range form $7000 to $14,000 per day, so an employee seeking to arbitrate would likely have to pay at least $3500, a cost that would likely exceed any claim that people like Chavarria might bring.  

[An aside: Ralphs argued that in a case such as this one, plaintiff would get to choose the arbitrator.  Since Chavarria tried to sue in court and Ralphs moved to compel arbitration, Ralphs was the party seeking arbitration.  The Ninth Circuit found this unpersuasive because inconsistent with the wording of the arbitration policy and because it requires employees to bring a frivolous lawsuit in order to force Ralphs to compel arbitration.  Even if the Court is right about the language of the arbitration policy, wouldn't Ralphs be estopped from insisting on its right to choose an aribtrator by having argued against such a right in this case?  And given that there is no bar to plaintiff proceeding in arbitration as part of a class, won't the cost of arbitration be allocated to the class?  So, the arbitrator's fee is only excessive in relation to the claim if the claims of the class in the aggregate do not exceed the arbitrator's fee.]

 The Ninth Circuit begins its analysis of the preemption issue with a summary of Concepcion131 S. Ct. 1740 (2011):

Like other contracts, arbitration agreements can be invalidated for fraud, duress, or unconscionability. Id. at 1746. A defense such as unconscionability, however, cannot justify invalidating an arbitration agreement if the defense applies “only to arbitration or [derives its] meaning from the fact that an agreement to arbitrate is at issue.” Id. The U.S. Supreme Court has held that state rules disproportionately impacting arbitration, though generally applicable to contracts of all types, are nonetheless preempted by the FAA when the rule stands as an obstacle to the accomplishment of Congress’s objectives in enacting the FAA. Id. at 1748.

Returning to the preemption argument, the Ninth Circuit noted that Concepcion had held that "the FAA preempts state laws that in theory apply to contracts generally but in practice impact arbitration agreements disproportionately."  But since California's procedural unconscionability doctrine applies to all contracts, it does not disproportionately affect arbitration agreements.  

As to substantive unconscionability, the Ninth Circuit noted a potential difficulty arising from the Supreme Court's recent decision in American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).  That case involved an argument that a class-action waiver in an arbitration agreement precluded plaintiffs from pursing their antitrust claims because the costs of proving such claims would exceed the value of any particular claim.  This Ninth Circuit found this case distinguishable:

The class waiver provision did not foreclose effective vindication of that right, the Court reasoned, because “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute an elimination of the right to pursue that remedy.” Id. at 2311. The Court explicitly noted that the result might be different if an arbitration provision required a plaintiff to pay “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at 2310–11.

The Ninth Circuit found that this case presents the exact situation excluded from the scope of the Italian Colors precedent.  The costs of arbitration alone, the Court found, "effectively foreclose pursuit of the claim."  The Court then explained more fully its concerns about Ralphs' arbitration policy:

In addition to the problematic cost provision, Ralphs’ arbitration policy contains a provision that unilaterally assigns one party (almost always Ralphs, in our view, as explained above) the power to select the arbitrator whenever an employee brings a claim. Of course, any state law that invalidated this provision would have a disproportionate impact on arbitration because the term is arbitration specific. But viewed another way, invalidation of this term is agnostic towards arbitration. It does not disfavor arbitration; it provides that the arbitration process must be fair.

If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees. Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power. California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power. The FAA does not preempt its invalidation of Ralphs’ arbitration policy.

[Another aside: At first, reading through this opinion, I thought this might be an attempt by liberal judges on the Ninth Circuit to find ways to undermine the Supreme Court's 5-4 majorities' clear indications of support for the enforcement of arbitration agreements.  But the three-judge panel consisted of two George W. Bush appointees and a Republican appointed late in the Clinton Presidency.  Either this is not a case on which liberal and conservative judges would differ or the Supreme Court is out of step with the views of the judges on lower courts.  

I have my doubts about the Court's procedural unconscionability analysis, and that analysis colors the substantive unconscaionability analysis.  It would of course be unconscionable if Ralphs could appoint its own president as the arbitrator.  But this arbitration agreement is facially neutral and would never result in Ralphs getting its preferred arbitrator.  At best, it gets its third choice (assuming plaintiffs can accurately identify Ralphs' preferences).  In any case, that choice will be a retired judge, so the Ninth Circuit's assumption that such a person would be incapable of impartiality is a bit insulting to retired judges.  This case seems like a long-shot for Supreme Court review, but it would be nice if the Court could clarify whether this case does indeed present facts that evade the Italian Colors precedent.]


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