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Court Unanimously Holds Arbitration Agreement Unconscionable And That California Law On Arbitration Still Applies Despite The Supreme Court Ruling In Conception

Plaintiffs were two carpet installers that worked for defendant.  When they were initially hired, and again later during their employment, plaintiffs were given form contracts and told to sign them if they wanted to work for Empire. Both contracts were presented only in English, despite the fact that one plaintiff could not read English and the other has difficulty reading more than simple English. The contracts were offered on a non-negotiable, take it or leave it basis.  The second contract (the “Agreement”) was 11 single-spaced pages of small-font print riddled with complex legal terminology. The arbitration provision was set forth in the 36th of 37 sections. The Agreement also included a shortened six-month statute of limitations and a unilateral fee-shifting provision that requires them to pay any attorneys’ fees Empire might incur. The Agreement said that arbitration will be governed by the commercial rules of the American Arbitration Association, although those rules were not attached to it or provided to plaintiffs.

The plaintiffs filed a class action challenging Empire’s allegedly unlawful misclassification of its carpet installers as independent contractors. The complaint alleged numerous Labor Code violations. Empire moved to stay the action and compel arbitration pursuant to the Agreement.  The trial court found the Agreement was unconscionable and therefore denied Empire’s motion to compel. It also denied Empire’s request for reconsideration in light of the United States Supreme Court’s decision in Concepcion.

The Appellate Court agreed the Agreement was procedurally unconscionable. It stated that the plaintiffs were required to sign the documents. They were not given a Spanish translation, despite asking for them. Neither plaintiff got a copy of the signed documents. One plaintiff had to sign the Agreement immediately and one was given 24 hours. Neither plaintiff was given a copy of the relevant arbitration rules.  Based on all this, the arbitration provisions were procedurally unconscionable.  It also agreed it was substantively unconscionable.  It pointed to the fact that the Agreement shortened the statute of limitations to six months, even for statutory claims that normally provide three or four years to assert them. The Agreement also required plaintiffs to pay any attorneys’ fees incurred by Empire, but imposed no reciprocal obligation on Empire. In addition, the Agreement exempts from the arbitration requirement claims typically brought by employers, namely, those seeking declaratory and preliminary injunctive relief to protect Empire’s proprietary information and non-competition/non-solicitation provisions, while restricting to arbitration any and all claims plaintiffs might bring. Put together, this was all enough to hold it substantively unconscionable.

The Court then ruled that that the trial court properly applied California law despite an Illinois choice-of-law provision in the Agreement. The Court said that the same factors that render the arbitration provision unconscionable warrant the application of California law. It stated that the Agreement was obtained by improper means and enforcing Empire’s choice-of-law provision would result in substantial injustice. The Court also rejected Empire’s argument that the unenforceable provisions should be severed and arbitration without those provisions should be mandated.  It held that Empire waived that argument by failing to raise it in the trial court.  Moreover, it said that the argument failed because the Agreement had so many defects that it was proper to rule the entire arbitration section was unenforceable in the interest of justice.

Finally, the Court addressed the issue of the U.S. Supreme Court decision inConception. Empire argued that the holding in Conception extends the Federal Arbitration Act (FAA) so broadly as to preempt each unconscionability-based rationale that supported the trial court’s refusal to compel arbitration here. The Court disagreed and said Empire read Conception too broadly. The Court stated that Conception addressed whether the FAA preempts the Discover Bank rule (a California rule which held that arbitration agreements in adhesive consumer contracts that forbid class-wide arbitration are, as a general matter, unconscionable). It noted that Concepcion held that it does, because requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. But at the same time as the Supreme Court repudiated the categorical rule in Discover Bank, it explicitly reaffirmed that the FAA permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, although not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. As such, this Court ruled that arbitration agreements remain subject, post-Concepcion, to the unconscionability analysis employed by the trial court in this case.  This is a VERY important ruling and very favorable to employees who are forced to sign unfair arbitration agreements.

For more information, or if you need legal assistance, please contact the Wagner Legal Group at info@wagnerlegalgroup.com or (310) 857-5293.

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