Arbitrator, Not Court, Decides Arbitration Agreement’s Enforceability, California Court Rules
A trial court lacked authority to rule on the enforceability of an arbitration agreement when the parties had contracted to delegate questions about the agreement’s enforceability to the arbitrator, the California Court of Appeal has ruled, reversing the denial of arbitration in a wrongful discharge action. Tiri v. Lucky Chances, Inc., No. A136675 (Cal. Ct. App. May 15, 2014).
Although the agreement’s delegation provision was in an adhesive contract, drafted by the employer and presented to the employee on a take-it-or-leave-it basis, and despite the fact the employee stated she was worried she would lose her job if she refused to sign it, the Court found the agreement was enforceable because it was not overly harsh or one-sided, and therefore, not substantively unconscionable.
Lourdes Tiri had worked as a cook for Lucky Chances, Inc. for three years when she was asked to sign an arbitration agreement. The agreement provided that all disputes would be resolved through “final and binding arbitration” and that the arbitrator, “and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”
Tiri alleged the human resources department gave her the agreement and asked her to sign it. She said no one explained the agreement to her or told her that its terms were negotiable. Tiri believed that if she did not sign the agreement she would lose her job.
Five years later, Lucky Chances terminated Tiri from employment. Thereafter, Tiri filed a wrongful discharge action against Lucky Chances. Lucky Chances asked the trial court to compel arbitration, but the trial court denied the motion, finding the agreement was unconscionable and unenforceable because it was a take-it-or-leave-it adhesion contract. Lucky Chances appealed, arguing the trial court erred in deciding the unconscionability issue because the agreement contained a clear delegation clause.
In California, parties to a contract may agree to delegate to an arbitrator questions about the enforceability of the agreement. Effective delegation requires the language of the clause be clear and unmistakable. The delegation clause also must not be revocable under state contract law, e.g., for fraud, duress or unconscionability. Where an arbitration agreement contains a delegation clause, courts may consider challenges to the clause itself; however, the arbitrator retains the authority to consider challenges to the agreement as a whole. To challenge a delegation clause as unconscionable, the party must show the clause was both procedurally and substantively unconscionable, with the “former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.”
Lucky Chances argued the delegation clause was clear and unmistakable. The appellate court agreed. The delegation clause stated unambiguously the arbitrator had “exclusive authority” to address all issues regarding the agreement’s enforceability.
Lucky Chances next argued the delegation clause was not unconscionable and should be enforced. Tiri maintained the delegation clause was part of a contract of adhesion and should not be enforced. The Court determined the delegation clause was presented to Tiri on a take-it-or-leave-it basis and Tiri had no meaningful opportunity to negotiate its terms. It also ruled Tiri was an unsophisticated party, and Lucky Chances did not explain the meaning of the agreement to her or give her time to review it. The Court ruled the delegation clause was procedurally unconscionable.
Turning to substantive unconscionability, Tiri argued that allowing an arbitrator to decide enforceability was unfair because the arbitrator has an interest in deciding that a dispute is arbitrable. The Court disagreed. It noted that such concerns are “always present with delegation clauses.” (Emphasis in original.) However, “to conclude that they signify substantive unconscionability,” the Court said, “would be tantamount to concluding that delegation clauses in employment arbitration agreements are categorically unenforceable.” Such a result would be inconsistent with the U.S. Supreme Court’s case law. Thus, the Court concluded, “[C]lear delegation clauses in employment arbitration agreements are substantively unconscionable only if they impose unfair or one-sided burdens that are different from the clauses’ inherent features and consequences.” Because the delegation clause did not impose any such burdens, it was enforceable, and the Court reversed the denial of arbitration.
This case is a positive development for California employers. A clear delegation clause is one way to keep decisions regarding an arbitration agreement’s enforceability out of California’s courts. Employers should consider including a clear delegation clause in their arbitration agreements.