Over the past few decades, it has become increasingly common for American corporations to require workers and consumers to sign arbitration agreements. Through these agreements, workers and consumers waive their right to pursue a lawsuit in court if they are harmed by the corporation’s misconduct. Instead, they must submit to a process called arbitration, in which legal disputes are resolved by a neutral third-party decision-maker. Many workers and consumers do not realize they have signed an arbitration agreement with a corporation–or what it would mean for them if they did.
Because arbitration agreements are contracts, they must meet the standards of contract law to be considered valid and enforceable by a court. While courts typically uphold contracts, they have the authority to refuse to enforce a contract if they determine that it is “unconscionable”—or, in other words, so one-sided and unfair that no reasonable or informed person would agree to it. In the case where an arbitration agreement is deemed invalid due to unconscionability, the party opposing mandatory arbitration can retain the ability to pursue their claims in court.
In California, the court’s power to refuse to enforce an unconscionable contract is codified at section 1670.5 of the California Civil Code. To be considered unenforceable due to unconscionability, an arbitration agreement must be both “procedurally” and “substantively” unconscionable. Generally, procedural unconscionability refers to the circumstances surrounding the execution of the contract, while substantive unconscionability refers to the level of inherent fairness of the contract’s terms.
To determine whether a contract is procedurally unconscionable, California courts will ask three questions:
- Was there adhesion?
- Was there surprise?
- Was there oppression?
In a contract of “adhesion,” the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms. To determine whether an arbitration agreement is a contract of adhesion, courts ask whether the more powerful party presented the arbitration agreement as a take-it-or-leave-it contract. For example, many employers force new employees to sign arbitration agreements before being hired, without providing the employees with any opportunities to negotiate. The employees have the choice of either signing the arbitration agreements in order to get the job, or finding work somewhere else. Because the arbitration agreements are presented to the employees as a condition of hiring, with no ability to negotiate, they are contracts of adhesion.
“Surprise” refers to deceptive tactics that hide the terms of the arbitration agreement. For example, an arbitration agreement may include language that is vague and extremely difficult to understand, or it may hide terms through difficult-to-read fine print. Courts commonly find unconscionable surprise in an arbitration agreement where: (1) One party has difficulty reading English; and (2) They were not given enough time to carefully review the contract.
The factors leading to unconscionable “oppression” in an arbitration agreement were outlined by the Supreme Court of California in OTO, L.L.C. v. Kho (2019). They include:2
- The amount of time the party is given to consider the proposed contract;
- The amount and type of pressure exerted on the party to sign the proposed contract;
- The length of the proposed contract and the length and complexity of the challenged provision;
- The education and experience of the party; and
- Whether the party’s review of the proposed contract was aided by an attorney.
Through analyzing these factors, several of which overlap with unconscionable surprise, courts attempt to determine whether a party had the power, time, and comprehension ability to knowingly enter into an arbitration agreement.
To determine whether an arbitration agreement is substantively unconscionable, courts analyze the actual terms of the arbitration agreement for fairness. One of the most common forms of substantive unconscionability is unilateral contract terms that only affect one party, and not the other. For example, employers with arbitration agreements will commonly mandate arbitration for the types of claims commonly brought by employees (e.g., discrimination, retaliation, and wrongful termination), but permit lawsuits in court for claims commonly brought by employers (e.g., protection of intellectual property). When only the employer has the ability to file a lawsuit, courts may find substantive unconscionability because the terms of the contract are one-sided.
Courts also look to the rules and procedures of the proposed arbitration process to analyze substantive unconscionability. For example, courts may find it substantively unconscionable for an arbitration agreement to unreasonably limit how much “discovery”—i.e., evidence-gathering—can be conducted in the arbitration. Limiting the arbitration’s hearing time, or the number of witnesses that can be called, also may be considered substantively unconscionable.
More broadly, courts will find arbitration agreements substantively unconscionable if they effectively limit a party’s ability to assert their legal rights. For example, if an arbitration agreement limits the types of claims, or the remedies, that a party can assert, it may be held substantively unconscionable. An arbitration agreement that unduly burdens a party with arbitration fees may also be held substantively unconscionable. Furthermore, unreasonably limiting the statute of limitations—the time in which a claimant can bring a claim after being harmed—will also be considered substantively unconscionable.
Is an unconscionable arbitration agreement unenforceable?
As described above, an arbitration agreement must be both procedurally and substantively unconscionable to be considered unenforceable by a court. Courts often rely on a “sliding scale” approach when measuring each type of unconscionability. As the Supreme Court of California explained in Armendariz v. Foundation Health Psychcare Services, Inc. (2000)3, “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” In other words, procedural and substantive unconscionability are both weighted together as a whole, and if one is more obviously present, it can be easier to prove unconscionability even with a smaller amount of the other.
A finding of procedural and substantive unconscionability, however, does not guarantee that a court will invalidate an entire arbitration agreement. Courts have discretion to either invalidate an entire arbitration agreement, or to “sever” just the specific provisions of the agreement it finds unconscionable. In other words, if an arbitration agreement has just one provision that the court finds unconscionable, the court may choose to invalidate that provision, but enforce the rest of the arbitration agreement. On the other hand, if the issues of unconscionability are so pervasive that the arbitration agreement is inherently oppressive, the court may choose to invalidate the entire contract.
Plaintiffs trying to show that an arbitration agreement is unenforceable due to unconscionability have a difficult undertaking. Courts tend to be very hesitant to invalidate contracts between two private parties. However, if a plaintiff unwittingly entered into an arbitration agreement due to coercion or deception, or if the terms of the arbitration agreement undermine the plaintiff’s ability to vindicate their rights, courts can and sometimes do step in and invalidate the contract. In a time where many corporations use mandatory arbitration agreements as a means to avoid consumer and employment lawsuits, the doctrine of unconscionability provides a potential avenue to justice for workers and consumers who are harmed by corporate misconduct.
Our attorneys at Valerian Law take the time to understand your needs and carefully examine all details surrounding your case in order to provide you with effective solutions. Call us at 888-686-1918 to speak with one of our experienced attorneys.
1 Trevor Bryne is a third year law student at Stanford Law School as of spring 2023. Trevor recently completed a stint as Law Clerk at Valerian Law.
2 8 Cal. 5th 111.
3 24 Cal. 4th 83.