Although the United States Supreme Court has consistently ruled to uphold arbitration agreements, many of the lower courts seem less willing to play along, although they usually make a point of stipulating why their rulings to do not contradict those of the Supreme Court. Overall, the lesson to employers (or anyone drawing up arbitration agreements) seems to be that you can have these agreements with terms that are favorable to the employer, as long as the terms are not too favorable.
This was evidenced by a recent lawsuit in California. In Chavarria v. Ralphs Grocery Co., an employee, Zenia Chavarria, filed a labor lawsuit against her employer, Ralphs Grocery. The lawsuit alleged violations of the California Labor Code and California Business and Professions Code. Chavarria asserted claims on behalf of herself and a proposed class of other employees of Ralphs Grocery. The company responded by trying to force Chavarria’s individual claims into arbitration, in accordance with the arbitration agreement which Chavarria had agreed to as a condition of employment.
The arbitration agreement contained a provision in which each party must pay its own attorney fees, subject to a later claim for reimbursement under applicable law. The agreement also states that the arbitrator’s fees must be appointed at the beginning of the arbitration and must be divided evenly between Ralphs and the employee.
The agreement further gave Ralphs permission to change the agreement without notifying the employee. According to the agreement, the employee’s continued employment was sufficient to constitute acceptance of any modification to the contract.
The arbitration agreement favored the employer so heavily that the lower court said that it “shocked the conscience”. In particular, the arbitrator selection process, as laid out in the agreement, was such that it would always produce an arbitrator chosen by Ralphs Grocery. The agreement even went so far as to specifically prohibit the use of an administrator from either the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Service (JAMS), both of which are known for providing fair and unbiased arbitrators.
The court held that the arbitration agreement was procedurally unconscionable because it was a condition of applying for employment and was presented on a “take it or leave it” basis. Additionally, the terms of the agreement were not presented to the employee until three weeks after she had agreed to be bound by it.
Ralphs argued that its arbitration agreement was in accordance with California state law and that the Federal Arbitration Act (FAA) preempts state laws. The FAA does provide that arbitration agreements must be enforced but it has an exception for “such grounds as exist at law or in equity for the revocation of any contract.”
The court maintained that the California state law supporting the unconscionability holding was not preempted by the FAA because it applies to contracts generally and therefore does not impact arbitration agreements more than any other agreements.
When the lower court ruled in Chavarria’s favor, Ralphs Grocery appealed. The case went to the Ninth Circuit Court of Appeals, which upheld the rulings of the lower court and remanded the case for further proceedings.
You can view a copy of the Ninth Circuit opinion here.