Ninth Circuit Court of Appeals Invalidates Arbitration Agreement

 
Tuesday, November 5, 2013
 
In Chavarria v. Ralphs Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013), the Ninth Circuit denied an employer’s motion to compel arbitration because it found the arbitration agreement both procedurally and substantively unconscionable under California contract law. The grocery company sought to compel arbitration of the plaintiff’s individual claim pursuant to its arbitration policy, to which all employees agreed upon submitting applications for employment. The Ninth Circuit held that the policy was procedurally unconscionable because it was a condition of applying for employment and was presented on a “take it or leave it” basis. In addition, its terms were not provided to the plaintiff until three weeks after she had agreed to be bound by it.  The panel held that the arbitration policy was substantively unconscionable because it was unjustifiably one-sided to such an extent that it “shocked the conscience.”  The Court further found that the policy’s arbitrator selection process would always produce an arbitrator proposed by the defendant in employee-initiated arbitration proceedings; the policy precluded institutional arbitration administrators, which have established rules and procedures to select a neutral arbitrator and the policy’s arbitrator-fee-apportionment provision would have the effect of pricing employees out of the dispute resolution process. 

The Court distinguished this case from the American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), where the Supreme Court upheld the arbitration policy with class waiver provision on the basis that the expense of proving a statutory remedy did not eliminate the right to pursue that remedy.  The Court found that in this case, administrative and filing costs, even disregarding the cost to prove the merits, effectively foreclose pursuit of the claim. Ralphs constructed an arbitration system that imposes non-recoverable costs on employees just to get in the door.  Further, the court stated that the Federal Arbitration Act did not preempt California’s law regarding unconscionable contracts.  The Court stated that  "[f]ederal 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 rather reflects a general policy against abuses of bargaining power.
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