Plaintiff sued Defendant (Plaintiff’s former employer), alleging sexual harassment, retaliation, and hostile work environment, under Title VII of the Civil Rights Act of 1964. Defendant moved to stay the proceedings, and compel arbitration, based on an arbitration agreement which Plaintiff signed as a pre-condition to employment with Defendant. The District Court denied the Petition to Compel Arbitration, ruling that the agreement was unconscionable. Defendant appealed.
A contract must be procedurally and substantively unconscionable to be unenforceable on the ground of unconscionability
When Plaintiff was hired by Defendant Countrywide, she was required to sign an arbitration agreement. The agreement required arbitration for claims for breach of contract, discrimination, harassment, violations of federal or state laws, and tort claims, but the agreement exempted claims for workers’ compensation, unemployment benefits, intellectual-property violations, unfair competition, and disclosure of trade secrets from the arbitration requirement. The arbitration agreement also required the employee to pay the arbitration filing fee and various other costs and to split the arbitrator’s fees with Defendant Countrywide. The agreement also limited any deposition of a Countrywide representative to four designated topics. Plaintiff later sued Defendants for sexual harassment, retaliation, and hostile work environment. The district court denied Defendant Countrywide’s petition to compel arbitration, finding that the arbitration agreement was unconscionable and therefore unenforceable. Defendant Countrywide appealed.
Must a contract be procedurally and substantively unconscionable to be unenforceable on the ground of unconscionability?
Yes. The court held that the arbitration agreement was unenforceable against Plaintiff because it was both procedurally and substantively unconscionable.
A contract must be procedurally and substantively unconscionable to be unenforceable on the ground of unconscionability. In determining whether a contract is unconscionable, the court must consider whether the contract is both procedurally and substantively unconscionable and whether the contract can be enforced without those terms, or whether it must be struck down entirely. In determining whether a contract is procedurally unconscionable, courts must determine whether any of the following factors exists: (1) oppression, arising from unequal bargaining power that results in a lack of real negotiation and an absence of meaningful choices, and (2) surprise, resulting from terms being hidden in a printed form drafted by the party that seeks to enforce those terms. With respect to substantive unconscionability, an agreement is substantively unconscionable if its terms are so one-sided as to shock the conscience.
Here, the arbitration agreement is both procedurally and substantively unconscionable. With respect to procedural unconscionability, Plaintiff, as an employee, was in a position of unequal bargaining power and did not have an opportunity to negotiate the terms of the agreement. Moreover, the arbitration agreement was unfairly one-sided as to be substantively unconscionable. First, it required arbitration for the types of claims employees were most likely to bring against Defendant Countrywide, while exempting from the arbitration requirement the types of claims Defendant Countrywide was most likely to bring against its employees. Second, the agreement imposed thousands of dollars in costs on the employees for the type of expenses that employees who were required to arbitrate generally would not be required to bear. Third, the discovery provision, which limited a deposition of a Countrywide representative to four designated topics but did not similarly limit depositions of employees, was also so unfairly one-sided. The court noted that the unconscionable provisions in the arbitration agreement were so pervasive that they could not be severed or limited. Because Defendant Countrywide’s arbitration agreement is unenforceable under the doctrine of unconscionability, the district court’s refusal to compel arbitration is affirmed.