In Ontiveros v. DHL Express (USA), Inc., (— Cal.Rptr.3d —, 2008 WL 2573717, Cal.App. 1 Dist., June 30, 2008), a California Court of Appeal considered whether there was substantial evidence for the trial court’s finding that an arbitration agreement was unconscionable. Because the agreement was a contract of adhesion, it required the arbitrator decide enforceability, it required the plaintiff share fees and costs related to arbitration, and it strictly limited discovery. In addition, the appellate court reviewed whether the trial court erred in refusing to sever the unconscionable provisions, and instead found the entire agreement unenforceable. The appellate court concluded that the arbitration agreement was unconscionable for the reasons asserted by the trial court and found the trial court’s decision not to sever the unconscionable provisions to be within its discretion.
Gina Ontiveros (“Ontiveros”) started working on a contract basis as a hazardous materials inspector for Airborne Express in May 1998. In October 1999, Ontiveros was hired to the permanent position of field service supervisor. In April 2000, Ontiveros was promoted to aircraft operations supervisor. Following Ontiveros’ promotion, she contends she was subject to severe sexual harassment and retaliation. In August 2003, DHL Express (USA), Inc. (“DHL”) acquired Airborne Express as a wholly owned subsidiary and, in 2005, Airborne Express was dissolved and its employees, including Ontiveros, became employees of DHL.
In connection with Ontiveros’ hiring at Airborne Express, she received a document titled “Mutual Agreement to Arbitrate Claims” (“arbitration agreement” or “agreement”). Ontiveros asserted that she received the arbitration agreement with a packet of other documents and was instructed to fill out, sign, and return the documents in order to start her new job and begin receiving a salary. Ontiveros asserted that Airborne Express never informed her of the rights she was giving up in signing the arbitration agreement, nor was she told to review the documents with a lawyer.
The arbitration agreement covered all possible claims between the parties. The agreement assigned the arbitrator the exclusive authority to resolve conflicts over interpretation, applicability, enforceability and formation of the agreement. In addition, the agreement limited each party to one deposition, other than depositions taken of expert witnesses designated by the other party. Additional discovery could only be granted by the arbitrator on a showing of “substantial need.” The agreement also required that both parties share the cost of arbitration and that each party would be responsible for its own attorney fees, unless a party prevailed on a statutory claim that provided an award for attorney fees.
The appellate court began with a review of relevant contract law. First, the court identified what the California Supreme Court determined are the five minimum requirements for lawful mandatory arbitration clauses in the workplace context. The agreement must:
(1) provide for neutral arbitrators;
(2) provide for more than minimal discovery;
(3) require a written award;
(4) provide for all relevant types of relief available in court; and
(5) not require employees to pay unreasonable costs, arbitrator’s fees, or expenses as a condition of access to the arbitration forum.
Next, the court explained the doctrine of unconscionability which allows the court the discretion to find the contract unenforceable in whole or in part because of “oppression” or “surprise” resulting from unequal bargaining power (procedural unconscionability), or because of “overly harsh” or “one-sided” results (substantive unconscionability). Finally, the court explained adhesion contracts, which are typically drafted by and imposed by the party in a stronger bargaining position. Adhesion contracts require the weaker party to either adhere to the contract or reject it, with no real opportunity to negotiate.
Following its summary of relevant contract law, the appellate court discussed a provision in the arbitration agreement which gave the arbitrator sole jurisdiction to resolve any dispute arising over the interpretation of the arbitration agreement. The court explained that it is unconscionable to give the arbitrator sole authority over the enforceability of the arbitration clause. The court supported its conclusion based on its finding that the arbitration agreement was a contract of adhesion, and therefore procedurally unconscionable. The court said that employers like DHL were at a distinct advantage in the arbitration setting because large employers are likely to be “repeat player[s]” in the arbitration world. This provides employers like DHL familiarity with the system and arbitrator’s “temperaments [and] procedural preferences . . . .” In addition, the court pointed out that the arbitrators have an interest in finding the contract valid, because if the arbitrators find the contract void or voidable, they have nothing to arbitrate. For these reasons, the court found the jurisdictional element of the arbitration clause unconscionable.
Next, the court discussed the “shared fees and costs related to arbitration” provision followed by the discovery provisions of the arbitration agreement. In connection with the “fees and costs” provision, the court pointed out that any provision requiring an employee in an arbitration agreement to pay arbitration fees is unlawful, and therefore substantively unconscionable. In connection with the discovery provisions, the court explained that because Ontiveros is so limited in discovery, and the “burden for showing a need for discovery is so high,” the provisions are substantively unconscionable. Moreover, the court said that there is necessarily an imbalance in the need for discovery because employers like DHL already have access to most of the relevant witnesses and documents that would be the subject of discovery.
Finally, the court considered whether the trial court erred when it refused to sever the unconscionable provisions of the agreement, and instead found the entire agreement unenforceable. The court explained that it is within the discretion of the trial court to sever unconscionable provisions of a contract. More importantly, when the unconscionability is rooted in the central purpose of the contract, the entire contract is “tainted with illegality” and as a whole cannot be enforced. The court concluded that because the arbitration agreement was an adhesion contract (procedurally unconscionable), and because three central provisions of the contract were substantively unconscionable, the trial court did not abuse its discretion in finding the entire contract unenforceable.