205 Cal. App. 4th 1138, 140 Cal. Rptr. 3d 492 (2012)
Plaintiffs Salome Samaniego and Juventino Garcia work or worked as carpet installers for Flooring Install, Inc., an alleged subsidiary or affiliate of Empire Today, LLC, a national carpet and flooring business.1 When they were initially hired, and again later during their employment, plaintiffs were given form contracts and told to sign them if they wanted to work for Empire.2 Both contracts were presented only in English, although Garcia cannot read English and Samaniego has difficulty reading more than simple written English.3 The contracts were offered on a nonnegotiable, take-it or leave-it basis, with little or no time for review.4
The Agreement at issue is 11 single-spaced pages of small-font print riddled with complex legal terminology.5 The arbitration provision is set forth in the 36th of 37 sections.6 Any dispute or claim arising from any provision of the Agreement, or relating in any way to the business relationship, must be submitted to arbitration before a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association.7 The Agreement also includes a shortened six-month statute of limitations for subcontractors to sue under the Agreement.8 It includes a unilateral fee-shifting provision that requires them to pay any attorneys’ fees Empire might incur to enforce any of its rights hereunder or to collect any amounts due.9 Although the Agreement directs that arbitration will be governed by the commercial rules of the American Arbitration Association, those rules were not attached to it or otherwise provided to plaintiffs.10 The Agreement exempts from arbitration claims for declaratory or preliminary injunctive relief involving specified sections.11
Samaniego and Garcia filed this putative class action challenging Empire’s allegedly unlawful misclassification of its carpet installers as independent contractors.12 The complaint alleges numerous Labor Code violations, including that Empire failed to pay minimum wage and overtime compensation, refused to indemnify employees for job-related expenses, wrongfully deducted from employee pay, coerced employees to make purchases from the company, failed to provide required meal periods, and failed to pay all wages due upon installers’ termination.13
Empire moved to stay the action and compel arbitration pursuant to the Agreement.14 The superior court found the Agreement was highly unconscionable from a procedural standpoint and demonstrated strong indicia of substantive unconscionability, and therefore denied Empire’s motion to compel.15 It also denied Empire’s request for reconsideration in light of the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which was issued several weeks after the denial of Empire’s motion.16 Empire timely appealed.17
Whether the arbitration agreement is unconscionable under California law?18
California law recognizes that unconscionability includes an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.19 Unconscionability has both a procedural and a substantive element.20 The procedural element requires oppression or surprise.21 Oppression occurs where a contract involves lack of negotiation and meaningful choice.22 Surprise occurs where the allegedly unconscionable provision is hidden within a prolix printed form.23 The substantive element concerns whether a contractual provision reallocates risks in an objectively unreasonable or unexpected manner.24 Both elements must be met before a contract or term will be deemed unconscionable.25 Both need not be present to the same degree.26 A sliding scale is applied so that the 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.27
Yes.
Plaintiffs Salome Samaniego and Juventino Garcia worked as carpet installers for Flooring Install, Inc., an alleged subsidiary or affiliate of Empire Today, LLC. When they were initially hired, and again later during their employment, plaintiffs were given form contracts and told to sign them if they wanted to work for Empire. Both contracts were presented only in English, although Garcia cannot read English and Samaniego has difficulty reading more than simple written English. The contracts were offered on a nonnegotiable, take-it or leave-it basis, with little or no time for review.
The Agreement at issue is 11 single-spaced pages of small-font print riddled with complex legal terminology. The arbitration provision is set forth in the 36th of 37 sections. Any dispute or claim arising from any provision of the Agreement, or relating in any way to the business relationship, must be submitted to arbitration before a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The Agreement also includes a shortened six-month statute of limitations for subcontractors to sue under the Agreement. It includes a unilateral fee-shifting provision that requires them to pay any attorneys’ fees Empire might incur to enforce any of its rights hereunder or to collect any amounts due. Although the Agreement directs that arbitration will be governed by the commercial rules of the American Arbitration Association, those rules were not attached to it or otherwise provided to plaintiffs. The Agreement exempts from arbitration claims for declaratory or preliminary injunctive relief involving specified sections.
Samaniego and Garcia filed this putative class action challenging Empire’s allegedly unlawful misclassification of its carpet installers as independent contractors. The complaint alleges numerous Labor Code violations, including that Empire failed to pay minimum wage and overtime compensation, refused to indemnify employees for job-related expenses, wrongfully deducted from employee pay, coerced employees to make purchases from the company, failed to provide required meal periods, and failed to pay all wages due upon installers’ termination.
Empire moved to stay the action and compel arbitration pursuant to the Agreement. The superior court found the Agreement was highly unconscionable from a procedural standpoint and demonstrated strong indicia of substantive unconscionability, and therefore denied Empire’s motion to compel. These facts establish procedural unconscionability through the adhesive nature of the contract, the plaintiffs’ limited English literacy, the absence of any Spanish translation, the dense and lengthy form with the arbitration clause buried near the end, and the failure to provide the referenced AAA rules.28 Substantive unconscionability is shown by the one-sided shortened limitations period that undercuts Labor Code protections, the unilateral fee-shifting clause, and the carve-out exempting typical employer claims from arbitration while forcing all employee claims into that forum.29
The arbitration agreement is unconscionable under California law and therefore unenforceable.30
Whether the trial court properly declined to sever unconscionable provisions rather than enforce the arbitration clause?31
When an arbitration agreement is permeated by unconscionability because it contains more than one unlawful provision. Such multiple defects indicate a systematic effort to impose arbitration not simply as an alternative to litigation but as an inferior forum that works to the stronger party’s advantage.32 The overarching inquiry is whether the interests of justice would be furthered by severance.33 The decision whether to sever the objectionable clauses or refuse to compel arbitration is within the trial court’s exercise of discretion.34
Yes. The record amply supports the ruling that the agreement is permeated by unconscionability.35 The presence of multiple one-sided provisions—the shortened limitations period, the unilateral fee-shifting clause, and the carve-out for employer claims—demonstrates a systematic effort to impose an inferior forum.36 The trial court could reasonably conclude that severance would not serve the interests of justice.37 Empire did not even request severance from the trial court.38
The trial court properly declined to sever the unconscionable provisions and correctly refused to enforce the arbitration clause.39
Whether the court correctly applied California law despite the Illinois choice-of-law provision in the Agreement?40
A choice-of-law provision, like any other contractual provision, will not be given effect if the consent of one of the parties to its inclusion in the contract was obtained by improper means, such as by misrepresentation, duress, or undue influence, or by mistake.41 Choice-of-law provisions contained in adhesion contracts are usually respected.42 The forum will scrutinize such contracts with care.43 The forum will refuse to apply any choice-of-law provision they may contain if to do so would result in substantial injustice to the adherent.44
Yes. The same factors that render the arbitration provision unconscionable warrant the application of California law.45 The Agreement was obtained by improper means through the adhesive presentation to workers with limited English literacy and no opportunity for negotiation or review.46 Enforcing the Illinois choice-of-law provision would result in substantial injustice by requiring enforcement of the unconscionable arbitration clause.47
The court correctly applied California law despite the Illinois choice-of-law provision in the Agreement.48
Whether the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion preempts the unconscionability analysis?49
The FAA permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, although not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.50 Concepcion repudiated the categorical Discover Bank rule against class waivers but reaffirmed that generally applicable unconscionability analysis remains available.51
No. Concepcion addressed only whether the FAA preempts the categorical Discover Bank rule.52 That rule invalidated class action waivers in consumer contracts of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages.53 The Court explicitly reaffirmed that the FAA permits agreements to arbitrate to be invalidated by generally applicable contract defenses such as unconscionability.54 The trial court here applied traditional California unconscionability analysis resting on the adhesive presentation of the agreement, plaintiffs’ limited English literacy, the buried arbitration clause, the one-sided six-month limitations period undercutting Labor Code protections, the unilateral fee-shifting clause, and the carve-out for employer claims.55
These defenses apply to contracts generally and do not single out arbitration, so Concepcion does not preempt the result reached by the trial court.56
The United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion does not preempt the unconscionability analysis in this case.57