Notes & Comment
Vol. 2012, No. 1
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Business Law
Are One-sided Arbitration Agreements Unlawful?
We've previously offered our random thoughts about arbitration as a means of resolving legal disputes. Many believe arbitration is an effective way to manage legal disputes, rather than costly and burdensome litigation. Some even impose that belief upon others -- in a way that's unlawful and leads to unfair results. While courts generally give deference to arbitration agreements, courts won't permit one party in a contract to impose its view about arbitration on another party when it's unjust and unfair.
That conclusion is supported by Wisdom v. Accenture, Inc., 12 C.D.O.S. 216 (No. C065744, Third Appellate District, January 3, 2012), a recent California Court of Appeal decision. The case threw out an employer's one-sided arbitration agreement that required workers to submit to arbitration but didn't apply equally to the company itself. Wisdom v. Accenture is noteworthy to transactional lawyers who write business contracts: imposing a one-sided arbitration agreement on a party with unequal bargaining power may result in having the arbitration agreement thrown out.
The Facts
The Wisdom plaintiffs worked for a staffing agency that required them to be available around the clock. When a dispute arose about overtime pay, the employees filed a lawsuit. The employer moved to stay the lawsuit and compel arbitration based on arbitration agreements the employees had signed in job applications. The arbitration provisions were one-sided and applied to the employees, but not to the employer-company. The trial court threw out the arbitration provisions as "unconscionable" contracts and permitted the employee lawsuit to continue. The Court of Appeal affirmed that decision.
The Decision
The Court of Appeal began by observing that in California, a court can refuse to enforce an unconscionable provision in a contract. This long-standing principle of California law requires two elements: the contract provision must be "procedurally" unconscionable, and it must be "substantively" unconscionable. If both elements are present in the context of an arbitration provision, a court may refuse to enforce it.
Wisdom was an employment case. The arbitration clause there was procedurally unconscionable because it was buried inside job application forms and wasn't explained to the applicants. There was unequal bargaining power between the parties and no negotiation -- circumstances inherent in a job application setting. The applicants didn't understand the arbitration provision they had signed, and the procedural rules that would apply to the arbitration weren't included as part of the job application.
The arbitration clause was substantively unconscionable primarily because it was one-sided and lacked mutuality. In other words, the provision applied to legal claims the employees might bring against the company, but not legal claims the company might bring against the employees. As the court noted, "[i]n the context of an arbitration agreement imposed by an employer on an employee, a lack of mutuality renders a contract substantively unconscionable." Given superior bargaining power, it's unfair for a company to impose a one-sided arbitration clause on its employees "without at least some reasonable justification for such one-sidedness based on 'business realities.'"
Conclusion and Summary
Wisdom v. Accenture, Inc. doesn't break new ground. But the case does serve to caution transactional lawyers and their clients that leveraging superior bargaining power to impose unfavorable and legally prejudicial contract terms upon weaker contracting partners may have legal consequences.
It's one thing to achieve favorable contract terms in an arms-length negotiation between relatively equal parties. It's quite another to take advantage of and impose unfair and one-sided contract provisions upon those with less bargaining power. While they generally defer to the parties' contract in the former situation, courts may step in and reform the contract in the latter circumstance.
© Matthew Joseph 2012. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, corporate formations and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.