In a new arbitration-related ruling, a California court in the case of Cook v. University of Southern California, found that an arbitration agreement requiring an employee to arbitrate all claims, even those not arising from the employment relationship, for an infinite amount of time, was unconscionable and entirely unenforceable. The decision arose from a lawsuit in which the plaintiff alleged discrimination and harassment by her employer and two co-workers. Despite the defendants' collective motion to compel arbitration based on an agreement signed by the plaintiff as a condition of employment, the court denied the motion, citing the purportedly pervasive unconscionability of the agreement. The defendants appealed the decision.
Factual Background
Pamela Cook was employed by the University of Southern California (USC). She filed a lawsuit against the University and two of its employees based on eighteen causes of action she claimed arose from her employment. Her lawsuit included claims for racial discrimination and failure to accommodate her disability, as well as retaliatory discrimination after she reported the alleged discriminatory acts to superiors. She also claimed that she was actually or constructively terminated as a result.
USC filed a motion to compel arbitration. It argued that the employment agreement Cook signed stated, "The University and faculty or staff member … 'employee,' agree to the resolution by arbitration of all claims, whether or not arising out of employee's University employment, remuneration or termination, that employee may have against the University or any of its related entities…"
Based on this agreement, USC asserted that Cook's claims fell within the parameters of the agreement and should be enforced. Cook responded that her claims were not subject to arbitration because the agreement was procedurally unconscionable as she was required to sign it as a condition of employment. She also claimed that it was substantively unconscionable because its scope was overly broad as it covered all claims even if those not related to her employment with USC and was infinite in duration.
The trial court denied USC's motion. Although it found that Cook's claims fell within the scope of the arbitration agreement, it also determined that the contract had some procedural unconscionability as it was signed as a condition of employment and effectively acted as a contract of adhesion. In addition, because it was infinite in substantive scope and temporal duration, extending past Cook's termination and beyond, it was also substantively unconscionable. In addition, the trial court held the contract lacked mutuality. Since, the unconscionable terms could not be severed in the trial court's opinion, it denied USC's motion to compel arbitration. USC appealed.
General Rule: Arbitration Agreements
The general rule under federal and state law is that it supports the enforcement of arbitration agreements. Arbitration is generally favored, and, once an agreement is shown to be formed, and the dispute within its scope, the employee must prove some defense to its enforcement, such as, most typically, purported unconscionability.
Unconscionability
If the terms of an arbitration agreement are found to be unconscionable, the agreement is unenforceable. OTO, L.L.C. v, Kho (2019) 8 Cal.5th 111, 118. Both procedural and substantive unconscionability must generally be present. They do not need to be present to the same extent, however. "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." Armendariz, supra, 24 Cal.4th at p. 114.
Procedural Unconscionability
Procedural unconscionability is defined as a "standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party, only the opportunity to adhere to the contract or reject it." Armendariz, supra, 24 Cal.4th at 113. This typically relates to "oppression" or "surprise" caused by unequal bargaining powers that causes a one-sided or unfair result. Id. This usually occurs with a contract of adhesion or a contract that "is standardized" and "imposed and drafted by the party of superior bargaining power, relating to the subscribing party only the opportunity to accept or reject it." Id.
In the case at hand, the lower court found some degree of procedural unconscionability because the contract the plaintiff signed was one of adhesion – that is, she was required to sign it as a condition of taking the job with USC.
Substantive Unconscionability
Substantive unconscionability “typically is found in the employment context when the arbitration agreement is ‘one-sided’ in favor of the employer without sufficient justification.” Peng, supra, 219 Cal.App.4th at pp. 1472–1473. Some courts require the terms of the contract to "shock the conscience." Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 88.
In this case, the trial court found that the agreement was substantively unconscionable based on three factors:
- The agreement had an overly broad scope.
- The contract stated that it had an infinite duration, and
- The purported lack of mutuality.
Scope
The agreement required the plaintiff to arbitrate "all claims, whether or not arising out of Employee's University employment, remuneration or termination, that Employee may have against the University or any of its related entities, including but not limited to faculty practice plans, or its officers, trustees, administrators, employees or agents, in their capacity as such or otherwise; and all claims that the University may have against the Employee."
Although USC argued that the scope of the agreement only applied to claims arising from the plaintiff's employment as "absurd results would otherwise ensue," the court held that the plain language of the agreement indicated the opposite. Although employment contracts may provide a "margin of safety" that "grants extra protection to the party with superior bargaining power if there is legitimate commercial need for doing so" the business needs must be explained in the contract itself, to be valid. Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1436.
USC asserted that the broad scope was justified "because if the scope were limited to claims arising of Cook's employment, then important categories of future claims, such as post-termination retaliation or defamation would be excluded from the agreement." The court disagreed. It found that the arbitration agreement did not present a legitimate reason for its broad scope and infinite duration. Therefore, the court found that it was substantively unconscionable on this basis.
Duration
The agreement also stated, "it shall survive the termination of Employee's employment and may only be revoked or modified in a written document that expressly refers to the Agreement to Arbitrate Claims and is signed by the President of the University." On appeal, USC argued the agreement could not be construed as infinite in duration and instead should be construed to be terminable at will after a “reasonable time.”
However, addressing the merits of that argument, the court disagreed. USC leaned on the case of Reigelsperger v. Siller, 40 Cal.4th 574, 580, to stand for the proposition that contracts that do not specify a duration are terminable at will. The court disagreed and reasoned that USC did not successfully show that this general rule should apply to the arbitration agreement in question here. Zee Medical Distributor Assn. Inc. v. Zee Medical, Inc. (2000) 80 Cal. App. 4th 1, stated that a contract "will only be deemed terminable at will after a reasonable period of time if it has neither an express nor implied term of duration." The Zee court rejected the argument that the contract was terminable at will because it did not identify a specific end date and instead held the contract contained “a valid, express contractual term of duration.” It also noted that the termination provisions in the contract “clearly indicate the parties did not contemplate termination at will.” (Id. at p. 11.)
Here the contract stated that the arbitration agreement would remain in place unless Cook and USC's president terminate the agreement in writing and sign it. The writing must specifically state that both parties are agreeing to terminate the arbitration agreement. Based on this language, it did not seem feasible to the court that the parties intended to make the contract terminable at will. Therefore, the trial court was correct in decision that the infinite duration presented in the contract language was substantively unconscionable.
Lack of Mutuality
Although the arbitration agreement required Cook to arbitrate all claims against USC and any of its "related entities," the court held it did not require those same entities to arbitrate any claims they may have had against Cook – that is, the agreement lacked mutuality. USC argued that an agreement is not unconscionable because it provides benefits to third party beneficiaries. The court disagreed and found that the agreement confers a benefit on USC and its entities without providing an equal benefit to Cook in exchange.
USC argued that the agreement contained a sufficient "modicum of mutuality" as USC had also agreed to arbitrate any claims under the agreement. However, the court held that case law does not support the contention that a modicum of bilaterality necessarily renders an agreement free of unconscionability, and that it did not change a clause of impact that is clearly one-sided as was present in the contract at issue here.
Severability
“An unconscionable contractual term may be severed, and the resulting agreement enforced, unless the agreement is permeated by an unlawful purpose, or severance would require a court to augment the agreement with 20 additional terms." Penilla v. Westmont Corp. (2016) 3 Cal.App.5th 205, 223. On appeal, the court found that the trial court reasonably concluded that "curing the unconscionable provisions would require substantive rewriting of the arbitration agreement to contradict its plain language, and that severance would provide a windfall to USC." It agreed that the unconscionable elements of the arbitration agreement permeated the contract as a whole and could not be severed. Thus, the trial court's decision to deny USC's motion to compel arbitration as affirmed.
Key Takeaways
- Substantive Scope: Employers should limit the scope of claims covered by the agreement to those arising from the employment relationship. Cook took great issue with the fact that, in its view, the agreement could cover a car accident between a USC employee and the plaintiff. The overwhelming vast majority of disputes arising result from the employment relationship, and an agreement so limited does not meaningfully surrender much, if anything, of value.
- Overbroad Duration: The agreement's infinite duration was problematic. Although the Cook court's consternation with the purportedly infinite duration was almost certainly (and irreversibly) colored by its unlimited substantive scope, these agreements should be written to terminate after a reasonable period of time, as defined by law. The Cook court's analysis is quizzical in this regard – as most agreements are, for good reason, unlimited in time. Nonetheless, care should be taken to address this potential problem which, despite Cook, is likely cured by an appropriate substantive limitation as to covered claims.
- Lack of Mutuality: The agreement required the employee to arbitrate all claims against USC and related entities but did not require those entities to arbitrate their claims against the employee, creating an imbalance. If at all possible, which is difficult, the agreement should endeavor for complete and total mutuality between the employee and employer, along with its employees and related entities.