In Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, the California Supreme Court reminds us of the state’s strict stance on the requirements for arbitration agreements, with particular insight into arbitration agreements in the employment context. By affirming that the arbitration agreement in question was unconscionable due to unfair terms, the court reinforced the importance of drafting balanced contract provisions, with particular consideration to the practical effect of language within arbitration agreements at the time of contract formation. Parties should carefully review their arbitration clauses to ensure they align with the principles discussed herein to reduce the risk of unenforceability due to potentially unconscionable provisions for which severance will not be deemed the appropriate remedy.
Factual Background of the Case
Charter Communications, Inc. (Charter) is a telecommunications company with almost 100,000 employees that serves customers throughout the United States. Charter used a program for alternative dispute resolution called Solution Channel. It was meant to cover all applicant, employee, and former employee disputes regarding "employment-based legal disputes." Before a person could even apply for a position with Charter, they had to agree to utilize Solution Channel as a means of dispute resolution. After an offer of employment was made to an applicant, they were prompted to read and electronically sign documents and policies that included a Mutual Arbitration Agreement (Agreement) and the Solution Channel Guidelines (Guidelines).
Angelica Ramirez was hired by Charter in July 2019. She completed the onboarding process, which included electronic signatures for the Agreement and Guidelines. She was terminated in May 2020 and brought a claim against Charter in July 2020. Her complaint included allegations of discrimination, harassment, and retaliation under the Fair Employment and Housing Act (FEHA) as well as wrongful discharge in violation of public policy.
Based on the provisions of the Agreement, Charter filed a motion to compel arbitration and recover attorney fees. Ramirez opposed the motion and asserted that the Agreement was procedurally and substantively unconscionable. Charter argued the Agreement was not unconscionable or in the alternative, that the unconscionable terms should be severed instead of voiding the entire Agreement.
The trial court found that the Agreement was a contract of adhesion since it was required as a condition of employment, meaning it was procedurally unconscionable to some degree. It found the Agreement was substantively unconscionable because it shortened the time for filing a claim; violated FEHA by failing to limit Charter’s recovery of attorney fees to cases involving frivolous or bad faith claims; and impermissibly allowed an interim fee award to a party that successfully compelled arbitration. The trial court rejected arguments that the discovery limitations and the exclusion of some claims were unconscionable. It determined that the Agreement was “permeated with unconscionability,” and declared it unenforceable. Charter's motion to compel arbitration was denied. On appeal, the court affirmed the lower court's decision finding that the contract was unconscionable based on a similar analysis, and found that additional provisions were unconscionable. The case then moved to the Supreme Court of California for review.
Arbitration Agreements Generally
Under both federal and California law, valid arbitration agreements are treated like any other contract. (See 9 U.S.C. § 2; see also OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125.) The California Arbitration Act (Code Civ. Proc., § 1280 et seq.; CAA) reflects a robust public policy supporting arbitration as a quick and relatively affordable method of dispute resolution. A written agreement to resolve disputes via arbitration is considered valid, enforceable, and irrevocable, except on grounds that could justify revocation of any contract. (Code Civ. Proc., § 1281.) One such ground is unconscionability. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 99.) A contract is deemed unconscionable if it meets both the procedural and substantive aspects of that defense, as is often the case when one party lacked a meaningful choice in entering the agreement (procedural) and the terms are excessively favorable to the other party (substantive). (Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243.)
Unconscionability
The party challenging an arbitration agreement must establish both procedural and substantive unconscionability. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 246.) Procedural unconscionability examines the negotiation process and whether unequal bargaining power led to "oppression" or "surprise." (Id. at p. 246.) Typically, this element is established if the agreement is a contract of adhesion, i.e., a standardized contract offered by a party in a stronger negotiating position that the other party can only accept or reject as is. (Yeng Sue Chow v. Levi Strauss & Co. (1975) 49 Cal.App.3d 315, 325.)
Substantive unconscionability looks at the fairness of the contract's terms and whether they create unjust or one-sided outcomes. Clauses are considered substantively unconscionable if they unreasonably or unexpectedly shift risks to the weaker party. (Pinnacle, supra, 55 Cal.4th at p. 246.)
Both elements must be present for a contract term to be deemed unconscionable. Courts use a sliding-scale approach, meaning that a highly one-sided term may require less evidence of procedural unfairness, and vice versa. (Armendariz, supra, 24 Cal.4th at p. 114.) Fairness is assessed based on conditions at the time of the contract's formation, not in hindsight. (Yeng Sue Chow, supra, 49 Cal.App.3d at p. 325.)
Substantive unconscionability should be evaluated only after procedural unconscionability is established. (Gentry, supra, 42 Cal.4th at p. 470.) If a contract shows no procedural unconscionability, courts presume that even one-sided terms were freely chosen. (Ibid.) In other words, poor negotiation alone does not make terms unconscionable, and courts generally do not intervene in cases that simply reflect a bad bargain.
As clarified in Baltazar, the doctrine of unconscionability addresses terms that are excessively harsh, oppressive, or so one-sided that they shock the conscience. This doctrine is intended to prevent unreasonably favorable terms for the more powerful party, not to address ordinary imbalances or unfavorable deals in retrospect. "The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement." (Baltazar, supra, 62 Cal.4th at p. 1245.)
In this case, the Court of Appeal found substantive unconscionability in four areas: (1) lack of mutuality in covered and excluded claims; (2) shortened filing deadlines; (3) limits on the number of depositions; and (4) the possibility of an unlawful award of attorney's fees, all of which the California Supreme Court reviewed individually.
Mutuality of Covered and Excluded Claims
The Agreement was deemed substantively unconscionable due to its lack of mutuality. Ramirez argued that the Agreement unfairly required arbitration for claims more likely to be brought by the employee. An arbitration agreement does not have to cover all claims, but when it selectively mandates arbitration, it must do so fairly for both parties. (Armendariz, supra, 24 Cal.4th at p. 120.)
If an employer enforces arbitration on employees while reserving judicial avenues for itself without any business-based justification, the agreement may exploit arbitration's advantages solely for the employer's benefit. However, if the employer provides a valid reason for this arrangement - unrelated to simply favoring the judicial forum - such an arrangement may be acceptable. (Armendariz, supra, 24 Cal.4th at pp. 117−118.) If such a justification is not present, courts are likely to find the agreement lacking in mutuality and, thus, unconscionable.
Here, the Agreement's covered claims were primarily those most likely to be brought by employees – such as wrongful termination, discrimination, and wage disputes – requiring them to submit these issues to arbitration. Contract claims that were more likely to be initiated by Charter – such as those pertaining to intellectual property rights, non-compete agreements, or allegations of theft or embezzlement – were excluded from arbitration. This division created a significant imbalance in favor of Charter, supporting a finding of substantive unconscionability.
Further, the classification of certain types of claims as belonging to both Charter and employees was misleading: the exclusions for workers’ compensation claims and unemployment insurance claims were illusory, as those are excluded from arbitration by law, and claims that have expired under an applicable statute of limitations cannot be brought in court, meaning none of those claims provided an additional benefit to employees.
While Charter argued the Agreement had mutuality by requiring arbitration for some claims it might bring and excluding claims that either party could theoretically pursue, the Court found this mutuality insufficient. Under Armendariz, an arbitration agreement requires a "modicum of bilaterality," but mere minimal mutuality does not justify a clause that is, in practical effect, unjustifiably one sided. (Cook v. University of Southern California (2024) 102 Cal.App.5th 312, 327.) Consequently, the Supreme Court agreed the Agreement was unconscionable on this issue, since it did not credit Charter’s justification, meaning it would “assume” the Agreement’s lack of mutuality was unconscionable.
Filing of Claims Under the Agreement
The Agreement imposed certain filing deadlines on claims, requiring written notice within the applicable statute of limitations for each legal claim. For claims that required filing with an administrative agency (e.g. FEHA claims), the Agreement mandated submission to Solution Channel within the same time limit as the administrative filing deadline. The Court of Appeal found this provision unconscionable for two key reasons:
- It effectively reduced the time to file a FEHA lawsuit from up to three years to just one year, which is the administrative filing deadline.
- It could force employees to arbitrate FEHA claims before the Department of Fair Employment and Housing (DFEH) completes its investigation or issues a right-to-sue letter.
The Court of Appeal's conclusion aligned with prior decisions. In Ellis v. U.S. Security Associates, (2014) 224 Cal.App.4th 1213, the court struck down a six-month filing limit for FEHA claims as unreasonable, emphasizing that employees typically have at least two years to pursue such claims. The court also noted that the shortened timeline undermined the DFEH's ability to provide administrative remedies, which are often the only recourse for employees with limited resources. Similarly, in Baxter v. Genworth N. Am. Corp. (2017) 16 Cal.App.5th 713, the court invalidated a provision requiring arbitration within the administrative filing deadline, reasoning that it curtailed the statutory period for vindicating rights under FEHA. Both cases concluded that reducing the filing period deprived employees of meaningful remedies and rendered the agreements substantively unconscionable.
Charter raised two arguments to defend the provisions of the Agreement. First, Charter argued that the timing clause was ambiguous and should be interpreted to allow employees the same filing time as in court. The Court rejected this, stating that the language was clear and unambiguous. The first sentence set the general limitations for all claims, while the second imposed a shorter period for claims requiring prior administrative filing.
Second, Charter contended the filing limitation did not harm Ramirez because she requested an immediate right-to-sue letter, bypassing the DFEH investigation. The Court dismissed this, stating that unconscionability “is determined with reference to the time when the contract was made” and cannot be resolved in hindsight, “considering circumstances of which the contracting parties were unaware.” (Yeng Sue Chow, supra, 49 Cal.App.3d at p. 325.)
The Court concluded that the filing limitation provision was substantively unconscionable because it significantly reduced the time available for employees to pursue statutory claims and undermined the DFEH's role in providing administrative remedies. These factors violated public policy and the legislative intent behind FEHA's protections, including its limitations periods, which cannot be abrogated by private agreement.
Discovery Limitations
The Agreement imposed specific discovery limits for arbitration, including a 90-day period of discovery, a cap of four depositions per party, 20 interrogatories (including subparts), and 15 requests for documents. Disputes over discovery were to be resolved by the arbitrator, who was required to ensure all parties received a fair opportunity to present relevant evidence.
The standard established in Armendariz requires that all arbitration agreements involving statutory rights meet specific requirements, including adequate discovery. While parties may agree to less discovery than court procedures allow, it must be sufficient to vindicate statutory claims. This principle underpins the analysis of whether a discovery provision is substantively unconscionable.
Ramirez argued the limits were inadequate for her FEHA claims, as she needed at least seven depositions. The appellate court found the deposition limit inadequate because it restricted her ability to pursue claims and did not allow the arbitrator to expand discovery. This analysis relied on post-contract formation circumstances. The Supreme Court disapproved of relying on post-contract considerations, emphasizing that such evaluations should focus on general factors known at the time of contract formation. The court clarified that arbitrators have broad authority to resolve discovery disputes and to order additional discovery if necessary to ensure fair arbitration. This interpretation aligns with the Armendariz requirement for adequate discovery.
Therefore, the court found that, since the language of the Agreement broadly granted authority over discovery disputes, it could be read to permit the arbitrator to expand discovery as necessary to ensure compliance with statutory requirements. When contact terms are ambiguous, courts prefer interpretations that uphold validity and enforceability. Here, construing the provisions to allow additional discovery eliminated any concerns regarding unconscionability.
Attorney Fees
The attorney fee provision in the Agreement required the losing party in a dispute over arbitration enforcement to pay the prevailing party's attorney fees. However, the courts found this provision problematic under California law, particularly in the context of claims under FEHA.
The trial court described the provision as "unusual, lacking mutuality, and producing overly harsh results." The Court of Appeal agreed, holding the clause unenforceable because it contravened FEHA's asymmetric rule on attorney fees. This rule, codified in Government Code Section 12695(c)(6), allows attorney fee awards to a prevailing defendant only if the plaintiff's action was frivolous, unreasonable, or groundless.
The Court also applied the principles established in Armendariz, which prohibits arbitration agreements from imposing costs on employees that exceed those they would face in court. The provision here violated these principles by creating a scenario where employees could bear substantial attorney fees, even without a finding that their opposition to arbitration was frivolous, unreasonable, or groundless.
Although Charter urged the Court to interpret the provision in a manner consistent with FEHA, by implying the clause required a finding of frivolousness, etc. before awarding fees, the Court declined to accept that interpretation. It reasoned that doing so would require it to rewrite the agreement. Thus, this provision, too, supported a finding of substantive unconscionability.
Severance of Terms
Under Civil Code section 1670.5, courts have discretion to handle unconscionable provisions by either severing the offending clauses, limiting their impact, or refusing to enforce the contract in its entirety. However, severance is not appropriate if the contract is "permeated by unconscionability." The primary question is whether the central purpose of the contract is “tainted with illegality”; if so, the contract cannot be cured, and the court should refuse to enforce it. If that is not the case, the court should evaluate whether the contract’s unconscionability can be cured purely through severance, or whether reformation by augmentation is necessary. If no reformation is required, then severance or restriction is the preferred course for provisions that are collateral to the agreement’s main purpose. However, if the unconscionability cannot be cured by limiting the offending provisions, but instead requires augmentation to cure the unconscionability, then the court should refuse to enforce the contract.
Here, the Supreme Court agreed with the lower courts that salvaging the Agreement would require the courts to “rewrite” it, which they cannot do. Given the number of offending terms, and the fact simply removing them would not suffice, the Court found that severance was not appropriate.
Conclusion
This case emphasized how California courts closely scrutinize arbitration agreements, especially those found in employment contracts. This decision highlights the need to ensure that the practical considerations apparent at the time of contract formation are likely to support enforcement of the agreement, consistent with applicable statutory rights, and that arbitration agreements are crafted to be as mutual and fair as possible.