California Mediation and Arbitration

Discovery: Sixth District Holds Arbitration Agreement Is Enforceable Where Discovery Rules Are Lenient Enough

The Court Of Appeal Distinguished Between The More Lenient Discovery Provisions In Vo And The Tougher Discovery Restrictions In Aixtron.

        In Vo v. Technology Credit Union, H051619 (6th Dist.  2/4/25) (Greenwood, Grover, Danner), the California Court of Appeal reviewed an arbitration agreement signed by Thomas Vo, an employee of Technology Credit Union (TCU). After Vo was terminated, he filed a lawsuit against TCU, alleging various violations under the Fair Employment and Housing Act. TCU moved to compel arbitration based on the arbitration agreement, but the trial court found the agreement to be unconscionable, particularly due to its lack of provisions for third-party discovery, relying on Aixtron to justify the decision.

        The Court of Appeal reversed the trial court's order, determining that the arbitration agreement was not unconscionable. The court held that the agreement provided adequate discovery, including the authority for the arbitrator to allow additional discovery if necessary. Despite concerns about third-party discovery, the court clarified that the arbitration agreement's incorporation of the JAMS Rules permitted the arbitrator to make decisions regarding the scope of discovery, thus ensuring Vo had sufficient access to necessary information for his claims.

        COMMENT. Aixtron and Vo both addressed the availability of third-party discovery in arbitration. In Aixtron, the court emphasized that the arbitration agreement failed to incorporate California Arbitration Act provisions or any rules that would grant the arbitrator authority to compel discovery from nonparties. Specifically, the court found that the arbitrator did not have the power to issue subpoenas to third parties for prehearing discovery, and thus, the agreement could not support such a discovery request.

Unconscionability: Fourth District Div. 3 Finds Arbitration Provision Presented In English To Spanish Speaking Legal Client Was Not Enforceable

Presenting An English Contract To A Spanish Speaking Legal Client Illiterate In English Was Problematic

        Justo Malo Sanchez filed a legal malpractice lawsuit against Consumer Defense Legal Group and its representatives, alleging issues with the firm's handling of his case. The retainer agreement he signed contained an arbitration clause, but Sanchez argued that the agreement was unconscionable. He contended it was procedurally unconscionable because he was illiterate in English, had a limited education, and was presented with the contract in a "take it or leave it" manner without translation or explanation. It was also substantively unconscionable due to high arbitration fees, which Sanchez could not afford.

        The trial court initially denied the motion to compel arbitration, citing concerns about the lack of proof of a valid agreement and the significant procedural unconscionability. After reconsideration, the court reversed its decision, granting the motion, convinced by defense arguments that Sanchez was not truly indigent and could afford arbitration fees. Sanchez then sought writ relief from the Court of Appeal, which granted the petition, ruling that the arbitration clause was both procedurally and substantively unconscionable. 

        The Court of Appeal agreed the contract was a standard, adhesive one and the arbitration provision was hidden, written only in English, and not adequately explained. Furthermore, the arbitration costs were prohibitively high, effectively denying Sanchez access to a forum to litigate his claims, rendering the arbitration clause unenforceable​. Sanchez v. Superior Court of Orange County, G064490 (4/3   2/3/25) (Delaney, Sanchez, Motoike).

        COMMENT: In the past, we have blogged about many cases in which a contract written in English presented some degree of unconscionability for a person who did not speak English. Here, the contract at issue was an attorney-client agreement, and a California statutory provision applies. California Civil Code section 1632(b)(6) requires a person in a trade or business who negotiates a contract in Spanish (and other specified languages) to provide a translation in Spanish of the contract. And this applies to: "A contract or agreement, containing a statement of fees or charges, entered into for the purpose of obtaining legal services, when the person who is engaged in business is currently licensed to practice law pursuant to Chapter 4 (commencing with Section 6000) of Division 3 of the Business and Professions Code."

Mass Arbitration: 9th Circuit Holds Mass Arbitration Approach Employed By Ticketmaster Is Unconscionable

Mass Arbitration Model For Batching Together Claims With Common Legal Or Factual Issues Held To Be Unconscionable.

        The Ninth Circuit affirmed the district court's denial of Live Nation and Ticketmaster’s motion to compel arbitration in a Sherman Act antitrust class action. Skot Heckman et al. v. Live Nation Entertainment, Inc.; Ticketmaster, LLC, No. 23-55770 (9th Cir. 10/28/24) (Fletcher, Christen; dissenting, VanDyke). Plaintiffs alleged anticompetitive practices in online ticket sales. The arbitration agreement, involving mass arbitration through a novel entity (New Era ADR), was deemed unconscionable under California law and unenforceable. The court also ruled that the Federal Arbitration Act (FAA) does not preempt California's unconscionability principles or its Discover Bank rule prohibiting class action waivers in consumer adhesion contracts.

        Judge VanDyke concurred in the judgment, arguing the FAA does not apply to New Era’s mass arbitration model because it fundamentally deviates from the bilateral arbitration Congress envisioned when enacting the FAA in 1925. Consequently, California’s Discover Bank rule applies, rendering the class action waiver in the agreement unconscionable and unenforceable.

        COMMENT: The ruling underscores the difficulty devising fair mass arbitration models. And the concurrence points to the incompatibility of bilateral arbitration with multiparty mass or class arbitration.

Unconscionability, Severance: 9th Maj. Says Arb Agreement Is Unconscionable; Dissent Favors Severance

To Sever Unconscionable Provisions Or Not To Sever . . . That Is The Question.

        The Ninth Circuit affirmed the district court’s decision denying USF Reddaway, Inc.’s motion to compel arbitration, finding the agreement procedurally and substantively unconscionable under California law. The court held the arbitration agreement was moderately procedurally unconscionable due to its adhesive nature and oppressive conditions under which it was signed. It also found substantive unconscionability in a one-sided preliminary injunction carve-out and a filing provision imposing notice requirements and a shortened statute of limitations exclusively on the plaintiff. The court determined the multiple unconscionable provisions rendered the agreement permeated with illegality, justifying the refusal to sever them. Jose Emilio Ronderos v. USF Reddaway Inc., No. 21-55685 (9th Cir. Sung, Foote; dissenting, Bennett).

        Judge Mark J. Bennett, dissenting, argued the district court erred in declining to sever the agreement’s unconscionable provisions, asserting the agreement was minimally procedurally unconscionable and that the one-sided filing and injunction carve-out provisions were collateral to the agreement’s purpose. Judge Bennett contended these terms could be easily severed without reforming the agreement, preserving its core intent to arbitrate disputes. He emphasized California law’s strong preference for severance and the existence of a severability clause. Bennett criticized the majority’s decision as inconsistent with the FAA’s policy favoring arbitration and accused the court of improperly disfavoring arbitration agreements.

Severability: Cal Supreme Court Explains There Is No Bright Line For Severing Unconscionable Provisions

Multiple Unconscionable Provisions Does Not Necessarily Make An Arbitration Agreement Unenforceable.

        In Ramirez v. Charter Communications, Inc., No. S273802 (S.Ct. 7/15/24) (Corrigan, J.), Angelica Ramirez, a former employee of Charter Communications, sued the company for employment discrimination, harassment, and retaliation. Charter sought to compel arbitration based on an agreement Ramirez signed during her onboarding. Ramirez challenged the arbitration agreement, arguing it was procedurally and substantively unconscionable.

        The trial court found the agreement unconscionable and denied Charter's motion to compel arbitration. The Court of Appeal affirmed, identifying several problematic provisions, including: a lack of mutuality in the claims subject to arbitration, a shortened statute of limitations for filing claims, and restricted discovery rights that could prevent a fair hearing. Additionally, the agreement included a fee-shifting provision that violated the Fair Employment and Housing Act (FEHA), which only allows fee awards to employers if an employee's claim is frivolous.

        The California Supreme Court agreed with the lower courts, holding that the arbitration agreement was unenforceable due to its unconscionable terms. The Court highlighted that the agreement unfairly disadvantaged Ramirez as an employee, lacked mutuality, and violated public policy concerning arbitration in employment disputes, particularly under FEHA.

        However, the Supreme Court held that the presence of multiple unconscionable provisions does not automatically make an agreement unenforceable. Instead, the court emphasized that courts should focus on whether the central purpose of the contract is tainted with illegality. If the illegal provisions are collateral to the main purpose, the court should try to sever them and enforce the remainder of the agreement. The Supreme Court concluded that the Court of Appeal had erred by not properly considering whether the unconscionable provisions could be severed and remanded the case for further consideration on this point​.

 

Arbitration, Unconscionability: 3rd District Agrees That American Automobile Association Arbitration Agreement Is Unconscionable

Court Affirms Order Denying Motion To Compel Arbitration.

        "On a sliding scale, the procedural and substantive unconscionability as to this arbitration agreement is high." Hasty v. American Automobile Assn. of Northern Cal., Nev. & Utah , C097674 (3rd Dist.  pub. 1/6/24) (Robie, Mauro, Krause). The order denying the AAA's  petition to compel arbitration is affirmed.

        COMMENT. Drafting an employee-employer arbitration agreement involves competing considerations. On the one hand, there is a natural desire on the part of employer's counsel to include provisions that advantage the client. On the other hand, there is the risk that the drafter will make the adhesion arbitration agreement too one-sided, and a court will find the arbitration agreement unconscionable.

Delegation: Ninth Circuit Concludes That Delegation Clause Is Enforceable, Regardless Of Whether Arbitration Clause Is Found To Be Enforceable

Nesting dolls (Matryoshka dolls). Wikipedia. Published under GNU Free Documentation License, Version 1.2, and any subsequent versions.

        We can analogize the next case to a nesting doll problem. The delegation clause in an arbitration agreement (Agreement) is a mini-agreement nested in the Agreement. The Agreement is nested in an employment contract, consumer contract, or some other contract. The different contracts can be analyzed separately, and their relationship to one another must be considered.

        Here, a district court judge found the nested delegation clause to clearly and unmistakably delegate arbitrability issues to the arbitrator. However, the judge also found the delegation clause to be substantively and procedurally unconscionable, and therefore unenforceable. This conclusion was based on the fact that the Agreement contained a pre-dispute jury trial waiver. The waiver, however, only kicked in if the Agreement was found to be unenforceable. Having determined that the delegation clause was unenforceable, the judge then concluded that the Agreement itself was unenforceable, based on the same pre-dispute jury waiver. The defendant employer, seeking to compel arbitration, appealed the adverse ruling. Kenneth Holley-Gallegly v. TA Operating, LLC, 22-55950 (9th Cir.  7/21/23) (Smith, Hamilton, Collins).

        The Court of Appeals reversed, directing the district court to order the arbitrator to decide the arbitrability issue. The reason? The pre-dispute waiver of a jury trial did not infect the nested delegation clause. The arbitrator could still decide the issue of arbitrability. If the arbitrator decided that the case was arbitrable, then the waiver of a jury trial became irrelevant, because the case would never be litigated in court, and there could not be a jury trial. Thus, the jury waiver could only possibly have effect if the arbitrator decided the Agreement was unenforceable -- i.e., reached the same conclusion as the district court judge. Under the delegation clause, the arbitrator might conclude that the Agreement was unenforceable or enforceable, and either way, the delegation clause could be operable.

Unconscionability: Second District, Div. 8 Holds That Illegible Contract Is Fair, And Therefore Not Unconscionable

Majority Of Panel Holds That Substantive Unconscionability Was Missing. Justice Stratton Dissents. 

        Writing for the majority, Justice John Shepard Wiley Jr. explains that the above contract is enforceable, requiring the plaintiff employee to arbitrate her dispute. Though the document is manifestly illegible, Justice Wiley concludes that the contract is fair. Therefore, there is no "substantive unconscionability." And as we know, California law requires both procedural and substantive unconscionability for a contract to be unenforceable on the basis of unconscionability. Fuentes v. Empire Nissan, Inc., B314490 (2/8   4/21/23) (Wiley, Harutunian; Stratton, dissenting). 

        Justice Maria E. Stratton dissents.  She writes, " '[W]atering down' unconscionability analysis is not what I have in mind. Acknowledging the obvious is my intention. Holding a signatory to an illegible contract that is also as prolix as this one strains the concepts of mutuality, fairness and common sense. If an employee literally cannot read the contract, how is that substantively fair?"

        COMMENT: Perhaps a simpler approach than "unconscionability," which requires satisfying two prongs, is a contract formation approach. Was there ever a meeting of the minds? Was there consent to the terms of the contract, when the contract was illegible and prolix? Justice Arthur Gilbert has written, "An arbitration clause in a contract is invalid because the clause is as inconspicuous as a frog in a thicket of water lilies." Domestic Linen Supply, Inc. v. L J T Flowers, Inc., 58 Cal.App.5th 180 (2020). Here, the job seeker wouldn't see the frog or the water lilies, just a typographic mess. Thus, in addition to the two-prong unconscionability analysis, arbitration clauses can also be analyzed under a contract formation analysis.

        Suppose the prospective employee had said she wanted to come back the next day when she could read what was actually written. And the employer had replied that if she wanted to go to work, she should sign. So she signed. Then the court could have said she signed because she wanted to start work. But since that was simply evidence of additional "procedural unconscionability," everything was copacetic. Or is it?

        This case stretches to the breaking point the legal fiction that agreements to arbitrate are always a matter of consent.

Same Outcome In A Tandem Case: Mohammad Basith v. Lithia Motors, Inc., B316098 (2/8  4/21/23) (Wiley, Harutunian; Stratton, dissenting).

        In Basith, a tandem case involving a contract substantially similar to the one in the Fuentes case, the Second District, Div. 8, reaches the same conclusion that the arbitration provision is valid and enforceable. It's another split decision, with Wiley and Harutunian in the majority, and Stratton again dissenting.

        Here, we get bit of policy to justify the outcome: "Our holding is that, unless we are to imperil the vast online world of take-it-or-leave-it contracts, substantive unconscionability must retain meaningful independent content. For that reason, the contracts here and in Fuentes are valid and enforceable, despite their procedural unconscionability."

        COMMENT: While it is true that the contracts are substantially the same, there is a factual difference between Basith and Fuentes. "We note at the outset that this case poses no issue of small or unreadable font. It is a striking coincidence that, not only do we encounter substantially similar form contracts in two simultaneous and otherwise unrelated cases, but also that font size should be a dominating issue in one case—Fuentes—and entirely absent as an issue in Basith’s case. The difference stems from the media: in Fuentes, the contract was printed only on paper, and was printed in a largely unreadable way, whereas Basith’s main contract was online."

        Nevertheless, Justice Wiley explains that a complaint about prolix legalese and a complaint about font size are just examples of procedural unconscionability, not substantive unconscionability. In short, the court majority does not recognize a situation in which the employer drafts a contract and thus knows its terms, and an employee is unable to read the illegible contract, as being one-sided and substantively unfair. This appears to be dictum in Basith, but it helps to further explain the majority's thinking in Fuentes, where font size and prolixity were issues, not to mention the poor condition of the tiny font.

 

 

Delegation, Unconscionability: First District Div. 2 Affirms Order Denying Petition To Compel Arbitration

On-Line Gaming Was The Context For The Case.

        The world of on-line gaming presents challenges to companies wishing to bind players to arbitration. As our next case illustrates, gamers are likely to be treated as unsophisticated consumers with unequal bargaining power. Pavel Gostev v. Skillz Platform, Inc., A164407 (1/2  2/28/23) (Miller, Stewart, Richman).

        Gostev, a gamer, alleged that Skillz Platform, Inc.'s game amounted to gambling and that it engaged in predator practices. By establishing an account, tapping next, and clicking on a hyperlink to Terms of Service, Gostev allegedly agreed that disputes would be delegated to an arbitrator to decide. Skillz moved to compel arbitration, and Gostev argued that the agreement failed to delegate decisions to an arbitrator by clear and unmistakeable evidence, and that the arbitration agreement was unconscionable. The trial court agreed with Gostev, and the Court of Appeal affirmed.

        The problem with the delegation argument was that language that delegated decisions concerning disputes about Terms, Services, and Product was not clear enough. It could mean that the threshold dispute was delegated to the arbitrator to decide, or it could mean that only substantive disputes about the Terms, Services, and Product were delegated. The agreement also referenced the rules of the AAA which have sometimes been applied successfully to make a delegation argument. But the Court of Appeal explained that here, where the consumer was likely to be in a position of unequal bargaining power and sophistication, it would not accept reference to AAA rules as good enough to establish effective delegation.

        The agreement was a take-it-or leave-it agreement, and hence, there was some degree of procedural unconscionability. Also the agreement was one-sided to substantively favor the company: plaintiff's monetary damages were limited to $50, arbitration was to be held in San Francisco, though the consumer was located in Washington, there was a one-year limitations period for bringing a claim, and a split of arbitration fees and costs limited consumer rights under the California Consumer Legal Remedies Act. Given the procedural and substantive unconscionability, the court agreed the arbitration agreement was unenforceable.

PAGA, Issue Preclusion: Arbitrator's Ruling In Favor Of Corporation Did Not Preclude Employees From Suing Manager For Wage And PAGA Claims

Trial Court's Denial Of Right To Amend Was Error.

        The Rocha brothers, Thomas and Jimmy, sued their former employer U-Haul Co. of California, and their manager Sandusky, alleging Sandusky had harassed them at work. The matter was arbitrated and the brothers lost their claim against U-Haul. However, before the matter went to arbitration, the trial judge denied the brothers' effort to amend their claims to add PAGA claims against U-Haul and to add wage and hour and PAGA claims against Sandusky. The brothers appealed confirmation of the arbitrator's award in favor of U-Haul, arguing that the arbitration agreement was unconscionable, and that they should have been allowed to amend their complaint. Thomas Rocha et al. v. U-Haul Co. of California, et al., B322599 (2/1  2/2/23) (Rothschild, Bendix, Benke) (partially published).

        After a discussion of unconscionability (unpublished), and concluding that the agreement was not unconscionable, the court moved on to the trial judge's refusal to allow amendment of the complaint. Split decision on appeal: the court's refusal to amend and add a PAGA claim against U-Haul was affirmed, because the arbitrator had found no labor violations by U-Haul, and that precluded a PAGA claim against the employer by virtue of issue preclusion.  But the Court of Appeal saw no reason to deny the brothers' request to add wage claims against Sandusky for work the brothers allegedly did for Sandusky personally outside their work for U-Haul, and thus no reason to deny the request to add a PAGA claim against Sandusky personally. So that part of the order denying the request to amend was reversed.