Clean-Up in Aisle 9: Ninth Circuit Finds Ralphs Grocery Company's Arbitration Policy Unconscionable Under State Law Not Preempted by the Federal Arbitration Act

As we have reported on several occasions, a string of United States Supreme Court cases over the past few years has strengthened the use and applicability of arbitration provisions in contracts. For example, in AT&T Mobility LLC v. Concepcion, the Supreme Court held that a rule making class waivers unconscionable was preempted by the Federal Arbitration Act (“FAA”), finding that contract defenses such as unconscionability that may generally be applied to all contracts, but in practice disproportionately impact arbitration agreements so as to stand as an obstacle to the FAA’s objectives. Earlier this year in American Express Corp. v. Italian Colors Restaurant, the Supreme Court upheld an arbitration policy with a class waiver provision against a claim that the expense of proving a statutory remedy outweighed the potential recovery, concluding that this did not eliminate the right of a party to pursue the remedy.

While these decisions support the enforceability of arbitration policies and put teeth into the FAA’s reach, they left open the possibility that, under certain circumstances, a state law contract defense may be applicable to prevent the use of an arbitration policy. On October 28, 2013, the Ninth Circuit held that the arbitration policy of a large grocery chain presented an example of such circumstances. The Ninth Circuit found that the employer’s arbitration policy was procedurally unconscionable under California law because it bound employees upon the submission of their employment applications without an opportunity to negotiate terms or affirmatively agree to its terms, factors further enhanced by the fact that a copy of the policy was not provided to the plaintiff until three weeks later. The Ninth Circuit also found that the arbitration policy was substantively unconscionable under California law because the arbitrator selection provision would, in practice, always result in one of the employer’s proposed arbitrators being selected and because the policy required the arbitrator’s fees being apportioned equally between the employer and the employee at the outset of the proceedings regardless of a claim’s merits.

Dovetailing with these rulings, the Court also found that the FAA did not preempt the application of California’s unconscionability law. It distinguished the problematic provisions of the arbitration policy from the class waiver provision approved by the Supreme Court in the American Express Corp. case. The Ninth Circuit also observed state that Concepcion case does not immunize all arbitration agreements from invalidation no matter how unconscionable they may be so long as they “invoke the shield of arbitration.” The Ninth Circuit concluded that by invalidating the terms of the employer’s arbitration policy, California’s unconscionability law does not disfavor arbitration, but rather provides that the arbitration process must be fair, reflecting a generally applicable policy against abuses of bargaining power.   The Ninth Circuit’s recent decision continues to highlight that there are pros and cons in consideration arbitration agreements and that adoption of such agreements must be considered and done carefully. We continue to suggest that if you are considering use of arbitration policies in employment agreements, or your organization already has one, that it would be prudent to have counsel knowledgeable about these issues either participate in the possible adoption process or review your agreements against the continually developing legal backdrop for such agreements.