The First Circuit Court of Appeals, applying Massachusetts law, held that a class waiver in an employee's arbitration agreement was unconscionable and thus unenforceable. In explaining its holding, which was apparently based solely on procedural unconscionability, the Court took care to limit its decision to the unique circumstances of the case.

In Skirchak v. Dynamics Research Corp., No. 06-2136, 2007 WL 4098823 (1st Cir. Nov. 19, 2007), Skirchak and Aldrich brought a class action lawsuit against Dynamics Research Corp. (DRC), their former employer, alleging that DRC violated the Fair Labor Standards Act by withholding overtime pay from eligible employees.

DRC moved to compel arbitration pursuant to a Dispute Resolution Program (DRP) that required arbitration on an individual basis and thus precluded class-wide arbitration. In opposing the motion, the former DRC employees argued that the class waiver was unconscionable and therefore unenforceable under Massachusetts law. The district court agreed, and severed the class waiver but still ordered the parties to arbitrate.

On appeal, the former employees argued that there was no appellate jurisdiction because there is no interlocutory appeal from an order compelling arbitration. In rejecting this argument, the Court found that the order compelling arbitration was a "final decision with respect to arbitration" because it dismissed all claims. See 9 U.S.C.A. § 16(a)(3).

The Court proceeded with an unconscionability analysis, but did so outside of the usual framework in which substantive and procedural unconscionability are separately considered. Instead, the Court relied on Miller v. Cotter, 863 N.E.2d 537 (Mass. 2007) for the proposition that Massachusetts law calls only for a case-by-case inquiry into the "setting, purpose, and effect" of the agreement.

However, in conducting that inquiry, the Court effectively limited its analysis to the question of procedural unconscionability and concluded that the class waiver was unenforceable solely by virtue of the circumstances surrounding the formation of the arbitration agreement.

The Court was troubled by several circumstances surrounding formation. First, the Court questioned the timing of events because DRC announced the DRP in an email sent to employees on the Tuesday preceding Thanksgiving even though the DRP took effect on the following Monday.

Second, the Court questioned the format of the presentation. Specifically, the email announcement was accompanied by three attachments discussing and detailing the DRP, and the class waiver was only mentioned several pages deep in an appendix to one of the attachments.

Third, the Court found that the method of acceptance (namely, continued employment) compounded the notice deficiencies insofar as DRC "did not require any sort of affirmative response or acknowledgment by the employee."

Lastly, the Court pointed out that DRC handled the announcement and explanation of the DRP differently from other personnel issues. Specifically, as the Court noted, DRC made a greater effort to communicate with employees in advance of the implementation of a new compensation plan.

This case is unique because the Court relied exclusively on the circumstances surrounding formation (i.e., procedural unconscionability) in finding the class waiver unconscionable. Under the law of most states, an unconscionability determination requires some modicum of both procedural and substantive unconscionability, but in this case, the Court openly sidestepped any analysis of the substantive terms or their effect.

This mode of analysis is arguably consistent with Massachusetts law because there is no definitive pronouncement on whether Massachusetts law requires both procedural and substantive unconscionability. Nevertheless, Miller implies that at least some degree of substantive unconscionability is required by directing courts to examine the "purpose" and "effect" of the agreement. See also Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370, 1377 n.13 (Mass. 1980) (referring to "a two-part test for unconscionability"). In this case, the Court examined only the "setting" of the agreement.