Employment arbitration agreements that require an employee to pay a filing fee directly to the employer to initiate arbitration of his or her disputes are substantively unconscionable, according to a federal district court in California.

In Abrahim v. ESIS, Inc., No. C-07-04014 JCS, 2008 WL 220104 (N.D. Cal. Jan. 25, 2008), employee Abrahim filed an employment discrimination action against employer ESIS. ESIS sought to compel arbitration of the dispute under an arbitration agreement within an employment contract. Abrahim opposed the motion, claiming, in part, that the agreement was unconscionable.

The Court determined that the arbitration agreement was procedurally unconscionable, as it was imposed on Abrahim as a condition of employment once she began working for ESIS.

As to substantive unconscionability, the Court was not convinced that either the employer's unilateral right to modify the agreement or the agreement's class action waiver was substantively unconscionable. Under California law, an employer's retained right to unilaterally modify the arbitration agreement implies a duty to modify in good faith, and Abrahim's failure to show bad faith combined with ESIS's policy to not change the agreement for pending arbitrations precluded a finding of unconscionability. Furthermore, the class action waiver was not unconscionable in this particular instance, because Abrahim had not asserted a class action claim.

However, the Court did single out the agreement's requirement that employees submit a $100 fee to ESIS to initiate arbitration as the agreement's sole substantively unconscionable provision. Like the fee provision stuck down in Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003), the Court found that requiring payment to the employer for the initiation of arbitration instead of to the arbitration administrator "was not a true filing fee." The Court was also troubled that such a payment arrangement "may very well deter employees from initiating complaints."

The Court's holding suggests that, under California law, an arbitration agreement should only require an employee to pay a fee to initiate arbitration if that fee is paid to the administrator, and only if that fee is the type of expense the employee would be required to bear if he or she were free to bring his or her action in court. See Armendariz v. Found. Health Psychare Servs., Inc., 6 P.3d 669 (Cal. 2000).

Nevertheless, the Court did not find that the fee provision tainted "the central purpose of the contract," and therefore severed the unconscionable fee provision and allowed the rest of the arbitration agreement to stand.