A federal court in California held that an arbitration agreement that places a limitation on the possible remedies available to an employee, and also requires the employee to pay half of the fees and expenses of the arbitrator, is unconscionable and thus unenforceable.

In Gelow v. Central Pacific Mortgage Corp., No. CIV. S-07-1988 LKK/KJM, 2008 WL 2357024 (E.D. Cal. June 3, 2008), Gelow and ten other former employees sued Central Pacific Mortgage Corporation (CPM). CPM moved to compel arbitration based on arbitration agreements in the employment contracts.

The Court denied CPM's motion to compel. First, two former employees argued that they never signed employment contracts that contained arbitration agreements. CPM could not produce contracts for those two individuals, but argued that it was standard business practice for all employees to sign employment contracts containing arbitration agreements. The Court rejected CPM's argument and held that it did not meet its burden to show that arbitration agreements were made with those two employees.

Furthermore, the Court held that all of the arbitration agreements were unconscionable and thus unenforceable. First, the Court held that they were procedurally unconscionable because they were non-negotiable in their terms and were required for continued employment. Also, they were virtually identical form contracts, and the employees had no meaningful opportunity to alter or reject the terms of the contract.

Moreover, the Court held that the agreements were substantively unconscionable. First, the agreement stated that the arbitrator could not "require Employer to adopt new Company policies or procedures," which was a form of injunctive relief that a court could order. Thus, since the agreement limited the possible remedies available to an employee, it was substantively unconscionable.

In addition, the agreement required that the employee pay half of the fees and expenses of the arbitrator if the employee brought a claim against the employer. The Court also found this provision substantively unconscionable. Citing precedent, the Court held that such provisions plainly favor the employer and discourage the employee from bringing claims.

CPM argued that the Court should sever the unconscionable provision(s) of the contract and compel arbitration, but the Court held that severance was not proper because there was more than one unlawful provision in the contract.

Because the arbitration agreements were both procedurally and substantively unconscionable, "and both to a significant degree," the Court held that they were unenforceable and thus denied the motion to compel arbitration.