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The California Court of Appeal affirmed a lower court ruling that an employee's arbitration agreement was unconscionable under California law. The Court based its unconscionability determination partly on a provision giving the arbitrator exclusive authority to decide the enforceability of the arbitration agreement.
In Ontiveros v. DHL Express (USA), Inc., 79 Cal. Rptr. 3d 471 (Cal. Ct. App. 2008), Ontiveros sued DHL, her former employer, for sexual harassment and discrimination. In response, DHL moved to compel arbitration pursuant to an arbitration agreement that Ontiveros signed when she was hired. The trial court denied the motion on the ground that the arbitration agreement was unconscionable and therefore unenforceable.
On appeal, DHL argued that the lower court erred in deciding the unconscionability matter because the arbitration agreement expressly provided that the arbitrator would have "exclusive authority to resolve any dispute relating to the . . . enforceability" of the arbitration agreement.
The Court determined that the provision delegating enforceability questions to the arbitrator was unenforceable based on Murphy v. Check'n Go of California, Inc., 67 Cal. Rptr. 3rd 120 (Cal. Ct. App. 2007). Moreover, the Court found that this provision of the agreement was actually a source of unconscionability that weighed against the enforceability of the overall arbitration agreement. The Court reached this finding based partly on the theory that self-interest would motivate the arbitrator to find in favor of the enforceability of the arbitration agreement.
Since the provision delegating enforceability questions to the arbitrator was unenforceable, the lower court had authority to resolve an unconscionability challenge directed at the arbitration agreement. The Court thus turned to the issue of whether the arbitration agreement was unconscionable under California law.
According to the Court, the arbitration agreement was procedurally unconscionable because it was a condition of employment. The Court found that the arbitration agreement was substantively unconscionable based on three provisions. The provision delegating enforceability questions to the arbitrator was one of the three provisions.
The other two provisions raised unconscionability concerns in light of the requirements set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669 (Cal. 2000). First, the arbitration agreement violated the Armendariz requirements because the cost allocation provision would require Ontiveros to pay half the fees up to a certain amount, thus requiring her to pay fees unique to arbitration.
Second, the arbitration agreement violated the Armendariz requirement of adequate discovery because even though the alleged harassment occurred over several years at two job sites, the arbitration agreement limited Ontiveros to only one deposition – though additional discovery would be permitted upon a showing of "substantial need."
Lastly, the Court rejected DHL's argument that the lower court should have severed the offending provisions instead of refusing to enforce the arbitration agreement. Accordingly, the Court affirmed the order denying DHL's motion to compel arbitration.
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