A federal court in California held that the Armendariz cost-allocation requirements do not apply where the arbitration agreement is not a mandatory condition of employment.

In Swarbrick v. Umpqua Bank, No. 2:08-cv-00532-MCE-DAD, 2008 WL 3166016 (E.D. Cal. Aug. 5, 2008), Stephen Swarbrick, Cesar Lopez and Elizabeth Festejo (collectively, Employees) were employees of Western Sierra bank who negotiated employment contracts that included arbitration agreements. Shortly after Western Sierra merged with Umpqua, Lopez requested arbitration regarding a dispute over compensation.

He withdrew his claim when he was notified that Umpqua was not required to pay all of the arbitration fees under American Arbitration Association (AAA) rules, because the employee arbitration agreement had been individually negotiated rather than negotiated through a group. The Employees then filed suit against Umpqua, alleging unpaid compensation.

In the court proceeding, the parties did not dispute that a valid arbitration agreement existed. Rather, the Employees argued that the agreement was unconscionable despite being negotiated by the Employees because the AAA rules were not provided at the time the contract was signed and because Umpqua was not required to pay all of the fees of arbitration.

While noting that a contract of adhesion is not required to prove procedural unconscionability, the Court ultimately rejected the Employees' unconscionability challenge.

The Court first rejected application of the Fitz case on which the Employees relied to argue that the arbitration agreement was unconscionable because the AAA rules were not provided at the time the contract was signed. See Fitz v. NCR Corporation, 13 Cal. Rptr. 3d 88 (2004). The AAA rules were not provided. However, they were incorporated by reference, and more importantly, the terms of the arbitration agreement did not conflict with the rules as they did in Fitz. Moreover, the incorporated AAA rules were not substantively harsh.

Further, the Employees could not rely on Armendariz for their argument that the agreement was unconscionable. See Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669 (2000). Aremdnariz did not apply in this case because (1) the arbitration agreement was not a mandatory condition of employment and (2) the Employees were not attempting to "vindicate unwaivable statutory or nonstatutory rights." Rather, the Employees voluntarily agreed to arbitrate with knowledge of what the agreement entailed, and they were given the opportunity to negotiate or reject the arbitration agreement.

Since the Employees failed to prove the arbitration agreement was unconscionable, the Court granted Umpqua's motion to compel arbitration.