The Ninth Circuit Court of Appeals has refused to enforce an arbitration agreement because of "onerous" substantive unconscionability in a cost-sharing provision. The Court declined to address the severability of the offending provision because the district court did not consider the severance issue in its order compelling arbitration.

In Gray v. Rent-A-Center W., Inc., No. 07-35185, 2008 WL 3890501 (9th Cir. Aug. 21, 2008), Gray sued his former employer, Rent-A-Center, alleging violations of the injured worker discrimination law, Or. Rev. Stat. § 659A.040, and Oregon’s Family Leave Act. Or. Rev. Stat. § 659A.150. Rent-A-Center maintained that the parties had entered into an arbitration agreement when Gray began employment, and moved to compel arbitration of Gray’s claims. The trial court granted the motion.

On appeal, Gray argued that the arbitration agreement was unconscionable and therefore unenforceable. Stating that "[d]isparity in bargaining power is endemic in contracts between employees and employers," the Court found that Gray had "virtually no bargaining power when he signed [Rent-A-Center’s] standard form arbitration agreement." The Court also found that the agreement’s cost-sharing term, which required arbitration costs to be shared equally, would likely "discourage most workers from seeking redress from an employer in the arbitral forum," and be "sufficiently onerous to deter Gray from vindicating his claim."

Accordingly, the Court held that the combination of unequal bargaining power and equal cost sharing rendered the agreement unconscionable and thus unenforceable.

Rent-A-Center argued that the cost-sharing provision could be severed from the agreement, but the Court refused to consider that issue because the lower court did not address severability in its order compelling arbitration. However, the lower court would have no reason to address the severability upon granting a motion to compel.