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In holding that an employer's arbitration agreement was unconscionable and therefore unenforceable, the Ninth Circuit Court of Appeals effectively ruled that procedural unconscionability will be presumed whenever a sophisticated employer requires prospective or current employees to sign an arbitration agreement. Since the Federal Arbitration Act does not permit laws that single out arbitration agreements for disfavored treatment, this presumption necessarily extends to all terms and conditions of employment.
In Davis v. O'Melveny & Myers, No. 04-56039, 2007 WL 1394530 (9th Cir. May 14, 2007), Davis, a paralegal, sued O'Melveny & Meyers (O'Melveny), her former employer, alleging discrimination and wrongful termination. O'Melveny filed a motion to compel arbitration pursuant to a dispute resolution program (DRP) that was implemented during O'Melveny's employment. The district court granted the motion.
On appeal, Davis argued that the DRP was unconscionable and therefore unenforceable. In addressing the unconscionability question, the Court followed California's "sliding scale" approach, whereby "the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa."
First addressing the procedural side of the scale, the Court concluded that the DRP was procedurally unconscionable simply because O'Melveny, a sizeable law firm, did not give Davis an opportunity to opt out of the DRP. In reaching this conclusion, the Court rejected O'Melveny's argument that advance notice of the DRP – specifically, three months notice – enabled Davis to make a meaningful choice.
Next turning to the substantive side of the scale, the Court concluded that the DRP was substantively unconscionable in light of four provisions: (1) a "Notice Provision" that, according to the Court, functioned as a one-year statute of limitations; (2) a "Confidentiality Provision" that the Court deemed overly broad; (3) an exemption from the DRP that permitted O'Melveny to seek injunctive relief for violations of the attorney-client privilege or the disclosure of other confidential information; and (4) a provision limiting administrative actions that, according to the Court, would have precluded Davis from filing FLSA complaints with the Department of Labor.
In conjunction with earlier Ninth Circuit cases, the Court's decision effectively creates, under California law, a presumption of procedural unconscionability whenever a sophisticated employer requires current or prospective employees to sign an arbitration agreement. The Court did not frame its approach as a presumption of procedural unconscionability, but the presumption is unmistakable when one considers that the mandatory nature of the arbitration agreement was the sole basis for the Court's finding of procedural unconscionability.
This de facto presumption does not place California among those jurisdictions that require no showing of procedural unconscionability. First and foremost, the presumption is confined to the employment context. Second, the presumption is overcome if the employee has an opportunity to "opt out" of the arbitration agreement.
Though confined to the employment context, the presumption of procedural unconscionability can not be confined to arbitration agreements because the Federal Arbitration Act does not permit state laws – whether a creature of the courts or the legislature – that single out arbitration agreements for disfavored treatment. Accordingly, the presumption extends to all terms and conditions of employment.
For example, if O'Melveny required Davis to sign a confidentiality agreement that prohibited her from disclosing client information to outside parties, the presumption of procedural unconscionability would attach to that agreement as well.
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