The California Supreme Court issued its opinion in Ramirez v. Charter Communications, affirming an arbitration agreement containing unconscionable provisions could be salvaged by severing the unconscionable provisions.
The Case
The plaintiff was hired by Charter Communications in July 2019 and signed an arbitration agreement as a condition of her employment. After her termination in May 2020, the plaintiff sued Charter Communications for discrimination, harassment, and retaliation under the Fair Employment and Housing Act (FEHA).
Both the trial court and the court of appeal found the arbitration agreement to be procedurally and substantively unconscionable and ruled that these unconscionable elements could not be severed from the agreement. With respect to substantive unconscionability, the lower courts identified four provisions that, in their view, were unconscionable:
- The lack of mutuality in the covered and excluded claims provisions.
- A shortened limitation period for filing claims.
- The limited number of depositions.
- The potential for the employer to recover attorney fees if it prevails on a motion to compel arbitration.
The California Supreme Court held that three of the four provisions identified by the lower courts gave rise to substantive unconscionability:
- Mutuality: The California Supreme Court agreed that the lack of mutuality in the covered and excluded claims gave rise to substantive unconscionability. The agreement excluded from its coverage claims most likely to be brought by the employer including claims related to intellectual property rights, noncompete agreements, theft, and disclosure of trade secrets. Meanwhile, the only excluded claims that an employee might bring were already not arbitrable as a matter of law, such as claims for workers’ compensation and unemployment insurance benefits.
- Shortened statute of limitations: The California Supreme Court also agreed that the effective shortening of the statute of limitations for filing FEHA claims from three years to one year gave rise to substantive unconscionability. The court reiterated that while arbitration agreements may shorten the statute of limitations for filing claims, such must be reasonable.
- Attorney fee shifting: The California Supreme Court also agreed that a provision allowing the employer to recover attorney fees for prevailing on a motion to compel arbitration gave rise to substantive unconscionability. The court reasoned that such a provision imposed a potential expense on the employee that the employee would not have otherwise faced since employers ordinarily cannot recover attorney fees in a FEHA action unless there is a finding that the action was frivolous, unreasonable, or groundless.
- Discovery limitations: The California Supreme Court disagreed, however, with the conclusion that the agreement’s limitation on depositions gave rise to substantive unconscionability. The court reiterated that arbitration agreements may include limitations on discovery so long as the employee is afforded discovery adequate to vindicate statutory rights. Rejecting the employee’s assertion that she would need at least seven depositions to prosecute her FEHA claims yet the agreement only afforded her four, the court stressed that unconscionability is determined at the time the agreement is entered, not in hindsight after claims are asserted. Moreover, four depositions were not unreasonable in light of the fact that the agreement could be construed as allowing the arbitrator to grant additional depositions if needed.
Red Flag Tips
- An arbitration agreement can be cured by severing or limiting a provision. It cannot be cured through reformation, augmentation, or a rewriting of the agreement.
- A court must consider whether severing the offending provisions and enforcing the balance of the agreement furthers the interests of justice.
California arbitration case law continues to evolve. Employers using arbitration agreements should have their agreements reviewed by their legal counsel to ensure enforceability.
