In a recent case before the First District Court of Appeal, Allan Villanueva briefed and argued the issue of whether a “Mutual Agreement to Arbitrate Claims” was unconscionable and therefore unenforceable.

On May 15, 2014, the Court held in Tiri v. Lucky Chances, Inc. “the trial court lacked the authority to rule on the enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law.”  Although the agreement and hence the delegation clause was procedurally unconscionable, the clause was not substantively unconscionable.

The delegation clause stated, “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”

The Court found the agreement procedurally unconscionable based on the agreement’s adhesive nature, the arcane nature of the clause, employee’s lack of sophistication, and the failure of employer to provide adequate time to review the agreement.

The Court did not find substantive unconscionability, however, because the delegation clause did not lack mutuality.  Tiri argued, as did the employees in Murphy and Ontiveros, that the delegation clause was one-sided because the employer that prepared the agreement would not bring a claim that the delegation clause it prepared was unenforceable, void or voidable.

Though mindful of the holdings in Murphy and Ontiveros, the Court ruled that those cases were undermined by US Supreme Court authority in Rent-A-Center v. Jackson and AT&T Mobility LLC v. Concepcion, both of which the Court held applied to state court cases.  This, even when it held that application of FAA to the case was immaterial.

The Court’s justification for holding that Rent-A-Center, and hence also Concepcion, applied to the case was that Rent-A-Center was decided under Section 2 of FAA, and language in California’s counterpart, CCP §1281, is identical. Actually, Tiri argued the language was not similar in that 9 USC §2 states, “written provision” whereas 1281 states, “written agreement.”  The Supreme Court in Rent-A-Center held the “written provision” language is dispositive.  Tiri argued whether California would interpret “written agreement” the same way is questionable in light of similar arguments in Murphy and the dissent’s observation in Rent-A-Center (5-4 decision after all), that the majority added “a new layer of severability—something akin to Russian nesting dolls—into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator.”

The Court concluded, “Having determined that the delegation clause was valid, we conclude that the trial court’s denial of Lucky Chances’s petition to compel arbitration was improper. Thus, it will be for the arbitrator to consider the conscionability of the agreement as a whole and its other severable provisions.”

In other words, if the arbitrator finds the agreement as a whole and its other severable parts were unconscionable, then the case would return to the courts for disposition.

Looks like the issues in this decision fall squarely among those being reviewed and decided by the California Supreme Court.  Send me a message if you have any thoughts or comments.

The Court of Appeal decision in Tiri v. Lucky Chances, Inc. can be found here.

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