Unconscionability is a legal doctrine that renders contracts unenforceable due to unfairness or oppression to a weaker party. It encompasses both procedural and substantive elements, with procedural unconscionability relating to the formation of the contract and substantive unconscionability relating to the fairness of the actual terms of the agreement.
In the context of arbitration agreements, unconscionability is crucial for validity and enforceability. The case of Hasty v. American Automobile Assn. of Northern Cal., Nev. & Utah (2024) is an example of how unconscionability can invalidate an employer's arbitration agreement.
In this case, employee Hasty sued her employer, the American Automobile Association of Northern California, Nevada, and Utah (Association), for discrimination, harassment, and retaliation. The Association sought arbitration, but Hasty opposed, citing unconscionability.
Hasty argued that the agreement was not mentioned during her interview or acceptance of the job offer. The trial court, expressing concerns about the agreement's presentation on an iPhone as well as its one-sided terms, found procedural and substantive unconscionability, invalidating the entire arbitration agreement. The Association appealed.
Upon review, the Court of Appeal emphasized the need for both procedural and substantive unconscionability for invalidation of an agreement.
Procedurally, the Court found the Association's agreement to be an unconscionable contract of adhesion, given its take-it-or-leave-it nature. The Court emphasized the Association's superior bargaining power over Hasty, which was evident in the agreement's font size, density, and overall presentation.
Substantively, the Court found that the Association's agreement was lacking in mutuality. Specifically, the agreement required arbitration for the weaker party, Hasty, but exempted the stronger party, the Association. The Court also found that the confidentiality clause was overly broad, limiting informal discovery. Additionally, the waiver of remedies from governmental agencies was found to be one-sided, especially in labor violation cases. Finally, the agreement's stipulation that claims must be brought solely on an individual basis, excluding PAGA or class actions, was criticized for curtailing Hasty's rights and being one-sided in its approach.
Faced with the option of severing or invalidating the agreement in its entirety, the Court refused to sever, deeming the Association's agreement "permeated with unconscionability," rendering it unenforceable.
For California employers, drafting conscionable arbitration agreements involves prioritizing transparency, clarity, and early disclosure procedurally. Substantively, employers must ensure mutuality, avoid one-sided terms, and define fair clauses. We highly encourage employers to seek legal review for compliance with all California employment laws when drafting arbitration agreements because, as Hasty demonstrates, failure to do so can be costly.