ARE ARBITRATION AGREEMENTS THAT ARE ILLEGIBLE UNCONSCIONABLE? IT DEPENDS
The California Supreme Court recently decided upon the following issue at hand:
To establish that a contract is unenforceable because it is unconscionable, the party opposing enforcement must show unfairness both in the procedure by which the contract was formed and the substance of its terms. Here, we consider how to account for illegibility in this analysis.
In the high court’s recent ruling in Fuentes v. Empire Nissan, Inc., it provided instructions for lower courts to use to evaluate enforceability when confronted with difficult-to-read contracts. Let’s take a look at the case and then conclude with a general framework that employers might use as a guide when crafting arbitration agreements.
Facts of the case in brief:
When applying to work at Empire Nissan, Evangelina Fuentes signed an “Applicant Statement and Agreement” with a mandatory arbitration provision. The contract was printed with tiny font, blurry, broken up and virtually unreadable. Its arbitration provision was a lengthy, densely printed paragraph consisting of complex sentences filled with legal jargon and statutory references. The trial court described the document as “visually impenetrable” to the point that it “challenge[s] the limits of legibility.” Fuentes had only five minutes to review this and other documents in the application packet with no opportunity to ask questions. When Fuentes had been working for Empire Nissan for about two and a half years, she went on medical leave for cancer treatment. A year later, Fuentes requested a brief extension of her leave before returning to work. The dealership then terminated her employment.
Procedural history:
· Trial court: Fuentes filed a complaint in court claiming wrongful discharge and related claims. Empire Nissan responded with a motion to compel arbitration, which Fuentes opposed. She argued, first, that Empire Nissan had not proved that there was a valid agreement to arbitrate because enforcing the agreement would be contrary to public policy due to the agreement’s illegibility and the fact that Empire Nissan gave her so little time to review it. Second, Fuentes argued that even if there was a valid arbitration agreement, it was unenforceable because it was unconscionable. The trial court denied Empire Nissan’s motion, concluding that the arbitration agreement was unconscionable; it did not reach Fuentes’s argument that Empire Nissan had not proved that the arbitration agreement was valid. The court found that the agreement’s text was barely legible, it was difficult to understand, and Empire Nissan had not provided Fuentes a meaningful opportunity to review it or negotiate its terms. Based on these findings, the court ruled that Fuentes had established “a very high degree of procedural unconscionability.” The court also ruled that Fuentes had established “a low to moderate degree of substantive unconscionability.”
· Appeal: Empire Nissan appealed and the Court of Appeal reversed in a divided opinion. The majority concluded that arguments about illegibility go exclusively to procedural unconscionability — not to substantive unconscionability, as the trial court had concluded. In reaching this holding, the court criticized and declined to follow Davis v. TWC Dealer Group, Inc. (2019), which held that a similarly formatted arbitration agreement was substantively unconscionable. Relying on the principle that “federal and California law strongly favor arbitration,” the majority interpreted the confidentiality agreements as requiring arbitration of claims brought under them. The court found there was no substantive unconscionability and did not address procedural unconscionability.
Analysis:
· Unconscionability
A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. Unconscionability has both procedural and substantive elements. The procedural element concerns the circumstances of contract negotiation and formation, particularly oppression or surprise due to unequal bargaining power. The substantive element concerns the fairness of an agreement’s actual terms, i.e., whether those terms are overly harsh or one-sided. Both procedural and substantive elements must be present to conclude a term is unconscionable, but need not be present to the same degree. Courts apply a sliding scale analysis so that the more substantively oppressive a term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa.
o The Supreme Court found that Empire Nissan’s arbitration agreement was imposed with a high degree of procedural unconscionability
§ There was significant oppression: (1) Empire Nissan did not provide Fuentes a meaningful opportunity to review the agreement or ask questions about it, much less to negotiate its terms; (2) when presented with the application packet, Fuentes was told she should hurry because the drug testing facility was about to close; (3) The company gave her only five minutes to complete the packet. (4) It did not verbally inform her that the packet included an arbitration agreement or provide her a copy of the form after she signed it.
§ There was an unusually high degree of surprise: (1) The agreement was printed in a tiny, blurry font, making it very difficult to read; (2) the agreement’s language presented a further barrier to understanding where the reader was confronted with a collection of complex sentences full of legal jargon and statutory references.
o The Supreme Court also found that the Court of Appeal erred in its evaluation of substantive unconscionability
§ “Fine-print Terms”: the Court agreed with Empire Nissan that its tiny print and almost illegible format did not indicate substantive unconscionability.
§ Mutuality of Arbitration Mandate: The Court of Appeal erred in applying a presumption in favor of arbitration to conclude that the confidentiality agreements did not create a one-sided carveout for claims only Empire Nissan would bring.
· Validity of Arbitration Agreement: The Supreme Court declined to express a view on this subject.
Employer takeaways:
· It is encouraging to know that the California Supreme Court persists in viewing arbitration agreements arising from employment relationships as enforceable contracts.
· Employers should ensure the clear readability of their arbitration agreements and avoid placing themselves in a predicament that is so avoidable. Why increase the chances of an unconscionability argument when contracts can be printed legibly?
· Also minimizing legalese and run on paragraphs and sentences can go a long way to ensure that your employees know and understand what they are signing.
· Finally, confirm that no other outstanding employment agreements are inconsistent with the arbitration agreement itself.
Questions regarding arbitration agreements? Rosasco Law Group APC can help.
