Compton v. Superior Court: California Court of Appeal Holds Arbitration Clause Unconscionable Under Armendariz

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As the battle between individual arbitration and litigated class actions continues across state and federal jurisdictions, California’s intermediate appellate court has underscored that, at least in California, an unconscionable contract that would otherwise be unenforceable will not be deemed enforceable merely because the subject matter is arbitration. See Compton v. Super. Ct., ___ Cal. App. 4th ___ (Cal. Ct. App. 2013) (available here).

In reaching this decision, the panel relied heavily on the California Supreme Court’s Armendariz v. Foundation Health Psychcare Servs., 24 Cal. 4th 83 (2000), a decision that defined the California standard for unconscionability at the time it was issued. Armendariz turned on the asymmetry of the at-issue arbitration provision, whereby the employer unilaterally got to determine which claims would be submitted to arbitration and which would be pursued in court. The court found such one-sidedness to be substantively unconscionable when presented in a contract of adhesion imposed by an employer on an employee, reasoning that, “[a]lthough parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope, . . . the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.” Armendariz at 118. Reinforcing two prior appellate decisions, the court held that such arbitration agreements must have at least a “modicum of bilaterality” to be enforceable. Id. at 117.

Similarly, in Compton, the at-issue arbitration provision, along with other one-sided terms, enumerated the types of claims that could and could not be submitted to arbitration. The employer included claims most likely to be brought by employees, while excluding claims most likely to be brought by the employer, thus allowing the employer to litigate in court claims that were important to it, while forcing employees into arbitration on claims most important to them. Compton slip op. at 4-5. After discussing the provision’s many asymmetric terms, all of which accrued to the defendant employer’s benefit, the 2-1 Compton majority reversed the trial court and found the at-issue arbitration clause unconscionable. Id. at 17-22. Because the Compton majority reversed the trial court’s finding as to unconscionability, it did not address two additional grounds also offered for reversal: that the defendant waived any entitlement to arbitration and that the ability to bring class actions is protected concerted action under the National Labor Relations Act. Id. at 9-10.

The majority rejected the defendant’s contention that the Armendariz “bilaterality rule” imposes a requirement of “perfect mutuality of obligation” on arbitration contracts, but not contracts generally, thereby uniquely burdening arbitration contracts in contravention of AT&T v. Concepcion. See id. at 18-22. After extensively citing to and quoting from Armendariz, Justice Laurence D. Rubin (writing for the Compton majority and joined by Justice Madeline Flier) explained that: “Concepcion did not discuss the modicum of bilaterality standard adopted by Armendariz . . . [or] overrule Armendariz. We . . . are therefore bound to . . . apply Armendariz to this case. Accordingly, we conclude that Concepcion does not apply to invalidate Armendariz’s modicum of bilaterality rule, at least in this context.” Compton slip op. at 21 (internal citation omitted).

In dissent, Justice Tricia Bigelow found the at-issue arbitration terms entirely symmetric as to the wage and hour claims brought by the plaintiff, and concluded that the arbitration provision therefore “binds [the parties] equally.” See Compton dissent at 4. Additionally, Justice Bigelow noted that any one-sided carve-outs as to certain claims could easily be severed from the agreement. Id.

Bigelow also cited with approval the decision of the Second Appellate District, Division Two (Compton was decided within Division Eight) in Iskanian v. CLS Transp. Los Angeles, LLC, holding that a mandatory waiver of class claims does not render an arbitration agreement imposed by an employer on an employee unconscionable. The California Supreme Court has granted review in Iskanian, which is expected to reconcile the application of Concepcion in the employment context.