Zaborowski v. MHN: Federal Judge Rules Contract Unconscionable, Denies Motion to Compel Arbitration

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Judge Susan Illston has stymied an employer’s attempt to force into arbitration a group of employees alleging that they were erroneously classified as independent contractors. See Zaborowski v. MHN Govt. Servs., Inc., No. 12-5109 (N.D. Cal. Apr. 3, 2012) (order denying motion to compel arbitration). The plaintiffs contend that by misclassifying them as independent contractors, their employer avoided providing them with benefits they are entitled to under California law. Judge Illston found the employment contract that plaintiffs signed to be “so permeated with unconscionability” that the arbitration clause within the contract was rendered unenforceable. Order at 13.

She began her analysis by noting that “Concepcion explicitly reaffirmed California’s general contract defense of unconscionability as applied to arbitration agreements,” adding that “[o]nly ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue’ are preempted by the FAA, and therefore invalid,” quoting directly from the Supreme Court’s Concepcion decision to underscore the continued vitality of California’s unconscionability doctrine. Order at 4.

Judge Illston proceeded to enumerate the various ways in which the at-issue arbitration clause is unconscionable (order at 5-10):

  • The arbitration clause is buried in the last of 23 paragraphs, and not set apart or highlighted in any way;
  • Signing the arbitration clause was a condition of employment, with no opportunity to negotiate the terms;
  • The clause imposes a six-month statute of limitations, far shorter than the usual three-year statute of limitations applicable to workplace violations;
  • The clause unilaterally empowers the employer to choose the pool of arbitrators;
  • Discovery is limited so as to disadvantage employees;
  • The arbitration provision has the effect of negating California fee-shifting statutes designed to address the inherent asymmetry in resources between employers and employees; and
  • Similarly, by prohibiting the arbitrator from awarding punitive damages, the arbitration provision further eliminates statutory protections.

Judge Illston concluded that the unconscionable provisions so permeated the at-issue arbitration clause as to not be severable, and on that basis denied the defendant’s motion. While unconscionability analysis is typically fact- and case-specific, the Zaborowski decision is likely to be much-cited by counsel and relied on by judges, as it addresses provisions that frequently appear in the arbitration clauses that are part of employment contracts.