Lou v. Ma Laboratories: Federal Judge Strikes Arbitration Agreement as Unconscionable

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When U.S. Supreme Court Associate Justice Antonin Scalia blithely dismissed adhesion contracts with the observation that “the times in which consumer contracts were anything other than adhesive are long past” (AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1750 (2011)), it was widely received as a death knell for the application of unconscionability analysis to arbitration agreements. And few contracts are more adhesive than those that are presented to employees on their first or last day of work; most newly-hired or newly-fired employees have little or no bargaining power. For that matter, employees typically have negligible bargaining power throughout their employment, when they are often asked to sign new contracts, tweaked to fully avail employers of new developments in the law.

Lou v. Ma Laboratories involved multiple agreements presented to plaintiff Cher Feng, both with and without arbitration provisions. See Lou v. Ma Labs., Inc., No. 12-5409 (N.D. Cal. May 17, 2013) (order denying motion to compel arbitration, available here). Yet despite the defendant having assiduously attempted to preserve its ability to force the plaintiff to arbitration, Judge William Alsup, of California’s Northern District, declined to enforce the at-issue arbitration agreement. See slip op. at 1-2.

Ms. Feng worked as an account manager at Ma Laboratories, and upon being hired, she signed a detailed, fourteen-page employment contract providing for disputes to be litigated in court. Slip op. at 1. However, a few months later, the plaintiff was asked to sign a nine-page “supplement” to the employment contract, which drastically changed the terms of her employment, including the addition of an arbitration clause, and which she contends she was required to sign in order to keep her job. Slip op. at 1-2.

Throughout the Lou decision, Judge Alsup’s focus was on the arbitration clause in the contract supplement. In finding the clause unconscionable, Judge Alsup undertook unconscionability analysis under California law, which has both a substantive and procedural component. “To determine whether an arbitration agreement is unconscionable, courts apply a sliding scale: ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’” Slip op. at 3, citing Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000). By relying on Armendariz and only making passing reference to Concepcion, Alsup thus tacitly affirmed the continuing vitality of California’s unconscionability doctrine.

Judge Alsup determined that the at-issue arbitration clause was procedurally unconscionable due to it being a contract of adhesion, since there was effectively no opportunity to negotiate its terms. Slip op. at 3-4. In addition, Alsup held to California authority requiring that if the rules governing an arbitration are not attached to an arbitration contract that an employee signs, that weighs as evidence of procedural unconscionability. Slip op. at 4-6. It was as to the arbitration provision’s substantive unconscionability that Alsup deployed his sharpest criticism, assailing the contract’s lack of mutuality (the defendant could litigate claims for injunctive relief, whereas the employer couldn’t) and asymmetric, ambiguous fee-shifting provision. Slip op. at 7-8.

While the decision made clear that the ruling is limited to Ms. Feng’s arbitration agreement, and not to any other class member, it would be surprising if future motions to compel arbitration did not meet the same fate, since the company presumably used the same or similar documents and procedures with all of their employees.