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Thursday, July 14, 2011

Zullo v. Superior Court: Court Invalidates Arbitration Agreement as Unconscionable

Since the SCOTUS decision in AT&T Mobility v. Concepcion, attorneys on both sides of the bar have wondered whether California courts would entirely abandon unconscionability analysis of arbitration agreements. If the Sixth District Court of Appeal's decision in Zullo v. Superior Court (Inland Valley Publishing Co.) (June 21, 2011, pub. July 12, 2011) is any indicator, the answer is no.

In Zullo, the plaintiff filed a FEHA discrimination and retaliation action. The trial court (Santa Clara Superior, Judge Elfving) granted the defendant's motion to compel arbitration, and the plaintiff filed for writ of mandate. The Court of Appeal reversed, holding that the agreement was unconscionable.

Relying on Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114, the Court found that the agreement was procedurally unconscionable as a contract of adhesion, implemented on a take-it-or-leave-it basis. Slip op. at 4. The Court also noted that the agreement called for the use of AAA rules, but the defendant did not provide the rules to the plaintiff. Id. at 5.

The Court also found the agreement substantively unconscionable:
As to substantive unconscionability, the arbitration policy is one-sided and harsh. Inland insists that the policy imposes a mutual obligation to arbitrate but the argument does not square with the language of the policy. Inland is right that the first paragraph expressly applies to any dispute arising out of the termination; but disputes “arising out of the termination” of an employee are the very claims that “are virtually certain to be filed against, not by [the employer].” Indeed, the arbitration policy adds a nonexclusive list of the statutes and laws to which it applies, all are of equal employment and nondiscrimination laws. Employees bring actions under these laws. Furthermore, what is implicit in the first paragraph of the arbitration policy is explicit in the second, where it states that “no other action will be brought by any employee,” that “Employees shall not have the right to raise any claim” other than by arbitration, and that “Employee agrees” to make a written request for arbitration within a year of when the dispute arises. And finally, in the acknowledgment of receipt the employee confirms that the handbook contains “an arbitration policy requiring me to submit any and all disputes” to arbitration and that “ I cannot pursue such claims before a judge or a jury.” There is nothing about the policy to support Inland's contention that it would be bound to arbitrate any claim it might have against an employee.

The instant policy also lacks mutuality in that it requires the employee, but not the employer, to respond to any communications regarding the arbitration proceedings within 10 days or forfeit her claim. This requirement is indisputably one-sided and unfairly prejudicial to petitioner. Under the plain terms of the arbitration policy Inland may delay the selection of an arbitrator, or any other action that might be needed to move the process along, without risking a penalty of any kind. The employee, on the other hand, is bound to respond to any communication within 10 days or lose her claim altogether. A fair agreement would impose the same time constraints upon both parties.
Id. at 5-6 (citations omitted).

Finally, the Court declined to excise the unconscionable provisions from the agreement. "The illegality cannot be excised here. Striking the forfeiture provision would not cure the other problem, which is that the agreement applies only to the petitioner. There is no single provision we can strike in order to remove that unconscionable taint." Id. at 6.

The opinion is available here.

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