Chavarria v. Ralphs Grocery Co.: Ninth Circuit Finds Arbitration Policy Unconscionable and Unenforceable

In Chavarria v. Ralphs Grocery Company, ___ F.3d ___(9th Cir. 10/28/13), the plaintiff filed a putative meal and rest period class action under the Unfair Competition Law (UCL), and Ralphs moved to compel arbitration of her individual claims. The district court denied the motion, holding that Ralphs’ arbitration policy was unconscionable under California law and therefore unenforceable. Ralphs appealed, and the Ninth Circuit affirmed. 

The Court found the policy procedurally unconscionable for the following reasons: acceptance of the policy was a condition of applying for employment; it was presented on a “take it or leave it” basis with no opportunity for negotiation; Ralphs did not provide the terms of the policy to Chavarria until three weeks after she had agreed to be bound by it; and the policy bound Chavarria, whether she signed it or not. Slip op. at 10-13. 

The Court found the policy substantively unconscionable for the following reasons: Ralphs would always be the party to select the arbitrator in employee-initiated arbitrations; the policy precluded institutional arbitration administrators which have "established rules and procedures to select a neutral arbitrator;" and the policy forced the employee to pay one half of the arbitration fees, "unless a decision of the U.S. Supreme Court directly addressing the issue requires that they be apportioned differently." Slip op. at 14-19. 

The Court concluded its unconscionability analysis as follows: 

Ralphs has tilted the scale so far in its favor, both in the circumstances of entering the agreement and its substantive terms, that it "shocks the conscience." Accordingly, Ralphs’ arbitration policy cannot be enforced against Chavarria under California law. 

Slip op. at 19-20. 

Perhaps more interesting is the Court's conclusion that the FAA does not preempt this unconscionability analysis.  Slip op. at 20-22. The Court rejected the argument that the Supreme Court's recent decision in American Express Corp. v. Italian Colors Restaurant, ___ U.S. ___, 133 S. Ct. 2304 (2013) (discussed here) precluded it from considering the provision requiring employees to pay half the cost of arbitration. The Court reasoned that imposing arbitration costs on employees would not just make it infeasible to prove the violations at issue, as in Italian Colors, but would "make access to the forum impracticable." The Court held that Ralphs could not do so, even in the context of the FAA.  

It will be very interesting to see whether the Ninth Circuit decides to review this decision en banc or whether the United States Supreme Court takes action on it. 

The opinion is available here.