Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 16

FACTS Octavio Sanchez works as a delivery driver at a Domino's Pizza restaurant owned by Western Pizza. He drives his own car in making deliveries. His hourly wage has ranged from the legal minimum wage to approximately $0.50 above minimum wage. Western Pizza reimburses him at a fixed rate of $0.80 per delivery regardless of the number of miles driven or actual expenses incurred. Sanchez brought this class action against Western Pizza alleging that the flat rate at which drivers were reimbursed for delivery expenses violated wage and hour laws and that the drivers were paid less than the legal minimum wage.
Sanchez and Western Pizza are parties to an undated arbitration agreement. The agreement states that (1) the execution of the agreement ''is not a mandatory condition of employment''; (2) any dispute that the parties are unable to resolve informally will be submitted to binding arbitration before an arbitrator ''selected from the then-current Employment Arbitration panel of the Dispute Eradication Services,'' and that the arbitrator must be approved by both parties; (3) the parties waive the right to a jury trial; (4) the arbitration fees will be borne by Western Pizza and, except as otherwise required by law, each party will bear its own attorney fees and costs; (5) small claims may be resolved by a summary small claims procedure; and (6) the parties a waive the right to bring class arbitration. The Superior Court of Los Angeles County denied the restaurant's motion to compel arbitration, and the restaurant appealed
DECISION The denial of the motion to compel arbitration is affirmed.
OPINION Croskey, J. Western Pizza contends *** the arbitration agreement is neither procedurally nor substantively unconscionable.
***
Procedural and substantive unconscionability must both be present to justify the refusal to enforce a contract or clause based on unconscionability. [Citation.] Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms. [Citations.] The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination. [Citation.]
[A] finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided. [Citation.] … [T]here are degrees of procedural unconscionability. At one end of the spectrum are contracts that have been freely negotiated by roughly equal parties, in which there is no procedural unconscionability. Although certain terms in these contracts may be construed strictly, courts will not find these contracts substantively unconscionable, no matter how one-sided the terms appear to be. [Citation.] Contracts of adhesion that involve surprise or other sharp practices lie on the other end of the spectrum. [Citation.] Ordinary contracts of adhesion, although they are indispensable facts of modern life that are generally enforced [citation], contain a degree of procedural unconscionability even without any notable surprises, and ''bear within them the clear danger of oppression and overreaching.''[Citation.]
Thus, a conclusion that a contract contains no element of procedural unconscionability is tantamount to saying that, no matter how one-sided the contract terms, a court will not disturb the contract because of its confidence that the contract was negotiated or chosen freely, that the party subject to a seemingly one-sided term is presumed to have obtained some advantage from conceding the term or that, if one party negotiated poorly, it is not the court's place to rectify these kinds of errors or asymmetries. [Citation.]
Unconscionability under California law is a generally applicable contract defense and therefore applies to arbitration agreements regardless of whether the FAA [Federal Arbitration Act] applies. [Citations.]
***
THE ARBITRATION AGREEMENT IS PROCEDURALLY
UNCONSCIONABLE
Procedural unconscionability focuses on oppression or unfair surprise, as we have stated. Oppression results from unequal bargaining power when a contracting party has no meaningful choice but to accept the contract terms. [Citation.] Unfair surprise results from misleading bargaining conduct or other circumstances indicating that a party's consent was not an informed choice. [Citation.]
***
The arbitration agreement [in this case] states that the purpose of the agreement is ''to resolve any disputes that may arise between the Parties in a timely, fair and individualized manner,'' but otherwise does not extol the benefits of arbitration. The arbitration agreement does not limit the limitations periods, the remedies available, or the amount of punitive damages. It states, ''Except as otherwise required by law, each party shall bear its own attorney fees and costs,'' and therefore incorporates any statutory right to recover fees rather than creating a presumption against a fee recovery. Thus, the arbitration agreement neither contains the same types of disadvantages for employees as were present in [citation] nor fails to mention such disadvantageous terms. Moreover, the arbitration agreement expressly states that the agreement ''is not a mandatory condition of employment.''
We conclude, however, that the record indicates a degree of procedural unconscionability in two respects. First, *** the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to choose from (''the then-current Employment Arbitration panel of the Dispute Eradication Services'') and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a ''repeat player'' before the same arbitrator will reap a significant advantage. [Citation.] These circumstances indicate that the employees' decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. We therefore must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly onesided as to be substantively unconscionable.
THE ARBITRATOR SELECTION PROVISION IS SUBSTANTIVELY
UNCONSCIONABLE
''Substantively unconscionable terms may take various forms, but may generally be described as unfairly onesided.'' [Citation.] ''Given the lack of choice and the potential disadvantages that even a fair arbitration system can harbor for employees, we must be particularly attuned to claims that employers with superior bargaining power have imposed one-sided, substantively unconscionable terms as part of an arbitration agreement. 'Private arbitration may resolve disputes faster and cheaper than judicial proceedings. Private arbitration, however, may also become an instrument of injustice imposed on a ''take it or leave it'' basis. The courts must distinguish the former from the latter, to ensure that private arbitration systems resolve disputes not only with speed and economy but also with fairness.'''[Citation.]
Sanchez contends the arbitration agreement is substantively unconscionable in several respects. He cites the class arbitration waiver, the small claims provision, the absence of any provision requiring a written arbitration award, the designation of an arbitration provider consisting of a single arbitrator, and the absence of any express provision for discovery. In light of our conclusion that the trial court properly decided that the class arbitration waiver is contrary to public policy and therefore unenforceable, we need not decide whether that provision is unconscionable. [Citation.]
***
*** We conclude that the absence of express provisions requiring a written arbitration award and allowing discovery does not render the arbitration agreement unconscionable. Rather, those terms are implied as a matter of law as part of the agreement. [Citation.]
*** We conclude that the matters authorized under the small claims provision are an ordinary incident of arbitration and that the small claims provision is not substantively unconscionable. Finally, an arbitration agreement must provide for a neutral arbitrator. *** In our view, the designation of a ''panel'' of arbitrators consisting of a single arbitrator selected by Western Pizza created a false appearance of mutuality in the selection of an arbitrator. Moreover, the effective designation of a single arbitrator in what appears to be a standard arbitration agreement applicable to a large number of corporate employees gives rise to a significant risk of financial interdependence between Western Pizza and the arbitrator, and an opportunity for Western Pizza to gain an advantage through its knowledge of and experience with the arbitrator. *** We conclude that this provision is unfairly one-sided and substantively unconscionable.
THE ENTIRE ARBITRATION AGREEMENT IS UNENFORCEABLE
A trial court may either sever an unconscionable or otherwise unlawful provision from an arbitration agreement and enforce the remainder, restrict the application of the provision so as to avoid unconscionable results, or refuse to enforce the entire agreement. [Citation.] Although a court has some discretion in this regard, a court may refuse to enforce the entire agreement only if the central purpose of the agreement is tainted by illegality. [Citation.] ***
Whether a contract is severable in this regard is primarily a question of contract interpretation. '''Whether a contract is entire or separable depends upon its language and subject matter, and this question is one of construction to be determined by the court according to the intention of the parties.''' [Citation.] Questions of contract interpretation are subject to de novo review unless the interpretation turns on the credibility of extrinsic evidence. [Citation.]
***
The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause, as we have stated. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement [citation], we believe that these provisions considered together indicate an effort to impose on an employee a forum with distinct advantages for the employer. [Thus,] *** we conclude that the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper.
INTERPRETATION The doctrine of unconscionability includes both procedural and substantive unconscionability.
ETHICAL QUESTION Did Western Pizza act unethically? Explain.
CRITICAL THINKING QUESTION When should a court modify the challenged clause and when should it refuse to enforce the entire clause in question?