Courts have been cracking down on legality of arbitration agreements in California
The California Court of Appeal recently upheld a lower court’s finding that an arbitration agreement was unconscionable and its decision not to sever multiple provisions that it considered substantively unconscionable.
Fast Auto Loans, Inc. – the defendant in the case of Beco v. Fast Auto Loans, Inc. – was a payday lender. Its former affiliate hired the plaintiff as a sales representative in 2014. When the affiliate disbanded in 2016, the plaintiff became branch manager at Fast Auto.
As a condition of employment, Fast Auto made its employees sign an arbitration agreement that aimed to incorporate by reference the American Arbitration Association’s National Rules for the Resolution of Employment Disputes. However, the agreement failed to attach a copy of these rules or to provide the relevant link or phone number.
The plaintiff electronically signed the agreement via the employee portal of Fast Auto’s website. He said that his supervisors told him that he would be terminated if he did not agree to acknowledge the legal documents.
In 2018, the plaintiff was fired. He filed with the Orange County Superior Court a complaint alleging 14 claims relating to his termination, including wage and hour violations under California’s Labor Code, wrongful termination, and claims under the Fair Employment and Housing Act.
Fast Auto filed a motion to compel arbitration. The trial court denied this motion and refused to enforce the arbitration agreement. The trial court found the arbitration agreement unconscionable to the extent that severance would not cure its defects. Fast Auto appealed.
The California Court of Appeal for the Fourth District, Third Division affirmed the trial court’s decision.
First, the appellate court ruled that the trial court, not the arbitrator, had the jurisdiction to decide the issues of unconscionability and enforceability of the arbitration agreement. The agreement did not show a clear and unmistakable intent to delegate the question of its validity to the arbitrator, the appellate court explained.
Second, the Court of Appeal held that the arbitration agreement was unconscionable. The appellate court found a moderate amount of procedural unconscionability and surprise. The plaintiff testified that he felt pressured to immediately sign the agreement. He also faced significant oppression, given the risk of losing his job, the agreement’s complexity, and the lack of attorney assistance, the appellate court said.
Next, the Court of Appeal determined that there was substantial substantive unconscionability in the arbitration agreement. Its provisions setting a restriction on limitations periods and limits on fees, cost-shifting, and discovery were one-sided and beneficial only to Fast Auto, the appellate court said.
The trial court had substantial evidence to decide that the entire agreement was unconscionable and unenforceable, given its adhesive nature and the oppression present in its execution, the appellate court added.
Lastly, the appellate court upheld the trial court’s decision not to sever the numerous unconscionable provisions and its conclusion that an unlawful purpose permeated the arbitration agreement, considering its multiple illegal provisions.