Why Non-Negotiable Arbitration Clauses Are Not Per Se Unconscionable: A Review of Torrecillas v. Fitness International, Inc.
Posted by GibbsGiden Under Labor and Employment
In Torrecillas v. Fitness Int’l, L.L.C., No. B296194, 2020 Cal. App. LEXIS 679 (Cal. Ct. App. July 21, 2020), Jose Torrecillas (“Torrecillas”) excelled as a general manager at Fitness International (“Fitness”). Torrecillas set multiple all-time sales records, became Fitness’s highest paid general manager, and received several promotions. Upon being promoted to Vice President of Sales and Marketing, Torrecillas signed a new employment contract that contained an arbitration agreement.
Fitness ended up firing Torrecillas in 2017, and Torrecillas sued in state court in 2018. Fitness moved to compel arbitration, but the trial court found that the parties’ arbitration agreement was both procedurally and substantively unconscionable. Fitness appealed.
- Procedurally Unconscionable Analysis
The California Court of Appeal first analyzed the procedural element of unconscionability. This element is found more often when parties use contracts of adhesion. A contract of adhesion is a contract offered by a party with superior bargaining power on a take-it-or-leave-it basis. Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 817 (1981). Here, the court determined that the employment contract was not a contract of adhesion because it was customized for Torrecillas and he had the opportunity to negotiate it.
The Court moved on to analyze the next, and main, elements of procedural unconscionability: (a) surprise; and (b) oppression.
A. Surprise Element
A party will be surprised by an arbitration agreement when it is hidden in a form contract. OTO, L.L.C. v. Kho, 8 Cal. 5th 111, 126 (2019). The Court of Appeal determined that Torrecillas was not surprised by the arbitration agreement because it was in conventional font and even underlined as “Dispute Resolution.” Therefore, Torrecillas should have noticed the agreement when he signed the employment contract, and he should not have been surprised when Fitness moved to compel arbitration.
B. Oppression Element
The Court of Appeal then analyzed whether the arbitration agreement was oppressive to Torrecillas. Oppression exists when there is a lack of negotiation and meaningful choice between the parties. The court relied on OTO, L.L.C. v. Kho to differentiate an oppressive arbitration agreement with Torrecilla’s agreement. Kho’s agreement was more oppressive than Torrecillas’s in seven ways: (1) Kho’s employer made him sign the arbitration agreement immediately with no time to read the documents; (2) Kho received the agreement from a “porter” which sent the message that a low level porter could not explain or negotiate anything with Kho; (3) anytime Kho spent reviewing the agreement would reduce his pay because of his employer’s piece-rate compensation system; (4) Kho’s agreement was in extremely small font and barely legible; (5) Kho’s employer made it impossible for him to consult with an attorney before signing; (6) Kho was not given a copy of what he signed; and (7) Kho was a novice employee who could easily be replaced.
Because the circumstances surrounding the signing of Torrecillas’s arbitration agreement were significantly less oppressive than Kho’s, the Court of Appeal found no oppression.
- Substantively Unconscionable Analysis
Next, the Court of Appeal analyzed whether the arbitration agreement was substantively unconscionable. An agreement will be substantively unconscionable when its bargain was so overly harsh or unreasonably one-sided that it shocks the conscience. Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000).
Here, Torrecillas argued six reasons why his arbitration agreement was substantively unconscionable: (1) the agreement unreasonably limited discovery to five-depositions and thirty interrogatories, which rendered the agreement unenforceable as a matter of law under Armendariz v. Foundational Health Psychcare Services, Inc; (2) the agreement was too broad in scope; (3) the agreement lacked mutuality because it only required Torrecillas to arbitrate claims; (4) the agreement improperly barred causes of action under the Unfair Competition Law (Bus. & Prof. Code, § 17200); (5) the agreement improperly barred causes of action under the Private Attorneys General Act (Lab. Code, § 2698); and (6) the agreement did not provide a filing fee exception for indigent people.
The Court of Appeal dismissed each of Torrecillas’s arguments saying that: (1) there was no evidence that the discovery limit created barriers for Torrecillas to pursue his claims because limited discovery is a key point of arbitration, and the arbitrator could grant discovery beyond these limits if needed. Furthermore, the Armendariz court only ensured that parties in arbitration would receive adequate, not unlimited, discovery; (2) the agreement was not overbroad because it limited arbitration to disputes arising out of the parties’ employment; (3) the agreement did not lack mutuality because it required arbitration of “all disputes between [Torrecillas] and [Fitness];” (4) the agreement did not bar actions under the Unfair Competition Law because that law is arbitrable; (5) while the Private Attorneys General Act is not arbitrable, the agreement excluded arbitration “where the law specifically forbids [it],” so any causes of action under that act could be heard in court; and (6) the agreement mirrors the filing fees that an employee would have to pay in court, so Torrecillas would qualify for an arbitration fee waiver if he became indignant.
After dismissing these arguments, the Court of Appeal determined that the agreement was not substantively unconscionable, and therefore not unconscionable.
Torrecillas is a reminder that the unconscionability doctrine is reserved for contracts that actually “shock the conscience.” Arbitration agreements are not per se unconscionable just because they keep people from having their day in court. Instead, so long as employees are given time to review their employment contracts and understand what they are signing, an employer with unlimited bargaining power can give “non-negotiable” arbitration agreements that will not be deemed unconscionable.
For more information contact the authors:
Mr. Henderson is a partner practicing in the Los Angeles office and is also licensed in the states of Alaska and Washington. He represents a variety of corporate and individual clients, including business and property owners, general contractors, subcontractors, and material suppliers, in a wide range of complex business, commercial, and construction negotiations and disputes. Mr. Henderson specializes in the prosecution and defense of litigation matters involving claims for breach of contract and construction-related claims, including construction delay, mechanics liens, payment and performance bonds, and judgment enforcement proceedings. He is also experienced in the defense of civil and administrative malpractice actions and insurance matters and has advised on several real estate and commercial transactions.
Paul MacCabe is a third year law student at Loyola Law School and a law clerk at Gibbs Giden focusing on the areas of civil litigation, real estate transactions, and construction law.
Mr. MacCabe can be reached at firstname.lastname@example.org.
The content contained herein is published online by Gibbs Giden Locher Turner Senet & Wittbrodt LLP (“Gibbs Giden”) for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel.
This publication may not be reproduced or used in whole or in part without written consent of the firm and the attorneys involved.
Copyright 2020 Gibbs Giden Locher Turner Senet & Wittbrodt LLP ©