Our next case continues our discussion of unconscionability, looking closely at one common type of contractual provision, arbitration clauses. The facts of this case are relatively straightforward. Misty Ferguson was an employee of Countrywide. When she began working there, she signed a contract which included a provision mandating that certain types of disputes between her and Countrywide would be arbitrated rather than going to court. She later filed a lawsuit in court for sexual harassment against Countrywide and her manager Leo Deleon. When Countrywide tried to force Ferguson to go to arbitration, the court refused to enforce the arbitration clause finding it to be unconscionable. In the opinion, you have read Judge Pregerson is reviewing that decision to see whether the arbitration clause in Ferguson's employment contract was in fact unconscionable and therefore unenforceable under California law. Arbitration has come up a couple of times during this course, but this case delves into the arbitration process in more detail, so it's worth saying a little bit more about it. Arbitration is an alternative to a lawsuit in an ordinary court. A neutral third party called the arbitrator gets to look at evidence, hear the parties' arguments and decide the case. The arbitrator's decision is binding on the parties and it generally cannot be appealed to a court. The details of how an arbitration works, for example, how the arbitrator is selected, what evidence can be presented et cetera, are all determined by the contract in which the parties agreed to arbitrate. Some state courts have been skeptical about the impartiality of arbitrators and the fairness of the arbitration process, but Congress in 1925 passed the Federal Arbitration Act or FAA to ensure that courts would enforce arbitration agreements unless those agreements were unenforceable because of some generally applicable state contract law doctrine. Under the FAA, a state cannot carve out special rules limiting enforcement of arbitration agreements. Those agreements can only be set aside for reasons that might also render other types of agreements unenforceable. Notwithstanding the FAA, some state courts have remained hostile to the enforcement of arbitration clause, so much so that states like California have been willing to distort their generally applicable law in order to reduce enforceability of arbitration agreements. Judge Pregerson applies California law to determine whether the arbitration clause in Ferguson's employment contract with Countrywide is a valid contract provision under California state law. Under California law, to find an arbitration clause unconscionable, the judge must find both procedural unconscionability and substantive unconscionability, but the precise mix of these two elements can vary. "The more substantively impressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable." Here, the court finds both procedural and substantive unconscionability and so the arbitration clause is unenforceable. The court looks at two factors to determine procedural unconscionability, which is about the fairness of the process by which the parties arrived at the contract. The first is oppression. Did the parties have unequal bargaining power? Was there actual meaningful negotiation between the parties? Did both parties have a choice? Here, Ferguson had no ability to bargain to vary the terms of the agreement. The contract was offered on a take-it-or-leave-it basis. The second factor for procedural unconscionability is surprise. Was the arbitration clause hidden? The court didn't discuss the surprise question in detail but it seems to reject the Countrywide's claim that, "The contract was written in plain language." One way that California's hostility to arbitration clauses has distorted unconscionability doctrine is by changing what constitutes procedural unconscionability. Today, in California, any form contract that is offered on a take-it-or-leave-it basis is going to be treated as having at least some degree of procedural unconscionability. This means that the vast majority of consumer and employment contracts have, are going to be procedurally unconscionable so that the question of unconscionability and setting aside the term will turn solely on whether the contract is sufficiently unconscionable in a substantive sense. In discussing substantive unconscionability, Judge Pregerson focuses on the question of whether the terms of the agreement, "Are so one-sided as to shock the conscience." He finds three ways in which they are substantively unconscionable. First, the arbitration clause only applies to the sorts of claims and employee like Ferguson might bring against Countrywide, discrimination or harassment, tort claims, but the clause leaves Countrywide free to go to court for the sorts of claims that it might bring against Ferguson, violations of intellectual property or unauthorized disclosure of trade secrets. Second, the contract forces Ferguson to bear a significant portion of the costs of arbitration. An earlier California Supreme Court decision had held that mandatory arbitration clauses in employment contracts could only be enforceable if the cost to the employee for arbitration was no more than the cost of going to court. Splitting the arbitration fees with the employee by itself can be substantively unconscionable. The court found that Countrywide's fees to be substantially unconscionable because they might be higher than employee would pay in going to court. Third, the provisions of the contract that limit discovery in a way that disproportionately disadvantages Ferguson was found to be substantively unconscionable. Countrywide, as the employer, likely has access to all sorts of information about what happened without needing discovery, while Ferguson needs discovery to have any information at all. These three one-sided aspects of the arbitration provisions seem to Judge Pregerson like an intentional attempt by Countrywide to bias the arbitration process in its own favor, and so he ruled that the whole arbitration clause was unconscionable and therefore unenforceable. But, frankly, the court's analysis of substantive unconscionability is hard to understand, except as an expression of judicial hostility toward enforcement of arbitration agreements, possibly especially when they are being used to deny an employee from having her day in court concerning the civil rights claim. Many individual provisions of the contract are by themselves one-sided. One provision might, for example, mandate that an employee work 40 hours per week and not require anything of an employer. But, of course, another provision of that contract might one-sidedly provide that the employer must pay the employee, and here, is it really one-sided for the employer and employee to split the arbitration fees? Splitting seems the opposite of one-sidedness, and employment provision that said employees had to send their kids to an employer's private kindergarten is likely to be enforced even if the fees were greater than what the employee would have to pay for public school. The provision covering the kinds of actions that can be brought is one-sided, but the one-sidedness might be reasonable. Employers might be more subject to reputational discipline than employees, especially today with social media. That might justify asymmetric access to courts. In two recent cases, the United States Supreme Court has overturned California law about the unconscionability of arbitration clauses. AT&T Mobility versus Concepcion in 2011, and American Express versus Italian Colors in 2013. Both of these cases dealt with provisions preventing class arbitration, the arbitration equivalent of class action lawsuits, and in both cases, the US Supreme Court overturned California decisions to say that arbitration clauses were valid and enforceable. The US Supreme Court, in a sense understands that states like California are manipulating unconscionability law to end-run the FAA, and these two sovereigns can be seen as in a struggle over arbitration enforceability. So, let's take a quiz. Two companies negotiate a contract that includes an arbitration clause. The arbitration clause says that one of the companies will have much more extensive discovery powers in arbitration than the other. Is the arbitration clause unconscionable? A court probably wouldn't find this arbitration clause unconscionable. Recall that unconscionability requires both procedural and substantive unconscionability. While this agreement might be lopsided enough to be substantively unconscionable, it seems like the two companies had a real opportunity to negotiate the terms of the contract, until the contract is not procedurally unconscionable. Whichever company gave up its discovery powers probably got something else in exchange. Under California law, arbitration clauses are invalid if there are no opportunity to negotiate, that would be procedural unconscionability, and the arbitration process is stacked against the weaker party, that would be substantive unconscionability. But the state's application of these rules are in flux because of the federal state tensions regarding arbitration enforcement.
