California Appellate Court Strikes Arbitration Agreement in Employee Handbook as Unconscionable

  • August 4, 2011

Reversing an order compelling arbitration, the California Court of Appeal has held that an arbitration agreement in an employee handbook was unconscionable because it was a contract of adhesion, failed to give adequate notice of the arbitration rules that will apply, and lacked mutuality.  Thus, the Court held that the agreement was unenforceable and ordered the trial court to vacate its order compelling arbitration. Zullo v. Superior Court, No. H036242 (Cal. Ct. App. Jul. 12, 2011).

The Facts

Sharon Zullo worked for Inland Valley Publishing Co., publisher of a weekly newspaper, from 2004 to 2009.  During her employment, Zullo acknowledged receipt of Inland’s employee handbook, which contained an arbitration agreement.  The agreement stated, in relevant part, “any dispute arising out of the termination … of any employee’s employment … or any claim for discrimination or harassment arising out of any employee’s employment … shall be submitted to final and binding arbitration before a neutral arbitrator pursuant to the American Arbitration Association Employment Dispute Resolution Rules ….”  The agreement also referenced the statutes it covered, including California’s Fair Employment and Housing Act (“FEHA”), Title VII of the Civil Rights Act of 1964, and other anti-discrimination laws.  Finally, it provided that binding arbitration was the “exclusive” means of resolving employment disputes and required employees to submit a request for arbitration within one year of the dispute and respond to communications from the arbitrator within 10 business days.  Failure to comply with the time limits would result in the claim being time-barred.

The Suit

Zullo claimed that her supervisor discriminated against her because of her race and national origin and that she was discharged for complaining about discrimination.  Zullo sued Inland for wrongful termination in violation of FEHA.  Inland moved to compel arbitration based on the agreement.  The trial court granted the motion, and Zullo appealed.

Standard for Arbitration Agreements

Under California law, an arbitration agreement that is both procedurally and substantively unconscionable may be invalidated.  A sliding scale is used to assess procedural unconscionability in proportion to substantive unconscionability: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to conclude the term is unenforceable, and vice versa.  Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 114 (Cal. 2000). 

When examining procedural unconscionability, a court looks two factors:  oppression and surprise.  “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.”  Substantive unconscionability refers to overly harsh or unjustifiable one-sided results.

Court Finds Agreement Unconscionable

The Court determined that “there is really no question that the arbitration agreement is procedurally unconscionable in that it is a contract of adhesion.”  It found significant that the agreement was in a handbook with other policies and employees were required to sign the handbook acknowledgement as a condition of employment and could not negotiate any terms.  Also significant to the Court’s finding of procedural unconscionability was the absence of the American Arbitration Association Rules in the handbook.  The Court said it was oppressive to require an employee to “make an independent inquiry to find the applicable rules in order to fully understand what she was about to sign.”

The Court also determined the agreement was substantively unconscionable.  It found significant and “indisputably one-sided and unfairly prejudicial” that the agreement applied only to claims that could be brought by an employee, such as anti-discrimination claims, imposed time limits on the employee, but not the employer, and if the employee failed to comply with those limits, she would forfeit her claim. 

Because it found the arbitration agreement to be “a contract of adhesion” that failed to give adequate notice of the applicable arbitration rules and allowed Inland a full range of remedies and forums, while limiting Zullo to binding arbitration, the Court concluded that the arbitration agreement was unconscionable and ordered the trial court to vacate its order compelling arbitration.

* * *

This case warns California employers of overreaching when drafting arbitration agreements.  Although California courts are hostile to enforcing arbitration agreements generally, they will do so if the agreement is not overly one-sided and harsh.  The agreement in this case was not sufficiently limited and failed to provide the employee with all of the information necessary to knowingly agree to arbitration. 

For additional information regarding this case or assistance in drafting arbitration agreements in California, please contact the Jackson Lewis attorney with whom you regularly work.

©2011 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

Focused on labor and employment law since 1958, Jackson Lewis P.C.'s 950+ attorneys located in major cities nationwide consistently identify and respond to new ways workplace law intersects business. We help employers develop proactive strategies, strong policies and business-oriented solutions to cultivate high-functioning workforces that are engaged, stable and diverse, and share our clients' goals to emphasize inclusivity and respect for the contribution of every employee. For more information, visit