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Court, Not Arbitrator, Decides on Unconscionability of Arbitration Agreement in California

  • March 1, 2012

Denying an employer’s request to arbitrate an employee’s discrimination, harassment, and wage-related claims, the California Court of Appeal has held that courts, not arbitrators, had the power to decide whether an arbitration agreement was unconscionable.  This is so even where an agreement is so broadly worded as to suggest that an arbitrator might have such authority.  Ajamian v. CantorCO2e, L.P., No. A131025 (Cal. Ct. App. Feb. 16, 2012).  The Court went on to find the arbitration agreement in question was unconscionable and unenforceable.  It also ruled the trial court did not abuse its discretion in declining to sever the offending terms from the agreement.


When Lena Ajamian joined CantorCO2e, L.P. as an office manager, she signed an acknowledgement that she had read the employer’s policies and procedures manual.  The 65-page manual included an employee handbook with an arbitration policy.  Under the policy, disputes are to be submitted before an American Arbitration Association panel of arbitrators under the AAA’s national rules for resolution.  In addition, the policy stated that if the employer and the employee had entered into an employment agreement containing an arbitration agreement, the employment agreement would control. Ajamian never separately signed the arbitration policy or an acknowledgement of receipt of the employee handbook.

One year after she was hired, the employer promoted Ajamian to a broker position and asked her to sign an employment agreement containing an arbitration provision.  Under the employment agreement, arbitration was the exclusive means for determining all disputed issues regarding the agreement.  The arbitration provision required arbitration of any disputes before an arbitration panel in New York.  The provision also stated that New York law and the arbitration rules from an alternative dispute resolution organization selected by the employer, such as AAA or the National Association of Securities Dealers, would control.  It barred the arbitrators from awarding special, exemplary, punitive or multiple damages to the employee, but authorized a liquidated damages award to the employer.  The employment agreement further provided that Ajamian could be liable for the employer’s attorneys’ fees if she challenged the agreement and the agreement was upheld.  The employment agreement included a severability provision permitting a court to limit an overbroad provision to make it enforceable.

According to Ajamian, she had asked that the arbitration provision be deleted, but the employer refused and told her she had to sign the agreement to receive her bonus.  Ajamian signed the employment agreement. 

Thereafter, the employer terminated Ajamian’s employment, and she sued the company for sexual discrimination, sexual harassment, and wage-related claims.  The employer asked the trial court to order arbitration based on the employment agreement or the handbook’s arbitration policy.  It argued that the question of enforceability should be decided by the arbitrator, that the agreement was not procedurally unconscionable, and that any provisions found to be substantively unconscionable could be severed.  The trial court denied the employer’s request, and the employer appealed.

Applicable Law

In general, under the Federal Arbitration Act (which applied to this case), courts determine the enforceability of an arbitration agreement, but the parties to an agreement may agree to delegate that issue to an arbitrator.  AT&T Technologies v. Communications Workers, 475 U.S. 643, 649 (1986).  The party seeking to enforce such an agreement must prove by “clear and unmistakable” evidence that they intended to delegate the issue to the arbitrator.  Rent-A-Center, W., Inc. v. Jackson, 130 S. Ct. 2772, 2777, n.1 (2010).

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 come to the conclusion that the term is unenforceable, and vice versa.  Armendariz v. Foundation Health Psychcare, 24 Cal. 4th 83, 114 (Cal. 2000).  When examining procedural unconscionability, a court focuses on the oppression that arises from unequal bargaining power and the surprise to the weaker party from hidden terms or the lack of informed choice.  Substantive unconscionability refers to overly harsh or unjustifiable one-sided results.

Unconscionability Found

Pointing out that under the arbitration agreement, arbitration was the exclusive means for determining any disputes regarding the agreement, the employer argued on appeal that an arbitrator, rather than a court, should determine whether the arbitration agreement was unconscionable.  Rejecting this argument, the Court ruled the agreement’s language was too ambiguous to be interpreted in that manner.  The provision could be interpreted as covering only the substantive disputes, the Court said, while leaving the question of enforceability to the court, which is the usual expectation of the parties.  Therefore, the provision failed to meet the clear and unmistakable evidence test necessary to delegate authority to an arbitrator.

The Court further noted that, had the parties actually contemplated this issue at the time of contracting, they could have so stated.  The absence of express language gave rise to an inference that the parties did not consider the matter, did not agree to it and, therefore, the enforceability issue could not be arbitrated.

The employer then argued that incorporation of the AAA rules into an agreement was clear and unmistakable evidence that the parties intended to submit the issue of unconscionability to the arbitrator.  The Court rejected this argument.  It noted that there are “many reasons for stating that the arbitration will proceed by particular rules, and doing so does not indicate that the parties’ motivation was to announce who would decide threshold issues of enforceability.”  Even if it did, the Court found the reference to the AAA rules insufficient because the agreement did not mandate that the AAA rules would apply.  Thus, the Court concluded the employer failed to establish by clear and unmistakable evidence that the parties intended to delegate to the arbitrator the question of unconscionability.

The Court then concluded that the arbitration agreement was procedurally unconscionable because it was a required term in a non-negotiable agreement.  That the employer did not provide a copy of the applicable AAA or other rules with the arbitration agreement and the arbitration agreement required the employee to incur significant travel expenses to attend arbitration in New York also supported the conclusion that the agreement was procedurally unconscionable.

Further, the Court found the arbitration agreement was substantively unconscionable.  First, the agreement required the employee to submit all disputes to an arbitration panel in New York under New York law and, as a result, the Court said, Ajamian was forced to waive her non-waivable statutory rights.  Second, the employer, but not the employee, had the right to choose the arbitration organization.  Third, the employee must waive her rights to special, exemplary and statutory double damages, while the employer had the right to liquidated damages. Fourth, Ajamian could be liable for the employer’s attorneys’ fees when she would have no such obligation under California law.

In addition, the Court held the trial court did not abuse its discretion in declining to sever the unconscionable terms in the arbitration agreement.
Finally, the Court concluded the trial court did not err in declining to enforce the handbook’s arbitration policy.  Ajamian never signed or agreed to the handbook’s provisions, and nothing in the employment agreement bound her to the handbook’s arbitration policy.  Accordingly, the Court affirmed the denial of the employer’s request for arbitration.


National employers should consider not using uniform employment agreements with arbitration provisions in California because of the particular nuances of California law.  Provisions common and enforceable in other states, including choice-of-law, fee-shifting, and limitations on remedies, may be suspect in California.  When such “suspect” provisions are coupled with an employee’s inability to negotiate the agreement’s terms, the result often is an unconscionable agreement under California law.  In addition, employers should consider providing the employee with a certain amount of time (e.g., two weeks or longer) within which he or she can opt out of the arbitration provision.

Employers who want to use arbitration agreements in California should consult with experienced California employment counsel to examine the risks and benefits.  Jackson Lewis attorneys are available to assist employers in developing an agreement to withstand challenge in California.

©2012 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.

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