Employers Might Not Be Able To Sever Unconscionable Provisions In An Arbitration Agreement

The Ninth Circuit denied an employer’s motion to compel arbitration of a former employee’s age disability discrimination lawsuit because the arbitration agreement contained unconscionable and one-sided terms.

When Jose Ronderos applied for a line-haul manager job with USF Reddaway, Inc. (Reddaway), Reddaway required Mr. Ronderos to sign a form arbitration agreement on a take-it-or-leave-it basis. The agreement included several one-sided requirements in favor or Reddaway, including:

• Notice: Ronderos (but not Reddaway) was required to provide notice of a claim by submitting a particular form in a particular manner;
• One-Year Statute of Limitations: Ronderos (but not Reddaway) agreed to waive claims if he did not provide notice of the claim within one year after his “claims arose” — not when Mr. Ronderos knew or reasonably should have known about his claims; and
• Injunctive Relief Carve Out: The agreement mandated arbitration for all employment claims, but included a carve out for Reddaway’s claims against Mr. Ronderos for injunctive relief.

Reddaway hired Mr. Ronderos for the position. Reddaway terminated Mr. Ronderos two and a half years later after he took a medical leave of absence. Mr. Ronderos sued Reddaway for age and disability discrimination, retaliation, and failure to accommodate his disability under California’s Fair Employment and Housing Act (FEHA). Reddaway filed a motion to compel the matter to arbitration. The trial court concluded that the arbitration agreement was unenforceable as it included procedurally unconscionable to a moderate degree, contained multiple substantively unconscionable provisions, and lacked mutuality to a substantial degree. Notably, the trial court declined to sever the unconscionable provisions and enforce the remainder of the agreement.

Reddaway appealed, and the Ninth Circuit Court of Appeals agreed with the trial court’s holding.

First, the Court of Appeals held that the arbitration agreement contained a “moderate degree” of procedural unconscionability because Reddaway forced Mr. Ronderos to sign the agreement under significant oppression and uneven power dynamics.

Second, the Court of Appeals agreed that the one-sided notice, statute of limitations, and preliminary injunction carve out were “substantively unconscionable,” and severely restricted Mr. Ronderos’ ability to vindicate his employment rights without providing a business-related justification. The Court of Appeals found:

• The one-year statute of limitations shortened the amount of time typically allotted to bring employment-related claims, including claims under FEHA;
• Because the statute of limitations began when the claim arose, the arbitration agreement deprived him of the “discovery rule,” which delays accrual of a claim until the plaintiff actually discovers or reasonable should have known about the claim;
• Reddaway failed to provide any business-related justification for requiring that only Ronderos must comply with notice requirements and the one-year statute of limitations; and
• The preliminary injunction carve-out preserved only Reddaway’s ability to seek preliminary injunctive relief in court.

The Court of Appeals also upheld the trial court’s decision to not sever the unconscionable portions of the agreement and enforce the remainder of the agreement. Reddaway claimed the Court should sever the unconscionable portions of the agreement because they were “collateral” to the main purpose of the agreement and because the agreement contained a severability clause.

The Court of Appeals disagreed, asserting that the multiple unconscionable portions demonstrated that the agreement was “permeated” with unlawful purpose, and the presence of a severability clause is only one factor in analysis of whether the interests of justice would be furthered by severance.

Arbitration agreements typically include a severability clause that states if any provisions of the agreement are determined to be unenforceable, the remainder of the agreement remains in full force and effect. However, this matter demonstrates that even with a severability clause, courts have the discretion to invalidate the agreement entirely.

When preparing an arbitration agreement for employees or prospective employees, employers should avoid including provisions that are objectively one-sided in the employers’ favor without sufficient business justification for those provisions. Employers should also ensure that those provisions do not have the effect of waiving certain unwaivable rights under FEHA and other laws.

Ronderos v. USF Reddaway Inc. (9th Cir. Aug. 22, 2024, No. 21-55685) 2024 U.S. App. LEXIS 21226.