Unconscionable Provisions in an Arbitration Agreement Do Not Automatically Void the Entire Agreement

Charter Communications Inc. (“Charter”) has nearly 100,000 employees and requires that all employees agree to use their alternative dispute resolution program called Solution Channel. When hired, employees must electronically sign a Mutual Arbitration Agreement (“Agreement”) and agree to the Solution Channel Guidelines.

Charter hired Angelica Ramirez in July 2019, and she signed the Agreement and agreed to adhere to the Solution Channel Guidelines. Charter fired Ramirez in May 2020.  She filed suit against Charter alleging claims for discrimination, harassment, and retaliation under the Fair Employment and Housing Act (“FEHA”), and a claim for wrongful discharge.

Charter relied on the Agreement and moved to compel arbitration and to recover related attorneys’ fees. Ramirez argued that the Agreement was both procedurally and substantively unconscionable. The Agreement included the following: (1) a provision stating which claims were covered or excluded from arbitration; (2) imposed a shortened filing period for certain claims; (3) limited the discovery available in arbitration; and (4) permitted Charter to recover attorneys’ fees if it successfully compelled arbitration. Charter argued that the Agreement was conscionable and if not, the court should sever the unconscionable provisions and enforce the rest of the Agreement.

Arbitration agreements are typically conscionable unless there is a lack of mutuality, and one side treats the other unfairly. In this case, the court found that lack of mutuality on its own is insufficient to prove unconscionability. The lack of mutuality must also be without reasonable justification.

The Supreme Court of California made the following findings regarding the four contested Agreement provisions:

• Covered and Excluded Claims Provision – The lack of mutuality made the “covered and excluded claims” provision substantively unconscionable as it required arbitration of claims Charter was likely to initiate, and exempted many types of claims that employees could bring.
• Shortened Claim Limitations Periods – Parties may agree to shorten claim filing periods, but those shortened limitations periods must be reasonable. Charter’s Agreement unreasonably and substantially shortened Ramirez’s time to fully pursue a FEHA claim, rendering it substantively unconscionable.
• Limits on Discovery – Parties may agree to have an arbitrator limit discovery for arbitration, but adequate discovery is indispensable for the vindication of FEHA claims. The court based the assessment of whether a limitation on discovery is unconscionable on factors that can be examined without relying on subsequent developments. Charter’s agreement was ambiguous as to if the arbitrator could order additional discovery. If a contract provision is open to two interpretations, one that would make it valid and the other that would render it void, a court should follow the interpretation that renders it valid. The court found this provision was conscionable if it was interpreted to mean that the arbitrator has the authority to order additional discovery if necessary to have a fair trial.
• Attorneys’ Fees – Charter’s Agreement required an award of attorneys’ fees to the party who successfully compels arbitration. This provision was unconscionable as an arbitration agreement imposed as a condition of employment cannot require an employee to pay attorneys’ fees unless the action was frivolous, unreasonable, or groundless.

Significantly, the court did not decide whether it would sever these unconscionable provisions and enforce the remainder of the Agreement or render the entire Agreement unenforceable.  The court remanded this issue to the court of appeal for further consideration and stated, “the court cannot refuse to enforce an agreement simply by finding that two or more collateral provisions are unconscionable as written.”

This case is important because it illustrates ways a court may find arbitration agreement provisions unconscionable and that agreements with more than one unconscionable provision are not automatically void. Employers should exercise caution when preparing arbitration agreements with employees to ensure the provisions are reasonable and to avoid including provisions that are substantively unconscionable, which could render the entire arbitration agreement unenforceable.

Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478.