Unconscionable Arbitration Provisions

Posted on Tuesday, July 13th, 2010.

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By Stephen E. Trimboli

In Nino v. The Jewelry Exchange, Inc., et al., the Third Circuit refused to enforce an arbitration agreement between an employer and an individual employee, finding the agreement to be both procedurally and substantively unconscionable.

“Procedural unconscionability” looks to “the process by which an agreement is reached and the form of {the} agreement, including the use therein of fine print and convoluted or unclear language.” A contract is substantively unconscionable when the contract contains “terms unreasonably favorable to the stronger party.” A party challenging a contract on unconscionability grounds must prove both procedural and substantive unconscionability.

The agreement in Nino was found to be procedurally unconscionable because it was presented to the employee “for signature on a take-it-or-leave-it basis,” with the employee being told simply to “read it and sign it,” and because the employer, a large employer doing business worldwide, possessed greater bargaining power than the plaintiff, an individual retail employee who, as an immigrant, needed to remain employed in order to maintain his work visa.

The court then identified three aspects of the arbitration agreement that rendered the agreement substantively unconscionable. First, the agreement required the employee to file a detailed grievance within five days of the complained-of incident in order to preserve his right to arbitrate. The court found this time period to be “’clearly unreasonable and unduly favorable’ to the employer,” noting that time periods as long as thirty days had similarly been found to be unreasonably short. The unreasonableness of the five-day filing period was exacerbated by a clause stating that the time period was binding and could be waived only by written mutual agreement, barring employees from resorting to the continuing violation and tolling doctrines. In contrast, whereas a failure to timely file or advance a grievance amounted to a default for the employee, the employer’s failure to respond in a timely fashion merely caused the employer’s prior determination on the grievance to become final and binding.

Second, the agreement required each party to bear its own attorney’s fees, costs and expenses, a provision deemed unconscionable because it restricted the arbitrator’s ability to award attorney’s fees, costs and expenses in cases involving fee-shifting statutes such as Title VII.

Third, the agreement called for the selection of a single arbitrator from a list of four candidates provided by the American Arbitration Association, but the selection process to rigged to allow the employer to strike two candidates, while the employee had only a single strike. The court found this provision to be “one-sided in the extreme,” to give “the employer an unreasonable advantage over the employee in the selection of an arbitrator,” and to be “utterly lacking in the rudiments of even-handedness.”

(On the other hand, the Nino Court found the following provisions not to be substantively unconscionable: a provision requiring the arbitration hearing to take place at the employer’s place of business, a provision requiring the parties to share the arbitrator’s and stenographer’s fees, and a provision requiring the arbitrator to be bound by the employer’s lawful rules, regulations, policies and procedures).

The District Court had deemed the unconscionable features of the arbitration agreement to be severable, and had enforced the agreement with the unconscionable features deleted. The Third Circuit disagreed. Relying on the “equitable override provision of the Restatement {(Second) of Contracts}, it reasoned that “enforcement of the bargain will be denied,” even if the unconscionable features could be otherwise severed, “if the person seeking {enforcement} has been ‘guilty of serious moral turpitude’ … or ‘serious misconduct.’” The court then found that the employer “sought to impose a scheme that it knew or should have known would provide it with an impermissible advantage.” The “pervasively one-sided nature of the agreement forecloses any possibility of severing the unfair provisions from the remainder of the agreement.”

As an alternative ground, the Nino Court held that the employer had waived the right to invoke arbitration by allowing the case to proceed for fifteen months without moving for arbitration, forcing the employee to engage in extensive discovery and related motion practice, and assenting to pretrial orders entered by the magistrate judge.

Nino is a case of significance that should be carefully studied by any attorney concerned with employer-employee arbitration agreements

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