No haunted house can scare general counsel as much as an opinion invalidating their company’s arbitration clause and thereby allowing a class action to proceed.  So, here is a Halloween tale for all to keep in mind.

Ralphs Grocery Company hired Zenia Chavarria to work in the deli of one of its grocery stores.  Ms. Chavarria’s employment application agreed that she would be bound by Ralphs’ arbitration policy, but Ralphs did not send her that arbitration policy until three weeks after she signed her application.  The arbitration policy included the following:

• a prohibition on using AAA or JAMS to administer the arbitration;
• a requirement that a single arbitrator decide the dispute, and the arbitrator must be a retired state or federal judge;
• a method of selecting the arbitrator that ensured that, unless the parties agreed on the arbitrator, the arbitrator would be chosen by the party who did not demand arbitration;
• a provision that each party must pay half of the arbitrator’s total expected fees at the outset of the proceeding; and
• a provision allowing Ralphs to unilaterally modify the arbitration policy without notice.

After her employment terminated, Ms. Chavarria brought a putative class action against Ralphs.  In response, Ralphs moved to compel arbitration of her individual claims.  The district court denied the motion, finding the arbitration agreement was unconscionable and unenforceable under California law.  The Ninth Circuit affirmed that result in Chavarria v. Ralphs Grocery Co., __ F.3d__, 2013 WL 5779332 (9^th Cir. Oct. 28, 2013).

The court found the arbitration agreement was procedurally unconscionable because Chavarria had to accept it in order to be employed and because she was not given the policy until three weeks after she was forced to accept it.  The court found the arbitration agreement was substantively unconscionable (i.e., so one-sided that it “shocks the conscience”) because: Ralphs would always get to choose the arbitrator in any dispute initiated by an employee; the employee must pay half of the arbitrator’s fees at the beginning of the process (fees that would run between $3,000 -$7,000 per day); and Ralphs could modify the arbitration policy without any notice.

The Ninth Circuit also concluded that California’s procedural unconscionability rules are not preempted, because they do not disproportionately affect arbitration agreements.  With respect to substantive unconscionability, the court found that its holding fell within the newly narrowed “effective vindication” doctrine that SCOTUS set forth in AmEx.  In particular, because Ralphs arbitration policy made it prohibitively expensive to file an arbitration against Ralphs (not just prove a case against Ralphs), it “effectively foreclose[d] pursuit of the claim.”

Finally, the Ninth Circuit made a plea in favor of allowing states to define some arbitration agreements as unconscionable:

“If state law could not require some level of fairness in an arbitration agreement, there would be nothing to stop an employer from imposing an arbitration clause that, for example, made its own president the arbitrator of all claims brought by its employees.  Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.”

What is the lesson for arbitration clause drafters everywhere? Do not overreach.