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Mandatory Arbitration Agreements: Avoiding “Unconscionable” Finding

New York arbitration agreements have become one of the best ways that companies can insulate themselves from costly litigation that may stem from employment disputes or allegations of liability from consumers.

However, they will do little good if challenged and found to be “unconscionable,” and therefore unenforceable, by a judge. In fact, this may only serve to prolong the proceedings and increase costs.

This is what recently happened in the employment lawsuit case of Chevarria v. Ralphs Grocery Company, where the U.S. Court of Appeals for the Ninth Circuit determined the mandatory arbitration agreement extended to the worker in question was unconscionable. Among the reasons cited:

  • The exact provisions of the contract weren’t made available to the worker until three weeks after he agreed to be bound by them;
  • The selection process for arbitrators excluded well-respected arbitration firms that have established rules that ensure a neutral arbitrator;
  • The fees that would be charged to the plaintiff for the arbitrator would be cost prohibitive, costing more than the potential dollar amount for the original claim (in which the worker indicated he had been denied meal and rest breaks, as required by law);
  • The agreement contained language indicating it could be modified by the employer at any time without any notice to the worker.

Around the same time as this decision, a federal judge in New Jersey granted a request by Dell Inc. to compel class action plaintiffs alleging defective laptops to enter into mandatory arbitration with the computer firm. The two sides had been battling it out over the enforceability of the arbitration agreement.

The plaintiffs in Khan v. Dell Inc. had argued that arbitration involving a big firm like Dell puts the complainants at a disadvantage because the company has gone to court on these kinds of issues numerous times before, allowing administrators and their attorneys to make informed, calculated decisions about proceeding.

It was also argued that sections of the agreement that forced plaintiffs to pay for the cost of arbitration and a lack of opportunity for customers to refuse the terms should render the agreement unenforceable.

However, the judge rejected all these claims.

So what makes the difference?

The basic test for unconscionability is to look at whether, in light of the needs of this particular case and the general background, the clauses involved are incredibly one-sided. Unconscionability is determined at the moment the parties enter into the agreement, not in light of any subsequent events.

Basically, if an arbitration agreement is absent any meaningful choice on the part of one of the parties and is unreasonably in favor to the other. Generally, both elements have to be present in order for the judge to use his or her discretion to refuse enforcement of a contract under this doctrine.

Unconscionability can be either procedural (the manner in which the contract was negotiated and the circumstances of both parties) or substantive (when a contract is one-sided or “overly-harsh”).

There are many reasons why company leaders might prefer arbitration over litigation. To start, litigation tends to be expensive and time-consuming. Arbitration is typically less so on both fronts. Secondly, jury awards have a tendency of being unpredictable, and juries are many times bias against companies (particularly large ones). And finally, arbitration can serve as a way to preserve employer-employee relations by working toward a private and amicable solution.

But again, an arbitration agreement does no one any good if it isn’t enforceable.

Experienced business attorneys should be brought in during the arbitration agreement drafting process to weigh in on the legal language of the contract. Each agreement is going to be different, depending on the ultimate goals of the firm, but generally, those agreements that have been upheld in court include:

  • Provisions for neutral arbitrators;
  • Allowances for more than minimal discovery;
  • A written award;
  • Provides for all types of relief that would otherwise be available were the case to end up in court;
  • Doesn’t require workers to pay any unreasonable costs or expenses as a condition of the agreement.

The Law Offices of Ira S. Newman provides arbitration representation in New York City, Long Island, Great Neck and throughout the area. Call 516-487-7375 or send us an e-mail.

Additional Resources:
Mandatory Employment Arbitration Agreements: The Key to Avoiding a Charge of Unconscionability, November 2002, By Alyssa Shenk, American Bar Association
More Blog Entries:
New York Non-Compete Litigation on the Rise, Sept. 4, 2014, New York City Arbitration Lawyers