California Court of Appeal Rules Arbitration Agreement Is Unenforceable

Quick Hits

• A California appellate court refused to enforce an arbitration agreement due to both substantive and procedural unconscionability.
• The court ruled certain provisions within the agreement rendered it substantively unconscionable and the manner in which it was presented electronically was procedurally unconscionable. In combination, the court found the “high degree” of unconcionability rendered the agreement unenforceable.

On December 21, 2023, the California Court of Appeal Third Appellate District in Hasty v. American Automobile Association of Northern California, Nevada & Utah rejected the employer’s bid to compel arbitration over claims of race and disability discrimination, harassment, wrongful discharge, and retaliation in violation of California law.

The court found the arbitration agreement at issue was unenforceable because it was both substantively and procedurally unconscionable. Importantly, the court scrutinized not just the language in the agreement but how the employer obtained electronic acknowledgments of the agreement.

Substantive Unconscionability

The Court of Appeal found the agreement was substantively unconscionable in four different ways. First, according to the court, the agreement contained an overly broad confidentiality clause.

Second, the court interpreted the agreement as waiving both individual and nonindividual claims under California’s Private Attorneys General Act (PAGA).

Third, the court found the agreement was overly broad in that it required the parties to waive their right to “any remedy or relief” resulting from a charge or complaint before a governmental agency.

Finally, the agreement provided a link to the applicable arbitration rules on a third party website, and the link no longer worked.

Procedural Unconscionability

In finding the arbitration agreement was procedurally unconscionable, the Court of Appeal relied almost exclusively on the employer’s method of electronic distribution of the arbitration agreement to employees and process for obtaining electronic acknowledgments of the agreement.

According to the decision, the plaintiff reviewed the onboarding documents on a smartphone with a smaller screen relative to a desktop computer or paper copy and as a result may have had difficulty reading what was presented.

Additionally, an employee had to click on an icon to view the arbitration agreement and could record their electronic acknowledgment by clicking on “I Agree” without ever accessing the agreement itself. The court’s decision highlights that the procedure by which employers present arbitration agreements to their employees is a key factor for courts when reviewing the enforceability of such agreements.  

Conclusion and Next Steps

According to the court, the arbitration was “permeated with unconscionability” and therefore the offending provisions could not be severed pursuant to the agreement’s severance provision. The combination of significant procedural unconscionability, combined with substantive unconscionability, led the court to deny enforcement of the agreement.

In light of the court’s decision, employers may want to review their use of arbitration agreements for updates based on the evolving nuances in this area of the law. They may further want to review their processes for electronic distribution of arbitration agreements and processes for gathering electronic acknowledgments.

Ogletree Deakins’ Arbitration and Alternative Dispute Resolution, Class Action, and California Class Action and PAGA practice groups will continue to monitor developments and will provide updates on the Arbitration and Alternative Dispute Resolution, Class Action, and California blogs.

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