In Ramirez v. Charter Communications, Inc, the California Supreme Court held that courts cannot refuse to enforce arbitration agreements simply by finding that three or more provisions are unconscionable. Rather, courts must use a three-prong test to assess whether to remove or limit unconscionable terms and enforce the remainder of the agreement.
The employee in Ramirez signed an arbitration agreement at the outset of her employment. After she was terminated, she filed a lawsuit in court rather than in arbitration. The employer filed a motion to compel the case to arbitration. The trial and appellate court concluded that because there were multiple unconscionable provisions in the employment arbitration agreement, that the employer’s motion should be denied.
The California Supreme Court affirmed the lower court’s findings that the provisions were unconscionable. Despite affirming that the arbitration agreement contained unconscionable terms, the Supreme Court held that the existence of unconscionable terms does not render the agreement per se unconscionable. It explained that there is no bright line rule regarding the number of unconscionable terms in a contract that mandates that a court refuse enforcement of the contract. Instead, it set forth a three-prong test.
It held a court may liberally sever any unconscionable provision of a contract and enforce the rest when:
- The unconscionable provision(s) are collateral to the main purpose of the contract;
- It is possible to cure the unconscionability by removing or limiting the provision; and
- Enforcing the remainder of the contract would be in the interests of justice.
Under the first prong, the court considers whether the main purpose of the contract is tainted by an unlawful purpose (e.g., creating a system that disfavors/disadvantages an employee’s claims and that favors/advantages an employer’s claims). If not, the unconscionable provision(s) are collateral.
Under the second prong, the court considers whether striking or limiting existing terms removes the unconscionability and whether the agreement contains a severance clause indicating the parties’ intent to have the court do so. However, if terms must be added to the contract to remove the unconscionability, the court should not enforce the contract.
Under the third prong, the court considers whether (1) severance of unconscionable terms condones an illegal scheme (e.g., whether severance creates an incentive for employers to draft one-sided agreements in the hopes that employees won’t challenge them, and if they do, that the court would fix the problems for them) and (2) if the agreement indicates a systematic effort to impose arbitration on an employee as an inferior forum that works to the employer’s advantage. If the answer is yes to either question, then in the interests of justice, the court should not enforce the agreement.
The case was remanded for further consideration in light of this three-prong test.
Ramirez v. Charter Communications, Inc. is a reminder to employers to ensure that their employment arbitration agreements are fair and balanced, and the decision clarifies the standard to determine whether courts can sever unconscionable (i.e., one-sided and/or illegal) terms.
If you use an arbitration agreement in your employment contracts or workplace, it is imperative to contact your business attorney to ensure the arbitration agreement will remain enforceable or needs to be redrafted.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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