Delegation to the Arbitrator of the Power to Decide Whether the Arbitration Clause is Unconscionable Is “Horse of a Different Color” That Must Satisfy High Evidentiary Standard

     The employer, CantorCo2e, L.P., and an executive, appealed from an order denying their petition to compel arbitration of the claims under the Federal Arbitration Act (FAA) brought by an employee who was a broker. The FAA can give some advantage to the employer seeking to compel arbitration, because arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions – e.g., unconscionability. Furthermore, here, the employer, who of course drafted the arbitration provision, had the beginning advantage of a broadly worded arbitration provision indicating that arbitration might be conducted under the rules of an arbitration service (AAA) giving arbitrators the power to decide the validity of arbitration agreements.

     However, under all the circumstances here, that was not enough to satisfy the trial court or the Court of Appeal that the parties intended to delegate authority to the arbitrator to decide the threshold issue of whether the arbitration provision was conscionable. Ajamian v. CantorCO2e , L.P., Case No. A131025 (1^st Dist. Div. 5 Feb. 16, 2012) (certified for publication).

     Given the broadly worded arbitration provision, why couldn’t the arbitrator, rather than the trial court, decide whether the employment dispute had to be arbitrated? The chief reason is that ordinarily it is the expectation of the parties that a court, rather than an arbitrator, will decide whether the arbitration provision is unconscionable. Therefore, delegation of that decision – contrary to what is typically the expectation of the parties – requires “clear and convincing evidence.”

    The Court of Appeal drew a distinction between the power of an arbitrator to decide substantive claims, and the power of the arbitrator to decide whether the arbitration clause itself is unconscionable. “Language such as ‘any disputes, differences or controversies’ may well be adequate and necessary for the parties to express their intention to arbitrate all substantive claims, since the number and diversity of potential future substantive claims is so great as to defy a specific enumeration of each type. But the issue of who would decide the enforceability of the arbitration clause itself is a horse of a different color.”

     The general language of the broadly worded arbitration provision, which was not drafted to expressly address the issue of the enforceability of the arbitration provision, did not amount to “clear and convincing evidence” of delegation. Additionally, there was no language to the effect that the arbitrator had “exclusive” right to decide the issue of enforceability/unconscionability. And while the rules of the AAA give the arbitrator the “power” to determine issues of the arbitrator’s jurisdiction, a court may also have power to decide such issues, unless the arbitrator has “exclusive” authority.

     There were also aspects of procedural and substantive unconscionability. Though the parties’ stories differed, there was substantial evidence that the agreement was not really negotiated, and the relevant rules were not attached.

     As to substantive unconscionability, (a) the arbitration provision precluded an award of special or punitive damages to either party, but permitted the arbitrators to award the employer liquidated damages; (b) the provision required waiver of California substantive law in favor of New York law; (c) the attorney’s fees provision was one-sided (obviously unenforceable if California law applied).

     Because the arbitration agreement was sufficiently “permeated” by unconscionability, the trial judge was not required to rewrite the contract and sever problematic provisions in order to allow arbitration to go forward.

     Employers are sometimes tempted to draft arbitration provisions that are one-sided and give them an unfair advantage – with unintended consequences. To quote Oscar Wilde, “I can resist anything except temptation.”

     Justice Needham authored the 3-0 opinion.