This appeal arises from the district court's denial of defendant-appellant Circuit City Stores, Inc.'s (Circuit City) motion to compel arbitration. Circuit City moved to compel arbitration in response to the action plaintiff-appellee Catherine Ingle filed in the Southern District of California, in which she alleged employment discrimination in violation of state and federal civil rights statutes. Circuit City argues on appeal that the district court erred in declining to enforce an arbitration agreement requiring Ingle and Circuit City to arbitrate employment-related legal claims. We have jurisdiction under 9 U.S.C. § 16(a), and we affirm.
FACTS and PROCEDURAL BACKGROUND
In September 1996, Catherine Ingle applied to become an Associate
On June 21, 1999, Ingle filed this action against Circuit City in the Southern District of California. In her complaint, Ingle alleged claims of sexual harassment, sex discrimination, and disability discrimination under the California Fair Employment and Housing Act, Cal. Gov't Code § 12940, et seq. (FEHA). She also alleged claims of sex discrimination and retaliation under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e, et seq.
On July 16, 1999, Circuit City moved to compel arbitration. On September 22, 1999, the district court entered an order denying the motion on the ground that the arbitration agreement was unenforceable under Duffield v. Robertson, Stephens & Co., 144 F.3d 1182 (9th Cir.1998). The district court held that Circuit City's form application for employment unlawfully conditioned Ingle's employment on her agreement to forego statutory rights and remedies. Circuit City now appeals, arguing primarily that its arbitration agreement is enforceable under Duffield
STANDARD OF REVIEW
We review de novo a district court's denial of a motion to compel arbitration. Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 936 (9th Cir.2001), cert. denied, 534 U.S. 1133, 122 S.Ct. 1075, 151 L.Ed.2d 977 (2002); United Food & Commercial Workers Union, Local 770 v. Geldin Meat Co., 13 F.3d 1365, 1368 (9th Cir.1994).
DISCUSSION
I. Circuit City's Arbitration Agreement
Circuit City compels all of its employees and job applicants to sign an arbitration agreement requiring arbitration of all employment-related legal claims. The "Circuit City Dispute Resolution Rules and Procedures" (Rules and Procedures) determine the substance and procedures of the arbitration agreement. Ingle and Circuit City agree that the arbitration agreement
II. The Doctrine of Unconscionability
The Federal Arbitration Act (FAA) provides that arbitration agreements generally "shall be valid, irrevocable, and enforceable." 9 U.S.C. § 2 (2002). But when grounds "exist at law or in equity for the revocation of any contract," courts may decline to enforce such agreements. Id.; Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 683, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 782 (9th Cir.2002).
It is a settled principle of law that "arbitration is a matter of contract." United Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960). Federal law "directs courts to place arbitration agreements on equal footing with other contracts." EEOC v. Waffle House, Inc., 534 U.S. 279, 293, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002). Arbitration agreements, accordingly, are subject to all defenses to enforcement that apply to contracts generally. See 9 U.S.C. § 2 (2002). To evaluate the validity of an arbitration agreement, federal courts "should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Ingle was employed in California; we therefore evaluate Circuit City's arbitration agreement under the contract law of that state. Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002) ("Adams III"); see also Ticknor, 265 F.3d at 937 (applying Montana law to determine whether arbitration clause was valid).
Because unconscionability is a generally applicable defense to contracts, California courts may refuse to enforce an unconscionable arbitration agreement. See Ferguson, 298 F.3d at 782. Unconscionability refers to "an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 486, 186 Cal.Rptr. 114 (1982); see also U.C.C. § 2-302; Cal. Civ.Code § 1670.5; Restatement (Second) of Contracts § 208 (1981). Thus, a contract to arbitrate is unenforceable under the doctrine of unconscionability when there is "both a procedural and substantive element of unconscionability." Ferguson, 298 F.3d at 783; accord Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000). Significantly, the California Supreme Court has noted that procedural and substantive unconscionability "need not be present in the same degree." Id. In Armendariz,
Id. at 114 (quoting 15 Williston on Contracts § 1763A, at 226-27 (3d ed. 1972)) (other citations omitted).
A. Procedural Unconscionability
To determine whether the arbitration agreement is procedurally unconscionable the court must examine "the manner in which the contract was negotiated and the circumstances of the parties at that time." Kinney v. United Healthcare Servs., Inc., 70 Cal.App.4th 1322, 1329, 83 Cal.Rptr.2d 348, 352-53 (1999). An inquiry into whether Circuit City's arbitration agreement involves oppression or surprise is central to that analysis. A contract is oppressive if an inequality of bargaining power between the parties precludes the weaker party from enjoying a meaningful opportunity to negotiate and choose the terms of the contract. Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 1532, 60 Cal.Rptr.2d 138, 145 (1997) (citation omitted). "Surprise involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Id. (internal quotation marks omitted).
There is no doubt that Circuit City's arbitration agreement is oppressive. In Adams III, we held that the arbitration agreement at issue in that case was procedurally unconscionable under California law because:
Adams III, 279 F.3d at 893. Procedurally, there is absolutely no difference between the version of the arbitration agreement we evaluated in Adams III and the version we review in this case. Because of the stark inequality of bargaining power between Ingle and Circuit City, we conclude that Circuit City's 1998 arbitration agreement is also procedurally oppressive. See id.; Ferguson, 298 F.3d at 783-84; Armendariz, 24 Cal.4th at 114-15, 99 Cal.Rptr.2d 745, 6 P.3d at 690; see also Stirlen, 51 Cal.App.4th at 1533-34, 60 Cal.Rptr.2d 138 (finding procedural unconscionability when an arbitration clause was part of a contract of adhesion in which the employee was presented with an employment
Circuit City argues that because Ingle had sufficient time — three days — to consider the terms of the arbitration agreement, the court should not find this agreement procedurally unconscionable. We disagree. The amount of time Ingle had to consider the contract is irrelevant. We follow the reasoning in Szetela v. Discover Bank, 97 Cal.App.4th 1094, 118 Cal.Rptr.2d 862 (2002), in which the California Court of Appeal held that the availability of other options does not bear on whether a contract is procedurally unconscionable. Id. at 1100, 118 Cal.Rptr.2d 862. Rather, when a party who enjoys greater bargaining power than another party presents the weaker party with a contract without a meaningful opportunity to negotiate, "oppression and, therefore, procedural unconscionability, are present." Ferguson, 298 F.3d at 784; Szetela, 97 Cal.App.4th at 1100, 118 Cal.Rptr.2d 862.
Circuit City contended at oral argument that our recent decisions in Circuit City Stores, Inc. v. Najd, 294 F.3d 1104 (9th Cir.2002), and Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (9th Cir.2002), should bear on our analysis regarding procedural unconscionability. However, we clearly stated that the arbitration agreements in those cases were not procedurally unconscionable only because Najd and Ahmed each had a meaningful opportunity to opt out of the arbitration program. See Najd, 294 F.3d at 1108; Ahmed, 283 F.3d at 1200. To invoke the holdings in Ahmed and Najd, Circuit City must show that it provided Ingle a meaningful opportunity to decline to enter into the arbitration agreement.
The California Supreme Court's decision in Armendariz is also instructive in this case. The Armendariz court held that it is procedurally unconscionable to require employees, as a condition of employment, to waive their right to seek redress of grievances in a judicial forum. See Armendariz, 24 Cal.4th at 114-15, 99 Cal.Rptr.2d 745, 6 P.3d at 690. Circuit City's arbitration agreement similarly requires, as a condition of employment, that employees waive their right to bring future claims in court. See Ferguson, 298 F.3d at 784. Ingle had no meaningful opportunity to opt out of the arbitration agreement, nor did she have any power to negotiate the terms of the agreement. Therefore, because Circuit City presented the arbitration agreement to Ingle on an adhere-or-reject basis, we conclude that the agreement is procedurally unconscionable.
B. Substantive Unconscionability
Substantive unconscionability centers on the "terms of the agreement and whether those terms are so one-sided as to shock the conscience." Kinney, 70 Cal.App.4th at 1330, 83 Cal.Rptr.2d 348 (internal quotation marks omitted). In evaluating the substance of a contract, courts must analyze the contract "as of the time [it] was made." A & M Produce, 135 Cal.App.3d at 487, 186 Cal.Rptr. 114.
Several substantive terms of Circuit City's arbitration agreement are one-sided. The provisions concerning coverage of claims, the statute of limitations, the prohibition of class actions, the filing fee, cost-splitting, remedies, and Circuit City's unilateral
1. Claims Subject to Arbitration
The one-sided coverage we found objectionable in Adams III remains in the version of the arbitration agreement we evaluate in this case.
This case presents a broad concern with respect to arbitration agreements between employers and employees. Circuit City argues that the arbitration agreement subjects Circuit City to the same terms that apply to its employees. But this argument is "exceedingly disingenuous,"
The only claims realistically affected by an arbitration agreement between an employer and an employee are those claims employees bring against their employers.
Thus, we conclude that, under California law, a contract to arbitrate between an employer and an employee, such as the one we evaluate in this case, raises a rebuttable presumption of substantive unconscionability. Unless the employer can demonstrate that the effect of a contract to arbitrate is bilateral — as is required under California law — with respect to a particular employee, courts should presume such contracts substantively unconscionable.
Circuit City's arbitration agreement expressly limits its scope to claims brought
2. Statute of Limitations
The Circuit City arbitration agreement states that the form by which an employee requests arbitration:
We have already expressly criticized Circuit City's statute of limitations provision, Adams III, 279 F.3d at 894-95, finding that Circuit City's "strict one year statute of limitations on arbitrating claims ... would deprive [Associates] of the benefit of the continuing violation doctrine available in FEHA suits." Id. This rule is identical to the one we held unconscionable in Adams III. Id. While Circuit City insulates itself from potential damages, an employee foregoes the possibility of relief under the continuing violations doctrine. Therefore, because the benefit of this provision flows only to Circuit City, we conclude that the statute of limitations provision is substantively unconscionable.
3. Prohibition of Class Actions
Circuit City's arbitration agreement directs arbitrators not to consolidate claims of different employees into one proceeding and generally prohibits the arbitrator from hearing an arbitration as a class action. We find that this bar on class-wide arbitration is patently one-sided, and conclude that it is substantively unconscionable.
The ability to pursue legal claims in a class proceeding has firm roots in both the federal and California legal systems. The United States Supreme Court has held that the "class suit was an invention of equity to enable it to proceed to a decree in suits where the number of those interested in the subject of the litigation is so great that their joinder as parties in conformity to the usual rules of procedure is impracticable." Hansberry v. Lee, 311 U.S. 32, 41, 61 S.Ct. 115, 85 L.Ed. 22 (1940). The California class action statute "rests upon considerations of necessity and paramount convenience, and was adopted to prevent a failure of justice." Weaver v. Pasadena Tournament of Roses Ass'n, 198 P.2d 514, 516, 32 Cal.2d 833, 837 (1948); see Cal. Civ. Proc. § 382 (2003); Fed.R.Civ.P. 23.
In Szetela, the California Court of Appeal severed a provision barring class-wide arbitration from a credit card company's arbitration agreement. Szetela, 97 Cal.App.4th at 1100-02, 118 Cal.Rptr.2d 862. In the court's view, by barring class arbitration in a contract of its own drafting, the defendant "sought to create for itself virtual immunity from class or representative actions despite their potential merit, while suffering no similar detriment to its own rights." Id. at 1101, 118 Cal.Rptr.2d 862. The Szetela court found the bar on class arbitration "harsh and unfair" to
Szetela, 97 Cal.App.4th at 1100-01, 118 Cal.Rptr.2d 862.
The Szetela court rejected Discover Bank's bar on class-wide proceedings as substantively unconscionable because the actual effect of the provision was to deny a procedural benefit only its customers would employ. In the context of an arbitration agreement between an employer and an employee, Circuit City adopts just such a provision. We cannot conceive of any circumstances under which an employer would bring a class proceeding against an employee.
4. Filing Fee
Under the terms of the arbitration agreement, to initiate a complaint against Circuit City, an employee must submit an "Arbitration Request Form with a required filing fee of $75 (made payable with a cashier's check or money order to Circuit City Stores, Inc.)." Under California law, "when an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court." Armendariz, 24 Cal.4th at 110-11, 99 Cal.Rptr.2d 745, 6 P.3d 669 (emphasis in original).
Though denominated a "filing fee," the employee-claimant must pay the required seventy-five dollars here directly to Circuit City, rather than to the arbitration service Circuit City identifies in the arbitration agreement. It thus appears that the employee is required to pay Circuit City for the privilege of bringing a complaint. While a true filing fee might be appropriate under Armendariz, the fee required by Circuit City is not the "type of expense that the employee would be required to bear" in federal court, and is therefore inappropriate under Armendariz. Moreover, by requiring employees to pay the fee to the very entity against which they seek redress, Circuit City may very well deter employees from initiating complaints.
The seventy-five dollar fee poses an additional problem. In federal court, plaintiffs in all types of cases may be exempt from paying court fees upon a showing of indigence. See 28 U.S.C. § 1915(a)(1). Circuit City's arbitration agreement, however, makes no similar provision for waiver of the filing fee (or other fees and costs of arbitration). Without such a provision for waiver in cases of indigence, employees in that category might well find it prohibitively expensive to pay seventy-five dollars to file a complaint. For these reasons, the arbitration agreement's fee provision is manifestly one-sided.
We therefore find the fee provision substantively unconscionable.
5. Cost-splitting
We have previously rejected the Circuit City arbitration agreement's cost-splitting provision. Adams III, 279 F.3d at 894. In Adams III, we held that Circuit City's "fee allocation scheme alone would render an arbitration agreement unenforceable." Id. Although in that case we evaluated an older version of the arbitration agreement, the version we review here contains the same provision that "each party shall pay one-half of the costs of arbitration following the issuance of the arbitration award."
By itself, the fact that an employee could be held liable for Circuit City's share of the arbitration costs should she fail to vindicate employment-related claims renders this provision substantively unconscionable.
6. Remedies
In Adams III, we criticized the limitations on available remedies in Circuit City's arbitration agreement.
The Circuit City arbitration agreement delimits what relief is available to employees who succeed in arbitration claims against Circuit City. The agreement grants the arbitrator the discretion to award (1) injunctive relief, including reinstatement; (2) one year of full or partial back pay, subject to reductions by interim earnings or public or private benefits received;
7. Unilateral termination/modification
Circuit City's arbitration agreement provides that "Circuit City may alter or terminate the Agreement and these Dispute Resolution Rules and Procedures on December 31st of any year upon giving 30 calendar days written notice to Associates." Circuit City, then, may modify or terminate any and all dispute resolution agreements with its employees unilaterally. Notably, the arbitration agreement affords no such power to employees. The United States Supreme Court has held that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); see also Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995) (confirming that arbitration under the FAA is a matter of "consent, not coercion"). Although the agreement requires Circuit City to provide exiguous notice
C. Severance
California law grants courts the discretion either "to sever an unconscionable provision or refuse to enforce the contract in its entirety." Adams III, 279 F.3d at 895; Cal. Civ.Code § 1670.5(a). In exercising this discretion, courts look to whether the "central purpose of the contract is tainted with illegality" or "the illegality is collateral to [its] main purpose." Adams III, 279 F.3d at 895 (quoting Armendariz, 24 Cal.4th at 124, 99 Cal.Rptr.2d 745, 6 P.3d at 696-97). Even though the 1998 arbitration agreement is a revised version of the agreement we held unconscionable in Adams III, it is nonetheless permeated with objectionable provisions. While many of the terms of Circuit City's arbitration agreement appear facially neutral, the effect of these provisions is to obstruct its employees' ability to substantiate claims against Circuit City. See Ferguson, 298 F.3d at 787 ("While many of its arbitration provisions appear `equally applicable to both parties, [these provisions] work to curtail the employee's ability to substantiate any claim against [the employer].'") (quoting Kinney, 70 Cal.App.4th at 1332, 83 Cal.Rptr.2d 348).
Circuit City correctly argues that the FAA articulates a strong public policy in favor of arbitration agreements. 9 U.S.C. § 2 (2002); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (holding that "questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration"). Nevertheless, this "policy is manifestly undermined by provisions in arbitration clauses [that] seek to make the arbitration process itself an offensive weapon in one party's arsenal." Kinney, 70 Cal.App.4th at 1332, 83 Cal.Rptr.2d 348.
While it is within this court's discretion to sever unconscionable provisions, because an "insidious pattern"
CONCLUSION
Because the Circuit City arbitration agreement is unconscionable under California contract law, we affirm the district
AFFIRMED.
FootNotes
We also note that our holding is in tension with Lozano v. AT & T, 216 F.Supp.2d 1071 (C.D.Cal.2002). The court in Lozano held, inter alia, that an arbitration clause prohibiting class actions was not substantively unconscionable, so long as the clause allows the arbitrator to provide for declaratory and injunctive relief under state consumer statutes and authorizes statutory damages on an individual basis. Id. at 1076; see also Arriaga v. Cross Country Bank, 163 F.Supp.2d 1189, 1195 (S.D.Cal.2001) (rejecting plaintiff's argument that bar on class-wide arbitration was substantively unconscionable). We reject the reasoning in Lozano and Arriaga to the extent that it conflicts with our holding that an essentially unilateral bar on class-wide arbitration is substantively unconscionable.
Comment
User Comments