Nino v. The Jewelry Exchange
609 F.3d 191 (3d Cir. 2010)
OPINION BY CIRCUIT JUDGE FUENTES:
Rajae Nino brought this action against his former employer, alleging that he was discriminated against on account of his gender and national origin.… [T]he employer invoked an arbitration provision in Nino’s employment contract and moved the District Court to compel the parties to arbitrate their dispute. Nino opposed the motion, arguing that the arbitration agreement was unconscionable and, therefore, unenforceable.… The District Court concluded that although the arbitration agreement contained unconscionable terms, those provisions could be severed from the contract and the remainder of its terms could be enforced. * * *
In our view, the pervasively one-sided nature of the arbitration agreement’s terms demonstrates that the employer did not seek to use arbitration as a legitimate means for dispute resolution. Instead, the employer created a system that was designed to give it an unfair advantage through rules that impermissibly restricted employees’ access to arbitration and that gave the employer an undue influence over the selection of the arbitrator. We hold that it is not appropriate, in the face of such pervasive one-sidedness, to sever the unconscionable provisions from the remainder of the arbitration agreement. * * * We will thus reverse the District Court’s order compelling the parties to arbitrate.
* * * We have repeatedly recognized that the Federal Arbitration Act (“FAA”) establishes a “strong federal policy in favor of the resolution of disputes through arbitration.” Under the FAA, arbitration agreements “are enforceable to the same extent as other contracts.” “A party to a valid and enforceable arbitration agreement is entitled to a stay of federal court proceedings pending arbitration as well as an order compelling such arbitration.”
* * * Under Virgin Islands law, “[t]he doctrine of unconscionability involves both ‘procedural’ and ‘substantive’ elements.” The procedural component of the unconscionability inquiry looks to the “process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language.” We have consistently found that adhesion contracts—that is, contracts prepared by the party with greater bargaining power and presented to the other party “for signature on a take-it-or-leave-it basis”—satisfy the procedural element of the unconscionability analysis. “A contract, however, is ‘not unconscionable merely because the parties to it are unequal in bargaining position.’” Instead, a party challenging a contract on unconscionability grounds must also show that the contract is substantively unconscionable by demonstrating that the contract contains “terms unreasonably favorable to the stronger party.” * * *
Looking first to the question of procedural unconscionability, we agree with the District Court that Nino had no opportunity to negotiate with DI [Diamonds International—the name under which the Jewelry Exchange does business] over the contract’s terms, that DI was the stronger contractual party, and that the arbitration agreement is thus procedurally unconscionable. First and most significantly, as the District Court expressly found, DI presented the arbitration agreement to Nino “for signature on a take-it-or-leave-it basis.” As Nino explained in his deposition, during his first week at the St. Thomas store, DI’s human resources manager provided him with a copy of the company’s employment contract and instructed him to “read it and sign it,” without affording him any opportunity to negotiate over its terms. * * *
We likewise conclude that the arbitration agreement is substantively unconscionable because it contains terms unreasonably favorable to DI, the stronger party. * * * First, … the arbitration agreement’s provision requiring that an employee file a grievance within five days of the complained-of incident in order to preserve his or her opportunity to arbitrate the dispute is substantively unconscionable. We have twice held in no uncertain terms that a thirty-day filing requirement in an arbitration agreement is substantively unconscionable.… [W]hile “a provision limiting the time to bring a claim or provide notice of such a claim to the defendant is not necessarily unfair or otherwise unconscionable,” the time period designated by the agreement must still be reasonable. If a thirty-day filing window is “clearly unreasonable” [as held in a prior case], then the five-day filing requirement imposed by the parties’ contract in this case is even more unduly favorable to DI.… Indeed, the filing requirement in Nino’s arbitration agreement is particularly unreasonable because it is both inflexible and one-sided. With regard to its inflexibility, the agreement states that its filing requirements “are binding and may not be waived except by written agreement of both parties.” * * * DI’s “unfair advantage is only compounded by the fact that [DI itself] is apparently not required to provide detailed and written notice to an employee of any of its own claims within a strictly enforced [five]-day time period.” Indeed, the arbitration agreement in this case imposes no notice requirement upon DI whatsoever. * * * The one-sided five-day filing requirement is manifestly unreasonable and is substantively unconscionable under Virgin Islands law.
Nino likewise argues, and the District Court found, that the arbitration agreement’s requirement that the parties bear their own attorney’s fees, costs, and expenses is substantively unconscionable. We agree. * * * [I]f arbitration is to offer claimants the full scope of remedies available under Title VII, arbitrators in Title VII cases, just like courts, must … ordinarily grant attorney fees to prevailing claimants rather than be restricted by private contractual language. Provisions in arbitration clauses requiring parties to bear their own attorney’s fees, costs, and expenses work to “the disadvantage of an employee needing to obtain legal assistance.” * * *
Finally, we turn to the arbitration agreement’s provision governing the selection of an arbitrator, which Nino contends is substantively unconscionable. Under the arbitration agreement, … DI is required to submit a request to the AAA for a panel of four arbitrators. The parties select a single arbitrator from this list according to the following process: From the panel the Employer will strike the first arbitrator for whatever reason is unacceptable to the Employer. The Employee will then be allowed to strike one arbitrator from the remaining names of panel members. This process will continue until there remains one arbitrator who will be the arbitrator for this grievance or the parties can decide on an arbitrator that would be mutually acceptable. Although it is phrased in neutral, procedural terms, the upshot of this provision is that DI is permitted to strike two arbitrators from the four-member AAA panel, whereas the employee is permitted to strike just one.
This provision is “one-sided in the extreme and unreasonably favorable to [DI].” It confers an advantage upon DI for no discernible purpose other than to stack the deck in its favor. Courts of Appeals have not hesitated to conclude that provisions in arbitration agreements that give the employer an unreasonable advantage over the employee in the selection of an arbitrator are unconscionable.… “By agreeing to arbitration in lieu of litigation, the parties agree to trade the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration,” but they do not accede to procedures “utterly lacking in the rudiments of even-handedness.” * * *
Our final task in addressing Nino’s unconscionability challenge to the arbitration agreement is to determine whether the unconscionable terms may be severed from the agreement such that the remainder of its terms may be enforced. * * * [T]wo lines of inquiry are relevant to the question of severability. The first of these is whether the unconscionable aspects “of the employment arbitration agreement constitute ‘an essential part of the agreed exchange’ of promises” between the parties. If the unconscionable aspects of the clause do not comprise an essential aspect of the arbitration agreement as a whole, then the unconscionable provisions may be severed and the remainder of the arbitration agreement enforced. * * * The second consideration for the question of severability … is whether the unconscionability of the arbitration clause demonstrates “a systematic effort to impose arbitration on an employee, not simply as an alternative to litigation, but as an inferior forum that works to the employer’s advantage.”
* * * We need not discuss whether the unconscionable provisions of the parties’ arbitration agreement comprise an essential aspect of the agreement as a whole, because we conclude that the one-sided nature of the arbitration agreement reveals unmistakably that DI “was not seeking a bona fide mechanism for dispute resolution, but rather sought to impose a scheme that it knew or should have known would provide it with an impermissible advantage.” The provisions in question do not simply accord an advantage upon DI indirectly or by happenstance. Instead, they are baldly one-sided, with only one discernible purpose—to create advantages for the employer that are not afforded to the employee. Of the four members of the arbitration panel, the agreement permits DI to strike two and the employee to strike just one. The employee is required to give notice to DI of the claims he intends to arbitrate, while DI is under no such obligation to provide any notice to the employee. The employee must file a detailed grievance regarding the matter he seeks to arbitrate within five days of the underlying events or lose the right to go to arbitration altogether, while DI is insulated against the risk of default for any failure to adhere to its own filing deadlines. * * *
We conclude … that the arbitration agreement is procedurally and substantively unconscionable, and that the pervasively one-sided nature of the agreement forecloses any possibility of severing the unfair provisions from the remainder of the agreement. * * *
What was the legal issue in this case? What did the appeals court decide?
What does it mean for a contract to be “unconscionable,” To be “procedurally unconscionable”? “To be substantively unconscionable”?
What was the evidence that this agreement was procedurally unconscionable? That this agreement was substantively unconscionable?
What does it mean to “sever” illegal terms from a contract? Why did the appeals court decline to do so here?
What would you advise this employer to do in light of this decision? Should it redraft the language of the arbitration agreement to deal with the court’s objections or drop the whole thing?
Narayan v. EGL, Inc
616 F.3d 895 (9th Cir. 2010)
OPINION BY DISTRICT JUDGE KORMAN:
The California Labor Code (“Labor Code”) confers certain benefits on employees that it does not afford independent contractors. * * * This appeal from a judgment of the United States District Court for the Northern District of California granting the motion of an employer for summary judgment … principally presents the issue whether, assuming the existence of an employer-employee relationship in California, the employer may avoid its obligations under the Labor Code by inserting a clause in an employer-drafted preprinted form contract in which: (1) the employee acknowledges that he is an independent contractor and (2) agrees that the contract would be interpreted in accordance with the laws of another jurisdiction where such an agreement is generally enforceable.
EGL, the employer, is a global transportation, supply