Why it matters

A California appellate panel disagreed with a former employee that an arbitration clause in her employment agreement was procedurally and substantively unconscionable, reversing a denial of the motion to compel arbitration. When Wilson Farrar was hired by Direct Commerce as a vice president of business development, she negotiated an employment agreement that was set forth in a six-page offer letter. The agreement had details about her compensation and stock options as well as an arbitration provision. Farrar later sued the employer for breach of contract and wrongful termination and Direct Commerce moved to compel arbitration pursuant to the agreement. A trial court judge denied the motion, ruling that the agreement was both procedurally and substantively unconscionable. But the appellate panel reversed. Procedurally, Farrar was not surprised by the arbitration provision and there was no evidence of oppression by the company, which negotiated with her over other terms. While the arbitration provision was one-sided because it excluded any claims arising from a separate confidentiality agreement Farrar also signed, that provision is “readily severable,” the court said. Ordering the provision severed, the court remanded the case to be sent to arbitration.

Detailed discussion

In November 2010, Wilson Farrar began discussions about joining Direct Commerce as vice president of business development. The company’s president sent her an initial draft of an employment agreement that outlined her job title, base salary, commission, and stock options, among other issues. The six-page letter also featured a paragraph titled “Arbitration” that appeared in the same font and graphic style as the other paragraphs and provided that arbitration would resolve any dispute “relating to your employment or its termination.”

Farrar continued to negotiate about her employment package, although she was led to believe that outside of the compensation details, the terms—such as arbitration—were non-negotiable. The parties reached a deal and Farrar signed the final agreement, which contained some changes from the draft, as well a confidentiality agreement.

Four years later, Direct Commerce terminated Farrar’s employment and she sued, alleging breach of contract and wrongful termination. Direct Commerce moved to compel arbitration. A trial court denied the motion, determining that the arbitration provision was both procedurally and substantively unconscionable. The employer appealed.

The appellate panel began with the issue of procedural unconscionability. “This case differs from many employment disputes where applicants for staff or lower level positions fill out a form employment application or are subsequently presented with a form employment agreement on a take-it-or-leave-it basis,” the court said. “Here we are dealing with a negotiated employment agreement for a top level executive who had extensive experience in sales and business development and held herself out as being experienced in contract negotiations.”

Although the parties were “roughly equal,” Farrar was not able to negotiate the terms of the arbitration paragraph, the court recognized, or the confidentiality agreement. In this respect, the agreement was adhesive but Farrar was still on notice about the arbitration provision, the panel said, as she received the offer letter before she reached the final employment agreement.

Finding “no evidence of ‘oppression’ or ‘sharp practices,’ on the part of the company,” the court said heightened scrutiny of the arbitration provision was not warranted.

Turning to substantive unconscionability, the panel found just one problem: a carve-out for claims related to the confidentiality agreement that provided a “wholesale exception” for the employer. The court also found a solution: severability.

“[T]he arbitration provision in the instant case is afflicted with only one substantively unconscionable provision, the exception for claims arising from the confidentiality agreement,” the court said. “This is not a case in which the arbitration provision is ‘permeated’ by unconscionability and, thus, would have to be ‘reformed’ in order to eliminate unconscionability.”

Instead, the court ordered the exception for claims arising from the confidentiality agreement to be severed and reversed the order denying the motion to compel arbitration.

To read the opinion in Farrar v. Direct Commerce, Inc., click here.