Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).