Seyfarth Synopsis: An arbitration provision that was provided only in English to a population consisting of one-third Spanish speakers, and that required claimants to bear one-half of arbitration expenses, was unenforceable as unconscionable.

Arbitration agreements generally are enforced unless a court determines that they are procedurally and substantively unconscionable. On September 9, 2016, in Penilla v. Westmont Corp., the California Court of Appeal affirmed an order denying the enforcement of an arbitration agreement that was available only in English (even to non-English speakers), and that contained shortened limitations periods. The arbitration agreement also had several other terms—such as permitting a default judgment against potential claimants who fail to advance one-half of undisclosed arbitral fees—that taken together rendered the arbitration unenforceable.

The Facts

Westmont rents land to low-income mobile home owners. Forty-six mobile home owners who entered into rental agreements with Westmont sued the company on various contract, tort, and statutory claims. Westmont, citing the arbitration provision within its rental agreements, moved to compel arbitration. The mobile home owners opposed the motion, arguing that the arbitration provision was both procedurally and substantively unconscionable.

The mobile home owners said the arbitration provision was procedurally unconscionable because it (i) was a contract of adhesion, (ii) was not provided or explained in Spanish for the one-third of the mobile home owners who spoke little English, and (iii) was signed under severe economic pressure. The mobile home owners said the arbitration agreement was also substantively unconscionability, because the agreement required claimants to advance expensive arbitration fees or face a default judgment.

The Trial Court Decision

Although the trial court found that a valid rental contract existed between Westmont and the mobile home owners, it did not compel arbitration, because the arbitration provision was both procedurally and substantively unconscionable. The trial court found that the mobile home owners (i) were under economic pressure to enter the rental agreements since they already were paying for mobile homes and could not afford other housing, and (ii) were not informed that the expense of a JAMS arbitrator ranged from $500 to $800 per hour and $5,000 to $10,000 per day. Westmont appealed this ruling.

The Court of Appeal’s Decision

The Court of Appeal affirmed the trial court’s reasons for denying the petition to compel arbitration, and articulated additional bases to find the arbitration provision unconscionable.

Although an arbitration agreement is not rendered unenforceable merely it is contained in a contract of adhesion, the Court of Appeal noted that the California Supreme Court has specifically opined that the “immobility of the mobile home, the investment of the mobile home owner, and restriction on mobile home spaces” heightens “an economic imbalance of power in favor of mobile home park owners.” As applied to Westmont’s arbitration provision, the Court of Appeal concluded that the evidence showed that the mobile home owner plaintiffs had no real practical choice but to agree to the rental agreements containing the arbitration provision.

Next, the Court of Appeal faulted Westmont’s managers who explained in Spanish that the rental agreement was required but who did not explain the arbitration provision’s terms to the one-third of mobile home owners who were not proficient in English. More importantly, the Court of Appeal explained that, even for the English-proficient mobile home owners, the arbitration provision was “confusing and sometimes contradictory,” reflected a “tenuous grasp of grammar and syntax,” and would be incomprehensible, deceptive, or surprising to a layperson—in English or Spanish.

The Court of Appeal then found that the failure to explain to mobile home owners that arbitration fees could be up to $5,000 per day was significant. In addition to the deterrent effect noted by the trial court, the Court of Appeal emphasized the failure in light of the arbitration provision’s imposition of a default judgment on parties who failed to advance their arbitration fees and the provision’s failure to either limit the amount of arbitration fees, or provide any means of reducing fees (e.g., permitting claims in small claims court or consolidation of claims to permit splitting arbitration fees with others).

The Court of Appeal also noted that the arbitration provision’s shortened arbitral limitations period, and limitations on available remedies, also raised concerns of substantive unconscionability. Specifically, the rental agreement created a limitations period for claims of one year—although the claims asserted in the plaintiffs’ lawsuit generally were subject to a limitations period of three or four years—and also limited awards of punitive damages to two percent of the owner’s equity.

What Penilla Means For Employers

Though this decision did not address an arbitration agreement in the employment context, it highlights some of the many pitfalls employers should mind while crafting arbitration agreements. Under the Armendariz decision, employers mandating arbitration already ae saddled with a rule that they must bear the costs of litigation that are uniquely attributable to arbitration. The Penilla decision does not establish any blanket propositions that would render an arbitration agreement unenforceable, but suggests that employers should consider carefully whether to provide an arbitration agreement in English only, whether to impose defaults for failures to pay fees without first indicating what those fees are, or, most especially, whether to attempt any shortening of a limitations period. The decision is yet another reminder to employers with arbitration agreements to consider whether any special provision is truly necessary and desirable for their particular workforces.