In our final installment of the blog series that previews employment cases being heard by the Supreme Court, the Zaborowski case will allow the Court to opine on the enforceability of arbitration agreements that may have questionable (or “unconscionable”) terms. Read on for more.

Once Again SCOTUS Takes on the Enforceability of Arbitration Agreements

On October 1, 2015, the U.S. Supreme Court agreed to hear MHN Government Services, Inc. v. Zaborowski, an appeal from a Ninth Circuit decision refusing to compel arbitration in a wage case.

The Holdings Below. Zaborowski contracted with MHN to provide counseling services to military personnel and their families.  At the beginning of their work relationship, Zaborowski signed an agreement to arbitrate claims against MHN.  That agreement contained a severability clause, which required the striking of any term in the agreement that a court deemed unenforceable while enforcing the remaining terms.  Claiming that MHN misclassified him and other consultants as “independent contractors,” rather than “employees,” Zaborowski filed suit in the Northern District of California seeking alleged overtime wages.  In response, MHN filed a motion to compel Zaborowski to arbitrate his claims.

In its ruling, the District Court held that the following terms in the arbitration agreement were unconscionable: (1) shortening the period for filing a claim; (2) giving MHN control over selection of an arbitrator; (3) awarding attorneys’ fees and costs to the prevailing or “substantially prevailing party”; (4) requiring Zaborowski to pay a $2,600 arbitration filing fee; and (5) waiving the potential recovery of punitive damages. Despite the severability clause and the “strong presumption in favor of arbitration” under the Federal Arbitration Act (“FAA”), the District Court refused to modify and enforce the arbitration agreement and instead nullified it.  The District Court reasoned that it could not fix the arbitration agreement “without being required to assume the role of contract author rather than interpreter.”  Under California state law, the District Court held that a trial court has the discretion to conclude that an arbitration agreement containing “multiple unlawful provisions” is “permeated by an unlawful purpose” and therefore unenforceable in its entirety.

The Ninth Circuit affirmed on appeal. Noting that it “may have reached a different conclusion,” the Ninth Circuit majority opinion nevertheless held that, under California law, the District Court did not abuse its discretion by refusing to sever the many unconscionable terms from the arbitration agreement and enforce the rest.

In a noteworthy dissent, Judge Gould disagreed, finding that the District Court should have severed the unconscionable terms and otherwise enforced the arbitration agreement. Relying on the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, Judge Gould opined that the FAA preempts California state law establishing that an arbitration agreement is unenforceable if it contains multiple unconscionable provisions.  In Judge Gould’s view, Concepcion created “a presumption in favor of severance” if an arbitration agreement can be enforced after severing the unconscionable terms.  To demonstrate that modification and enforcement should have occurred here, Judge Gould included in his dissent an actual redlined version of Zaborowski’s arbitration agreement, which provided a visual demonstration of the ease with which the allegedly unconscionable terms could have been stricken and the rest of the arbitration agreement enforced.

Why This Case Matters.  If the Supreme Court reverses the Ninth Circuit’s decision, companies may find it easier to enforce arbitration agreements containing provisions that are deemed unconscionable under state contract law.  A reversal of the Ninth Circuit’s decision would be consistent with Supreme Court precedent regarding the enforceability of arbitration agreements.  But, regardless of the outcome, this case is important because the Supreme Court’s decision may provide direction to trial courts across the country regarding the circumstances under which they should and should not enforce arbitration agreements.

What Employers Can Do To Be Proactive.  This case highlights to companies the importance of having arbitration agreements that can withstand judicial scrutiny if and when attacked.  Companies that are considering the implementation of arbitration agreements should do so with this in mind, and with an eye toward recent developments in this area of the law.  As for companies with existing arbitration agreements, it is never too late.  Companies can always evaluate the strengths and vulnerabilities of their arbitration agreements and, if appropriate, make changes that are not only consistent with developing law, but also business needs and goals.