Why it matters

The U.S. Court of Appeals for the Ninth Circuit sent an employment dispute to arbitration, reversing a denial of the employer's motion to compel arbitration. Each December, the plaintiff employee signed an "Incentive Bonus Agreement" to receive her bonus from C.H. Robinson Company. The one-page document had eight provisions, including one on dispute resolution where both parties agreed to waive all claims unless submitted to mediation, followed by binding arbitration; another provision featured a class or collective action waiver. When the employee was terminated, she demanded mediation, alleging she was misclassified as exempt from overtime pay requirements. Mediation was unsuccessful and she filed a class action which included a California Private Attorneys General Act (PAGA) claim. The federal district court denied the employer's motion to compel arbitration based on certain aspects of the agreement that the court felt were unenforceable, but the Ninth Circuit reversed. An adhesion contract is not per se unconscionable, the panel said, and the agreement at issue had only a small amount of procedural unconscionability with limited elements of substantive unconscionability. As for the class action waiver, the Court agreed that it was invalid with regard to the PAGA claim, but found the waiver of other representative, collective, or class action claims did not render the agreement unenforceable.

Detailed discussion

An account manager for C.H. Robinson Company, Lorri Poublon, signed an "Incentive Bonus Agreement" each December in order to receive a financial bonus. The one-page document had eight provisions. The seventh provision, titled "Dispute Resolution," required the parties to submit employment-related claims to a mediator and then, if mediation was not successful, final and binding arbitration, and also prohibited collective, representative or class actions. It also contained a judicial carve-out that preserved the employer's right to seek judicial relief for certain claims seeking injunctive or equitable relief, and included language permitting the agreement to continue in full force even if any part of that provision was determined to be void or unenforceable.

After she was terminated in February 2012, Poublon alleged that her former employer misclassified her as exempt from overtime pay requirements and submitted her claim to mediation. When mediation was unsuccessful, she filed a class action suit against C.H. Robinson, including a count under PAGA.

Pursuant to the agreement, the employer moved to compel arbitration. The federal district court denied that motion, holding that the dispute resolution provision was both procedurally and substantively unconscionable and therefore unenforceable. C.H. Robinson appealed to the U.S. Court of Appeals for the Ninth Circuit.

Beginning its analysis with a nod to the Federal Arbitration Act's mandate to respect arbitration agreements, the federal appellate panel noted that California's standard for unconscionability is a sliding scale involving both procedural and substantive unconscionability.

While the adhesive nature of a contract is sufficient to establish some degree of procedural unconscionability, "the California Supreme Court has not adopted a rule that an adhesion contract is per se unconscionable," the panel wrote, and "the adhesive nature of a contract, without more, would give rise to a low degree of procedural unconscionability at most."

The fact that C.H. Robinson did not provide Poublon with a copy of the applicable American Arbitration Association's rules or the employer's Arbitration Procedure handbook did not make the agreement oppressive, the Court found. The Court was also not persuaded that Poublon felt forced into signing the agreement not only in order to receive her bonus but also to keep her employment with the company.

"[T]here is no evidence in the record that C.H. Robinson ever stated or suggested that Poublon would be fired for failing to sign the agreement," the Ninth Circuit wrote. "To the contrary, the record shows that in response to Poublon's question regarding what would happen if she did not sign the agreement, [her supervisor] responded only that she would not receive her bonus."

The panel then worked its way through each of the eight provisions in the agreement to evaluate their substantive unconscionability.

Although agreeing with the district court's finding that the judicial carve-out provision for certain types of claims was substantively unconscionable, the Ninth Circuit reached a different conclusion regarding the waiver of representative claims. The parties did not dispute that the California Supreme Court's decision in Iskanian v. CLS Transportation prohibits the waiver of PAGA claims.

But just because the waiver of a representative PAGA claim is unenforceable does not also make the provision unconscionable, the Ninth Circuit held. Combined with suggestions from the U.S. Supreme Court "that arbitration agreements can generally waive collective, class-wide, and representative claims," the Ninth Circuit ruled that the provision was not substantively unconscionable even with the unenforceable PAGA waiver in it.

The Court also found no unconscionability with respect to the agreement's provisions on the subjects of venue, confidentiality, sanctions, unilateral modifications, discovery limitations and a reaffirmation clause. Weighing both the procedural and substantive unconscionability it had actually found in the agreement, the Ninth Circuit elected to enforce the remainder of the agreement without the unconscionable provisions.

Although Poublon contended that an agreement is necessarily permeated by unconscionability if more than one clause in the agreement is unconscionable or illegal, the Ninth Circuit disagreed. "California courts have not adopted such a per se rule," the Court said. "In this case severance [of the improper provisions] is appropriate."

The Court determined that there was just one unconscionable clause in the dispute resolution provision, the judicial carve-out. "This provision can be extirpated without affecting the remainder of the paragraph and is 'collateral to the main purpose of the contract,' which is to require arbitration of disputes," the panel wrote. Further, "the waiver of representative claims is unenforceable to the extent it prevents an employee from bringing a PAGA action. This clause can be limited without affecting the remainder of the agreement."

The agreement itself supports this approach of excising any invalid portion of the agreement, the Court added, as the language of the dispute resolution provision allows for modifications "to the extent necessary, consistent with [the agreement's] fundamental purpose and intent, in order to make it enforceable."

"Accordingly, we conclude that the dispute resolution provision is valid and enforceable once the judicial carve-out clause is extirpated and the waiver of representative claims is limited to non-PAGA claims," the Court said, reversing the denial of the motion to compel arbitration.

To read the opinion in Poublon v. C.H. Robinson Company, click here.