In Pokorny v. Quixtar, the Ninth Circuit upheld a district court's order that a mandatory arbitration agreement was procedurally and substantively unconscionable under California law and thus unenforceable.
In a class action brought against it by a number of its distributors, Defendant Quixtar, Inc. sought to dismiss the lawsuit based on an arbitration agreement which plaintiffs had been required to sign before entering into business with Quixtar. The agreement would have required the plaintiffs to engage in a two-step conciliation process before entering into binding arbitration. The Ninth Circuit affirmed the district court's determination that California law should apply to the issue of whether the agreement was unconscionable, despite the agreement's choice-of-law clause selecting Michigan, because several of the plaintiffs were located in California. As its basis for finding that the agreement was procedurally unconscionable, the Court emphasized the fact that plaintiffs did not have the opportunity to individually negotiate the terms of the agreement, the agreement was presented on a take-it-or-leave-it basis, and that Quixtar retained the right to unilaterally amend at any time the rules of conduct which were to guide the conciliation and arbitration processes. With respect to upholding the district court's finding of substantive unconscionability, the Court concluded that the arbitration requirements were not mutual in that Quixtar was not obligated, as plaintiffs were, to submit claims to arbitration and that Quixtar maintained the right to alter the rules of conduct for the arbitration proceedings whereas plaintiffs did not.
The lessons for employers to take away from this case are not novel, but they are important nonetheless when drafting arbitration agreements: 1) allow each side the opportunity to negotiate the terms, rather than presenting it on a take-it-or-leave-it basis; 2) any terms of the agreement must be mutual; and 3) do not assume that a choice-of-law provision electing the law of another state will preclude the application of California law in an analysis of the agreement's validity.