Chavarria et al. v. Ralphs Grocery Co.

Decision: The US Court of Appeals for the Ninth Circuit Court invalidated an employer’s arbitration agreement because it was both procedurally and substantively unconscionable. A former employee brought a putative class action alleging that the defendant committed various wage and hour violations. The Ninth Circuit upheld the trial court’s denial of the defendant’s motion to compel arbitration, finding that the agreement was procedurally unconscionable because it was presented on a take-it or leave-it basis and because the terms of the agreement were not provided to the employee until three weeks after the employee agreed to be bound by the agreement. The court further held that the agreement was substantively unconscionable because (i) it would always result in an employer-proposed arbitrator even if the employee initiated the arbitration and (ii) it required each party to pay half of the arbitrator’s expected fees at the outset, and precluded the employee from recovering those fees, making many claims impracticable.

The Ninth Circuit rejected the employer’s arguments that the Federal Arbitration Act preempted the district court’s unconscionability analysis. In so doing, the court explicitly considered the Supreme Court’s Concepcion decision, which held that the FAA can preempt state laws having a “disproportionate impact” on arbitration. The Ninth Circuit determined that California’s procedural unconscionability rules do not disproportionately affect arbitration agreements because they apply to the formation of all contracts.

Impact: Even after Concepcion and its progeny, this case shows that courts are still willing to invalidate arbitration agreements that they view as overly favorable to employers. Chavarria highlights the risk that an employer’s arbitration agreement will be declared unconscionable if the employee is forced to shoulder excessive costs to arbitrate. While using an arbitration agreement is often advisable, employers should closely scrutinize these agreements to confirm that they are not susceptible to attack as excessively one-sided.