Why it matters: According to a California appellate court, an arbitrator should have decided the issue of an arbitration agreement’s enforceability – not a trial court judge. Although the panel agreed with the trial court that the agreement was procedurally unconscionable (as a contract of adhesion presented to the employee on a take-it-or-leave-it basis allegedly without explanation), the court reversed denial of a motion to compel arbitration, ruling that the agreement was not substantively unconscionable. Because it was not overly harsh or one-sided, the appellate court said the agreement should be enforced, including the provision that an arbitrator resolve disputes relating to its interpretation or enforceability.

Detailed Discussion

Lourdes Tiri worked as a cook at Lucky Chances, a card-club casino and restaurant in California. Three years into her employment, Tiri said she was called into the human resources department and handed an agreement to sign. According to Tiri, the agreement was not explained and she felt as though she had to sign it as a condition of employment.

The five-page document titled “Mutual Agreement to Arbitrate Claims” provided that the process of final and binding arbitration would resolve “any and all differences and/or legal disputes” between the parties, with limited exceptions. A delegation provision stated that “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”

Tiri signed the agreement. Five years later she was fired. She filed suit in California state court alleging wrongful discharge, and Lucky Chances moved to compel arbitration based on the agreement.

A trial court judge denied the motion, ruling that the agreement was both procedurally and substantively unconscionable and therefore unenforceable.

But on appeal, an appellate panel reversed, holding that the trial court “lacked the authority to rule on the enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law.”

Noting that the application of either the Federal Arbitration Act or California law would yield the same result, the court said that clauses in arbitration agreements delegating enforcement issues to an arbitrator are effective when they are clear and not revocable under state law.

Analyzing the delegation clause for revocation, the court acknowledged that the agreement was procedurally unconscionable as a contract of adhesion presented to Tiri on a take-it-or-leave-it basis without the benefit of an arm’s-length bargaining transaction.

“Tiri was an unsophisticated party who was presented with the agreement containing the clause years after being hired by Lucky Chances, and was given little time to review it,” the court wrote. “The arcane nature of the clause, Tiri’s lack of sophistication, and the failure of Lucky Chances to provide adequate time to review the agreement all add to the oppression and surprise of the delegation clause in this case.”

However, the court rejected Tiri’s contention that the delegation clause was also substantively unconscionable. “The delegation clause is not overly harsh, and does not sanction one-sided results,” the court said. Nor did the clause lack mutuality, “because Tiri and Lucky Chances are bound by it equally. The agreement requires arbitration for ‘any and all differences and/or legal disputes’ (whether by or against the employee or employer). This mutuality is nearly unqualified.”

Tiri’s argument that other provisions of the arbitration agreement, such as the confidentiality clause, were substantively unconscionable did not sway the court because they were not specific to the delegation clause. “[S]he did not assert and demonstrate that the confidentiality clause as applied to the delegation clause renders that clause unconscionable by impeding her ability to arbitrate whether the arbitration agreement as a whole is unconscionable,” the court said.

Concerns about delegation clauses that arbitrators are invested in the outcome or that mutuality is lacking because an employer would not claim it drafted an unconscionable agreement are “always present with delegation clauses in employment agreements,” the panel wrote. “To conclude that they signify substantive unconscionability would be tantamount to concluding that delegation clauses in employment arbitration agreements are categorically unenforceable.”

Instead, courts should find delegation clauses unconscionable “only if they impose unfair or one-sided burdens that are different from the clauses’ inherent features and consequences,” something Tiri failed to demonstrate.

“As a result of our conclusion that the delegation clause is valid, we leave to the arbitrator the question whether the arbitration agreement as a whole, or any of its other severable provisions, is unconscionable,” the court concluded.

To read the decision in Tiri v. Lucky Chances, click here.