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Employment Arbitration Agreements: Do Unconscionable Provisions Prevent Enforcement?
Many employers have employment contracts with some or all of their employees under which the employee agrees that all employment-related disputes will be resolved through arbitration, thereby waiving the employee’s right to bring such claims in court. There are many cases in which an employee seeks to avoid arbitration by arguing that the agreement is “oppressive” or “unconscionable.” The Second Circuit Court of Appeals has issued a decision holding that “unconscionable” provisions in arbitration agreements may not prevent enforcement of the arbitration obligation if the employer waives the unconscionable clauses. Ragone v. Atlantic Video, 595 F.3d 115 (2d Cir. 2010).
In the Second Circuit, in order to set aside an arbitration agreement as “unconscionable,” there must typically be a showing that the agreement is both procedurally and substantively unconscionable. An agreement will not be found procedurally unconscionable because it was offered on a “take it or leave it” basis, or because the employee did not read the agreement, or because the employee is not fluent in English or lacks a college degree. In exceptional cases, an arbitration agreement can be overturned based on substantive unconscionability alone. The test of unconscionability is whether the clause effectively prevents the employee from pursuing her statutory rights.
The Court strongly suggested that there were clauses in the arbitration agreement in this case which were unconscionable. For example, the employment agreement had a 90-day statute of limitations, which, if enforced, would have overridden the 300-day statute of limitations under Title VII. The agreement also provided that there could be no appeal from any arbitration award. Although appeals from arbitration awards can be asserted only on limited grounds, such as bias of the arbitrator or because the award fails to “draw its essence” from the contract, the clause in this case would deprive the employee of her statutory right to appeal even on these narrow but important grounds. Similarly, the employment agreement provided that the loser will pay the costs of arbitration. That provision conflicts directly with Title VII, under which costs can not be assessed against unsuccessful plaintiffs unless the plaintiff’s claims were frivolous.
The most interesting part of this decision is the Court’s conclusion that because the employer agreed to waive enforcement of these objectionable clauses, the balance of the agreement could be enforced. This result, according to the Court, is justified by the duty of courts to encourage and support arbitration.
The plaintiff made a strong argument that such a rule encourages employers to overreach in drafting arbitration clauses, knowing that they can later say “never mind” to clauses that should not have been included in the first place. This is not to say that such a strategy is appropriate, but rather that there are employers who, as a practical matter, can be expected to use such a strategy to broaden their contractual rights, even if those rights might not be enforceable.
