Less than a year ago, the California Supreme Court in Ramirez v. Charter Communications, Inc. opined, in the context of employment arbitration agreements, that there is no bright line rule that requires a court to refuse enforcement if a contract has more than one unconscionable term.  Rather, the appropriate inquiry is qualitative.  “At the outset, a court should ask whether the central purpose of the contract is tainted with illegality. [Citations]. If so, the contract cannot be cured, and the court should refuse to enforce it.”  This ruling gave lower courts the power to liberally sever any unconscionable portion of a contract and enforce the rest when: “the illegality is collateral to the contract’s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice.” 

As a result of this holding, the Supreme Court remanded the case – a discrimination, harassment, and retaliation dispute between Charter Communications and a former employee – to the Court of Appeal to determine whether Charter’s arbitration agreement should have its unconscionable provisions severed.  In fact, there were at least three sections that both courts identified as being substantively unconscionable: (1) the lack of mutuality in the covered and excluded claims provision – with the claims of the employee being more likely subject to arbitration than those claims of the employer; (2) the shortened limitations period for filing claims; and (3) the potential for an unlawful award of attorneys’ fees.

Charter argued that the purported illegality of these unconscionable provisions was collateral to the contract’s main purpose, and it was possible to cure the illegality by means of severance.  The Court of Appeal disagreed on both points, determining that severance of these provisions would amount to rewriting the arbitration agreement and “impose terms to which neither party has agreed.”  In particular, it found that the arbitration agreement lacked the basic, requisite “mutuality” of arbitration as required by seminal law.  Specifically, the employee’s claims would be invariably subject to arbitration, but the claims likely to be brought by the employer were likely to be exempt from arbitration.  Moreover, as written, the arbitration agreement required that the employee would potentially have to initiate arbitration of her FEHA claims before an administrative investigation could be conducted which would deny her the right to “a free, quick look at the defenses the employer is likely to raise.” 

Applying the new test set forth by the California Supreme Court, the lower court found that the sheer number and scope of the unconscionable provisions could not be severed without fundamentally altering the nature of the agreement.  Quoting Mills v. Facility Solutions Group, Inc., the court declined to “create an incentive for an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, [have] the court […] simply modify the agreement to include the bilateral terms the employer should have included in the first place.”

This new Ramirez decision provides a useful benchmark by which to test the qualitative assessment for enforceability set out by the California Supreme Court.  Employers should not feel empowered to draft one-sided agreements with the hope that, if challenged, a court will sever the unconscionable provisions.  Rather, the earlier Ramirez decision is intended to protect those employers whose arbitration agreements contain isolated instances of unconscionability that could be easily severed without fundamentally altering the initial bargain between employer and employee.

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