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Media Alerts - Chavarria v. Ralphs Grocery Company - 9th Circuit
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December 4, 2013
  Chavarria v. Ralphs Grocery Company - 9th Circuit
Headline: Ninth Circuit Affirms the Denial of a Defendant's Motion to Compel Arbitration in a California Labor Law Action on Behalf of a Plaintiff and a Proposed Class.

Area of Law: Contracts; Federal Preemption; Arbitration Provisions

Issue(s) Presented: Whether the mandatory arbitration provision in Ralph's employment application is unconscionable under California law and therefore unenforceable, and whether Federal Arbitration Act bars application of California's unconscionability rule.

Brief Summary: Plaintiff is a former employee of Ralphs Grocery Company who brought action against the company on behalf of her and a class of similarly situated individuals alleging violations of the California Labor Code and California Business and Professions Code. Ralphs moved to compel arbitration pursuant to the employment application provision - providing arbitration as the exclusive remedy - which all applicants must sign when applying. Plaintiff opposed the motion, claiming the provision was unconscionable and thus unenforceable.

The Ninth Circuit upheld the trial court's finding that the provision was procedurally unconscionable because it was a condition of applying for employment, was presented on a "take it or leave it" basis leaving no room for negotiation, and was distributed to the plaintiff three weeks after she agreed to the provision.

The court also affirmed the lower court's finding that the arbitration provision was substantively unconscionable because the provision would always produce a Ralphs' arbitrator in proceedings initiated by an employee-applicant, it did not allow for use of established institutional arbitration administrators who ensure neutrality in such proceedings, and the cost apportionment rules effectively excluded employee-applicants from the arbitration process.

The court held the Federal Arbitration Act (FAA) did not preclude application of California's unconscionability rule because the California rule is not disproportionately aimed at regulating arbitration, but rather applies to contracts generally. Thus, the court affirmed the lower court's finding that California law rendered the mandatory arbitration provision unconscionable.

For the full opinion:

Extended Summary: Ralphs required applicants to sign a mandatory arbitration provision as a condition of submitting an employment application. The application provided notice of the provision, but was not routinely provided to employee-applicants for several days. The provision was four pages, single-spaced and contained complex legal language.

Plaintiff, a former employee of Ralphs, brought suit alleging numerous violations of the California Labor Code and California Business and Professions Code. Ralphs moved to compel arbitration based on mandatory arbitration provision. Plaintiff opposed the motion, arguing that the provision was both procedurally and substantively unconscionable and therefore unenforceable. The trial court found the arbitration provision unconscionable and denied Ralphs' motion to compel arbitration. Ralphs appealed.

A contract provision is unenforceable for unconscionability where it is both procedurally and substantively unconscionable. Under California law, a greater showing of one type of unconscionability can compensate for a lesser showing of the other. Procedural unconscionability examines how the provision was negotiated and implemented, focusing on the respective bargaining power of the parties. Substantive unconscionability looks at the provision itself to determine if the provision "shocks the conscience."

The Ninth Circuit affirmed the lower court's finding that the provisions were so procedurally and substantively unconscionable so as to render them unenforceable. Procedurally, the court pointed to three problems - 1) the provision required acquiescence as a condition of application for employment; 2) there was no negotiation as to the provision, rather it was offered on a "take it or leave it" basis; and 3) the policy itself was not provided to the plaintiff until three weeks after she was required to sign and accept it as part of her application. The court emphasized the third reason, noting that this "defect...multiplied the degree of procedural unconscionability."

The arbitration provision was also substantively unconscionable. The provision was written such that, in an employee-initiated proceeding, the arbitrator would always be selected by Ralphs because the provision disadvantages the party who initiated arbitration. Additionally, the provision outright excludes use of nationally recognized arbitration administrators, who are traditionally involved in arbitration to ensure neutrality and fairness in such proceedings. Lastly, the provision apportions arbitration costs at the outset of the proceedings, evenly between the parties, not based at all on the merits, and gives all the power for apportionment to the arbitrator. This apportionment policy effectively excludes employee-applicants from arbitration because the cost would so great and outweighs any potential award of damages.

In addressing Ralphs' preemption argument, the court recognized that Congress enacted the FAA to encourage the use of arbitration and preclude states from promulgating statutes that disproportionately impact arbitration provisions. However, the court distinguished California's unconscionability rule from other laws that disproportionately impact arbitration because unconscionability affects all types of contract provisions, and is not exclusively applicable to or practically enforced against arbitration provisions.

Thus, because California's unconscionability rule is applicable to the arbitration provision in question, and because the provision was both procedurally and substantively unconscionable, the Ninth circuit affirmed the lower courts denial of Ralphs' motion to compel arbitration.

Panel: Richard C. Tallman, Richard R. Clifton, and Consuelo M. Callahan, Circuit Judges.

Date of Issued Opinion: October 28, 2013

Docket Number: 2:11-cv-02109-DDP-VBK

Decided: Affirmed

Case Alert Author: Kathleen M. McHale

Counsel: Steven M. Katz (argued), Linda S. Husar, and Mara Matheke, Reed Smith LLP, Los Angeles, California, for Defendant-Appellant. Glenn A. Danas (argued), Capstone Law, Los Angeles, California; Mark Yablonovich, Neda Roshanian, and Michael D. Coats, Law Offices of Mark Yablonovich, Los Angeles, California, for Plaintiff-Appellee.

Author of Opinion: Clifton, Circuit Judge

Case Alert Circuit Supervisor: Professor Ryan T. Williams

    Posted By: Ryan Williams @ 12/04/2013 11:03 AM     9th Circuit  

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