84 | 2023 Cal-Peculiarities ©2023 Seyfarth Shaw LLP www.seyfarth.com parties; and they sometimes limit the remedies available and the time in which to file a claim. California, however, casts a peculiarly disapproving gaze on all these provisions. The leading case is the California Supreme Court’s 2000 decision in Armendariz v. Foundation Health Psychcare Services.37 Under Armendariz and its progeny, California courts refuse to enforce arbitration agreements if they are “unconscionable,” and define unconscionability very broadly.38 Armendariz arose in the context of an employer-employee agreement, and businesses since have argued that the harsh anti-arbitration rules set forth in Armendariz should not apply in other contexts, such as where the individual contesting arbitration is, for example, a partner suing a partnership or an independent contractor suing the contractor’s principal. But California courts have applied Armendariz broadly, extending it to any situation characterized by “a power imbalance analogous to that of an employer-employee relationship.”39 Armendariz explains that a contract is unenforceable if it is unconscionable both procedurally and substantively. Procedural unconscionability addresses the circumstances of negotiating and forming contracts, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability involves terms that the court deems overly harsh or one-sided. Both forms of unconscionability must exist for a contract to be unenforceable, with the two forms evaluated on a “sliding scale,” so that the more substantively unconscionable the contract is, the less evidence of procedural unconscionability is needed to rule the contract unenforceable, and vice-versa. This vague standard often empowers courts to strike down arbitration agreements they don’t like. Judicial hostility toward arbitration was on full display in a trial court decision that the Court of Appeal corrected in 2020. A fitness company’s vice president sued the company after signing an arbitration agreement. The agreement recited that it had been negotiated, that the employee should seek legal advice about it, that the agreement covered all disputes between the parties, and that arbitrations are subject to rules the employee could find on the corporate intranet. The trial court denied the employer’s motion to compel arbitration because the agreement was a “contract of adhesion” and limited the number of depositions to five, absent a ruling by the arbitrator. In reversing, the Court of Appeal explained:40 As a matter of general contract law, California courts require both procedural and substantive unconscionability to invalidate a contract. … We apply a sliding scale, meaning if one of these elements is present to only a lesser degree, then more evidence of the other element is required to establish overall unconscionability. … In other words, if there is little of one, there must be a lot of the other. We reverse because there was little or none of either element. More specifically, the trial court was out of line, even by California standards, for these reasons. First, there was little procedural unconscionability. The agreement was not one of “adhesion,” even if the contractual text came from a corporate word processor. The key issues are surprise and oppression, not adhesion. Here there was no surprise as the arbitration agreement was prominently displayed, and there was little oppression in that there was an opportunity to negotiate, even if arbitration was a condition of employment. Second, there was little or no substantive unconscionability. The plaintiff did not show that a five-deposition limit would create a significant barrier to pursuing his claims, and the arbitrator presumably would act reasonably to authorize more discovery upon a showing of substantial need.41 5.2.3 California’s broad view of procedural unconscionability Analyses of procedural unconscionability focus on “oppression” and “surprise” arising from unequal bargaining power. A California court can sense “oppression” in light of (1) how much time an employee has to sign a contract, (2) any pressure exerted to have the employee sign, (3) the contract’s length and complexity, (4) the employee’s level of education and experience, and (5) whether the employee’s review was aided by legal counsel.42 And courts can find “surprise” in the context of contracts containing long sentences or paragraphs containing legalistic language written in extremely small font.43
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