California Court Finds Arbitration Agreement Procedurally, Substantively Unconscionable

A California appellate court found an arbitration agreement both procedurally and substantively unconscionable, affirming the denial of an employer’s motion to compel arbitration in a discrimination lawsuit.

Hired as a care coordinator at Newport Healthcare, Karla Velarde was required to attend an orientation scheduled for her first day of work. When she arrived, she was escorted to a large conference room where she waited until a human resources manager arrived.

The HR manager presented Velarde with a stack of 31 documents and told her she was required to complete the forms before she could start working. The HR manager told her, “we gotta get through [these to] get you onboard. We’ll try to get through them as fast as possible.” Velarde felt pressured to fill out the forms quickly.

One of the forms was an arbitration agreement, which Velarde refused to sign because she did not understand what it was. The HR manager told her, “if there are ever any issues, [the arbitration agreement] will allow us to resolve them for you.”

Velarde asked if she needed to sign the agreement in order to start working. The HR manager responded, “Yes. This will help us resolve any issues without having to pay lawyers.” She signed the agreement.

When Velarde was later terminated, she filed a complaint in California state court alleging disability, discrimination and whistleblower protection violations, among other claims, against Newport Healthcare and its parent company, Monroe Operations.

The defendants moved to compel arbitration, but the trial court denied the motion, finding the agreement both procedurally and substantively unconscionable.

The defendants appealed, but an appellate panel affirmed.

Beginning with procedural unconscionability, the court found “ample evidence” to affirm the trial court.

“To start, the contract was adhesive,” the court said. “In addition, Newport Healthcare pressured Velarde into agreeing to arbitration by presenting her with the agreement, alongside 30 other documents, to review and sign while its HR manager stood and waited. Thus, Velarde had little to no time to review the terms of the agreement.”

The terms she could review—references to the Federal Arbitration Act and the Federal Rules of Evidence, for example—would not be readily meaningful to a lay person, the court added.

“Of further concern to this court is the fact Newport Healthcare misrepresented the terms and nature of the agreement,” the court wrote. The HR manager’s responses to Velarde were “manifestly untrue, as the agreement required the parties to resolve all covered disputes in an adversarial arbitration before an arbitrator in which all parties would bear their own attorney fees. We do not mean to suggest the HR manager intentionally misled Velarde. The misinformation may have been given out of negligence, ignorance, or inadvertence. But we focus on the effect, not the intent.”

The facts of the case demonstrated that Velarde’s execution of the document was not the product of a “voluntary or informed agreement to its terms,” the court said. “On this record we have little doubt concluding Velarde did not understand the nature of what she was agreeing to or the rights she was foregoing.”

As for substantive unconscionability, the agreement did not conform to Velarde’s expectations, the court explained.

Newport Healthcare told Velarde the agreement would allow them to resolve any issues without either side having to pay lawyers, which conveyed the expectation that she could resolve any claimed violation of her rights in an inexpensive, speedy and informal manner.

“This may have been important to Velarde given that she had been unemployed for nine months, having been laid off from her prior job due to the pandemic,” the court wrote. “But the procedures set forth in the arbitration agreement were not likely to result in an inexpensive, speedy, and informal resolution of her claims.”

Additionally, the terms of the agreement placed Velarde in a disadvantageous position, as it was unlikely she would be able to navigate the arbitral process on her own, while Newport Healthcare—with an attorney available to navigate the complexities for it—leaving the terms of the agreement “so one-sided as to benefit only Newport Healthcare,” the court added.

“Taken in isolation … ‘the arbitration process here is no more complicated than ordinary civil litigation … ,’” the court concluded. “But we do not analyze unconscionability in a vacuum; we ‘must be sensitive to context’ as well as any procedural unconscionability in the formation of the agreement. We have no doubt the same ‘contract terms might pass muster under less coercive circumstances … .’ Had Newport Healthcare either correctly explained the terms of the agreement, or had not explained them at all, and had given Velarde a reasonable opportunity to review the agreement and to consult counsel, ‘this would be a different case.’ But that is not what happened here.”

To read the opinion in Velarde v. Monroe Operations, LLC, click .

Why it matters: The decision provides an important reminder to employers: even where the terms of an arbitration agreement may not be objectionable, if it is presented to an employee in an unconscionable manner, the court will deny its enforcement. In Velarde’s case, the court expressed concern about how the agreement was presented—with little to no time to review and pressure to sign it quickly—as well as the misrepresentations made regarding the terms and nature of the agreement.