Unconscionable Employment Arbitration Agreements

Well, we only have two weeks left in the semester in my employment law class at Penn State. Frankly, I'm disappointed in myself for not blogging more about the interesting cases and issues we're covering in class. I'm covering arbitration today, including a fairly recent Third Circuit opinion on the enforcement of employment arbitration agreements.

2-Step Analysis

In Nino v. The Jewelry Exchange, 609 F.3d 191 (3d Cir. 2010), the Court held that an employment arbitration agreement was unconscionable and therefore unenforceable. Analyzing unconscionability requires a two-step analysis:

1. The procedural component; and
2. The substantive component.

The Procedural  Component

"We have consistently found that adhesion contracts-that is, contracts prepared by the party with greater bargaining power and presented to the other party 'for signature on a take-it-or-leave-it basis'-satisfy the procedural element of the unconscionability analysis." This is a pretty low hurdle, and likely covers many employment arbitration agreements. Unless the employee is a professional negotiating a full contract, I suspect most employment arbitration agreements meet this standard.

The Substantive Component

"[A] party challenging a contract on unconscionability grounds must also show that the contract is substantively unconscionable by demonstrating that the contract contains 'terms unreasonably favorable to the stronger party.'"

The Court found several of the clauses in the arbitration agreement at issue in Nino objectionable:

• The agreement required employees to file grievances within 5 days - the Court noted that even 30 days was too short (meanwhile the employer had no notice requirements for any of its claims). 
• Another clause required the parties to bear their own attorney's fees, costs and expenses. This clause conflicted with Title VII's fee-shifting structure, and burdened the employee's ability to seek legal representation in a discrimination dispute.
• The agreement also had a lopsided system for selecting the arbitrator. The parties would request a panel of 4 arbitrators from the AAA, and then take turns striking one until one was left - starting with the employer. The obvious effect being that the employer strikes two and the employee only strikes one.

Severability

Finally, the Court analyzed whether the substantively unconscionable provisions could be severed from the agreement such that the Court could compel arbitration minus the bad parts. The analysis involves two "separate and independent" bases for declining to enforce the agreement as a whole:

The first of these is whether the unconscionable aspects “of the employment arbitration agreement constitute [ ] ‘an essential part of the agreed exchange’ of promises” between the parties. If the unconscionable aspects of the clause do not comprise an essential aspect of the arbitration agreement as a whole, then the unconscionable provisions may be severed and the remainder of the arbitration agreement enforced . . . . 

The second consideration for the question of severability . . . is whether the unconscionability of the arbitration clause demonstrates “a systematic effort to impose arbitration on an employee, not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage.”

(internal citations omitted). The Court concluded that the agreement was so "pervasively one-sided" that it could not sever the unconscionable provisions, and therefore the entire agreement was effectively unenforceable.