Arbitration agreement did not clearly and unequivocally delegate to arbitrator the power to determine unconscionability

Rent-A-Center, W., Inc. v. Jackson, 561 U.S. ___, 130 S.Ct. 2772 (2010) held that parties could delegate to the arbitrator the power to decide threshold decisions of arbitrability.  This, of course, leads to questions about how explicit such a delegation must be to pass muster.  Rent-A-Center observed that, unless the parties "clearly and unmistakably provide otherwise," the question of arbitrability is one for the Court.  In Ajamian v. CantorCO2e, L.P. (February 16, 2012), the Court of Appeal (First Appellate District, Division Five) examined an arbitration agreement to determine whether the trial court erred by deciding the arbitration question and concluding that the agreement was unconscionable.

The Court first considered the issue of who should decide the arbitrability question:

The “clear and unmistakable” test reflects a “heightened standard” of proof. (Rent-A-Center, supra, 130 S.Ct. at p. 2777, fn. 1.) That is because the question of who would decide the unconscionability of an arbitration provision is not one that the parties would likely focus upon in contracting, and the default expectancy is that the court would decide the matter. (First Options, supra, 514 U.S. at pp. 943-945.) Thus, the Supreme Court has decreed, a contract's silence or ambiguity about the arbitrator's power in this regard cannot satisfy the clear and unmistakable evidence standard. (Id. at pp. 943-945.)

Slip op., at 9.  Turning to the language of the agreement, the Court concluded that the agreement was ambiguous.  The Court held that a provision directing “[a]ny disputes, differences or controversies” to arbitration could apply to the threshold question of arbitrability or all substantive disputes.  Becasue the language was not clear and unmistakable, the Court held that no delegation of the threshold question was enforcable.

Next, the Court considered whether a reference to AAA rules, which give arbitrators the right to decide arbitrability, was sufficient to delegate that question to the arbitrator.  The Court examined existing decisions, finding a split of authority on the issue.  After identifying cases on both sides of the issue, the Court concluded that a reference to AAA rules, without more, was insufficient:

In our view, while the incorporation of AAA rules into an agreement might be sufficient indication of the parties' intent in other contexts, we seriously question how it provides clear and unmistakable evidence that an employer and an employee intended to submit the issue of the unconscionability of the arbitration provision to the arbitrator, as opposed to the court. There are many reasons for stating that the arbitration will proceed by particular rules, and doing so does not indicate that the parties' motivation was to announce who would decide threshold issues of enforceability.

Slip op., at 19.  The Court also noted that the agreement was unclear as to whether AAA rules or rules of another arbitration entity would govern.

The Court next reviewed the trial court's finding of unconscionability.  First, the Court exmained the procedural unconscionability:

Substantial evidence supports the court's finding. Ajamian, who had already been working as a broker for almost 10 months, had no realistic bargaining power and was required to sign the Employment Agreement to receive her promised compensation – for work she had already performed. Furthermore, the Employment Agreement was not the subject of any negotiation. Ajamian stated in her declaration that she wanted to make changes to the Employment Agreement and felt uncomfortable signing it, but felt she had no choice based on Margolis' statements.

Slip op., at 26.  The Court concluded that it was unnecessary to quantify the degree of procedural unconscionability, since substantive unconscionability was evident in several ways:

In finding that the arbitration provision was unconscionable, the court found that the damages limitation in the arbitration provision was unlawful and the attorney fees clause elsewhere in the Employment Agreement (which the arbitration provision would enforce) was unconscionable. Ajamian also argued, as she does here, that the arbitration provision is substantively unconscionable for reasons the trial court did not rule upon: the provision requires her to forfeit numerous unwaivable substantive California statutes; it grants CantorCO2e discretion to choose the arbitration rules and source of the arbitration panel; and it forces Ajamian to pay tens of thousands of dollars she did not have when she entered into the agreement to obtain relief by arbitrating before three arbitrators in New York.

Slip op., at 28-29.  During its extensive discussion, the Court explained by Pearson Dental did not apply:

As a general proposition (where the clear and unmistakable test does not apply), we agree that ambiguous terms should be construed, where reasonable, in favor of arbitration. But the Pearson Dental rule does not apply here. In Pearson Dental, the court considered a single potentially unconscionable term in an arbitration agreement; here, there are multiple unconscionable terms in the Employment Agreement. Moreover, the term in Pearson Dental was ambiguous and did not expressly preclude the plaintiff from pursuing any remedy; by contrast, the unconscionable terms in the Employment Agreement categorically mandate that arbitration proceed, under the laws of New York and an arbitration organization of CantorCO2e's choosing, without the relief to which Ajamian would be entitled in California, but with an obligation to pay CantorCO2e's attorney fees if unsuccessful. Further, the language of the arbitration provision does not lend itself to an interpretation that the arbitrator may make awards contrary to the terms of the Employment Agreement; indeed, the Employment Agreement explicitly states just the opposite. (See Wherry, supra, 192 Cal.App.4th at pp. 1249-1250.)

Slip op., at 33.  The Court concluded its analysis by rejecting an argument that an Employee Handbook referencing an arbitration policy that would be signed by employees could create an enforceable arbitration agreement.

The arbitration arms race continues...