The use of arbitration agreements is a common practice throughout this industry. By entering into such an agreement (or by entering into a contract or other written agreement containing an arbitration clause), the parties agree that any disputes that may arise are to be settled out of court through submission of the dispute to a neutral third party consisting of an arbitrator, or panel of arbitrators.
Arbitration has its pluses and its minuses. On the plus side, arbitration is typically less formal than litigation in a court of law. The process tends to move faster than court proceedings do, costly discovery is typically limited, and the rules of evidence are more relaxed. Additionally, an arbitrator’s decision is typically not subject to appeal or challenge except on very limited grounds (such as fraud), which lends a degree of finality to the process. On the negative side, arbitration can be quite costly, requiring the payment of significant fees up front; an obstacle the “little guy” might have trouble overcoming, and one the “big guy” counts on to discourage claims in the first place. There have, in fact, been a number of recent high profile cases involving transportation companies (Uber in particular) in which courts have modified or invalidated arbitration provisions due to concerns that they have been crafted, not so much with dispute resolution in mind, but with the objective of thwarting the assertion of any type of claim.
As a general matter, a court will not rewrite a contract just because a party made a bad deal, or because it believes the arrangement is unfair. However, when a court is faced with a situation in which one of the parties is in a much stronger bargaining position than another, and seems to have strong-armed or abused the other party to the point that the agreement is fundamentally unfair, a court will either invalidate or modify the offending provision(s), or throw out the entire document and refuse to enforce it. In contract law this is known as the doctrine of unconscionability. A recent decision by a California appellate court involving an arbitration agreement signed by a courier service driver illustrates this point rather clearly. While this decision is based upon California law, most states analyze contracts for unconscionability in substantially an identical manner.
The driver in Subcontracting Concepts LLC v. De Melo applied for a job delivering packages with the defendant courier service. At the conclusion of his interview, the driver was presented with a copy of the company’s “Owner/Operator Agreement.” The agreement designated De Melo as an independent contractor, was five pages long, and was typed in small font. Buried within that small type was a lengthy arbitration clause. De Melo was told that if he wanted the job, he needed to sign the document “on the spot.” De Melo was not fluent enough in English to fully understand the document, he was not asked if he wanted the document translated into his native Portuguese, and no one explained the document to him in detail in either English or Portuguese. Because he could not read the document, De Melo was unaware that, among other things, he was agreeing to arbitration before a panel of three arbitrators, that New York law applied, he was responsible for his own arbitration expenses, and that he was giving up his right to recover attorney’s fees and other costs.
After working for the company for two years, De Melo filed a wage claim with the California Labor Commissioner. In response, the company filed a petition in court to stay the proceedings before the Labor Commissioner and compel De Melo to arbitrate. The Labor Commissioner intervened and opposed the petition, and the court denied the petition, finding that the subject arbitration agreement was unconscionable.
The courier service appealed the determination, maintaining that an unconscionability analysis was improper given that the driver was an independent contractor, and that the law the lower court used was only applicable to statutory employees. The appellate court flatly rejected this argument, noting that the wage claim filed with the Labor Commissioner asserted that he had been misclassified, and whether such was the case was a matter for determination in that proceeding.
Thereafter, the court conducted its analysis of whether the arbitration agreement was unconscionable, beginning its analysis with a determination as to whether there was unfairness in the agreement’s execution, and thus “procedural unconscionability.” It concluded that the arbitration clause was procedurally unconscionable for several reasons. First, under California law where an arbitration agreement is imposed upon an employee as a condition of employment with no opportunity to negotiate, the agreement is considered to be a contract of adhesion (one executed under duress). Second, the document was presented to an individual not sufficiently fluent in English to fully understand legal documents written in that language, and the terms were not explained to him. Third, while the document referred to the American Arbitration Association, it did not state what rules governed the arbitration, nor was De Melo provided with a copy of the governing rules.
The court also found the agreement was “substantively unconscionable,” as it was loaded with harsh and oppressive terms. Among other things, the agreement required De Melo to bear his own costs for arbitration – costs that would likely be substantial given that the agreement required three arbitrators. The court also found unconscionable the fact that the arbitration provision only permitted an award of monetary damages, and prohibited the award of attorney’s fees, punitive damages or equitable relief. This precluded De Melo from seeking statutory remedies; remedies that the California Labor Code expressly provides cannot be waived by a private agreement. Lastly, the arbitration provision prohibited the driver from pursuing his claims through an inexpensive administrative hearing before the Labor Commissioner, and instead required costly arbitration. This too was found to be unconscionable.
Finally, the appeals court looked to whether the lower court should have attempted to modify or delete the offending provisions and concluded that the lower court correctly found the document to be “so permeated with unconscionability that severance of the unconscionable terms was not possible.”
This case underscores the fact that while arbitration agreements can be a useful tool for efficiently resolving disputes with workers, just because something is written up by lawyers doesn’t mean a court will enforce it. An unconscionable agreement of any type executed under duress and imposing terms and conditions a court finds to be overwhelmingly unfair to the less powerful party can and oftentimes will be invalidated. In this case, a non-English speaking driver was presented with an arbitration clause buried in a lengthy document with tiny type and pressured to sign it on the spot in order to get a job he needed. Within that arbitration clause were, among other provisions, several provisions waiving legally un-waivable rights and remedies, provisions prohibiting the driver from obtaining anything other than monetary relief, a requirement that three arbitrators hear all disputes regardless of their complexity, and a requirement that the driver share the costs of arbitration. By driving too hard a bargain with a low-level worker, Subcontracting Concepts ran afoul of the doctrine of unconscionability, leaving the court with little option but to throw the arbitration agreement out.
Roberta C. Pike, Esq., Kenneth R. Tuch, Esq. and Laurence I. Cohen, Esq. are partners with Pike, Tuch & Cohen, LLP, with offices located at 1921 Bellmore Avenue, Bellmore, New York 11710. The firm specializes in commercial and employment litigation, including misclassification, wage and hour, employment practices, franchising and business practice matters, and transactional matters. The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.