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Further Thoughts on Arbitration Clause Unconscionability in California Contracts

UPDATE:  There's a lively contract drafting discussion going on over at Ken Adams Blog (My Version of the Triple A Standard Arbitration Clause). To the many comments there -- most of which concern the important issue of clarity -- I would add the following:  it's a lazy lawyer who uses anyone's "standard" clause in any agreement.  Attorneys' fees provisions, integration clauses, venue and arbitration agreements and the like should be tailored to the disputes that are likely to arise in view of the most recent case law.  The decision discussed here was published on August 26 of this year.  Any arbitration clause that pre-dates that decision should be reviewed and revised to make it as air-tight as possible.

Since posting the holding of the recent Parada decision here yesterday, I've had further thoughts on the matter which I posted to both the AAA LinkedIn and the Commercial and Industry Arbitration LinkedIn Group sites.*/  I provide those thoughts here for anyone who represents businesses struggling to draft enforceable arbitration clauses and attorneys who oppose or are attempting to enforce them.

(above, lawyer on verge of bagging practice to mediate and arbitrate instead)

Follow the hilarious Charles Fincher at LawComix and on Twitter @CharlesFincher @BeatriceBitcher  @ RichardPrickman and @LawComix.

 The California Supreme and appellate courts HATE consumer/employee arbitration clauses. It's almost impossible to draft one that will pass their unconscionability standards -- even O'Melveny failed to get it right.

In this case the Court found the arbitration clause substantively unenforceable even though the Plaintiffs were "investors" and hence neither the "consumers" nor the "employees" for whom prohibitively expensive arbitration alone can render the clause unenforceable. This case does not extend the prohibitively expensive doctrine into non-consumer contracts, but instead uses the expense as one of the factors leading to the conclusion that the arbitration provisions are substantively unconscionable.

This creates a slippery slope for the Courts to import (implicitly rather than explicitly) the prohibitively expensive doctrine into its consideration of arbitration clause enforceability when the contract is "adhesive." For this reason, it wouldn't surprise me if the California Supreme Court de-published it.

This is one of those issues where the Courts' self-interest in clearing their dockets does not defeat a continuing strong bias against arbitration at the appellate level. Of course the appellate courts do not have to deal with the litigation as the trial courts do and the trial courts continue to somewhat reflexively grant motions to compel arbitration.

This leaves everyone who wishes to avoid the Court system and use arbitration to resolve commercial disputes in a position of uncertainty that the law of contracts is designed to prevent.

One solution - the one I suggest - is to use the AAA's expedited commercial procedures for contracts where the individuals signing are likely able to demonstrate an inability to pay for arbitration.

Note that the failure to attach the arbitration rules agreed upon was a factor in the Court's decision that the arbitration clauses were unenforceable. I doubt that any company proffering arbitration to customers attaches the often lengthy rules but they would be wise now to do so if they're operating in California.

The bottom line in California now?
If the contract is non-negotiable (form; customer no opportunity to bargain) and the customer will be able to demonstrate an inability to pay AAA or JAMS fees, an expedited procedure should be offered in the arbitration agreement or the business enterprise should assume the cost of arbitration (with a prevailing party clause to recoup the expense should the commercial enterprise prevail). The governing rules should also be attached.

The point is to make the arbitration option as clear and transparent as possible and as inexpensive an option as Court would be. Even those who believe they can distinguish Parada from their own case should know it's in their best interest to adhere to the Parada guidelines or be forced to defend their arbitration clause in Court against strenuous opposition.


*/  I belong to two groups on LinkedIn that any attorney who arbitrates cases or who counsels clients to put arbitration clauses into their contracts should join.  They are the Greater AAA Connection, which describes itself as:

 a professional and social network of current and former employees, neutrals, and students of the AAAU from around the world. If you have an AAA connection, this might be your connection. Join in!

and the Commercial and Industry Arbitration Group, which describes its mission as:

the open discussion of issues and sharing of information concerning commercial and industry arbitration, mediation and other forms of alternative dispute resolution. Commercial and industry ADR is a broad topic and covers the spectrum from arbitrations and mediations arising out of general, commercial contracts through more specialized forms of dispute resolution used by various industries, including the reinsurance, maritime, telecommunications, securities, financial services, construction industries and others. We also consider labor and employment arbitration and mediation to be within this spectrum.

Comments (1)

Read through and enter the discussion by using the form at the end
Margaret - September 5, 2009 9:50 PM

Thanks for the recomendations on the LinkedIn groups. This is an area I want to learn more about.

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