Arbitration Insight No. 4

ARBITRATION CLAUSE UNCONSCIONABILITY

Higgins v. Superior Court (2006) 140 Cal.App.4th 1238 is a text book example of how the courts may apply Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 guidelines for determining whether an arbitration provision is unconscionable. For ease in following Higgins, I have provided the relevant Armendariz language, without quotation marks and internal citations, concerning unconscionability:

Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. If the contract is adhesive, the court must then determine whether other factors are present which, under established legal rules – legislative or judicial – operate to render it [unenforceable]. Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him. The second – a principle of equity applicable to all contracts generally – is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or unconscionable.

… (U)nconscionability has both a “procedural” and a “substantive” element, the former focusing on “oppression” or “surprise” due to unequal bargaining power, the latter on “overly harsh” or “one-sided” results. The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves. In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.

Id. at pp. 113-114; emphasis in the original.

Higgins involves a writ proceeding by five orphaned siblings, ages 14 through 21, who thought they had received a free house from the television program “Extreme Makeover: Home Edition.” When that didn’t happen, they sued, among others, the show’s producers; ABC, Inc., the network that broadcasts the program, and the Leomitis, whose house was remodeled by the show and with whom the petitioners had been living. The trial court granted the television defendants’ motion to enforce an arbitration clause. The appellate court found the arbitration provision to be unconscionable and ordered the trial court to enter an order denying the motion to compel arbitration.

As background, after the petitioners’ parents died, they moved in with the Leomitis, who had three children of their own. After the producer of Extreme Makeover agreed to completely renovate the Leomitis’ home, it sent an Agreement and Release to the Leomitis and each of the petitioners. A few days later, the producers met with the Leomitis at their home. The petitioners, while present, did not participate in this meeting. Thereafter, the Leomitis handed the agreements to the petitioners and instructed them to flip through the pages and sign them. Charles, the oldest of the petitioners and the guardian of three of them, stated that only five or ten minutes passed from the time they were handed the agreements and then signed them.

The court found first that the arbitration provision constituted a contract of adhesion because the lengthy 72-page agreement, which was drafted by the television defendants, did not include the petitioner’s names or other identifying information. “There is no serious doubt that the television defendants had far more bargaining power than petitioners.” (Id. at p. 1252.) Additionally, while it is “technically correct” that the petitioners were not told that they could not negotiate any of the agreement’s terms, “the uncontested evidence” was that “the Agreement was presented to petitioners on a take-it-or-leave-it basis by the party with the superior bargaining position who was not willing to engage in negotiations.” (Ibid.)

The court next found that the arbitration provision was procedurally unconscionable because it appeared as the 69th paragraph in a lengthy, single spaced document; the arbitration language was not highlighted and the document had been drafted by the television defendants who knew that petitioners were young and unsophisticated. (Id. at pp. 1252-1253.)

Finally, substantive unconscionability was found because of the one-sided nature of the arbitration clause which required only the petitioners to submit their claim to arbitration, whereas the program’s producer had the right to seek injunctive or other equitable relief in a court of law. (Id. at p. 1253.) The petitioners were also barred from seeking review of the arbitrator’s decision whereas the producer was not. (Id. at p. 1254.)

There are many lessons to be learned from Higgins. I’ll leave it to the reader to determine which are applicable to his or her cases.

Copyright, Michael D. Marcus, August 2006

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