Arbitration Agreement Review in California

The Court reviews the arbitration agreement de novo to determine whether it is legally enforceable, applying general principles of California contract law. ' " (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884.) With respect to unconscionability, the trial court's findings "are reviewed de novo if they are based on declarations that raise 'no meaningful factual disputes.' However, where an unconscionability determination 'is based upon the trial court's resolution of conflicts in the evidence, or on the factual inferences which may be drawn therefrom, we consider the evidence in the light most favorable to the court's determination and review those aspects of the determination for substantial evidence.' The ruling on severance is reviewed for abuse of discretion. " (Murphy v. Check 'n Go of California, Inc. (2007) 156 Cal.App.4th 138 (Murphy).) The United States Supreme Court has explained: "Courts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clear and unmistakable' evidence that they did so. " (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938.) California law is consistent with federal law on this question. In Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, the California Supreme Court stated: "It is, of course, possible for the parties to agree that the arbitrator may determine the scope of his authority. 'The arbitrability of a dispute may itself be subject to arbitration if the parties have so provided in their contract.' Even then, it is necessary for the court to examine the contract to ascertain whether the parties 'have so provided.' " (Accord, Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 552 21 Cal.Rptr.3d 322 (Dream Theater).) In Murphy v. Check 'n Go of California, Inc. (2007) 156 Cal.App.4th 138, the Court addressed a situation in which a plaintiff who sued her former employer had previously signed a "Dispute Resolution Agreement" as a condition of employment. Pursuant to the agreement, covered claims included, inter alia, " 'any assertion by you or us that this Agreement is substantively or procedurally unconscionable.' " (Id. at p. 142.) The plaintiff had opposed the employer's motion to compel arbitration on unconscionability grounds, arguing that a class action waiver in the agreement was substantively unconscionable. (Id. at p. 143.) The trial court had denied the motion to compel, concluding that it had the power to rule on unconscionability issues; the agreement was a contract of adhesion; the agreement's class action waiver was substantively unconscionable; the agreement's provisions for arbitration of unconscionability issues and preexisting claims were also substantively unconscionable; and the unconscionable terms would not be severed from the agreement. (Ibid.) The appellate court affirmed the trial court's rulings, explaining: "While the language of the agreement regarding arbitration of unconscionability issues could not be clearer, plaintiff's alleged assent to this provision was vitiated by the fact that it was set forth in a contract of adhesion, i.e., a standardized contract drafted by the stronger party and presented to the weaker party on a take-it-or-leave-it basis ." (Murphy, supra, 156 Cal.App.4th at p. 144.) The court further concluded that both of two judicial limitations on the enforcement of adhesion contracts were present, in that (1) parties would not ordinarily expect an arbitrator, rather than the court, to determine his or her own jurisdiction, and (2) regardless of the reasonable expectations of the parties, the provision for arbitrator determinations of unconscionability was itself substantively unconscionable. (156 Cal.App.4th at p. 145.) The court noted that substantively unconscionable terms can be generally described as unfairly one sided or lacking in mutuality. (Ibid.) The agreement was "facially mutual insofar as it covers assertions of unconscionability by 'you or us' but, as plaintiff points out, the provision is entirely one sided because defendant cannot be expected to claim that it drafted an unconscionable agreement." (Ibid.) The court described these two limitations as follows: " '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." ' " (Murphy, supra, 156 Cal.App.4th at p. 145.) The court therefore agreed with the trial court that, "in this contract of adhesion, the provision for arbitrator determinations of unconscionability is unenforceable. Under the circumstances of this case, the judge is the proper gatekeeper to determine unconscionability." (Murphy, supra, 156 Cal.App.4th at p. 145.)