Maribel Baltazar was hired by clothing retail merchandiser Forever 21 in 2007. During the hiring process, Baltazar was given an 11-page document to sign, two pages of which contained an arbitration agreement. At first, Baltazar refused to sign the pages containing the arbitration agreement but was informed in no uncertain terms that she would not be employed if she did not sign. Baltazar signed the agreement.
The trial court sided with Baltazar, agreeing that the arbitration agreement was not only procedurally unconscionable, but also substantively unconscionable because it listed only employee claims as types of disputes to which it applies and gave Forever 21 alone the right to protect trade secrets.
Forever 21 appealed. The Appeals Court overruled the trial court despite agreeing with it that the arbitration agreement was procedurally unconscionable.
Despite the agreement, the Appeals Court ruled that the agreement was not substantively unconscionable and ruled in favor of Forever 21. Baltazar appealed to the California Supreme Court.
JUDGE KRUGER As a starting point for our analysis, we review general principles of unconscionability. “One common formulation of unconscionability is that it refers to “‘an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.’” As that formulation implicitly recognizes, the doctrine of unconscionability 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 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.”
“[A] finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided.
“The unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as ‘overly harsh,’ ‘unduly oppressive,’ ‘so one-sided as to ‘shock the conscience,’ or ‘unfairly one-sided.’ All of these formulations point to the central idea that the unconscionability doctrine is concerned not with ‘a simple old-fashioned bad bargain’ but with terms that are ‘unreasonably favorable to the more powerful party.
…[C]ourts, including ours, have used various nonexclusive formulations to capture the notion that unconscionability requires a substantial degree of unfairness beyond “a simple old-fashioned bad bargain.” …A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided contract provisions are unconscionable; hence the various intensifiers in our formulations:
“overly harsh,’ ‘unduly oppressive,’ ‘unreasonably favorable.’ The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.”
Here, the trial court concluded that the arbitration agreement was procedurally unconscionable because it was written on a preprinted form and offered on a take-it-or-leave-it basis, thus making it a contract of adhesion. The Court of Appeal agreed. The Court of Appeal noted, however, that while the contract was adhesive in nature, there was no element of surprise. Baltazar not only knew about the arbitration agreement, but initially sought to avoid it, ultimately deciding to accept it because Forever 21 was not willing to offer the job on other terms. Nor was there any oppression or sharp practices on the part of Forever 21. Baltazar was not lied to, placed under duress, or otherwise manipulated into signing the arbitration agreement. The adhesive nature of the employment contract requires us to be “particularly attuned” to her claim of unconscionability, but we do not subject the contract to the same degree of scrutiny as “[c]ontracts of adhesion that involve surprise or other sharp practices.”
Baltazar’s petition for review raises … claims of substantive unconscionability…
Baltazar argues that the arbitration agreement at issue is unfairly one-sided because it lists only employee claims as examples of the types of claims that are subject to arbitration. As noted, the arbitration agreement states that the parties mutually agree to arbitrate “any claim or action arising out of or in any way related to the hire, employment, remuneration, separation or termination of Employee,” and it further provides that the disputes subject to arbitration “include but are not limited to: claims for wages or other compensation due; claims for breach of any employment contract or covenant (express or implied); claims for unlawful discrimination, retaliation or harassment …, and Disputes arising out of or relating to the termination of the employment relationship between the parties, whether based on common law or statute, regulation, or ordinance.” …In Baltazar’s view, this provision makes clear that the kinds of claims typically brought by employees are all subject to arbitration, but it leaves in doubt whether the kinds of claims employers typically bring are also subject to arbitration, thus allowing the employer to litigate that issue when it brings a claim.
We disagree. The arbitration agreement at issue here makes clear that the parties mutually agree to arbitrate all employment-related claims: that is, “any claim or action arising out of or in any way related to the hire, employment, remuneration, separation or termination of Employee.” That provision clearly covers claims an employer might bring as well as those an employee might bring…. The examples do not alter the substantive scope of the agreement, nor do they render the agreement sufficiently unfair as to make its enforcement unconscionable.
Baltazar argues that the arbitration agreement here is unduly one-sided because it provides that, in the course of arbitration, “all necessary steps will be taken to protect from public disclosure trade secrets and proprietary and confidential information.” Baltazar contends that because the agreement neither defines “all necessary steps” nor specifies what constitutes “proprietary and confidential information,” the agreement unfairly demands that employees take whatever steps the employer deems “necessary“ to protect whatever information the employer claims to be “proprietary and confidential.”
Baltazar misreads the confidentiality provision. Nothing in the agreement indicates that an employee must accede to any and all demands Forever 21 might make for the protection of confidential and proprietary information. As defendants explain: “This provision contemplates that if trade secret, confidential and proprietary information need[s] to be introduced into the arbitration that the parties [will] work with the arbitrator to make sure that such information is not disclosed to the public.” The agreement does not restrict the use of such information in the proceeding, nor does it pretermit any determination of whether a particular piece of information is a trade secret or otherwise qualifies as proprietary and confidential. Agreements to protect sensitive information are a regular feature of modern litigation, and they carry with them no inherent unfairness.
To the extent that Baltazar’s complaint is instead that the agreement calls for the protection of an employer’s confidential information without similarly calling for the protection of the confidential information of employees, we disagree with the suggestion that this omission renders the arbitration agreement unduly harsh or one-sided. A contract can provide a “margin of safety” that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable.” Here, the basis for the extra measure of protection is a legitimate commercial need to protect Forever 21’s “valuable trade secrets and proprietary and confidential information” from public disclosure. Although Baltazar may dislike the wording of the confidentiality provision, she does not dispute that it is based on a legitimate commercial need. Moreover, nothing in the agreement precludes employees from seeking comparable protection for their personal information during arbitration proceedings, as circumstances may warrant.
We conclude that the parties’ arbitration agreement is not unconscionable.
CRITICAL THINKING:
What values are encapsulated by the unconscionability principle? Which stakeholders and values did the California Supreme Court favor when it made its decision? Exhibit 4-2 offers tips on creating a binding arbitration clause.20 ETHICAL DECISION MAKING:
What is the unconscionability principle and what problems may arise from its definition? How does the California Supreme Court define “procedurally unconscionable” and “substantively unconscionable?” How do the two terms interact with each other in determining the outcome of the case?