3 Notes for Arbitration Agreements After Calif. Supreme Court Ruling

Editor's note: Authored by Erin Trenda, Wendy Brenner and Matt Nguyen, with assistance from 1L Diversity Fellow Hersh Gupta, this article was originally published in Law360.

Last month, the California Supreme Court issued its decision in Ramirez v. Charter Communications Inc. invalidating several arbitration clauses in employee contracts used nationwide by Charter Communications as unconscionable and unenforceable — with notable implications for many arbitration agreements subject to California law.[1]

Ramirez interpreted arbitration clauses in the context of an employment agreement, but its reasoning applies to all arbitration agreements where California courts perceive a significant power imbalance.

Particularly when contrasted with U.S. Supreme Court precedents favoring arbitration, the latest California high court ruling in Ramirez underscores its long-standing skepticism toward arbitration when tilted too generously in favor of one contracting party.[2]

In the aftermath of Ramirez, companies stand to benefit from reexamining their existing arbitration agreements subject to California law. By excising or revising arbitration provisions like the ones invalidated in Ramirez, parties can reduce the risk that California courts, and potentially other jurisdictions, will void their agreements to arbitrate in their entirety.

Ramirez Court Strikes Certain Arbitration-Related Clauses

Writing for a unanimous court, Associate Justice Carol Corrigan held that nearly all the challenged arbitration provisions in Charter's employment contracts were unconscionable in an opinion offering new guidance for the continued vitality of many common arbitration clauses.

Under California law, courts must find both procedural and substantive unconscionability to void a contract term.[3] As an initial matter, Ramirez found some procedural unconscionability in the challenged provisions because Charter's employment contract — like countless other consumer and employment contracts — functioned as a contract of adhesion without the opportunity for the other party to negotiate terms.[4]

Turning to substantive unconscionability, the court observed that Charter's arbitration clause placing limits on discovery, i.e., allowing each party a maximum of four depositions, was not unconscionable because the agreement expressly allowed the arbitrator to deviate from that strict limit, if necessary, to permit "full and equal opportunity to all parties to present evidence that the arbitrator deems material and relevant to the resolution of the dispute."[5]

As explained below, however, the court concluded that the following three arbitration-related provisions were each unconscionable: Charter's selective arbitration of employee-initiated claims, its procedural and timing restrictions on initiating arbitration, and its grant of interim attorney fees for the party that successfully compels arbitration.

Severing Terms or Striking the Whole Agreement

Following Ramirez, parties should not assume that courts will sever unconscionable terms and uphold the overall arbitration agreements.

Even though it invalidated several arbitration provisions as unconscionable, Ramirez did not go all the way by striking the entire arbitration agreement. Rather, it remanded to the lower court while providing the following guidance on whether the terms it deemed unconscionable could be severed from the overall agreement to arbitrate.

The court clarified that a high number of unconscionable provisions tilts the scale against severability as "the appropriate remedy," but that there is "no bright line rule" requiring any number of unconscionable terms before an arbitration agreement may be voided in its entirety.

To the contrary, the court underscored that "the appropriate inquiry is qualitative," such that courts should examine if the "central purpose" of the arbitration agreement is "tainted with illegality."[6]

If so, then the court will refuse to sever and will invalidate the whole agreement, regardless of how many provisions were deemed unconscionable. By contrast, if those provisions function as collateral to the arbitration agreement, then the agreement may survive.

In other words, even one unconscionable arbitration clause may be sufficient to taint an arbitration agreement and render it unenforceable.

Ramirez also stressed several other factors in considering whether severability may be the appropriate remedy. While Ramirez held that courts may consider the inclusion of a severability clause in the agreement, courts also must evaluate whether severing discrete provisions would incentivize the stronger party to lard their arbitration agreements with unlawful provisions in the hope that the other party will not challenge all of them.

Consequently, in the court's view, severability turns too on the court's normative assessment of whether severing unconscionable provisions promotes or undermines the interests of justice.[7]

It remains to be seen whether Charter intends to petition the U.S. Supreme Court to reverse the state high court pursuant to the Federal Arbitration Act and federal preemption. However, the California court's order — remanding the case to the lower court for deciding severability in the first instance — suggests that Charter, in the absence of a conclusive ruling on the enforceability of the arbitration agreement as a whole, faces an uphill battle if it attempts to seek Supreme Court review at this time.

Key Takeaways

Ramirez highlights the importance of a carefully crafted arbitration agreement. Because California's unconscionability analysis requires procedural and substantive unconscionability to void a contract provision, any arbitration agreement with indicia of procedural unconscionability, such as contracts of adhesion, may trigger scrutiny under Ramirez.

Although the court refused a bright-line rule on invalidating an arbitration agreement altogether, the court emphasized that the contracting parties' differing bargaining power is relevant to the equation, and it may be especially pronounced in the employer-employee context in which this case was decided.

In light of Ramirez, parties should carefully review their arbitration agreements for the following. 

1. Ensure mutuality of claims subject to and excluded from arbitration.

We expect California courts to look disfavorably on arbitration clauses that disproportionately divert one party's claims to arbitration, while preserving the other party's right to pursue important claims for declaratory or injunctive relief, or otherwise secure relief, in the courts.

In response, companies may achieve mutuality in arbitration by identifying all claims subject to arbitration, classifying each claim as primarily employer- or employee-initiated or neutral, and ensuring that their clauses divert a similar number of each party's claims to arbitration.

Ramirez observed that a clause in Charter's arbitration agreement expressly exempted several key pro-employer claims from arbitration. These claims include seeking court-ordered injunctive relief to protect the employer's intellectual property and trade secrets, and to enforce severance and noncompete agreements against employees.

In its briefing, Charter had characterized those provisions as benefiting Charter and its employees, but the court observed only a "remote possibility" that employees would bring claims to enforce intellectual property or noncompetes.[8]

So even as this section exempted some employee-initiated claims, the court found those exemptions illusory, as they existed simply to comply with existing law barring certain claims from arbitration, such as workers' compensation and unemployment insurance, without providing any additional benefit to employees.[9]

The court further found that Charter's employment contracts forced a wide range of employee-initiated claims into arbitration, including pay disputes, unlawful termination, discrimination and retaliation, and health and safety violation claims.

Building on prior state law precedents, the court thus held that Charter's selectivity of arbitrable claims in these provisions suffered from a "lack of mutuality ... indicative of substantive unconscionability."[10]

With respect to the provision protecting Charter's ability to pursue injunctive relief outside arbitration, the court pointed out that "Charter offered no justification in its briefing" for excluding those claims. Recognizing that judicial relief may be necessary to protect valuable intellectual property, such as trade secrets, the court implied that some articulated justification could warrant those added protections.[11]

Importantly, Ramirez does not foreclose a party's efforts to protect important IP and other rights to declaratory and injunctive relief in court. Instead, it imposes the burden on parties to offer in the applicable agreement or in legal filings some "cognizable justification" that the clause was not simply inserted to advantage one party over the other.

In other words, a carefully crafted arbitration provision detailing such an explanation or offering analogous benefit to rights important to the other party may surmount the restrictions imposed by Ramirez and preserve companies' access to the courts to vindicate key rights outside of arbitration.

2. Avoid provisions that substantially deprive the other contracting party of rights available under federal or state law.

Post-Ramirez, California courts are more likely to invalidate arbitration clauses that interfere with administrative processes made available by statute (e.g., a fulsome investigation by the California Civil Rights Department); that meaningfully shorten the window that parties have, pursuant to statute, to seek recourse via courts or arbitration; or that, absent bad faith or frivolity, deter parties from initially filing an action in court, even if the court later compels arbitration.

For one, Ramirez found that Charter's employment contract unconscionably narrowed the amount of time in which employees must bring claims against Charter — even in arbitration.

The Charter provision at issue forced employees to file any claims with Charter's arbitration body no later than the last day the employee could file the claim with the California Department of Fair Employment and Housing, pegging the employee deadline to the agency filing period of one year instead of the overall statute of limitations of three years.

Given this restricted time frame, the court held that this provision was unconscionable for two reasons. First, it shortens the employee's filing period by two full years, thereby impeding employees' ability to thoroughly investigate potential claims on their own. And second, it could force employees to file claims in arbitration before the DFEH has independently investigated their claims, thereby depriving employees of the benefits of an agency investigation and support.

Following Ramirez, companies should consider the legislative purpose supporting all pertinent timing requirements connected to arbitrable claims — e.g., the time the other party has pursuant to statute to file a whistleblower complaint to a government agency, the length of time a party would otherwise have to bring suit in court under the statute of limitations, and how different statutory timing requirements interact with one another — to ensure that their arbitration provisions do not unduly narrow the time frame for investigating and bringing claims.

In addition, another challenged section in Charter's employment contract provided that, if a court compels arbitration, the party that resisted arbitration must pay all costs, fees and expenses incurred by the party seeking to compel arbitration, including reasonable attorney fees.

Crucially, although California's Fair Employment and Housing Act permits either prevailing party in a civil action to recover fees and costs,[12] it also sets forth a key one-sided limitation that a prevailing defendant cannot receive fees and costs unless the action was "frivolous, unreasonable, or groundless."[13]

The court thus concluded that this interim fee-shifting provision in Charter's employment contract also was unconscionable because it mandates attorney fees in all circumstances — contrary to statute.

In light of this holding, arbitration clauses should authorize fee-shifting in the California employment context only if the arbitrator finds that the action was "frivolous, unreasonable, or groundless," and only impose such fees once the action has resolved in its entirety.

Similarly, in nonemployment contexts, companies should evaluate whether federal or California law imposes specific caveats on fee-shifting, and if so, incorporate them into their arbitration agreements.

3. Revise or remove arbitration clauses that reinforce the perception that their arbitration agreements could be viewed as being unfair or one-sided.

Ramirez articulated a bright-line rule for the arbitration provisions discussed above, while also offering doctrinal guidance on how California courts moving forward will scrutinize all manner of arbitration provisions that disproportionately benefit one party.

Ultimately, companies like Charter that use the same employment or consumer contract nationwide may benefit from either revising these contracts to address the unconscionability limitations imposed by Ramirez, or developing California-specific contracts that account for these considerations. While other state jurisdictions may not share California courts' skepticism toward arbitration, there is no doubt that litigants outside of California may latch on to the reasoning in Ramirez to argue that their arbitration agreements are similarly unconscionable.

Thus, by retaining any clauses similar to those invalidated in Ramirez, parties bear heightened risk that California courts, and those in other jurisdictions, not only void those specific clauses, but also find that the arbitration agreement is void in its entirety.

Since, under Ramirez, even a single unconscionable provision has the potential to doom an arbitration agreement, companies should carefully review all arbitration-related clauses in their existing employment and consumer contracts. In making protective modifications to these provisions, companies should seek to achieve mutuality between the parties, or to provide meaningful benefit to the other party beyond their existing rights under federal or state law.

By doing so, companies may successfully insulate these discrete provisions from judicial scrutiny and, most importantly, protect the parties' agreement to arbitrate altogether.

Cooley 1L Diversity Fellow Hersh Gupta contributed to this article.

[1] No. S273802, 2024 WL 3405593, at *1 (Cal. July 15, 2024).

[2] See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 10 (1984) (FAA declared "national policy favoring arbitration"); AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (rejecting California court's unconscionability ruling as applied to arbitration agreements given "liberal policy favoring arbitration") (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)); Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 238 (2013) (upholding class waiver in arbitration agreement); Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 643 (2022) (finding that FAA preempts California law invalidating contractual waivers of "representative claims").

[3] No. S273802, 2024 WL 3405593, at *3 (Cal. July 15, 2024).

[4] Id. at *4.

[5] Id. at *11.

[6] No. S273802, 2024 WL 3405593, at *18 (Cal. July 15, 2024), quoting Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 124 (2000).

[7] No. S273802, 2024 WL 3405593, at *19 (Cal. July 15, 2024).

[10] Id. at *6.

[11] No. S273802, 2024 WL 3405593, at *7 (Cal. July 15, 2024).

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