936 F. Supp. 2d 1145
N.D. Cal.2013Background
- MHN allegedly misclassified MFLCs as independent contractors instead of employees under FLSA and state laws.
- MFLCs provided counseling services at U.S. military installations nationwide and abroad under Provider Services Task Order Agreement with an express arbitration clause.
- Arbitration clause requires AAA rules, San Francisco venue, three arbitrators chosen by MHN and one by MFLC, and limits on discovery and damages; includes costs shifting and punitive damages prohibition.
- Plaintiffs contend the arbitration clause is procedurally and substantively unconscionable and thus not enforceable.
- Court analyzed unconscionability under California law and FAA framework, concluding the clause is permeated with unconscionability and not severable, so arbitration is not compelled.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the arbitration clause procedurally unconscionable? | Agreement is adhesion, oppressive, and contains surprise. | Arbitration clause part of a negotiated contract; not procedurally unconscionable. | Procedural unconscionability found. |
| Is the arbitration clause substantively unconscionable? | Multiple terms (statute of limitations, arbitrator pool, discovery, fees, punitive damages, etc.) are one-sided. | Terms are within contractual discretion and do not render the clause unconscionable. | Substantive unconscionability found for several provisions. |
| Are any unconscionable provisions severable and does severability apply? | Severing terms could restore fairness. | Unconscionable provisions are not severable and indicate permeation. | Arbitration agreement is permeated; not severable. |
| Is the San Francisco forum-clause unconscionable? | For geographically dispersed MFLCs, SF is oppressive. | Plaintiffs chosen San Francisco by filing there; clause does not diminish California rights. | Forum selection clause not unconscionable. |
| Does the agreement’s enforcement framework (arbitrator’s authority and applied law) render it unconscionable? | Labeling workers as independent contractors and limiting remedies conflicts with FLSA/California law. | Arbitrator must apply contract and law; can enforce economic reality test. | Enforcement provisions not unconscionable when read with contract-law requirements. |
Key Cases Cited
- Armendariz v. Found. Health Psychcare Svcs., Inc., 24 Cal.4th 83 (Cal. 2000) (sets framework for procedural and substantive unconscionability in arbitration)
- Concepcion v. California, 563 U.S. 333 (Supreme Court 2011) (FAA preempts state rules prohibiting certain class-action waivers; defenses to arbitration must be generally applicable)
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (U.S. Supreme Court 1991) (arbitration as a matter of contract; limits on non-contract defenses not allowed)
- Kilgore v. KeyBank, Nat. Ass’n, 673 F.3d 947 (9th Cir. 2012) (adhesion and one-sided terms support unconscionability finding)
- Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) (examines severability; unconscionability permeation standard)
- Armendariz v. Foundation Health Psychcare Services, 90 Cal.App.4th 1102 (Cal. App. 2000) (discusses procedural and substantive unconscionability; sliding scale test)
- Davis v. O'Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007) (unconscionability scope in severability context)
- Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244 (9th Cir. 1994) (one-sided arbitration terms can be deemed unconscionable)
- Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748 (9th Cir. 1979) (economic realities determine employment status for FLSA context)
- Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006) (adhesion and procedural unconscionability considerations)