Employment Client Alert: “Delegation Clause,” Is Not Unconscionable

In Malone v. Superior Court (California Bank & Trust) (No. B253891, filed 6/17/2014), a California appeals court held a “delegation clause” contained within an arbitration provision, which empowers the arbitrator to determine the enforceability of the actual arbitration provision, was not unconscionable.

Keeya Malone (“Malone”) was an employee of California Bank & Trust. Malone accepted an employee handbook, which contained an arbitration clause that required “[a]ny legal controversy or claim arising out of” Malone’s employment to be submitted to arbitration. Within the arbitration provision was also a “delegation clause” which read “[t]he arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.”

Malone filed suit against California Bank & Trust alleging violations of the California Labor Code and unfair business practices. California Bank & Trust moved to compel arbitration. Malone opposed the motion on the ground the arbitration provision was generally unconscionable. Malone further argued that before the Court could enforce the arbitration agreement, it must determine whether the delegation clause was enforceable. The trial court ultimately held the delegation clause was enforceable, and granted the motion to compel arbitration.

Malone appealed, arguing that three California appellate decisions had previously held similar delegation clauses unenforceable. [See Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138 (“Murphy”); Bruni v. Didion (2008) 160 Cal.App.4th 1272 (“Bruni”); and Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494 (“Ontiveros”).] California Bank & Trust argued the United States Supreme Court decision in AT&T Mobility LLC v. Concepion (2011) ___ U.S. ___ [131 S.Ct. 1740] (“Concepcion”) effectively overruled Murphy, Bruni and Ontiveros.

The Court began its analysis by acknowledging the delegation clause would be deemed enforceable unless Malone made a sufficient showing that the clause was procedurally and substantively unconscionable. In discussing the issue, the Court identified three qualities upon which delegation clauses had been held unconscionable in Murphy, Bruni and Oliveros: (1) delegation clauses are not bilateral; (2) the arbitrator has a self-interest in finding the agreement arbitrable; and (3) a delegation clause is outside the reasonable expectation of the parties.

The Court rejected each ground in turn. First, no argument can be made that only an employee would raise an issue of “interpretation, applicability, or enforceability.”

Second, the alleged self-interest of the arbitrator is a rationale that is preempted by the Federal Arbitration Act (“FAA”). The Court noted the Concepcion decision pointed out that where a state law rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” the rule is preempted by the FAA, even if it is not expressly hostile to arbitration.

Third, the Court noted the only evidence of procedural unconscionability was that the arbitration agreement was within a contract of adhesion. Due to the minimal showing of procedural unconscionability, Malone would need to demonstrate considerable evidence of substantive unconscionability. The contention that “delegation clauses” are outside the parties’ reasonable expectation was an insufficient ground, standing alone, to demonstrate the required level of substantive unconscionability.

The Court concluded “[t]he delegation clause is not inherently unfair – it is not unilateral; it does not provide for a biased decision maker. Moreover, the clause is clear and unmistakable; and is not hidden in fine print in a prolix form.” The Court affirmed the trial court’s grant of the petition to compel arbitration, empowering the arbitrator with the authority to determine the enforceability of the arbitration provision as a whole.

This case is a reminder to employers to closely and pragmatically review their present or contemplated arbitration agreements, which cover their California employees, to identify any provisions that might be considered unfair or unconscionable.

This document is intended to provide you with general information about employment law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

June 19, 2014