Arbitration agreement deemed `unconscionable' in California.

Mandatory employee arbitration agreements that bar class action lawsuits and impose greater limits on employee rights than are allowed by law are "unconscionable and unenforceable," a California court has held.

Ramirez v. Circuit City Stores, Inc., marks a victory for employees faced with the choice of either signing the agreements or looking for another job. (No. A085701, 1999 WL 1129013 (Cal. Ct. App. Dec. 10, 1999).)

"It's a great case," said Paul Bland of Washington, D.C., chair of ATLA's mandatory arbitration litigation group, noting that the ruling is important because it is one of only a few in the nation to look at whether limits on class actions in arbitration agreements are unconscionable.

Robert Ramirez signed an arbitration agreement as a condition of his employment at a Fresno, California, Circuit City store, which sells electronics equipment and appliances.

The agreement barred employees from participating in class actions against Circuit City. It also limited discovery, set out the relief available, and capped punitive damages in employment disputes that would be arbitrated.

After Ramirez began working at the store, he filed a class action lawsuit, claiming that some of the company's wage practices violated California's labor laws. Circuit City petitioned the trial court to compel arbitration in the matter, but the court denied the petition, finding that the company's agreement was unconscionable and that it barred employees from exercising rights guaranteed by state law.

The state court of appeal affirmed the trial court's ruling, finding that the agreement contained procedural and substantive elements that made it unconscionable.

First, the court held that the company's requirement that job candidates sign the agreement or find work elsewhere is not "a meaningful choice," and it "ignores the realities of the marketplace.

"Although persons familiar with employment rights and employment law probably could comprehend the nature of the rights they would be giving up by agreeing to the arbitration agreement, it is unrealistic to suppose that persons such as Ramirez, seeking work and applying for positions not requiring specialized education, would have the background to understand the significance of rights they were relinquishing," Judge William Stein wrote for the court.

Second, the court found that the company's agreement was unilaterally imposed, meaning employees were required to arbitrate their disputes, but the company was not barred from taking its claims against employees to court. "It is by now well settled that an agreement that requires the weaker party to arbitrate any claims he or she may have, but permits the stronger party to seek redress through the courts, is presumptively unconscionable," Stein wrote.

Third, the court found that Circuit City's prohibition against class action participation is contrary to a California Supreme Court holding on the issue because it would "unduly benefit the wrongdoer and unduly disadvantage the members of the affected class."

Finally, the court held that Circuit City's cap on punitive damages violates public policy by "discouraging the prosecution of employee claims that are encouraged by statute."

Bland said the decision will benefit plaintiffs in California and possibly in many other states. "Circuit City was trying to take away people's day in court," he said, adding that such mandatory agreements "make it very hard to hold Circuit City responsible for anything that it did."

Bland said litigation in the area of employee and consumer arbitration agreements has increased over the past several years, producing mixed results among the states.

"There has been a lot more litigation on [unconscionability issues] and a number of them have been less friendly [to plaintiffs]," Bland said. "Generally, you'll see courts in Florida, California, Montana, West Virginia, Ohio, and Alabama being very sensitive to whether a clause is unfair."

Bland said, however, that the law in New York and Delaware is less favorable to consumers who argue unconscionability.