Ninth Circuit declares one-sided arbitration clauses presumptively unconscionable.

California employers who make new hires sign agreements to arbitrate employment disputes will have a harder time enforcing those contracts given a recent decision by the Ninth Circuit.

In a unanimous opinion, the court found that a mandatory arbitration agreement that Circuit City Stores, Inc., required as a condition of employment so grossly favored the company that it was both substantively and procedurally unconscionable under California law. Similar agreements, the court said, should be presumed unenforceable. (Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003).)

The decision marks the first time a court has concluded that employment-related arbitration agreements should be considered unenforceable until proven otherwise, said plaintiff lawyer Jeffrey Needle of Seattle. In typical contract disputes, the plaintiff bears the burden of proving that an agreement should not be enforced.

"This is very new and very powerful. It significantly diminishes the ability of an employer to coerce employees into waiving their constitutional right of access to courts and trial by jury," Needle said.

Although the case was decided under California contract law and is therefore binding only on employers in that state, its impact will be felt in other jurisdictions, Needle said. "It has far broader implications ... because contract law in other states is not vastly different."

The plaintiff, Catherine Ingle, signed Circuit City's agreement when she was hired in 1996. Three years later, she sued the company, alleging sexual harassment and sex and disability discrimination. The trial court denied Circuit City's motion to compel arbitration, and the Ninth Circuit affirmed, calling the company's contract "oppressive."

"Several substantive terms of Circuit City's arbitration agreement are one-sided," the Ninth Circuit held. "The provision concerning coverage of claims, the statute of limitations, the prohibition of class actions, the filing fee, cost-splitting, remedies, and Circuit City's unilateral power to modify or terminate the arbitration agreement all operate to benefit the employer inordinately at the employee's expense."

The court rejected the company's claim that the agreement was fair because it also applied to lawsuits the company would bring against employees. The contract explicitly limits its application to employment-related disputes brought by workers, the court noted. And even it if didn't, the company would rarely bring a claim against an employee.

"Because the possibility that Circuit City would initiate an action against one of its employees is so remote, the lucre of the arbitration agreement flows one way: The employee relinquishes rights while the employer generally reaps the benefits of arbitrating the employment disputes.... By essentially covering only claims that employees would likely bring against Circuit City, this arbitration agreement's coverage would be substantively one-sided even without the express limitation to claims brought by employees," Judge Harry Pregerson wrote for the court.

Not all employment-related arbitration agreements are as "overreaching" as Circuit City's, Needle said. But the beauty of the decision for plaintiffs is that the burden of proving enforceability shifts to the defendant as soon as the agreement is made, regardless of its terms.

"They are all presumptively unconscionable. The employer has to demonstrate bilateral application," he said.