By Steven G. MehtaSteve Mehta



A recent case came down that addressed the issue of arbitration agreements and whether they can be enforceable in light of arguments regarding unconscionability. In Olvera v. El Pollo Loco, Inc., — Cal.Rptr.3d —-, 2009 WL 1110828 (2nd. Dist. Cal. App. April 27, 2009), the plaintiff, Carlos Olvera, was a general manager of an El Pollo Loco restaurant.  The employees were provided with documents that identified the company’s dispute resolution policies.  One page of the document identified in Spanish and English that the parties could use mediation as a form of alternative dispute resolution.   There was no mention of arbitration.  On a separate page, there were other procedures and policies that that included a procedure on dispute resolution that was in English only.  The dispute resolution policy stated that all employment-related disputes must be resolved through binding arbitration. It stated procedures for demanding arbitration and that the parties “may agree” to mediation, but that the sole means to resolve any dispute not resolved through other means was through arbitration. It also stated that class arbitration was prohibited.


El Pollo Loco filed a motion to compel arbitration.  Plaintiff argued that the agreement was procedurally and substantively unconscionable because it was non-negotiable, and that it was misleading because of the multiple policies and the language issues.  Plaintiff further argued that the waiver of the class action arbitration was also unenforceable. 


The court explained that a contract is unenforceable, in whole or in part, if it is unconscionable. Both procedural and substantive unconscionability must be present to justify the refusal to enforce a contract or clause based on unconscionability. Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms. The more procedural unconscionability is present, the less substantive unconscionability is required to justify a determination that a contract or clause is unenforceable. Conversely, the less procedural unconscionability is present, the more substantive unconscionability is required to justify such a determination.


The Court held that the agreement was procedurally unconscionable in two respects. First, the inequality in bargaining power between the low-wage employees and their employer made it likely that the employees felt at least some pressure to sign the acknowledgment and agree to the new dispute resolution policy. 


Second, the court explained that the employees’ agreement to be bound by the new dispute resolution policy was not an informed decision. The court explained that:

“The explanatory materials provided… if the problem was not resolved in that manner, mediation was required. This was stated in large type, in both English and Spanish, and presented in an inviting, easy-to-read format. The description of the new policy, however, was totally inaccurate. The dispute resolution policy itself, on another page, required binding arbitration of all employment-related disputes and stated that the parties “may agree to mediate,” not that mediation was required. The description provided in the explanatory materials was misleading in that it described the new policy as one of required mediation rather than required arbitration. Moreover, the policy itself appeared in much smaller type than the explanatory materials, and in English only. This exacerbated the effect of the misrepresentation and made it more likely that the employees would be misled.” 



As such, the court concluded that “the degree of procedural unconscionability is high.”


The court also found substantive unconscionability with the class arbitration waiver because it insulated El Pollo Loco from employee class actions and class arbitrations.  The court explained that class actions may be especially important if many of those employees are low-wage earners with limited English language skills who are likely ill-informed of their statutory rights.  Moreover, the waiver was unfairly one-sided because it benefited only El Pollo Loco, which was unlikely to sue its employees in a class action lawsuit.


As such, given the procedural and substantive unconscionability, the court found the arbitration agreement along with the waiver of class action rights as unenforceable.


These decisions reaffirm law regarding arbitration that there must be an element of both substantive and procedural unconscionability before the courts will agree to render an arbitration agreement unenforceable.  It also appears clear that the greater the procedural unconscionability, the less that is necessary to prove for substantive unconscionability. Moreover, as in Roman, where there was some, but not a lot of evidence, of procedural unconscionability, the courts appear to be less willing to render the arbitration agreements unenforceable.  


Arbitration is a favored concept in California.  However, there are many occasions when those agreements are not enforced.  Parties need to be aware that when they are drafting arbitration agreements that they need to make sure that there is a certain element of fairness to the agreement so that it can be deemed to be procedurally fair and uniform.  This will help to make the arbitration agreement enforceable.