Chavarria v. Ralphs

The Federal Arbitration Act does not preempt a finding under California state law that an arbitration agreement is unconscionable where the allocation of arbitration costs effectively forecloses pursuit of a claim.

Zenia Chavarria worked as a deli clerk at Ralphs Grocery Company (“Ralphs”) for six months. She brought a claim in California district court alleging that she and all similarly situated employees of Ralphs had not been paid for their lunch breaks as required under California labor law. Ralphs moved to compel arbitration under the terms of Chavarria’s employment agreement. The district court found that the arbitration agreement was unenforceable because it was unconscionable. Ralphs appealed. The Ninth Circuit held that the arbitration agreement was both procedurally and substantively unconscionable under California law. The panel found that the agreement was procedurally unconscionable for several reasons. First, the agreement was binding whether or not Chavarria signed. Second, the agreement could be unilaterally changed by Ralphs at any time. Third, Chavarria did not receive the terms of the arbitration clause until three weeks after it became effective. The panel also found the agreement to be substantively unconscionable for several reasons. Particularly, the panel pointed to an onerous provision that divided the administrative costs of arbitration between both parties regardless of the outcome, which “severely limits the authority of the arbitrator to allocate costs in the award.” In addition, the panel held that the Federal Arbitration Act does not preempt California contract law in these circumstances. The panel explained that even though California’s unconscionability doctrine served as a safeguard against abuse of bargaining power in this case, unconscionability is not generally antagonistic to arbitration. AFFIRMED and REMANDED.