American Software, Inc. v. Ali

California Court of Appeal
46 Cal. App. 4th 1386, 54 Cal. Rptr. 2d 477 (1996)

ELI5:

Rule of Law:

A provision in an employment contract is not unconscionable, and is therefore enforceable, if it was negotiated between sophisticated parties with comparable bargaining power and its terms, while potentially harsh, are not so one-sided as to 'shock the conscience.'

Facts:

From September 1991 to March 1994, Melane Ali worked as a salesperson for American Software, Inc.
Ali's written employment contract stated that commissions were earned only when payment was received by the company.
The contract included a clause stipulating that upon voluntary termination, an employee's right to commissions is forfeited for any payments received by the company more than 30 days after the termination date.
Before signing the contract, Ali reviewed it, had an attorney 'buddy' review it, and successfully negotiated the removal of another unfavorable clause.
Ali was aware of the commission forfeiture clause when she signed the agreement.
Ali voluntarily resigned to take a job with a competitor.
After her departure, American Software received payments from IBM and Kaiser for sales Ali had secured, but these payments arrived more than 30 days after her termination date.
American Software, citing the contract, refused to pay Ali commissions on the IBM and Kaiser payments.

Procedural Posture:

Melane Ali's claim for unpaid commissions was first denied by the California Labor Commissioner.
Ali then filed for a de novo review in the superior court (the trial court of first instance).
The superior court found the contract's commission forfeiture provision to be unconscionable and awarded Ali approximately $30,000.
American Software, Inc. (appellant) appealed the superior court's judgment to this court, the California Court of Appeal. Melane Ali is the respondent.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Is a provision in an employment contract that forfeits a salesperson's right to commissions on payments received by the company more than 30 days after the employee's voluntary termination unconscionable and therefore unenforceable?

Opinions:

Majority - King, J.

No. The contract provision is not unconscionable and is therefore enforceable. To be deemed unconscionable, a contract must be both procedurally and substantively unconscionable at the time it was made. Procedural unconscionability was absent here because Ali was a sophisticated party who read the contract, had legal counsel review it, understood its terms, and possessed sufficient bargaining power to negotiate other provisions. Substantive unconscionability requires terms so one-sided they 'shock the conscience,' a standard higher than mere unreasonableness. This provision did not meet that high standard, as it reflected a common business practice of allocating risks and ensuring accounts are serviced post-departure. The court rejected the less rigorous 'reasonableness' test used in prior cases like Ellis, instead adopting the 'shock the conscience' standard from California Grocers Assn., concluding that courts should not act paternally to rewrite contracts negotiated at arm's-length.

Analysis:

This decision solidifies the 'shocks the conscience' standard for substantive unconscionability in California employment contracts, signaling a shift away from a less stringent 'reasonableness' test. It demonstrates judicial deference to freedom of contract, particularly between sophisticated parties, even when a contract term leads to a harsh outcome for one party. By explicitly disagreeing with the reasoning in Ellis v. McKinnon Broadcasting Co., the court makes it more difficult for employees to challenge commission forfeiture clauses that they knowingly agreed to. The ruling emphasizes that the analysis must focus on the circumstances at the time of signing, not on the subsequent financial impact of the provision.

Gunnerbot

AI-powered case assistant

Loaded: American Software, Inc. v. Ali (1996)

Try: "What was the holding?" or "Explain the dissent"