Ferguson v. Countrywide Credit Industries, Inc.
298 F.3d 778 (2002)
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Rule of Law:
Under California law, a mandatory employment arbitration agreement is unenforceable under the doctrine of unconscionability if it is both procedurally unconscionable (e.g., a non-negotiable condition of employment) and substantively unconscionable (e.g., its terms are unfairly one-sided in favor of the employer).
Facts:
- Misty Ferguson was hired by Countrywide Credit Industries, Inc.
- As a mandatory and non-negotiable condition of her employment, Ferguson was required to sign an arbitration agreement.
- The agreement required arbitration for claims employees are most likely to bring, such as claims for discrimination, harassment, and wrongful termination.
- The agreement explicitly excluded from arbitration claims that Countrywide was most likely to bring against an employee, such as those for intellectual property violations, unfair competition, or the unauthorized use of trade secrets.
- The agreement's fee provision required the employee to pay a filing fee up to $125 and to share equally in all other arbitration costs after the first day of hearings.
- The agreement's discovery provision limited depositions of a corporate representative to no more than four designated subjects, but placed no similar limit on depositions of the employee.
- Ferguson alleged she was subjected to sexual harassment and retaliation by her supervisor, Leo DeLeon, which formed the basis of her claims against Countrywide.
Procedural Posture:
- Misty Ferguson filed a complaint in federal district court against Countrywide Credit Industries, Inc. and Leo DeLeon, alleging sexual harassment, retaliation, and hostile work environment.
- Countrywide filed a petition in the district court to compel arbitration of Ferguson's claims based on its mandatory arbitration agreement.
- Ferguson opposed the petition, arguing the agreement was unenforceable.
- The U.S. District Court denied Countrywide’s petition, finding the arbitration agreement was unconscionable.
- Countrywide, as the appellant, appealed the district court's denial to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Is a mandatory arbitration agreement imposed as a condition of employment unconscionable and therefore unenforceable when it requires arbitration for claims typically brought by employees but excludes claims typically brought by the employer, imposes costs on the employee not required in court, and contains one-sided discovery provisions?
Opinions:
Majority - Pregerson, Circuit Judge
Yes. A mandatory arbitration agreement is unconscionable and unenforceable when it is procedurally and substantively one-sided. The court found Countrywide's agreement unconscionable under California's two-prong test. First, it was procedurally unconscionable because it was a contract of adhesion, presented to Misty Ferguson as a non-negotiable, take-it-or-leave-it condition of employment, giving her no meaningful choice. Second, it was substantively unconscionable due to multiple unfairly one-sided terms. These included: (1) a lack of mutuality, as it covered claims employees would likely bring but exempted claims the employer would likely bring; (2) an unlawful fee-splitting provision that required the employee to bear arbitration costs they would not incur in court, contrary to the rule in Armendariz; and (3) discovery provisions that, while not independently unconscionable, contributed to the overall scheme designed to favor the employer. The court concluded that these unconscionable provisions were so pervasive that they could not be severed, rendering the entire agreement unenforceable.
Analysis:
This decision solidifies the application of California's unconscionability doctrine, particularly the Armendariz standards, to mandatory employment arbitration agreements within the Ninth Circuit. It serves as a strong precedent against employer-drafted agreements that create a biased or inferior forum for resolving employee disputes. The case illustrates that courts will look at the cumulative effect of various provisions—such as claim coverage, cost-sharing, and discovery—to determine if an agreement is systematically designed to disadvantage the employee. For employers, this case highlights the risk of overreaching in drafting arbitration clauses; for employees, it provides a clear basis to challenge agreements that are not mutually binding and fair.
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