Mitchell v. HCL America, Inc.
2016 WL 3129176, 2016 U.S. Dist. LEXIS 72011, 190 F. Supp. 3d 477 (2016)
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Rule of Law:
Under the Federal Arbitration Act (FAA), an arbitration agreement in an employment contract is enforceable even if it contains substantively unconscionable clauses, provided those clauses are collateral to the agreement's main purpose and can be severed. State law doctrines that invalidate arbitration clauses are preempted by the FAA if they apply only to arbitration or are applied in a way that disfavors it.
Facts:
- Sometime prior to February 2011, defendant contacted plaintiff regarding a position in its department located in Cary, North Carolina.
- Defendant extended an offer of employment to plaintiff in a letter dated February 18, 2011.
- The offer letter contained an arbitration provision requiring all employment disputes to be arbitrated in Sunnyvale, California, under rules requiring the parties to share costs.
- The arbitration provision also exempted from arbitration any disputes arising under a separate "Undertaking" agreement, which related to intellectual property.
- The offer letter contained a choice of law provision selecting California law to govern the agreement.
- When plaintiff objected to the arbitration provision, defendant informed her that the agreement was "standard" and she had to "take it or leave it."
- Plaintiff accepted the offer, relocated from Denver, Colorado to Cary, North Carolina, and began her employment.
- During her employment, plaintiff alleged she was denied a bonus, passed over for a promotion in favor of a younger male, and later given a negative performance review and reassigned to a less desirable role after filing a discrimination charge.
Procedural Posture:
- On October 23, 2015, plaintiff filed a lawsuit against defendant, her employer, in the U.S. District Court for the Eastern District of North Carolina.
- The complaint asserted federal claims under Title VII and the ADEA, as well as state law claims.
- On January 11, 2016, defendant filed a motion to compel arbitration and stay proceedings pursuant to the Federal Arbitration Act.
- The District Court is now ruling on defendant's motion.
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Issue:
Is an arbitration provision in an employment contract enforceable when it contains clauses that are substantively unconscionable under state law, such as a lack of mutuality and an oppressive forum selection clause, and a clause that is unconscionable under a state law rule preempted by the Federal Arbitration Act?
Opinions:
Majority - Flanagan, L.
Yes, the arbitration agreement is enforceable after severing the substantively unconscionable clauses not preempted by the Federal Arbitration Act. The court found that although the adhesive nature of the employment offer created a minimal degree of procedural unconscionability, several clauses required substantive analysis. The court held that the clause exempting intellectual property claims (the 'undertakings clause') and the clause requiring arbitration in California were substantively unconscionable under California's general contract law principles against one-sided risk allocation and oppression, and these state law principles were not preempted by the FAA. However, the clause requiring cost-splitting was unconscionable under a California rule that specifically disfavors arbitration by forbidding any cost-sharing for employees; this rule was therefore preempted by the FAA. Because the two unconscionable, non-preempted clauses were collateral to the main purpose of arbitrating disputes and did not demonstrate a systematic effort to create an unfair forum, the proper remedy was to sever them and compel arbitration under the remaining terms.
Analysis:
This case provides a detailed framework for analyzing unconscionability challenges to arbitration agreements where state and federal laws intersect. It demonstrates that the Federal Arbitration Act's strong policy favoring arbitration does not grant employers carte blanche to impose entirely one-sided terms. The decision affirms that generally applicable state contract defenses, such as rules against a lack of mutuality or oppressive terms, can be used to invalidate specific clauses. However, it also reinforces the FAA's potent preemptive power over state laws that create special, hostile rules for arbitration, such as California's per se ban on employee cost-splitting, which conflicts with the federal 'prohibitive cost' standard. This distinction is crucial for both drafting employment agreements and litigating their enforceability.
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