Stirlen v. Supercuts, Inc.

California Court of Appeal
97 Daily Journal DAR 405, 60 Cal. Rptr. 2d 138, 51 Cal. App. 4th 1519 (1997)

ELI5:

Rule of Law:

An arbitration clause is unenforceable under the doctrine of unconscionability if it is both procedurally adhesive and substantively one-sided, such as by compelling an employee to arbitrate all claims with limited remedies while reserving the employer's right to litigate its most likely claims in court. The application of general state contract law principles like unconscionability to invalidate an arbitration agreement is not preempted by the Federal Arbitration Act (FAA).

Facts:

In January 1993, Supercuts, Inc. hired William N. Stirlen as its vice-president and chief financial officer.
As a condition of employment, Stirlen was required to sign a standard, non-negotiable employment contract containing a detailed arbitration clause.
The contract compelled Stirlen to arbitrate any dispute arising from his employment or termination within one year, limiting his available remedies to actual damages for breach of contract and explicitly excluding punitive damages or equitable relief.
The same clause permitted Supercuts to file suit in court for specific performance or injunctive relief for breaches of contract related to trade secrets, inventions, or non-competition.
The contract also stipulated that if Supercuts sued Stirlen for these specified issues, his salary and benefits would cease immediately, 'without penalty to the Company,' pending the outcome of the action.
In late 1993 and early 1994, Stirlen informed Supercuts' CEO, David E. Lipson, of his concerns about 'accounting irregularities' and potential violations of law.
In February 1994, Lipson suspended Stirlen from his job, and Supercuts terminated his employment the following month.
After his termination, Lipson allegedly made defamatory statements to securities analysts, blaming Stirlen for the company's declining earnings.

Procedural Posture:

William N. Stirlen filed a complaint against Supercuts, Inc. and its CEO David E. Lipson in the San Francisco Superior Court (a trial court).
Supercuts filed a motion to compel arbitration pursuant to the clause in Stirlen's employment contract.
The Superior Court denied Supercuts' motion to compel arbitration, ruling that the arbitration provision was unconscionable and against public policy.
Supercuts (appellant) filed a direct appeal of the order denying the motion to compel arbitration to the California Court of Appeal, First District (an intermediate appellate court), with Stirlen as the respondent.

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Issue:

Is an arbitration clause in an employment contract unconscionable and therefore unenforceable when it requires the employee to arbitrate all disputes with significantly limited remedies, while allowing the employer to litigate its most likely claims in court and unilaterally cut off the employee's pay during such litigation?

Opinions:

Majority - Kline, P. J.

Yes, the arbitration clause is unconscionable and unenforceable because it is both procedurally and substantively unconscionable. The court found that the clause was part of a contract of adhesion, establishing procedural unconscionability, because it was a standard, non-negotiable form presented to Stirlen on a 'take it or leave it' basis. The clause was substantively unconscionable because it was egregiously one-sided: it forced the employee to arbitrate all of his most likely claims while allowing the employer to litigate its most likely claims in court. Furthermore, it severely restricted the employee's remedies, stripping him of statutory rights to punitive damages and equitable relief under civil rights statutes like the FEHA and Title VII. The court also highlighted a 'draconian' provision that allowed Supercuts to halt an employee's pay and benefits during litigation it initiated, which serves to intimidate employees. Finally, the court held that this application of California's general contract law of unconscionability is not preempted by the Federal Arbitration Act, which permits the invalidation of arbitration agreements on grounds that exist for the revocation of any contract.

Analysis:

This case is a landmark California decision that solidifies the application of the unconscionability doctrine to invalidate lopsided arbitration agreements in the employment context. It establishes that for an arbitration clause to be enforceable, it must possess a 'modicum of bilaterality' and cannot function as a vehicle for employers to strip employees of significant statutory rights and remedies. The decision affirms that the Federal Arbitration Act's pro-arbitration policy does not shield arbitration clauses from scrutiny under generally applicable state-law contract defenses like unconscionability. This holding significantly influences the drafting of employment contracts, cautioning employers against creating arbitration schemes that are excessively favorable to themselves at the employee's expense.

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