On July 15, 2024, the California Supreme Court issued a unanimous decision in Ramirez v. Charter Communications, Inc., which (1) held that Charter Communications, Inc.’s “Mutual Arbitration Agreement” contained unconscionable provisions; and (2) remanded for a qualitative analysis the question of whether, under the totality of the circumstances, the unconscionable provisions are severable.[1]

Defendant-petitioner Charter Communications hired plaintiff-respondent Angelica Ramirez in July 2019 and fired her in May 2020.[2] As part of her employment, Ramirez signed her assent to a “Mutual Arbitration Agreement” and agreed to use “Solution Channel,” an alternative dispute resolution program.[3] In July 2020, Ramirez sued Charter for discrimination, harassment, retaliation, and wrongful discharge.[4] Charter moved to compel arbitration and to recover the attorney fees incurred while seeking that ruling.[5] Ramirez argued that the arbitration agreement was both procedurally[6] and substantively[7] unconscionable.[8]

The court agreed with the appellate and trial courts that Charter’s arbitration agreement was unconscionable, in part because it (1) compelled arbitration for claims which employees were likely to bring, but exempted claims which Charter was likely to bring,[9] (2) contained an unreasonably shortened time limitations period,[10] and (3) allowed attorney’s fees without a finding that a plaintiff’s claim was frivolous or groundless, and also when Charter successfully moved to compel arbitration.[11] The court also noted that unconscionability assessments must focus on the circumstances known at the time of the agreement, not those after the contract was signed.[12]

Regarding the question of whether the unconscionable provisions could be severed per the arbitration agreement’s severability clause, the court agreed with Charter that there is “no hard and fast rule regarding the number of provisions that may be severed from a contract.”[13] The court noted that a contract’s severability clause “cannot divest a trial court of its discretion.”[14] The court further stated that

Here, we clarify that no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term. Likewise, a court is not required to sever or restrict an unconscionable term if an agreement has only a single such term. Instead, the appropriate inquiry is qualitative . . . a court should ask whether “the central purpose of the contract is tainted with illegality . . . .”

[C]ourts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract’s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice.[15]

Accordingly, California employers who require their employees to sign mandatory arbitration agreements should do their best to ensure mutuality and that the agreement (1) applies equally to claims which both employer and employee are likely to bring;[16] (2) provides a reasonable time period to file a claim;[17] and (3) requires a finding that a party’s claim was frivolous or groundless before awarding attorney’s fees.[18]

California employers also should be aware that including a severability clause in a mandatory arbitration agreement does not mean that a court automatically will sever clauses that it finds unconscionable from the remainder of the agreement.[19] Instead, a court must conduct a qualitative analysis to determine whether it can cure the unconscionable provisions by severing them from the remainder of the agreement.[20]

 

[1] Ramirez v. Charter Comms., Inc., 551 P.3d 520, 528 (Cal. 2024).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] See id. at 530. Procedural unconscionability refers to whether an agreement is adhesive, focusing on the circumstances of negotiation and formation.

[7] See id. Substantive unconscionability refers to whether the actual terms of an agreement are unreasonably or unfairly favorable to the more powerful party.

[8] Id. at 528.

[9] Id. at 531.

[10] Id. at 535-36.

[11] Id. at 541.

[12] Id. at 539.

[13] Id. at 545.

[14] Id. at 547.

[15] Id. at 546-47.

[16] See id. at 531.

[17] See id. at 535-36.

[18] See id. at 541.

[19] See id. at 546.

[20] See id.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at [email protected].