In a nutshell, as stated by the Court:
Several years after she was hired, Lourdes Tiri signed an agreement with her employer, Lucky Chances, Inc., requiring disputes between them to be resolved by arbitration. In one of the provisions, the parties agreed to delegate questions about the enforceability of the agreement to the arbitrator, instead of a court. Tiri was subsequently fired, and she filed a complaint in superior court for wrongful discharge. Lucky Chances petitioned to compel arbitration, but the trial court denied the petition on the basis that the arbitration agreement was unconscionable and therefore unenforceable.
Lucky Chances appeals the court’s order denying arbitration. We hold that the trial court lacked the authority to rule on the enforceability of the agreement because the parties’ delegation of this authority to the arbitrator was clear and is not revocable under state law. Accordingly, we reverse.
What-what-what? Read on.
The arbitration agreement contained this language:
The agreement also includes an explicit provision that delegates to the arbitrator issues regarding the agreement’s enforceability: “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”As the court noted, that is a delegation clause, which grants the arbitrator the jurisdiction to determine whether the arbitration agreement is enforceable. In the absence of that sort of clause, a court determines whether there is a valid agreement, including whether the agreement is "unconscionable."
As you know if you're reading this, in California, there is a lot of litigation in court over that issue.
Here's why the delegation clause is important. The trial court denied the employer's motion to compel arbitration? Why? 1) the agreement was "take it or leave it," i.e., procedurally unconscionable and 2) the employer did not attach the AAA arbitration rules, even though it cited the website where they must be found. Those two facts rendered the agreement "unconscionable," a word that has been stretched into meaninglessness. It used to mean something like "so one-sided as to shock the judicial consciousness," but now it simply means "not exactly perfect."
The court of appeal made some important rulings. First, the court recognized its decision would be the same under California's or the federal arbitration acts. Second, the court explained that the court may consider challenges to the delegation clause itself, but not to the enforceability of the agreement to arbitrate as a whole.
Third, the court explained that a delegation clause is enforceable if (1) it is clear and unmistakable (2) if the clause itself is not void because of some defense applicable to any contract (fraud, duress, unconscionability).
The court found the language above was clear and unmistakable. The employee argued that the clause was unconscionable. The court of appeal found it was procedurally unconscionable (because it was "take it or leave it."). But the court also found no reason that a delegation clause automatically is substantively unconscionable. And there was nothing about this delegation clause that rendered it one-sided or non-mutual. Therefore, it was not unconscionable as a whole.
Of course, the arbitrator is free to rule on whether the agreement as a whole is unconscionable. So, there may still be litigation over such agreements. But they will be in arbitration. If this ruling stands, it will certainly make arbitration agreements easier to enforce without court litigation.
This case is Tiri v. Lucky Chances, Inc. and the opinion is here.
