## Facts

- Zenia Chavarria, a former Ralphs deli clerk, filed a putative class action alleging violations of the California Labor Code and California’s unfair competition law.
- Ralphs relied on an employment application in which applicants agreed to a Mediation and Binding Arbitration Policy as a condition of employment, incorporating the policy by reference.
- Chavarria did not receive the policy’s full text until approximately three weeks after signing the application, at new-employee orientation.
- The policy required a retired judge as arbitrator and barred use of institutional providers (e.g., AAA or JAMS).
- In employee-initiated arbitration, Ralphs would propose three or four retired judges, the employee could strike one, and Ralphs would choose the arbitrator from the remaining names.
- The policy generally required the parties to split arbitrator fees equally, with fees potentially reaching very large daily amounts, requiring substantial upfront payments to begin arbitration.
- The policy allowed Ralphs to unilaterally modify its terms, treating continued employment as acceptance.
- The district court denied Ralphs’s motion to compel arbitration, finding the policy procedurally and substantively unconscionable under California law; Ralphs appealed.

## Issues

1. Whether the arbitration policy was procedurally and substantively unconscionable under California contract law and therefore unenforceable.
2. Whether the Federal Arbitration Act preempted applying California’s unconscionability doctrine to invalidate the arbitration policy.

## Decision

- The Ninth Circuit affirmed the order denying Ralphs’s motion to compel arbitration.
- The court held the policy was procedurally unconscionable because it was imposed as a nonnegotiable condition of employment and its terms were not provided until weeks after the employee agreed to be bound.
- The court held the policy was substantively unconscionable because it was unjustifiably one-sided, including a structurally employer-favoring arbitrator-selection process and fee-splitting rules likely to deter low-value wage claims by imposing large upfront costs.
- The court held the FAA did not preempt California unconscionability doctrine as applied because the doctrine is a generally applicable contract defense and was not applied in a manner that disfavors arbitration as a category.

## Legal Principles

- Under California law, an arbitration agreement is unenforceable if it is both procedurally and substantively unconscionable, evaluated on a sliding scale.
- Adhesion employment arbitration terms imposed on a take-it-or-leave-it basis, coupled with delayed disclosure of terms after assent, support procedural unconscionability.
- Substantive unconscionability may be shown by unfair one-sided terms, including arbitrator-selection mechanisms that effectively give one party control over the decisionmaker and fee provisions that functionally block access to the arbitral forum.
- The FAA permits invalidation of arbitration agreements on generally applicable contract defenses (including unconscionability) so long as the defense is not applied in a way that disproportionately burdens arbitration agreements.

## Conclusion

The Ninth Circuit refused to compel arbitration because the employer’s policy combined adhesive formation with biased arbitrator selection and prohibitive cost-splitting, making it unconscionable under California law, and the FAA did not require enforcement of such terms.


Chavarria v. Ralphs Grocery Co., 733 F.3d 916 (9th Cir. 2013)