## Facts

- Saint Clair Adams applied for employment with Circuit City and, as a condition of being considered and hired, signed a Dispute Resolution Agreement (DRA) requiring binding arbitration of employee claims.
- The DRA incorporated employer-drafted procedures that capped remedies, including limits on back pay, front pay, and punitive damages.
- The DRA required the employee to split arbitration forum costs (including arbitrator fees and related expenses) unless the employee prevailed and the arbitrator shifted costs to Circuit City.
- The DRA obligated employees to arbitrate claims against Circuit City but did not similarly obligate Circuit City to arbitrate claims against employees.
- Adams later sued Circuit City and co-workers in California state court alleging sexual harassment, retaliation, constructive discharge, intentional infliction of emotional distress, and related statutory claims, seeking compensatory and punitive damages.
- Circuit City filed a federal action to compel arbitration; after Supreme Court review clarified the FAA applied to this agreement, the case returned for review of enforceability under California contract defenses.

## Issues

1. Whether the DRA was unconscionable under California law (procedurally and substantively) and therefore unenforceable despite FAA coverage.
2. If unconscionable, whether the offending provisions could be severed so that arbitration could still be compelled.

## Decision

- The court held the DRA was procedurally unconscionable because it was imposed as a mandatory, take-it-or-leave-it condition of employment with no meaningful opportunity to negotiate.
- The court held the DRA was substantively unconscionable due to one-sided obligations, limits on statutory and common-law remedies, and cost-splitting provisions that could deter employees from pursuing statutory rights.
- The court refused to sever the unconscionable terms, finding the agreement was permeated by unconscionability rather than containing isolated defects.
- Arbitration was not compelled, and Adams could pursue his claims outside the arbitral forum.

## Legal Principles

- The FAA permits courts to refuse enforcement of an arbitration agreement on generally applicable state-law contract grounds, including unconscionability.
- Under California law, an adhesive employment arbitration agreement imposed as a condition of employment supports procedural unconscionability.
- Substantive unconscionability may be shown by lack of mutuality (employee-only arbitration duties), restrictions that materially limit statutory remedies, and fee arrangements that impose substantial forum costs on employees asserting statutory rights.
- Severance is improper when unconscionable terms are central to the arbitration scheme and the agreement is permeated by unconscionability.

## Conclusion

Even when the FAA covers an employment arbitration agreement, California unconscionability doctrine can render the agreement unenforceable where it is imposed on an adhesive basis and structured with one-sided arbitration duties, remedy limitations, and employee cost burdens that collectively prevent fair vindication of statutory rights.


Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002)