Facts
- Volt, a staffing company, and its client, Diamond Pet Food Processors of California, LLC, jointly employed two workers at Diamond’s facility.
- Volt issued an employee handbook that included a mandatory arbitration policy covering employment-related disputes.
- Each employee signed a written acknowledgment confirming receipt of the handbook and acceptance of the arbitration policy.
- The arbitration policy required covered disputes to be arbitrated consistent with the rules of the American Arbitration Association (AAA).
- Instead of attaching or specifying a particular AAA rule set, the policy provided a hyperlink to the AAA’s website.
- The AAA’s website contained numerous separate sets of rules (described as dozens of sets, many unrelated to employment disputes).
- The employees filed employment claims in federal court against Volt and Diamond.
- Defendants notified the employees’ counsel that the claims were subject to arbitration and sought to proceed in arbitration.
- The employees refused to submit the dispute to arbitration, and defendants moved to compel arbitration under the Federal Arbitration Act (FAA).
- The employees opposed the motion, arguing the arbitration agreement was procedurally and substantively unconscionable under California law, focusing on the hyperlink reference and the multiple AAA rule sets available online.
Issues
- Whether an arbitration agreement in an employee handbook, accepted by signed acknowledgment and referencing “AAA rules” through a hyperlink to the AAA website, was unenforceable as procedurally and substantively unconscionable under California law.
- If the agreement was enforceable, whether the FAA required the court to compel arbitration of the employees’ employment claims and halt the federal litigation.
Decision
- The court granted defendants’ motion to compel arbitration.
- The court found the employees had agreed, through their signed acknowledgments, to arbitrate covered employment disputes.
- The court rejected the employees’ unconscionability challenge based on the clause’s general reference to AAA rules and the hyperlink to the AAA website.
- The court ordered the parties to proceed to arbitration and stayed the federal action pending arbitration.
Legal Principles
- The FAA requires courts to enforce written arbitration agreements according to their terms, except where generally applicable state contract defenses (such as unconscionability) would defeat enforcement.
- In determining enforceability, a federal court applies ordinary state-law contract principles to issues such as assent and unconscionability, while giving effect to the FAA’s preference for arbitration.
- Under California law, unconscionability has two components—procedural and substantive—and both must be present for a court to refuse enforcement; the required showing operates on a sliding scale.
- Procedural unconscionability can be shown by oppression (for example, a take-it-or-leave-it employment condition) or surprise (for example, terms that are hidden or not reasonably available), but a finding of some procedural unconscionability does not alone invalidate an agreement.
- Substantive unconscionability focuses on whether the challenged provision is overly one-sided or unfair in operation, such as by giving one side control over the process or stripping statutory rights or remedies.
- Referring disputes to a neutral administering organization’s rules (such as AAA rules) generally supports enforceability; incorporating such rules by reference, including through a website link, does not by itself establish substantive unfairness.
- Where an arbitration clause points generally to an administrator’s rules without naming a specific rule set, the agreement may still be enforced when the governing rules can be identified in a manner consistent with the contract’s subject matter (here, employment disputes), rather than treating the agreement as void for uncertainty.
Conclusion
In Collins, the Eastern District of California enforced a handbook-based arbitration agreement accepted by signed acknowledgment and compelled arbitration of employees’ employment claims, holding that the hyperlink reference to AAA rules—despite the AAA website offering many different rule sets—did not establish the combination of procedural and substantive unconscionability required under California law to defeat enforcement under the FAA, and the court stayed the litigation while arbitration proceeded.