## Facts

- Misty Ferguson worked for Countrywide Credit Industries, Inc. and alleged sexual harassment, retaliation, and hostile work environment under Title VII and California FEHA.
- As a non-negotiable condition of employment, Ferguson was required to sign an arbitration agreement.
- The agreement required arbitration of virtually all claims an employee would likely bring, including statutory discrimination and harassment claims, tort claims, and contract claims.
- The agreement excluded several categories of claims more likely to be asserted by the employer, including intellectual-property, trade-secret, and unfair-competition disputes (as well as certain benefit-related matters).
- The agreement imposed employee-paid arbitration costs, including a filing fee and sharing the arbitrator’s fees and other expenses.
- The agreement restricted discovery in ways that limited employees’ ability to obtain evidence from management, including limiting a deposition of a Countrywide representative to designated topics.
- After Ferguson sued in federal court, Countrywide moved to compel arbitration; the district court denied the motion as unconscionable, and Countrywide appealed.

## Issues

1. Whether the mandatory employment arbitration agreement was unenforceable under California contract law because it was procedurally and substantively unconscionable.
2. Whether, given the agreement’s terms, Ferguson could be compelled to arbitrate her Title VII and related employment-discrimination claims.
3. Whether any unconscionable terms could be severed to enforce the remainder of the arbitration agreement.

## Decision

- The Ninth Circuit affirmed the order denying Countrywide’s petition to compel arbitration.
- The court held the arbitration agreement was procedurally unconscionable because it was imposed on an adhesive, take-it-or-leave-it basis as a condition of employment.
- The court held the agreement was substantively unconscionable due to multiple one-sided provisions, including:
  - asymmetrical coverage favoring employer-court access for employer-leaning claims while channeling employee claims to arbitration;
  - fee- and cost-sharing requirements that could deter employees from pursuing statutory rights;
  - discovery restrictions that impaired employees’ ability to prove statutory violations.
- The court declined to sever clauses, concluding unconscionability permeated the agreement and it could not be enforced to compel arbitration of Ferguson’s claims.

## Legal Principles

- The FAA permits enforcement of arbitration agreements, but state-law defenses of general applicability, including unconscionability, may render an arbitration agreement unenforceable.
- Under California law, unconscionability generally requires both procedural unconscionability (oppression/surprise from unequal bargaining power) and substantive unconscionability (overly harsh or one-sided terms), applied on a sliding scale.
- An arbitration agreement imposed as a mandatory condition of employment is procedurally unconscionable where the employee lacks meaningful choice.
- Substantive unconscionability may be shown by lack of mutuality, including requiring employees to arbitrate most of their likely claims while exempting employer-likely claims from arbitration.
- Cost-splitting and fee provisions that impose expenses beyond those typically faced in court can chill enforcement of statutory employment rights and support a finding of substantive unconscionability.
- Discovery limits that materially impair an employee’s ability to vindicate statutory rights may contribute to substantive unconscionability.
- Where unfair terms are pervasive and reflect a systematic tilt in favor of the drafter, a court may refuse severance and invalidate the arbitration agreement in full.

## Conclusion

The Ninth Circuit held that Countrywide’s mandatory employment arbitration agreement was unconscionable under California law and so could not be used to compel arbitration of Ferguson’s Title VII and related claims; because unfairness permeated the agreement, severance was not an appropriate remedy.


Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778 (9th Cir. 2002)