## Facts

- William N. Stirlen worked for Supercuts, Inc. as vice president and chief financial officer from January 1993 until his termination in March 1994.
- Stirlen alleged he was terminated after raising concerns about accounting irregularities, possible legal violations, and operational problems.
- His executive employment contract contained a mandatory arbitration provision that required the employee to arbitrate all disputes.
- The provision restricted the employee’s available relief largely to contract-type damages and curtailed remedies typically available for tort and statutory claims (including limits affecting punitive damages).
- The provision did not impose comparable restrictions on Supercuts and allowed the company to pursue litigation in court and maintain broader remedial options.
- Stirlen asserted the contract was presented on a take-it-or-leave-it basis and was required for executives.
- Stirlen sued Supercuts and its CEO, asserting claims including wrongful termination in violation of public policy, defamation, intentional misrepresentation, statutory violations, and related theories, and sought declaratory relief that the arbitration clause was unenforceable.
- While demurrers were pending, Supercuts moved to compel arbitration; the trial court denied the motion as against public policy and unconscionable.

## Issues

1. Whether the employment contract’s compulsory arbitration clause was unenforceable as procedurally and substantively unconscionable under California Civil Code § 1670.5.
2. Whether the Federal Arbitration Act preempted application of California’s general unconscionability doctrine to invalidate the arbitration clause.

## Decision

- The Court of Appeal affirmed the order denying Supercuts’ motion to compel arbitration.
- The court held the arbitration provision, considered as a whole, was unconscionable and against public policy.
- The court held the FAA did not preempt use of Civil Code § 1670.5 because unconscionability is a generally applicable contract defense not directed at arbitration agreements.
- The court declined to sever individual terms because the clause’s unfairness was pervasive rather than limited to isolated provisions.

## Legal Principles

- A contract term may be refused enforcement under California Civil Code § 1670.5 when it is unconscionable, evaluated through both procedural unconscionability (oppression/surprise in formation) and substantive unconscionability (overly harsh or one-sided terms), applying a sliding-scale relationship between the two.
- An adhesive employment arbitration agreement can be procedurally unconscionable when imposed on a nonnegotiable, take-it-or-leave-it basis in a setting of unequal bargaining power.
- Substantive unconscionability is shown where an arbitration clause is materially one-sided, such as requiring the employee to arbitrate all disputes while preserving the employer’s access to court and broader remedies.
- Arbitration provisions that substantially restrict an employee’s statutory or tort remedies for workplace-related claims may be contrary to public policy and contribute to substantive unconscionability.
- The FAA permits state courts to apply neutral, generally applicable contract defenses (including unconscionability) to arbitration agreements; such application is not preempted when it does not single out arbitration for disfavored treatment.
- Courts may invalidate an arbitration clause in its entirety rather than sever terms when the overall design reflects systematic imbalance favoring the drafter.

## Conclusion

The court refused to compel arbitration because the executive employment arbitration provision was imposed in an adhesive setting and was structured to favor the employer by requiring employee arbitration while limiting employee remedies and preserving the employer’s court access; applying California unconscionability law to invalidate the clause was not preempted by the FAA.


Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519 (Cal. Ct. App. 1997)