How To Get Out Of A Contract: More Musings on Gentry

Last week I blogged about the first half of the Cal Supremes’ decision in Gentry v. Circuit City (2007) ___Cal.4th___, S141502.  And the first half –- casting considerable doubt on “class action waivers” in binding arbitration agreements, at least as to overtime claims – was noteworthy and got the most notice in the blawgosphere.  But I think the second half is potentially much more far-reaching.  It may open up the potential for unconscionability arguments in all kinds of contracts, and strike a big blow against all kinds of “contracts of adhesion.”

More after the jump.

First, some background.  As a general rule, the California courts uphold contracts of adhesion – take-it-or-leave-it form contracts – all the time.  Consumers, employees and others are considered bound by contractual language despite the fact that the courts, the lawyers and everybody else knows nobody reads this stuff.  Graham v. Scissor Tail, Inc. (1981) 28 Cal.3d 807, 817-18.

Nonetheless, our courts allow attacks on contracts for “unconscionability.”  To overturn a contract on this ground, the contract must be both “procedurally” unconscionable and “substantively” unconscionable.  Discover Bank v. Superior Court (2005) 36 Cal.3d. 148, , 160.  A procedurally unconscionable contract is one involving “oppression” or “surprise” because of unequal bargaining power, while substantively unconscionable terms are those which are unfairly one-sided.

The way the analysis works is this: As a threshold matter, the court must look at whether there is procedural unconscionability, and if there is any, it then turns to the substantive unconscionability question. If both are present, the court may choose not to enforce the contract.  And this is a sliding scale process: if the substantive terms are sufficiently harsh, it won’t take much in the way of procedural problems to get the contract knocked out.  But there still has to be some.  So when two parties sit down at the table and hammer out each term on a custom, one-on-one basis, the courts will tolerate fairly harsh outcomes, assuming that this is what the parties wanted.  But when the contract is a form, dictated by one side on a take-it or leave-it basis, there's always a risk that the court will find procedural unconscionability and then dig in looking for fairness issues.

In Gentry, the Court didn’t deal with substantive unconscionability at all, but only procedural unconscionability.  Its analysis and its conclusions are pretty startling, given the facts.

Circuit City gave its employees an “Associate Issue Resolution Package.”  In the package, the employer made its best pitch for binding arbitration.  Then it told its employees they would be bound by the binding arbitration provision if they did nothing, but if they didn’t want to be bound, all they had to do was fill out a simple, understandable one page form and mail it in within thirty days of their start dates.  Send in the form, no binding arbitration.  Don’t send in the form, binding arbitration.  I can just about guarantee that Circuit City’s lawyers designed this process to overcome claims of procedural unconscionability, and the argument seems pretty sound.  Employees get to choose, they get the job either way, and they get a month to think it over and do their own due diligence.  The Court of Appeal agreed, and so did two panels of the Ninth Circuit: in cases brought by other employees: Circuit City Stores, Inc. v. Ahmed (9th Cir. 2002) 283 F3d 1183; Circuit City Stores, Inc. v. Najd (2002) 294 F.3d 1104.

Yeah, well, sorry Circuit City, but better luck next time.  The Supremes reversed the Court of Appeal, holding that there was at least some procedural unconscionability even with the thirty day opt-out provision.  Why?  Well, “First and foremost, the explanation of the benefits of arbitration in the Associate Issue Resolution Handbook was markedly one-sided.”  The handbook pitched arbitration as faster and more cost-effective, but didn’t tell employees that the program had a one-year statute of limitations instead of the three-year and four-year statutes applicable to wage and hour litigation.  Similarly, it didn’t tell the employee that his right to back pay would be limited to one year from when he knew or should have known he had a claim.  Moreover, the handbook didn’t tell him his right to punitive damages would be limited to $5,000. Finally, it didn’t tell him that under the agreement, the parties would “generally” be responsible for their own attorneys’ fees, whereas under the statute pertaining to overtime law suits, he would be entitled to recover his attorneys’ fees and costs if he were successful. 

Of course, all this information was in the materials Circuit City gave its employees – it just wasn’t in the more accessible pitch literature .  The employee would have to read the fine print during the thirty-day opt-out period while he figured out what to do.

But here’s the real nugget: The Supremes also found procedural unconscionability because, given Circuit City’s expressed preference for binding arbitration, “it is not clear that someone in Gentry’s position would have felt free to opt out.”  Well, I’ll tell you what else isn’t clear: it isn’t clear after this case that any contract of adhesion can escape scrutiny for substantive unconscionability if the side with the power has expressed a preference that the “little guy” sign it and hasn’t given him clear, conspicuous warning that some parts of it aren’t to his advantage.  The possibility of opening every contract to scrutiny for fairness is fairly breathtaking.

Comments

[Andrew Sussman]

I have no sympathy for Circuit City. The moral seems clear and should have been obvious at the beginning: If you're going to provide information to employees to get them to bargain away their rights, clearly inform them of what those rights are.

[michael walsh]

I'm not at all certain that the scope is as sweeping as you think. The major underpinning of that conclusion was that, even with the 30-day opt-out period, when the employer has made it so clear that they want and expect an arbitration agreement, the average reasonable employee would fear retaliation if he or she did not accept the terms. The same might hold true for medical arbitration agreements (fear that the doctor would not treat you), but it wouldn't necessarily apply to other sorts of transactions, including many consumer-vendor relationships.

[Jon-Erik G. Storm]

I agree with Michael--I do not think Gentry fundamentally alters contract law.

Even if it does make every adhesion contract procedurally unconscionable, it only need be the case that the contract is substantively not unconscionable. It's not a total escape hatch even at that extreme.

Employment relationship are a long-recognized example of a highly asymmetrical relationship. So, we'll see...

[Irene]

The page number of "Circuit City Stores, Inc. v. Ahmed (9th Cir. 2002) 283 F3d 1183" was wrong...should be "283 F.3d 1198"

This is a good case in interpreting contracts of adhesion. Thanks for the example.