Tuesday, January 18, 2005
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Another Circuit City Employee Arbitration Agreement Is Held Unconscionable by Ninth Circuit
By a MetNews Staff Writer
An arbitration agreement which imposed greater burdens on the employee than the employer was held unenforceable Friday by the Ninth U.S. Circuit Court of Appeals.
The standard form agreement used by Circuit City Stores, Inc. has previously been held unconscionable under California law, and fares no better under the law of Washington state, Senior Judge A. Wallace Tashima concluded.
Judge Richard A. Paez concurred. Judge Carlos T. Bea dissented, arguing that since the majority could not cite Washington authority, it should have certified the issue to the Washington Supreme Court.
California cases, Tashima explained, found the agreement substantively unconscionable and rejected provisions that forced an employee—but not Circuit City—to arbitrate disputes, limited remedies, required the employee to split costs and fees, imposed a one year statute of limitations, and gave Circuit City the unilateral right to modify or terminate the agreement.
The California cases, Tashima said, were persuasive authority because California’s definition of substantive unconscionability, “so one-sided as to shock the conscience,” is virtually the same as Washington’s definition of “one-sided or overly harsh” and “shocking to the conscience.”
The plaintiff in the case, Mohammed Al-Safin, applied for a job at a Circuit City store in 1997. Before the store would review his application, Al-Safin was required to sign a Dispute Resolution Agreement stating that he agreed to resolve all disputes through arbitration pursuant to Circuit City Dispute Resolution Rules and Procedures.
The DRRP in effect in 1997 stated that the rules could be amended on December 31 of each year, with 30 days notice to employees, and that claims were subject to the rules in effect at the time the claim arose. On December 31, 1997, Circuit City amended the rules to state that claims were subject to the rules in effect when Circuit City received the employee’s Arbitration Request Form and filing fees.
Al-Safin was terminated in November 1998, and filed suit in the U.S. District Court for the Western District of Washington a year later claiming violations of federal and state anti-discrimination laws.
Circuit City filed a motion to compel arbitration, which the district judge denied. In Circuit City’s first appeal, the Ninth Circuit reversed, saying the agreement to arbitrate was enforceable with respect to the federal claims, and remanded with respect to the state claims.
Circuit City subsequently amended the rules to correct a number of provisions that courts had found unenforceable. After doing so, the company renewed its motion to compel Al-Safin to arbitrate, arguing that the agreement was enforceable under the new rules.
District Judge Marsha J. Pechman, however, held that if the rules in effect at the time of the employee’s termination were unconscionable under state law—which she concluded they were—he could not be required to arbitrate state claims under later-adopted rules of which he had no notice.
On its second appeal, Circuit City argued that the law of the case limited the district court to determining whether specific provisions were unconscionable under state law, that the issue of unconscionability should be determined on the basis of the 2003 version of the rules, that any offending provisions could be severed, and that the agreement was in any event not unconscionable under Washington law.
Tashima, however, said the district judge had been faithful to the court’s mandate and that her ruling on unconscionablity was correct.
Al-Safin could not be compelled to arbitrate under the 2003 rules, Tashima explained, because that the court had previously ruled that the modification provision of the 1998 rules was unenforceable under California law because it allowed Circuit City to alter the rules at will. Circuit City, using the same provision, was attempting to implement new rules four years after Al-Safin was terminated and three years after litigation had begun in Washington, Tashima said.
While Al-Safin did not dispute that he received notice of the modification to the 1997 rules, his employment was terminated before the 1998 rules were amended. Although Circuit City posted notice in each of its stores and included the amendment in its applicant packets, it did not communicate the changes to Al-Safin, Tashima said.
Applying basic contract law, the court held that because Circuit City did not provide notice to former employees, there was no valid offer to amend the rules, and as a result, no acceptance by Al-Safin. The result was that those amendments never went into effect for Al Safin and the 1998 version in effect when he was terminated was the controlling version of the rules, Tashima said.
Like California, Washington courts have discretion to determine whether to sever the unenforceable provisions or determine the entire agreement is unenforceable, Tashima said. The California cases all held that the unconscionable terms in Circuit City’s arbitration agreement rendered the entire agreement unenforceable because the court would be required to rework the entire agreement.
Like the agreements considered in the California cases, the 1998 version of the arbitration agreement had so many unconscionable clauses that to sever them all would render the agreement unworkable, so severance was not an acceptable alternative to declaring the entire agreement invalid, Tashima said.
Bea, dissenting, objected to the reliance on California cases even if the law on unconscionability was similar in the two states. Bea also objected to the requirement of reasonable notice to former employees of changes to the arbitration agreement, because, he said, “the reasonable notice requirement serves no purpose once the employment relationship has ended.”
The case is Al-Safin v. Circuit City Stores, Inc., 03-35297.
Copyright 2005, Metropolitan News Company