Takeaway
In short, this case shows that mandatory employment arbitration agreements remain subject to ordinary state contract law and will not be enforced when their terms systematically create an unfair, employer-favored forum.
Misty Ferguson sued Countrywide Credit Industries, Countrywide Home Loans, and her supervisor, Leo DeLeon, alleging sexual harassment, retaliation, and a hostile work environment under Title VII and California’s Fair Employment and Housing Act. Countrywide sought to compel arbitration under an employment arbitration agreement that Ferguson was required to execute as a condition of employment. Ferguson disputed that she had signed the agreement and requested a jury trial on that formation question under § 4 of the Federal Arbitration Act.
The district court found a genuine dispute about whether Ferguson had made the agreement but held that, even assuming an agreement existed, it was unenforceable. Applying California’s unconscionability doctrine, the court concluded that Countrywide’s mandatory arbitration program was both procedurally and substantively unconscionable. It also held, as an alternative ground, that Ferguson could not be required to arbitrate her Title VII claims under then-existing Ninth Circuit precedent. Countrywide immediately appealed the denial of its petition to compel arbitration.
Issue #1
Whether the Federal Arbitration Act permits a court to invalidate Countrywide’s employment arbitration agreement under California’s unconscionability doctrine.
Holding
Yes. The FAA allows application of generally applicable state contract defenses, including unconscionability, and California law rendered this agreement unenforceable.
Reasoning
Section 2 of the FAA generally requires enforcement of written arbitration agreements, but it preserves grounds that exist in law or equity for revoking any contract. Federal courts therefore apply ordinary state-law rules governing contract formation and validity. Because California’s unconscionability doctrine applies generally rather than singling out arbitration agreements for disfavored treatment, applying it did not conflict with the FAA.
Under the California Supreme Court’s decision in Armendariz, unconscionability has procedural and substantive components. The two need not be present to the same degree: a strongly oppressive substantive term can require less proof of procedural unfairness, and vice versa.
Issue #2
Whether Countrywide’s mandatory, nonnegotiable arbitration agreement was procedurally unconscionable.
Holding
Yes. The agreement was imposed as a condition of employment on a take-it-or-leave-it basis, leaving Ferguson without meaningful bargaining power or an opportunity to negotiate its terms.
Reasoning
Procedural unconscionability concerns the circumstances in which an agreement was made, particularly oppression and surprise. Oppression arises from unequal bargaining power and the absence of real negotiation; surprise concerns the concealment of terms in a standardized form.
Countrywide drafted the agreement and required Ferguson to accept it to obtain employment. Like the agreement considered in Circuit City Stores, Inc. v. Adams, it was a standardized, nonnegotiable condition of employment. That disparity in bargaining power and lack of meaningful choice established procedural unconscionability.
Countrywide’s assertion that Ferguson could have sought work elsewhere, or that the agreement was written in plain language, did not cure the problem. California law asks whether the party faced the disputed terms without a meaningful opportunity to negotiate them, not whether she could theoretically reject the job and find another employer.
Issue #3
Whether the terms of Countrywide’s arbitration agreement were substantively unconscionable.
Holding
Yes. The agreement systematically favored Countrywide by requiring arbitration of the claims employees were most likely to bring while preserving court remedies and cost advantages for claims Countrywide was most likely to assert.
Reasoning
Substantive unconscionability examines whether contractual terms are so one-sided that they are unfairly oppressive. The Ninth Circuit adopted the California Court of Appeal’s analysis in Mercuro, which had considered materially identical Countrywide provisions.
The agreement required arbitration of employment-related claims, including contract, tort, discrimination, harassment, wage, and statutory claims. But it excluded claims for injunctive or equitable relief involving intellectual property, unfair competition, trade secrets, and confidential information—claims Countrywide was more likely to bring against employees. The exclusion of workers’ compensation and unemployment claims did not restore mutuality because those matters were already governed by separate adjudicatory systems.
The fee provision independently imposed an impermissible burden. It required an employee to pay up to $125 in filing fees, required Countrywide to pay only the first hearing day, and then required the parties to share all other arbitration costs. Under Armendariz, an employer that mandates arbitration as a condition of employment may not require an employee to bear expenses unique to arbitration that she would not bear in court. The potentially substantial forum and arbitrator fees could deter employees from bringing even meritorious discrimination claims.
Countrywide’s later attempt to revise the fee provision through an employee email was ineffective. The agreement itself allowed modification only through a writing signed by the employee and a company executive that specifically referred to and expressed an intent to modify the agreement. Countrywide offered no evidence that it followed that procedure.
The court did not hold that the discovery limits alone were unconscionable. Although the limits on depositions and discovery requests could favor Countrywide in practice, the arbitrator could expand discovery for good cause, and the record did not establish that the limits would prevent Ferguson from vindicating her statutory rights. Still, those provisions reinforced the broader pattern of an agreement designed to tilt the arbitral forum toward Countrywide.
Issue #4
Whether the court could sever the unconscionable provisions and enforce the remainder of the arbitration agreement.
Holding
No. The agreement was permeated by unconscionability, so severance would require judicial rewriting rather than the removal of isolated unlawful terms.
Reasoning
California Civil Code § 1670.5 permits a court to sever or limit an unconscionable clause, but it also permits refusal to enforce the entire contract when unconscionability permeates the agreement. Under Armendariz, multiple unlawful provisions can reveal a systematic effort to make arbitration an inferior forum favoring the employer.
Here, the lack of mutuality in covered claims, the unlawful cost-sharing arrangement, and the discovery provisions collectively reflected that systemic one-sidedness. Removing those defects would leave little of substance and would require the court to add or rewrite terms to create a fair agreement. Because courts may not reform an arbitration contract in that manner, the entire agreement was unenforceable.
Issue #5
Whether Ferguson’s Title VII claims were independently nonarbitrable under Duffield v. Robertson Stephens & Co.
Holding
The court did not decide that question because unconscionability independently required affirmance.
Reasoning
The district court had relied alternatively on Duffield to conclude that Ferguson could not be compelled to arbitrate her Title VII claims. The Ninth Circuit affirmed solely on California unconscionability grounds and expressly declined to address the alternative Title VII rationale.