The California Supreme Court recently handed down an intriguing decision that casts doubt on—and in some cases even condemns—some of the most common practices used by employers in both drafting and presenting arbitration agreements to their employees. In doing so, the court highlighted circumstances under which similar agreements with “an unusually high degree” of procedural unconscionability may be blocked from being enforced. Accordingly, it’s important that you understand which of the employer’s terms and practices were criticized by the court so you can avoid those same pitfalls in your own arbitration programs moving forward.

Arbitration Agreements and Enforceability

To understand the holding in OTO v. Kho, we must first understand California law on enforcing arbitration agreements. In general, agreements to arbitrate require the parties to pursue their claims before a private arbitrator (usually a retired judge) outside of the normal court system and, consequently, tend to reduce the expense and complexity of resolving employment disputes. However, a court will refuse to enforce an arbitration agreement if the employee can show that the agreement is both substantively unconscionable, such that the terms themselves were unfair or one-sided; and procedurally unconscionable, such that the way the agreement was presented was unfair, surprising or oppressive. In OTO v. Kho, the court considered both aspects when analyzing the agreement.

The Arbitration Agreement in Question