Arbitration Terms

Last week, in a putative wage and hour class action against the online retailer (“Overstock”), District Judge David Barlow of the U.S. District Court for the District of Utah issued a decision addressing three recurring questions about enforceability of employment arbitration agreements. See Love v., Case No. 2:22-cv-00118, 2022 WL 3345730 (D. Utah, Aug. 12, 2022). Although Judge Barlow is unlikely to have the final word on these arbitration enforceability questions, his opinion is a useful indication of the current state of the law in the 10th Circuit and the District of Utah.

1. Who Decides the Question of Arbitrability?

The Overstock arbitration agreement did not expressly indicate whether a judge or an arbitrator should decide the threshold question of whether Ms. Love’s claims should be adjudicated in court or in arbitration. However, the agreement provided that “any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration . . . in accordance with the rules then in effect of the American Arbitration Association.”

Relying on 10th Circuit precedent, the Court held that incorporation of the AAA rules indicated that the parties “clearly and unmistakably intended for an arbitrator to decide arbitrability” because Rule 6 of the AAA Employment Arbitration Rules states: “The arbitrator shall have the power to rule on . . . the arbitrability of any claim or counterclaim.” (One of the cited 10th Circuit cases involved incorporation of JAMS rules, with the same result.)

Despite this determination that an arbitrator should determine arbitrability, the Court proceeded to address two unconscionability challenges. The Court explained that it “decides enforceability of the arbitration clause when the ‘enforceability argument applies . . . specifically to the arbitration provision (such as a claim that the provision is unconscionable),” rather than to the agreement as a whole.

2. Is It Unconscionable to Require an Employee to Pay Half of the Arbitration Fees and to Bear His/Her Own Attorney Fees?

The Overstock arbitration agreement provided: “The Company and I shall each pay one-half of the costs and expenses of such arbitration, and each of us shall separately pay our counsel fees and expenses.” The Court determined that this fee-shifting provision was unconscionable because it was “likely that a plaintiff faced with these costs and fees would be deterred from accessing the arbitral forum.” Thus, this fee-shifting provision fell within the judicially created “effective vindication exception” and was unenforceable. However, the fee-shifting provisions did not prevent enforcement of the remainder of the agreement because the Court found the provision to be severable under the agreement’s severability clause.

3. Are Unilateral Carveouts from Arbitration Agreements Unconscionable?

The Overstock arbitration agreement contained a unilateral carve-out allowing the company to seek injunctive relief in the event Ms. Love violated contractual obligations regarding confidential information, inventions, returning company documents, and non-solicitation of employees. The Court held that this unilateral carve-out was not unconscionable because Ms. Love was unlikely to assert claims under the four identified contractual sections and because Ms. Love was able to seek injunctive relief (and all other relief she was likely to need) from the arbitrator.