On July 15, 2024, the California Supreme Court issued a new ruling further defining the contours of California law regarding the interpretation and enforcement of arbitration agreements. In Ramirez v. Charter Communications, Inc., the Court emphasized that there is no bright line, quantitative rule governing when a court may sever unconscionable terms, as opposed to when it must void the entire contract.
When considering whether to enforce an agreement to arbitrate, courts look to whether the arbitration agreement is unconscionable—that is, whether its terms and the circumstances of its execution are so unfair or unjust as to shock the conscience. If a court finds that an arbitration agreement contains unconscionable terms, it may choose to sever the unconscionable terms and leave the remainder of the agreement intact, or it may decline to enforce the agreement as a whole.
In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the California Supreme Court provided guidance as to when a court may sever appropriate to sever unconscionable terms from an agreement rather than voiding the entire contract. The Court explained that “[c]ourts are to look at the various purposes of the contract. If the central purpose is tainted with illegality, then the contract as a whole cannot be enforced.” However, where the illegal (i.e., unconscionable) provisions are collateral to the main purpose of the contract, and those provisions can be excised from the contract, “then such severance and restriction are appropriate.” (Id. at 124.)
Ultimately, the Court in Armendariz determined that severance of the agreement was inappropriate for two reasons. First, the agreement had “more than one unlawful provision,” which, according to the Court, indicated a “systematic effort to impose arbitration . . . as an inferior forum that works to the employer’s advantage.” Second, the Court reasoned that the arbitration agreement’s lack of mutuality rendered it “permeat[ed]” by unconscionability because “there is no single provision a court can strike or restrict in order to remove the unconscionable taint[.]” (Id. at 124-125.)
Since Armendariz, several lower courts have applied a numeric analysis to determine whether or not unconscionable terms may be excised from a contract. Thus, where an arbitration agreement is found to have more than one unconscionable term, those courts applied a quantitative analysis and determined that severance is inappropriate.
Ramirez expressly forecloses this numerical analysis, holding that “no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term.” (Ramirez, supra, at p. 44.) However, the Court likewise cautioned that “a court is not required to sever or restrict an unconscionable term if an agreement has only a single such term.” (Ibid.) Instead, Ramirez instructs that courts should first ask whether the “central purpose of the contract is tainted with illegality.” If so, “the contract cannot be cured.” (Id. at 44.) If not, courts should ask whether the offending provision can be severed or limited, or if it must be reformed—“[i]f the unconscionability cannot be cured by extirpating or limiting the offending provisions, . . . then the court should refuse to enforce the contract.” (Ibid.)
So, what is the practical effect of the Ramirez decision? Ultimately, it may be unlikely to significantly change current court practices (other than with respect to courts no longer expressly invoking a quantitative analysis in their rulings) because courts are vested with broad discretion in deciding whether or not to sever unconscionable terms. (Id. at 39.) Further, even though Ramirez forecloses a purely numerical approach to the severance analysis, the Court nonetheless observed that, “[a]lthough there are no bright line numerical rules regarding severance, it is fair to say that the greater the number of unconscionable provisions a contract contains the less likely it is that severance will be the appropriate remedy.” (Id. at 45.) Thus, while Ramirez provides some additional guidance in favor of severance, the better course of action is to ensure that agreements to arbitrate do not contain any unconscionable terms.
We have deep experience in addressing arbitration agreements, both at the drafting stage and in litigation. If you have any questions or would like to discuss your arbitration agreement, please feel free to contact us.