Unconscionability - Consumer Transactions

Case: Ferguson v. Countrywide Credit Industries, Inc. (2002, 9th) [pp. 553-560]

Parties: Plaintiff - Ferguson (employee)

Defendant - Countrywide (employer)

Procedural History: trial court held arbitration clause unconscionable. D

appealed.

Facts: Ferguson brought a claim against Countrywide for sexual harassment,

retaliation and hostile work environment. Countrywide then filed a petition for
an order compelling arbitration of P's claims, because of an employment contract
signed by P prior to employment. P disputed that she had ever signed such
agreement, but trial court said that even if she had signed it, it is
unenforceable because it is unconscionable. Countrywide then appealed that
decision.

Issue: Whether the trial court was correct to deny Countrywide's petition to
compel arbitration, based on its unconscionability. Yes.

Holding: Affirmed. K unconscionable. Arbitration clause unconscionable.

Reasoning: A standardized K is usually enforceable, unless it is unconscionable.

To render a contract unenforceable based on unconscionability, there must be both
procedural and substantive unconscionability (although a greater degree of one can
make up for less of the other).
• Procedural Unconscionability - K can be procedurally unconscionable if there is
oppression or surprise. Court says there was oppression here, because although P
was given time to review it and to make the decision of whether to accept it, her
employment was based on whether she would first sign it. There were no
negotiations here, and the employer has a much greater bargaining power, b/c if
she chose not to sign, she could not begin employment.
• Substantive Unconscionability - where the actual terms of the agreement are so
one-sided they shock the conscious
○ One sided coverage of arbitration agreement - arbitration clause
specifically covers certain claims and not others. The ones that must be
arbitrated are more likely claims that an employee would bring, and the ones not
subject to the arbitration clause are claims the employer is more likely to bring.
Very one-sided, in Countrywide's favor.
○ Arbitration Fees - they can be unconscionable if it would cost P more in
arbitration fees than a normal litigation would have. Here, it would have been.
For public policy, they don’t want Ps not bringing cases in b/c of the costs.
○ One-sided discovery provision - again, the terms in regards to discovery
also very one-sided and in Countrywide's favor (D would have certain advantages
over P from these provisions). There is no mutuality here.
The court recognized a pattern of one-sided terms to Countrywide's advantage.
Because this lack of mutuality so permeated the K, the court could not just
partially enforce the remainder of the K w/o unconscionable terms, but had to deny
the enforceability of the K as a whole.
§ 2-302. Unconscionable contract or Term.
(1) If the court as a matter of law finds the contract or any term of
the contract to have been unconscionable at the time it was made the court may
refuse to enforce the contract, or it may enforce the remainder of the contract
without the unconscionable term, or it may so limit the application of any
unconscionable term as to avoid any unconscionable result.
RULE: A standardized K is usually held enforceable, unless it is unconscionable.
For K to be unconscionable there must be procedural and substantive
unconscionability (although a greater degree of one can make up for less of the
other). K can be procedurally (manner in which K was enacted) unconscionable if
there is oppression or surprise (unequal bargaining power; lacks meaningful
choice). K can be substantively unconscionable where the actual terms of the
agreement are so one-sided they shock the conscious (party benefits from
unreasonably favorable terms).
.

Notes
• Can an employer insist that all disputes arising btwn employer and employee be
mandated to go to arbitration?
• FAA (Federal Arbitration Act) - says if you sign an arbitration agreement, the
courts will enforce it, unless its unconscionable or if state law says it would be
unenforceable
○ Why would state law be applied? This is a federal question case (title
VII), but FAA says that this statute would not apply to contracts that would be
unenforceable under state law, so state law would be applied here.
• Distinction btwn procedural and substantive unconscionability
• Procedural test: if there is unequal bargaining power; that there's no
opportunity for meaningful negotiations
○ Countrywide says - well they had enough time to review the K
• Substantive test: terms so one-sided as to shock the conscious
○ Very vague standard
○ Court appears to fill it out with discussion
○ Discovery part itself not so one-sided, but part of a pattern