In August 2000, the California Supreme Court handed down a landmark ruling that changed the face of employment arbitration agreements going forward.  That case, known as Armendariz v. Foundation Health Psychcare Services, Inc., clarified the standards of “procedural” and “substantive” unconscionability in these agreements.  While Armendariz is commonly cited for its holdings on these different types of unconscionability, a lesser aspect of the holding, which was largely unremarked upon for nearly 25 years, dealt with the issue of severing unconscionable provisions.  The reason this has been overlooked is because the California Supreme Court in Armendariz refused to sever several provisions of the arbitration agreement scrutinized in that case because they “permeated” the agreement with unconscionability, rendering the agreement incurable.

Recently, the California Supreme Court revisited the Armendariz ruling in Ramirez v. Charter Communications, Inc.  In Ramirez, the employer attempted to enforce an arbitration agreement that contained several unconscionable provisions.  Specifically, “[t]he challenged provisions included those: describing which claims were subject to and excluded from arbitration; imposing a shortened filing period for certain claims; limiting discovery available in arbitration; and allowing Charter [the employer] to recover attorney fees in a manner contrary to FEHA.”  The high court summarily agreed with the Court of Appeal that these provisions were indeed unconscionable.  However, the California Supreme Court disagreed with the lower courts on the issue of severability.

Specifically, the Court clarified that there is no bright line rule that requires a court to refuse enforcement if a contract has more than one unconscionable term.  Rather, the appropriate inquiry is qualitative.  “At the outset, a court should ask whether ‘the central purpose of the contract is tainted with illegality. [Citations]. If so, the contract cannot be cured, and the court should refuse to enforce it.”

If the central purpose is permissible, a court must ask whether the contract can be cured “purely through severance or restriction of its terms, or whether reformation by augmentation is necessary”.  If no reformation is required, “the offending provision can be severed or limited, and the rest of the arbitration agreement left intact,” and “severance or restriction is the preferred course for provisions that are collateral to the agreement’s main purpose.”  Courts cannot do more to save an otherwise unconscionable agreement.  The trial court must also ask whether the unconscionability should be cured because the interests of justice would be furthered by such actions.  In essence, the court would look to the primary purpose of the agreement and determine “whether mere severance of the unconscionable terms would function to condone an illegal scheme and whether the defects in the agreement indicate that the stronger party engaged in a systematic effort to impose arbitration on the weaker party not simply as an alternative to litigation, but to secure a forum that works to the stronger party’s advantage.”

Among other considerations attendant to these points, the California Supreme Court concluded that “courts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral the contract’s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice.”