Court: Court of Appeals for the Ninth Circuit; February 24, 2005; Federal Appellate Court
Batory, a former employee of Sears, appeals the district court's ruling affirming the validity and enforceability of an arbitration agreement he signed. Sears cross-appeals, arguing that Batory has not waived his right to arbitration. Batory contends the agreement is unenforceable on four grounds: it is an adhesion contract, lacks mutuality, is unsigned by Sears, and is an illusory contract. The enforceability is governed by the Federal Arbitration Act (FAA), which mandates contracts to be valid unless grounds for revocation exist.
The court applies Arizona contract law, finding only the adhesion contract argument has merit. Batory claims the agreement is invalid as it was presented as a "boilerplate" adhesion contract, lacking "knowing assent." He states he signed it under pressure from a superior without adequate review. However, the district court rejected this, noting Batory had the discretion to decline signing. The court did not specify the legal standard used for this determination.
The court references Broemmer v. Abortion Servs. of Phoenix, establishing that an adhesion contract must be offered on a "take it or leave it" basis without a realistic choice regarding its terms. While evidence suggests enrollment in Sears’ Dispute Resolution Program (DRP) may have been voluntary, Batory's claims that he and 20 other employees were not given sufficient opportunity to review the agreement before signing establish a genuine dispute. The court highlights that while Batory was presented with a standardized contract, he could only enroll in the DRP by accepting the form contract as presented.
Batory's ability to reject the contract does not equate to having a realistic choice regarding its terms, classifying the Pre-Dispute Agreement as an adhesion contract under Arizona law, contrary to the district court's finding. For an adhesion contract to be unenforceable, it must either contradict Batory's reasonable expectations or be unconscionable. Although these issues were not raised at the lower court level or on appeal, Arizona law allows unconscionability to be considered sua sponte, meaning they are not waived. Evidence suggesting the Agreement and DRP may be unconscionable warrants a remand for an evidentiary hearing per Arizona Revised Statutes 47-2302. Arizona courts have not specifically defined the unconscionability of arbitration agreements, but both substantive and procedural unconscionability can render a contract unenforceable.
The district court must evaluate whether the Agreement or DRP exhibits unconscionability based on:
1) An imbalance in obligations, as Sears must arbitrate all "Covered Claims," which only pertain to claims against the company, excluding claims Sears may bring against employees;
2) Sears' unilateral right to modify or terminate the DRP without providing employees equivalent rights;
3) Fee provisions that do not allow for waivers in cases of indigence.
Batory also claims the DRP lacks mutuality since it only applies to employees’ claims against Sears. However, the argument that mutuality is absent is incorrect. Under Arizona law, mutuality exists if both parties must arbitrate Covered Claims, even if those claims are defined asymmetrically. The employer's commitment to the arbitration process serves as adequate consideration.
Sears Batory contends that Sears cannot enforce the Agreement or DRP booklet due to lack of signature. However, the Ninth Circuit affirms that the FAA requires a writing but not necessarily signatures. Batory also claims the arbitration agreement is unenforceable as illusory, arguing that because Sears can modify or cancel the DRP unilaterally without offering employees a similar right, there is no mutual consideration. The district court countered that Sears’ ability to modify the DRP is limited by a requirement to provide 60 days’ notice and cannot affect previously submitted claims, which constitutes adequate consideration.
On cross-appeal, Sears argues that Batory waived his right to arbitration by filing a lawsuit. The applicable law is governed by the FAA, which the DRP incorporates. To prove waiver, Sears must establish Batory’s knowledge of his right to arbitration, inconsistent actions regarding that right, and resulting prejudice from Batory’s delay. Sears failed to demonstrate prejudice, as no substantial litigation occurred beyond the pleading stage. Consequently, Batory has not waived his right to compel arbitration.
The court reverses the district court’s finding that the Agreement and DRP do not constitute an adhesion contract and remands for a hearing on unconscionability under Arizona law. It affirms the district court’s determination that Batory has not waived his arbitral remedy. The ruling is not for publication or citation in courts of the circuit except as allowed by Ninth Circuit Rule 36-3.
