How to Avoid Procedural Unconscionability in Your Contracts: Lessons From OTO v. Kho

As we recently discussed here, the California Supreme Court issued its opinion in OTO, LLC v. Kho, Case No. S244630 (Cal. Supreme Court August 29, 2019), which invalidated an arbitration provision in an employment contract. The case is remarkable in many respects and likely will be an important legal precedent going forward. In OTO, the plaintiff — Ken Kho — was a service technician for car dealership in Oakland — OTO, LLC. About three years into his employment with OTO, Kho was asked to sign an employment agreement that was entitled “Comprehensive Agreement, Employment At-Will and Arbitration.” The agreement contained an arbitration clause. About a year later, Kho was fired and he sued OTO in an administrative hearing for unpaid wages before the California Department of Labor Standards Enforcement (“DLSE”). Based on the arbitration provision in the employment agreement, OTO objected and asked the DLSE to send the case to arbitration. The DLSE refused and entered judgment against OTO in an amount exceeding $150,000. In response, OTO petitioned the California Superior Court to vacate the administrative judgment and to compel arbitration.

The case reached the California Supreme Court and, as noted, the court held that the arbitration clause was invalid and unenforceable. The court ruled that the case presented a circumstance where there was an “an unusually high degree” of procedural unconscionability. Procedural unconscionability is a legal doctrine that focuses on the procedures and methods used in negotiating and obtaining agreement to a contract. The doctrine is a sliding scale so that a contract is deemed more unconscionable if the procedures are more unfair, more surprising/time compressed, and more oppressive. Unconscionability is a basis for holding that a contract is invalid and unenforceable. Procedural unconscionability is not generally about the content of the contract; but, rather about how it is presented in terms of font, textual presentation, how the contract is presented for signature, etc.

OTO provides an unusually clear list of things that one should not if one wishes to avoid procedural unconscionability. Specifically, the California Supreme Court cited these facts:

• OTO presented the agreement to Kho for signature in his work area
• It was presented by a non-management employee for signature
• The employee waited in Kho’s work area while he signed the agreement and related documents
• The signing took about three to four minutes
• As such, Kho did not have time to read it or ask questions about the agreement, Kho did not have time to consult with an attorney or other person, and the agreement was not explained to him
• Kho’s native language is/was Chinese
• Even if Kho had asked questions, the non-management employee would not have had the answers
• The arbitration clause was in a tiny font (either 7 point or 8.5 font)
• The clause contained 51 lines of text without any breaks or headings or bolding
• The clause contained many long complex sentences including one that was 12 lines long
• The clause had many unexplained statutory references
• The clause contained numerous examples of legal jargon
• No copy of the agreement was given to Kho after he signed it
• The clause did not explain how to initiate arbitration or how payment would be handled

These facts, taken together, led the California Supreme Court to conclude that the agreement (including the arbitration provision) was unenforceable. The case — and the above list — provides a good example of the various pitfalls that every San Diego business should avoid when preparing and presenting contracts for signature. An experienced San Diego corporate attorney can help.

Call San Diego Corporate Law Today

For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law.  Mr. Leonard has been named as “Best of the Bar” by the San Diego Business Journal for four years running. Mr. Leonard has extensive experience in drafting employee policies, employee handbooks, employment contracts, and all other contracts and agreements necessary for running your business. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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