Reported / Citable
Background
Craig Stoker was hired by Blue Origin, LLC, the space exploration company, as a senior director of program management in August 2020. When hired, Stoker signed an employee agreement that included a broad arbitration provision. The arbitration agreement applied to virtually all employment-related disputes but contained certain exclusions, including claims for sexual harassment or sexual assault (which the employee could voluntarily choose to arbitrate) and claims for equitable relief involving trade secrets, fiduciary duties, and other matters favoring the employer.
Stoker’s employment ended in 2022. He sued Blue Origin and others for various employment claims, including sexual harassment in violation of the Fair Employment and Housing Act. Blue Origin moved to compel arbitration. Stoker opposed, arguing first that the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFAA) prohibited arbitration of his sexual harassment claims and any related dispute, and second that the arbitration agreement was unconscionable.
The trial court ruled the EFAA applied and denied the motion to compel arbitration. Blue Origin appealed.
The Court’s Holding
The Second District Court of Appeal, Division Three, affirmed but on different grounds than the trial court used. The court held that the arbitration agreement was both substantively and procedurally unconscionable and that severance was not appropriate. Because of these unconscionability findings, the court did not need to reach the EFAA issue.
On procedural unconscionability, the agreement was a contract of adhesion presented as a condition of employment with a sophisticated employer. Stoker had no meaningful opportunity to negotiate the terms. Procedural unconscionability is common in employment arbitration agreements but is one factor in the unconscionability sliding scale.
On substantive unconscionability, the court identified multiple problematic provisions. The carve-out for equitable relief on trade secrets, breach of fiduciary duty, and similar claims allowed Blue Origin to keep its most likely employer-side claims in court while requiring employees to arbitrate their employee-side claims. This lack of mutuality is a hallmark of substantively unconscionable arbitration agreements. Other terms in the agreement also tilted heavily in Blue Origin’s favor in ways that compounded the substantive unfairness.
Severance was not appropriate. California law allows courts to sever unconscionable provisions and enforce the rest of an arbitration agreement only when the agreement is not permeated by unconscionability. Where multiple substantively unconscionable provisions exist, severance would essentially require the court to rewrite the agreement, which courts generally decline to do. The Blue Origin agreement contained too many problematic terms to be salvaged by selective severance.
Key Takeaways
- Arbitration agreements that contain carve-outs allowing the employer to litigate its likely claims in court (such as trade secret and fiduciary duty claims) while requiring the employee to arbitrate likely employee claims are substantively unconscionable due to lack of mutuality.
- The combination of procedural unconscionability (adhesion contract presented as condition of employment) and multiple substantively unconscionable terms can render an arbitration agreement entirely unenforceable.
- Severance of unconscionable provisions is not appropriate when the agreement is permeated by unconscionability. Courts will not rewrite agreements that contain numerous one-sided terms.
- An appellate court may affirm an order denying arbitration on grounds different from those used by the trial court, including unconscionability rather than the EFAA.
- The federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 may also apply to such cases, but unconscionability provides an independent ground for denying arbitration.
Why It Matters
This decision is important for California employment arbitration practice and for the development of unconscionability doctrine. The opinion reaffirms that California courts will look closely at the substantive provisions of arbitration agreements and will reject agreements that include carve-outs designed to keep employer-friendly claims in court while pushing employee-side claims into arbitration.
For employer counsel drafting employment arbitration agreements, the case is a sharp reminder that mutuality is essential and that broad equitable relief carve-outs raise serious unconscionability concerns. For employee counsel, the opinion provides a strong framework for unconscionability challenges, particularly for agreements containing one-sided carve-outs. By avoiding the EFAA issue, the court also leaves open important questions about the scope of that federal statute, but the opinion makes clear that employees have multiple potential paths to defeating motions to compel arbitration in employment cases involving sexual harassment claims.