Legal Memorandum: Unconscionable Arbitration Agreements

Issue: Under the law of the Virgin Islands, when is an arbitration agreement unconscionable?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts
Keywords: Arbitration agreement; Unconscionable; Validity
Jurisdiction: Federal, Virgin Islands
Cited Cases: 328 F.3d 1165; 335 F.3d 1101; 230 F. Supp. 2d 1214; 341 F.3d 256
Cited Statutes: 9 U.S.C. § 2; Restatement (Second) of Torts § 208; U.C.C. § 2-302
Date: 05/01/2004

            Although it is often said that federal law favors the enforcement of arbitration agreements, there is an important caveat: only valid arbitration agreements are enforceable.  Alexander v. Anthony Int’l, L.P., 341 F.3d 256, 263-64 (3d Cir. 2003).  Before a court may direct parties to proceed with arbitration, it “must still ascertain whether the parties entered a valid agreement to arbitrate.”  Id. at 264.  “If there are grounds . . . at law or in equity for the revocation of any contract,” the court must find the arbitration provision invalid and unenforceable and, of course, may not compel arbitration. 9 U.S.C. § 2; Alexander, 341 F.3d at 264.  In this regard, the Supreme Court has expressly noted that “unconscionability” is a ground that “may be applied to invalidate arbitration agreements without violating [federal law].”  Doctor’s Assocs. Inc. v. Casarotta, 517 U.S. 681, 687 (1996).  

To evaluate an employment-based arbitration agreement for unconscionability, the court must be cognizant of the economic pressure brought to bear on employees who are desperate for work and who have few other options for gainful employment.  As the California Supreme Court observed, “the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.”  Armendariz v. Foundation Health Psychare Servs. Inc., 6 P.3d 669, 690 (Cal. 2000).

In Alexander, the Third […]

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