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From Antitrust Law Daily, October 30, 2018

Substantively unconscionable clause in au pair agreements should have been severed and arbitration ordered

By Ronald Miller, J.D.

Because the arbitration provisions contained in au pair agreements had only one substantively unconscionable clause, the Tenth Circuit ruled that a federal district court abused its discretion by refusing to sever the offending clause and otherwise enforce the agreement to arbitrate. Although the appeals court agreed the au pair agreements were adhesive contracts, it found they were procedurally unconscionable to only a moderate degree. Further, the au pairs’ youth, status as foreigners, and inexperience with contracts did not increase the procedural unconscionability to any significant degree, and because the provision was not concealed, no element of surprise could be inferred. Because the au pair agreements had moderate procedural unconscionability and significant substantive unconscionability due to an arbitration provider selection clause, they were unenforceable as written. However, contrary to the district court, the appeals court concluded that the one offending clause in the arbitration provision should be severed and the parties’ agreement to arbitrate their dispute enforced (Beltran v. AuPairCare, Inc., October 30, 2018, McHugh, C.).

Au pair program. Au pairs filed a class action lawsuit against au pair sponsoring companies alleging violations of antitrust laws, RICO, the FLSA, and state minimum wage laws, and other state laws. Au pairs are limited to one-year or less in the United States for each trip, and are required to be "proficient in spoken English." Sponsors designated by the State Department conduct the au pair exchange program. The sponsors are responsible for selecting au pairs, selecting suitable host families, and placing au pairs with particular host families.

The au pair program affords foreign nationals "the opportunity to live with an American host family and participate directly in the home life of the host family." Au pairs provide child care services for the host family subject to weekly and daily hour limitations, pursue six hours of academic credit during their year in the U.S., and receive in exchange monetary compensation, and two weeks paid vacation over the course of the year.

The au pair agreements contained a choice of law provision stating that they were governed by the laws of California. Additionally, the agreement signed by the au pairs contained identical arbitration provisions. After the named plaintiff filed her second amended complaint to add two former au pairs, the employer filed a motion to compel arbitration and dismiss the lawsuit.

Unconscionable provisions. The district court denied the employer’s motion, finding the arbitration provision unconscionable. The district court concluded that the au pair agreements were contracts of adhesion and procedurally unconscionable because the au pairs were relatively young at the time they signed the contracts, were foreigners, spoke English as a second language, and had no experience with contracts or contract law. Although each au pair had read the contract before signing it, the district court found that neither understood what "arbitration" meant. It also found an element of surprise because the arbitration provision was "buried" at the end of 80 paragraphs under a nondescript header and did not explain in plain English that the au pairs were waiving their right to access the United States court system.

The district court also determined that the arbitration provision was substantively unconscionable. It agreed with the au pairs that the clause vesting the employer with the right to unilaterally select an arbitration provider was substantively unconscionable. Finding the arbitration provision both procedurally and substantively unconscionable, the district court refused to sever any offending clauses, and denied the employer’s motion to compel arbitration.

Unconscionability. The Tenth Circuit agreed with the district court that the arbitration agreement was unconscionable, however it reached that conclusion for reasons more limited than those found by the lower court. As a consequence, the appeals court concluded that the provision was not permeated by unconscionability, and therefore the offending clauses should have been stricken, so that the parties’ agreement to arbitrate could be enforced.

Under California law, "unconscionability consists of both procedural and substantive elements." "The procedural element addresses the circumstances of the contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power." "Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided." The appeals court began its analysis by addressing procedural unconscionability.

Contract formation. Applying California law to the au pair agreement and arbitration agreement, the employer did not contest that the au pair agreements were adhesive contracts, which established a modest degree of procedural unconscionability. In this instance, the appeals court rejected the au pairs’ argument that they did not have a "meaningful alternative" to entering the au pair agreement. The au pair program is not employment in the traditional sense, and cannot be described as "necessary employment." It is a means of educational and cultural exchange. Thus, participation in the program is not a matter of "necessity."

The appeals court was also not convinced the fact that the au pairs spoke English as a second language increased the procedural unconscionability of the agreement. It was uncontested that the au pairs received translations of the agreement in their native languages. Moreover, to be eligible for participation in the program, au pairs had to be "proficient in spoken English." Further, the court concluded that the au pairs’ contention that their age, status as foreigners, inexperience in contract law, and lack of knowledge of the meaning of "arbitration" were not factors increasing the procedural unconscionability of the contract formation. Those factors increased procedural unconscionability only a "moderate" degree. Finally, the appeals court found any surprise from the contract to be negligible.

Fairness of actual terms. The au pairs argued that three distinct clauses in the arbitration provision were unconscionable: the clause allowing the employer to unilaterally select the arbitration provider; the forum selection clause; and the fee shifting clause. First, the appeals court concluded the clause allowing the employer to unilaterally select the arbitration provider had the same inherent unconscionability as allowing it to select the arbitrator. Thus, this clause had a high degree of substantive unconscionability.

However, the au pairs’ contention that the forum selection clause was unconscionable was rejected. Here, the appeals court agreed with the employer that evidence in the record suggested that the au pairs should have reasonably expected they would be required to arbitrate in California, since it was a California company and the agreement was negotiated in California. Thus, the clause was not unconscionable. Finally, the appeals court rejected the au pairs’ contention that the fee shifting clause was unconscionable. The court observed that by its own terms, the fee shifting clause applied only to breach of contract claims.

Severance. Having found that only the arbitration provider selection clause was the only substantively unconscionable clause, the appeals court concluded that the contract was not permeated by unconscionability. It determined that it could easily sever the one offending clause from the remainder of the agreement. Accordingly, the appeals court concluded that the district court abused its discretion by not severing the offending clause. Thus, it determined that the arbitration provision should be severed and the parties’ agreement to arbitrate their dispute enforced.

The case is No. 17-1359.

Attorneys: David H. Seligman (Towards Justice) for Johana Paola Beltran. Thomas B. Quinn (Gordon & Rees) and Jennifer Arnett-Roehrich (Gordon Rees Scully Mansukhani) for AuPairCare, Inc. Brooke A. Colaizzi (Sherman & Howard) for InterExchange, Inc. Chanda Marie Feldkamp (Kelly & Walker) for USAuPair, Inc. Martin Jose Estevao (Armstrong Teasdale) for GreatAuPair, LLC. Bogdan Enica (Law Office of Bogdan Enica) for Expert Group International Inc. dba Expert AuPair.

Companies: AuPairCare, Inc.; InterExchange, Inc.; USAuPair, Inc.; GreatAuPair, LLC; Expert Group International Inc.; Expert AuPair

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