Ferguson v. Countrywide Credit Industries, Inc.

United States Court of Appeals for the Ninth Circuit · 2002 · Contracts

298 F.3d 778 (9th Cir. 2002)

Updated July 26, 2026

ContractsArbitrationUnconscionabilityEmployment ContractsFAAarbitration agreementprocedural unconscionabilitysubstantive unconscionability

Facts

When Ferguson was hired by Countrywide, she was required as a condition of employment to execute an arbitration agreement. The agreement required arbitration of many employee claims, including discrimination, harassment, tort, and contract claims, but excluded claims Countrywide was more likely to bring, such as claims for injunctive or equitable relief for intellectual property violations, unfair competition, and trade secret or confidential information claims. The agreement also required the employee to pay a filing fee up to $125, required Countrywide to pay the first hearing day, and required all other arbitration costs to be shared equally, while limiting discovery to three depositions and thirty discovery requests. Ferguson disputed whether she signed the agreement, but the district court ruled that even assuming the agreement existed, it was unenforceable because it was unconscionable.

Issue

Whether Countrywide's mandatory employment arbitration agreement was enforceable under the FAA and California contract law, or instead unenforceable because it was procedurally and substantively unconscionable. Also, if some provisions were unconscionable, whether they could be severed so that the remainder of the agreement could still be enforced.

Rule

Under the FAA, generally applicable state-law contract defenses such as unconscionability may invalidate arbitration agreements. Under California law, an arbitration agreement is unconscionable only if it has both procedural and substantive unconscionability, though not necessarily to the same degree; procedural unconscionability turns on oppression and surprise, while substantive unconscionability asks whether the terms are so one-sided as to shock the conscience. In mandatory employment arbitration, an employer may not require the employee to bear any expense beyond what the employee would bear in court, and a court may refuse to sever offending terms where unconscionability permeates the agreement.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz accepted an accounting job with North Harbor Claims Group in Phoenix. On her first day, she was told she had to sign the company's standard arbitration agreement immediately or lose the job; the form was preprinted, applied to all new hires, and managers said no terms could be changed.

If Lena later sues for workplace discrimination and the company moves to compel arbitration, which is the strongest argument that the agreement is procedurally unconscionable under the governing rule?

Explanation. Procedural unconscionability focuses on oppression and surprise in contract formation. A take-it-or-leave-it arbitration agreement imposed as a condition of employment by an employer with superior bargaining power is procedurally unconscionable because there is no meaningful opportunity to negotiate. The opinion rejected the idea that an employee's ability to seek another job defeats procedural unconscionability, and plain language alone does not eliminate oppression. (Derived from Ferguson v. Countrywide Credit Industries, Inc. (2002).)