Barnum f. Paul Ryan Associates CA1/2 ( 2014 )

Filed 7/30/14 Barnum f. Paul Ryan Associates CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
TERRENCE BARNUM,
Plaintiff and Respondent,
A138345
v.
PAUL RYAN ASSOCIATES, INC., et al., (San Francisco City and County
Super. Ct. No. CGC-12-522893)
Defendants and Appellants.
This case presents two issues: whether the trial court erred in (1) refusing to
enforce a mandatory employment arbitration agreement after finding it contains
procedurally and substantively unconscionable provisions and, alternatively, (2) in
declining to sever the provision it found substantively unconscionable and enforce the
remainder of the agreement.
We shall find the challenged rulings justified and therefore affirm the judgment.
FACTS
Respondent Terrence Barnum, who at the time of suit had 45 years of experience
in the construction industry, was hired by appellant Paul Ryan Associates (Ryan), a
general contractor, in December of 2007. According to Barnum’s first amended
complaint, Barnum’s primary responsibility during the four years he was employed by
Ryan was supervision of its employees’ work and that of its subcontractors on particular
jobsites to insure Ryan’s projects were completed timely, safely, economically and in
compliance with the plans and specifications. Throughout his employment at Ryan,
Barnum assertedly “performed in an exemplary manner, receiving commendations and
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accolades from management and clients. By 2011, Barnum believed he was the oldest
field employee working for Ryan.”
That year, a client of Ryan sued the company and others alleging construction
defects, mismanagement, and safety hazards at a large scale residential renovation project
in San Francisco, and counsel for the plaintiffs in that case required Barnum to appear for
deposition regarding his knowledge of the factual allegations. At a meeting convened
prior to the deposition by Ryan’s attorneys, Barnum indicated his beliefs that the client’s
claims were in some measure justified, and Ryan bore a level of responsibility, and stated
that he intended to respond honestly to questions put to him about these matters at the
deposition. Thereafter, the complaint alleges, Barnum’s supervisors questioned him
about “his supposed animus against the company,” ordered him to return his company
computer and phone, prohibited him from further contact with employees, and demanded
he provide information he asserts he was unable to provide without his computer, which
Ryan refused to return. Ryan then commenced an investigation of allegations that
Barnum mistreated subcontractors at a Berkeley jobsite.
Barnum alleges he was wrongfully terminated on August 5, 2011. Barnum was
told he was terminated “because of his ‘behavior toward employees and subcontractors
which also raised a safety issue.’ ” Barnum asserts that “[i]n reality, the stated grounds
for the termination were a pretext for unlawful retaliation and discharge,” as alleged in
the present action.
Barnum also alleges that appellant Peter Heelan, a superintendent for Ryan,
informed others in the construction industry that Barnum “was no longer employed
because he had ‘gone postal’ and abused subcontractors and employees.” Barnum
alleges that Heelan could not have obtained such information except from Ryan’s
managerial employees.
Barnum alleges eight causes of action: (1) wrongful termination in violation of
public policy; (2) retaliation; (3) intentional infliction of emotional distress; (4) breach of
contract; (5) age discrimination; (6) unfair business practices; (7) defamation; and (8)
2
misrepresentation preventing employment of a former employee in violation of Labor
Code section 1050, et seq.
Ryan declined to answer the complaint and, on November 9, 2011, instead filed a
petition to compel arbitration and stay the judicial proceedings.
The petition to compel was based on the arbitration provisions set forth in the
employment agreement dated and signed by the parties on November 20, 2007. The
agreement consists of a two-page email letter from Ryan to Barnum offering at-will
employment as “Superintendent” pursuant to specified terms and conditions. After
describing salary, benefits, paid time off, restrictions relating to trade secrets and a
provision requiring Barnum to “comply with all Ryan policies, rules and procedures as
they may be established, stated and/or modified from time to time at Ryan’s sole
discretion,” the agreement includes a lengthy provision relating to arbitration.
The arbitration agreement, written in the same single-space manner and font as the
rest of the employment agreement, and not highlighted in any manner, states as follows:
“Except as specified below, to the fullest extent allowed by law, any and all
disputes, claims or controversies of any kind arising out of or related in any way to
hiring, employment or the termination of employment with Ryan (including without
limitation any statutory or common law claims against Ryan or any of its agents or
employees) shall be fully and finally resolved through binding arbitration before a neutral
arbitrator, pursuant to the California Arbitration Act, California Code of Civil Procedure
section 1280, et seq.1 You and Ryan therefore waive any right to a jury trial on any such
claims or matters. Any arbitration between the parties will be conducted before the
American Arbitration Association (‘AAA’) in San Francisco, California, under the
AAA’s then existing national rules for the resolution of employment disputes, as
modified in any respect necessary to comply with the requirements of California law for
enforcements of arbitration agreements regarding employment-related disputes. This
1
All further statutory references are to the Code of Civil Procedure unless
otherwise indicated.
3
arbitration provision shall not apply to any claims for injunctive or other similar equitable
relief. Before commencing any arbitration proceedings, any dispute between me and
Ryan or any of its agents or employees shall first be submitted, in writing, to one of
Ryan’s Senior Vice Presidents for a good faith attempt at resolution under Ryan’s
internal dispute resolution procedures.”
The following paragraph states that the letter “sets forth the entire agreement
between you and Ryan of the terms of your employment with Ryan,” and includes the
proviso that those terms “may only be modified in writing signed by both you and one of
Ryan’s Senior Vice Presidents.”
In a declaration in opposition to the motion to compel, Barnum states under
penalty of perjury that Ryan never provided him a copy of the AAA national rules for the
resolution of employment disputes at the times he signed his employment application and
the employment agreement, or the times at which he acknowledged receipt of the 2007
and 2010 employment Handbooks, which referred to the AAA rules, “or at any other time
during my employment.” Barnum’s declaration also states he “was never provided with a
copy of the Ryan internal dispute resolution procedures with my offer letter or my
employment application.” Finally, Barnum states in the declaration that “I do not recall
anyone from Ryan ever discussing the topic of arbitration with me.”
In its February 11, 2013 order denying Ryan’s motion to compel arbitration and
stay the judicial proceedings the court states that “[t]he arbitration agreement is
procedurally unconscionable because it is a contract of adhesion and because the rules
that would govern the arbitration were not provided. The arbitration agreement is
substantively unconscionable because the exception for injunctive or equitable relief
operates in favor of employers and goes far beyond merely acknowledging the statutory
availability of interim relief.” The court stated that it declined to sever that provision
“because it is integral to the agreement the parties reached concerning the scope of what
would be arbitrated, and its severance would impose on the parties obligations to which
they did not agree. This is true even though injunctive relief is not at issue in this case
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because an employer cannot impose unconscionable terms only to back away once
challenged.”
STANDARD OF REVIEW
“Like any other contract, an agreement to arbitrate is subject to revocation if the
agreement is unconscionable. [Citations.] [¶] Absent conflicting extrinsic evidence, the
validity of an arbitration clause, including whether it is subject to revocation as
unconscionable, is a question of law subject to de novo review. [Citations.]” (Serpa v.
California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 702 (Serpa).)
DISCUSSION
As explained in detail in Armendariz v. Foundation Health Psychcare Services,
Inc. (2000) 24 Cal.4th 83 (Armendariz), unconscionability has both procedural and
substantive elements. Although both must appear in order to invalidate a contract or
provision thereof, they need not both be present in the same degree: “[T]he more
substantively oppressive the contract term, the less evidence of procedural
unconscionability is required to come to the conclusion that the term is unenforceable,
and vice versa.” (Id. at p. 114; accord, Serpa, supra, 215 Cal.App.4th at pp. 702-703;
Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1468-1469.)2
“Procedural unconscionability focuses on the elements of suppression and
surprise. [Citations.] ‘ “ ‘ “Oppression arises from an inequality of bargaining power
2
In its opening brief, Ryan claims that the FAA “mandates arbitration under this
employment agreement” apparently on the theory that the trial court’s ruling amounts to a
“blanket rule . . . that an arbitration agreement is automatically unenforceable when it
contains a mutual carve-out for injunctive relief claims,” and such a rule is inconsistent
with AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740. This argument,
improperly made for the first time on appeal, is frivolous. So far as the record shows, the
contract in this case is between a California corporation and a California resident
concerning work to be performed entirely in California; the FAA only applies to
contracts involving interstate commerce. (Woolls v. Superior Court (2005) 127
Cal.App.4th 197, 212.) Moreover, by its own terms, the FAA permits a state court to
declare an arbitration contract unenforceable “upon such grounds as exist at law or in
equity for the revocation of any contract” (9 U.S.C. § 2), which includes
unconscionability.
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which results in no real negotiation and an absence of meaningful choice. . . . Surprise
involves the extent to which the terms of the bargain are hidden in a ‘prolix printed form’
drafted by a party in a superior bargaining position.” ’ ” ’ [Citations.]” (Serpa, supra,
215 Cal.App.4th at p. 703.)
“Substantive unconscionability focuses on the actual terms of the agreement and
evaluates whether they create an ‘ “ ‘overly harsh’ ” ’ or ‘ “ ‘one sided’ ” result[]’
[citations], that is, whether contractual provisions reallocate risks in an objectively
unreasonable or unexpected manner. [Citation.] Substantive unconscionability ‘may
take various forms,’ but typically is found in the employment context when the
arbitration agreement is ‘one-sided’ in favor of the employer without sufficient
justification, for example, when ‘the employee’s claims against the employer, but not the
employer’s claims against the employee, are subject to arbitration.’ [Citations.]” (Serpa,
supra, 215 Cal.App.4th at p. 703.) As our Supreme Court has said, “it is unfairly one-
sided for an employer with superior bargaining power to impose arbitration on the
employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim
against the employee, without at least some reasonable justification for such one-
sidedness based on ‘business realities.’ ” (Armendariz, supra, 24 Cal.4th at p. 117;
Kinney v. United HealthCare Services (1999) 70 Cal.App.4th 1322, 1330
[“ ‘[s]ubstantive unconscionability’ focuses on the terms of the agreement and whether
those terms are ‘so one-sided as to ‘shock the conscience” ’ ”].)
The trial court properly concluded that the arbitration agreement in this case is
both procedurally and substantively unconscionable.
Procedural Unconscionability
Contracts offered to employees on a take-it-or-leave-it basis commonly contain at
least some aspects of unconscionability. As our Supreme Court and Courts of Appeal
have reiterated, “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, supra, 24 Cal.4th at p. 115;
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Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071; Serpa, supra, 215 Cal.App.4th
at p. 704.)
The trial court conclusion that the arbitration agreement in this case was
procedurally unconscionable rested not only on the fact that the employment agreement
was a contract of adhesion, which Ryan does not challenge, but also on the undisputed
fact that Ryan never provided Barnum with either the AAA rules that would govern the
arbitration or the procedures and rules governing the internal pre-arbitration dispute
resolution process mandated by the agreement, subsequent versions of which changed
certain terms of the agreement.
Ignoring what appears to us to be the rationale of the court’s ruling, Ryan assumes
that the ruling is based upon an erroneous rejection of the settled proposition that
employers and employees may agree on specific rules for the arbitration, such as those of
the AAA, and incorporate them by reference in the arbitration agreement. Ryan’s
assumption is reflected in the four cases on which he relies: Greenspan v. LADT, LLC
(2010) 185 Cal.App.4th 1413, 1442 (Greenspan); Rodriguez v. American Technologies,
Inc. (2006) 136 Cal.App.4th 1110, 1123; Roman, supra, 172 Cal.App.4th at pages 1475-
1476; Dream Theater, Inc. v. Dream Theater ( 2004) 124 Cal.App.4th 547, 556.3
However, in none of these cases was there any dispute between the parties as to the
arbitration rules incorporated by reference into the parties’ agreement or whether they
had been provided to the employee by the employer; the issue in these cases was simply
the effect of indisputably applicable rules.
For example, in Greenspan, supra, 185 Cal.App.4th 1413, the defendants argued
that an arbitration award should be vacated because, among other things, the plaintiff
3
Ryan also relies on Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th
107 (Martinez), apparently for the sole reason that (at a different page from those cited by
Ryan) it reiterates the unremarkable statement that an agreement to arbitrate in a
particular forum is “ ‘ “as integral a term of a contract as any other, which courts must
enforce.” ’ ” (Id. at p. 121, quoting Alan v. Superior Court (2003) 111 Cal.App.4th 217,
228, quoting Wall Street Associates v. Becker Paribas, Inc. (S.D.N.Y. 1993) 818 F.Supp.
679, 683.)
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trustee did not plead joint and several liability on the breach of contract claim and thus
the issue was not arbitrable. The court rejected the argument. Because under rule 11 of
JAMS Rules, which the parties agreed to, “the arbitrator, not a court, determines what
issues are arbitrable, and we consequently defer to the arbitrator’s determination that the
issue of joint and severable liability was arbitrable.” (Greenspan, at p. 1435.) The
plaintiff in Greenspan never complained that he had not been provided or did not know
the provisions of rule 11 of JAMS Comprehensive Arbitration Rules & Procedures.
(Greenspan, at pp. 1442-1443.)
In Rodriguez v. American Technologies, Inc., supra, 136 Cal.App.4th 1110, the
plaintiffs claimed that two of their grievances fell outside the scope of the arbitration
clause. The court rejected the claim because the contract mandated arbitration in
accordance with the AAA’s Construction Industry Rules, and rule 8(a) of those rules
gave the “arbitrator . . .the power to rule on his or her own jurisdiction.” “By
incorporating rule 8(a) into their agreement, the parties clearly evidenced their intention
to accord the arbitrator the authority to determine issues of arbitrability.” (Rodriguez, at
p. 1123.) Again, unlike this case, the failure of the defendant in Rodriguez to provide a
copy of the rules that would govern the agreed upon arbitration was not complained of.
In Roman v. Superior Court, supra, 172 Cal.App.4th 1462, the plaintiff employee
contended that the arbitration agreement imposed an unconscionable limit on discovery.
Disagreeing, the court pointed out that the 1997 AAA arbitration rules incorporated into
the arbitration agreement, and also the 2007 AAA rules in effect at the time arbitration
was demanded, gave the arbitrator the authority to order such discovery as he or she
deemed necessary to full and fair exploration of the issues in dispute, consistent with the
expedited nature of discovery, which was consistent with the scope of discovery
approved in Armendariz, supra, 24 Cal.4th at page 106. (Roman v. Superior Court,
supra, 172 Cal.App.4th at pp. 1475-1476.) Once again, the plaintiff did not claim he was
never made aware of the applicable rules.
Dream Theater, Inc. v. Dream Theater, supra,124 Cal.App.4th 547, also involved
a dispute about the arbitrability of third party claims under the arbitration clause of their
8
contract. The Court of Appeal reversed the trial court’s stay of arbitration because the
contract incorporated the AAA Commercial Arbitration Rules, which “specify that the
arbitrator will decide disputes over the scope of the arbitration agreement.” (Dream
Theater, Inc., at p. 557.)
The issue in the present case is not the meaning of the AAA rules incorporated by
reference into the arbitration agreement, as in the cases Ryan relies on, but on whether
Ryan ever gave Barnum either a uniform set or clear description of the AAA rules
governing the arbitration, or the other “policies, rules and procedures [relating to Ryan’s
internal dispute resolution process] as they may be established, stated and/or modified
from time to time at Ryan’s sole discretion” which the agreement also imposed on
employees.
The case law pertaining to whether it is procedurally unconscionable to
incorporate, but not attach, applicable arbitration rules turns heavily on the
circumstances. One line of cases finds it “oppressive to require the party to [an
arbitration agreement] to make an independent inquiry to find the applicable rules in
order to fully understand what she was about to sign.” (Zullo v. Superior Court (2011)
197 Cal.App.4th 477, 486, citing Harper v. Ultimo (2003) 113 Cal.App.4th 1402, in
which the court refused to enforce an arbitration clause that incorporated by reference but
failed to attach the rules of the Better Business Bureau, Fitz v. NCR Corp. (2004) 118
Cal.App.4th 702, 721 (Fitz), in which the failure to attach the AAA rules made the
agreement procedurally unconscionable, and Trivedi v. Curexo Technology Corp. (2010)
189 Cal.App.4th 387, 393 (Trivedi ), holding, without discussion, that failure to attach
arbitration rules added to the procedural unconscionability; accord, Carmona v. Lincoln
Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 84.)
On the other hand, another line of cases, the most recent of which distinguishes
those just cited, indicates that the failure to attach the applicable rules is not improper
unless for some apparent reason it produces the requisite surprise or oppression. (Peng v.
First Republic Bank (2013) 219 Cal.App.4th 1462, 1469-1472 (Peng); Giuliano v. Inland
Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1281-1282; Lagatree v. Luce,
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Forward, Hamilton & Scripps (1999) 74 Cal.App.4th 1105, 1126-1127; Izzi v. Mesquite
Country Club (1986) 186 Cal.App.3d 1309, 1318; accord, Galen v. Redfin Corp. (2014)
___ Cal.App.4th ___ [2014 WL 3564056]; Lane v. Francis Capital Management LLC
(2014) 224 Cal.App.4th 676, 691-692.)
Barnum claims that in the circumstances of this case the failure to provide the
pertinent AAA rules and the rules governing Ryan’s internal dispute resolution process
does create surprise and oppression.
As earlier noted, the arbitration agreement provides that arbitration will be
conducted “under the AAA’s then existing national rules for the resolution of
employment disputes, as modified in any respect necessary to comply with the
requirements of California law for enforcement of arbitration.” The agreement also
provides that Barnum is required to “comply at all times with all Ryan policies, rules and
procedures as they may be established, stated and/or modified from time to time at
Ryan’s sole discretion.” As indicated, Barnum stated in his declaration in opposition to
the motion to compel arbitration that he was also never provided a written copy of “the
Ryan internal dispute resolution procedures” at any time during his employment; nor did
he recall “anyone from Ryan ever discussing the topic of arbitration with me.”
After he signed the agreement Barnum was at various times required to sign
documents acknowledging requirements different from those specified in the arbitration
agreement, which created confusion and exacerbated the failure to provide the applicable
AAA rules. On November 25, 2007, the day before he signed the employment agreement
containing the arbitration agreement, Barnum executed a five-page “employment
application” containing provisions that differed in certain particulars from those in the
employment agreement. For example, it required that arbitration be conducted in San
Mateo, rather than in San Francisco, and required pre-arbitration submission of any
dispute to Ryan’s “chief operating officer” rather than to a “Senior Vice President” of the
company. In 2010, Barnum was apparently provided an updated “Ryan Employee
Handbook” (Handbook) and acknowledged receipt in a written document that reiterated
the arbitration provisions contained in the employment agreement, but added a new
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provision stating that any policy revisions of the Handbook “will be issued in writing by
RYAN’s President and that no other Company official is authorized to change or alter
any provisions of the Handbook either orally or in writing.” Because the Handbook
Barnum acknowledged receiving is not itself a part of the record, it is unclear whether it
also modified the arbitration provision in any way.
The case Ryan rests upon most heavily is Peng, supra, 219 Cal.App.4th 1462,
which was recently decided by Division Five of this court. Distinguishing many of the
cases Barnum relies upon, Peng concludes that “the failure to attach the AAA rules,
standing alone, is insufficient grounds to support a finding of procedural
unconscionability.” (Id. at p. 1472.)
In our view, the facts of this case differ in material respects from those of Peng
and the cases it relies upon. (See Peng, supra, 219 Cal.App.4th at p. 1470, citing
Giuliano v. Inland Empire Personnel, Inc., supra, 149 Cal.App.4th at pp. 1281-1282;
Lagatree v. Luce, Forward, Hamilton & Scripps, supra, 74 Cal.App.4th at pp. 1126-
1127; Izzi v. Mesquite Country Club, supra, 186 Cal.App.3d at p. 1318.)
Barnum’s procedural unconscionability argument rests in some measure on the
fact that the arbitration provision at issue “pegs both the scope and procedure of the
arbitration to rules which might change” (Harper v. Ultimo, supra, 113 Cal.App.4th at p.
1407), but it rests additionally on the inability of even the most diligent employee to
know—either at the time they signed the agreement or thereafter—Ryan’s internal
dispute resolution rules and procedures. As previously noted, the arbitration agreement
requires that “[b]efore commencing any arbitration proceedings, any dispute . . . shall
first be submitted . . . [for] resolution under Ryan’s internal dispute resolution
procedures,” and further provides that the “Ryan policies, rules and procedures” relating
to this internal process “may be established, stated and/or modified from time to time at
Ryan’s sole discretion.” Therefore, unlike Peng, supra, 219 Cal.App.4th 1462, and the
cases it relies upon, we are not confronted with “the failure to attach the AAA rules,
standing alone.” (Id. at p. 1472, italics added.)
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The problem in this case is not just that presented in Harper v. Ultimo, supra, 113
Cal.App.4th 1402; i.e., that the applicable AAA rules might be substantially less
favorable than those existing at the time of the agreement to arbitrate, which would at the
very least necessitate an expensive preliminary legal battle. (Harper, at p. 1406.) The
AAA, an alternative dispute resolution service provider, presents itself and is generally
considered neutral; it could not survive in the marketplace in which it competes if it
suddenly imposed rules that fell more onerously on employees than employers. Ryan is
unconstrained by that marketplace, however, and its economic interests are very different
from those of the AAA. The prospect that Ryan may subsequently alter the internal
dispute resolution “policies, rules and procedures” existing at the time of the agreement
“from time to time” in its “sole discretion” is therefore far more problematical for
employees than the prospect that the AAA rules may adversely change. Moreover, the
applicable rules have been changing. As Barnum points out, the iterations of the
arbitration provisions variously set forth in the employment agreement, the employment
application and various employment Handbooks Barnum was periodically required to
acknowledge receipt of in writing were different from one another, and the changes were
not highlighted in any way to underscore the significance of the provisions.
In short, what we have in this case is not merely a contract of adhesion and the
failure of the employer to provide employees even the then existing AAA rules, which it
could easily have done, but also the unilateral ability of the employer to impose pre-
arbitration dispute resolution rules or conditions that even the most diligent employees
could not learn of or anticipate at the time they agreed to arbitrate.4 Under the sliding
scale set forth in Armendariz, supra, 24 Cal.App.4th at page 114, the potential for such
oppression and/or surprise inherent in the contract of adhesion before us is sufficient
4
It is appropriate to note that the order denying Ryan’s motion to compel did not
indicate that the “rules that would govern the arbitration” refer solely to AAA rules, and
also that the arbitration agreement imposes a pre-arbitration process that conforms to
“Ryan’s internal dispute resolution procedures.”
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evidence of procedural unconscionability to warrant inquiry into the issue of substantive
unconscionability.
Substantive Unconscionability
A. Mutuality
The arbitration agreement provides that all disputes related to “hiring, employment
or the termination of employment with Ryan (including without limitation any statutory
or common law claims against Ryan or any of its agents or employees)” must be resolved
through binding arbitration. Exempted from the arbitration requirement, however, are
“any claims for injunctive or other similar equitable relief.” The trial court found that the
exception for injunctive and other equitable relief was substantively unconscionable
because it “operates in favor of employers and goes far beyond merely acknowledging
the statutory availability of interim relief.”
Ryan argues that this carve-out provision for injunctive and other equitable relief
is not substantively unconscionable because it is mutual and does not exclude only
certain claims more likely to be pursued by an employer. Barnum counters that this is
just the type of relief most likely to be sought by the stronger party, i.e., the employer,
which renders the provision substantively unconscionable.
The issue of mutuality of arbitration provisions was addressed in Armendariz,
supra, 24 Cal.4th at pages 115-116, in which the plaintiff argued that an arbitration
agreement that required employees to arbitrate their wrongful termination claims against
their employer, but did not require the employer to arbitrate any claims it might have
against its employees, was substantively unconscionable. Our Supreme Court agreed
with the plaintiff, explaining that a “ ‘modicum of bilaterality’ ” is required in arbitration
agreements because, “[g]iven the disadvantages that may exist for plaintiffs arbitrating
disputes, it is unfairly one-sided for an employer with superior bargaining power to
impose arbitration on the employee as plaintiff but not to accept such limitations when it
seeks to prosecute a claim against the employee, without at least some reasonable
justification for such one-sidedness . . . . Without reasonable justification for this lack of
mutuality, arbitration appears less as a forum for neutral dispute resolution and more as a
13
means of maximizing employer advantage. Arbitration was not intended for this
purpose.” (Armendariz, at pp. 116, 117-118, quoting Stirlen v. Supercuts, Inc. (1997) 51
Cal.App.4th 1519, 1541 (Stirlen).)
The parties discuss a number of cases, including, for example, Fitz, supra, 118
Cal.App.4th at pages 724-725, in which the employer claimed that its arbitration
agreement was “ ‘completely bilateral’ ” because it did not “carve out particular types of
claims where employees are required to arbitrate, but the [employer] is permitted to seek
redress for the same claim in a judicial forum,” and because the agreement permitted both
employees and the employer to “submit disputes regarding noncompete agreements and
intellectual property rights to the courts.” The appellate court rejected the employer’s
argument and held that the arbitration agreement was “unfairly one-sided because it
compels arbitration of the claims more likely to be brought by [the employee], the weaker
party, but exempts from arbitration the types of claims that are more likely to be brought
by [the employer], the stronger party.” (Id. at p. 725.)
In Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 175-176 (Mercuro), the
appellate court found substantively unconscionable an arbitration agreement that
specifically covered breach of contracts claims, tort claims, discrimination claims, and
claims for violation of, inter alia, any federal or state statute, but specifically excluded
“ ‘claims for injunctive and/or other equitable relief for intellectual property violations,
unfair competition and/or the use and/or unauthorized disclosure of trade secrets or
confidential information . . . .’ ” The agreement was one-sided in that it compelled
arbitration of the claims employees were most likely to bring against their employer and
exempted from arbitration the claims the employer was most likely to bring against its
employees. (Id. at p. 176; see also Martinez, supra, 118 Cal.App.4th at p. 115
[substantive unconscionability found where arbitration agreement specifically exempted
from its terms any claims by employer “for injunctive and/or other equitable relief for
unfair competition and/or the use and/or unauthorized disclosure of trade secrets or
confidential information”]; O’Hare v. Municipal Resource Consultants (2003) 107
Cal.App.4th 267, 274 (O’Hare) [arbitration agreement was substantively unconscionable
14
where it required employee to arbitrate any work-related claim while explicitly reserving
employer’s right to file a lawsuit seeking injunctive and equitable relief based on
employee’s alleged breach of confidentiality provisions]; Stirlen, supra, 51 Cal.App.4th
at pp. 1528, 1537 [employer’s reservation, in its arbitration agreement, of “unilateral right
to litigate rather than arbitrate” equitable claims for patent infringement and improper use
of confidential information could not be justified by need for provisional remedies, given
that section 1281.8, subdivision (b), addressed such concerns].)
In Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138, 1147-1148,
Division Three of this District found that an arbitration agreement that exempted from the
arbitration requirement “claims typically brought by employers—namely, those seeking
declaratory and preliminary injunctive relief to protect [the company’s] proprietary
information and noncompetition/nonsolicitation provisions—while restricting to
arbitration any and all claims plaintiffs might bring,” supported the trial court’s finding of
substantive unconscionability.
In Trivedi, supra, 189 Cal.App.4th at pages 396, 397, Division Four of this
District found substantive unconscionability in a provision in an arbitration agreement,
which provided that “ ‘provisional injunctive relief may, but need not, be sought in a
court of law while arbitration proceedings are pending, and any provisional injunctive
relief granted by such court shall remain effective until the matter is finally determined
by the Arbitrator.’ ” (Id. at p. 392.) The court noted that this provisional equitable relief
discussed in the arbitration agreement was no broader than that already provided for in
subdivision (b) of section 1281.8, which states that a party to an arbitration agreement
may file “in any proper court, an application for a provisional remedy in connection with
an arbitrable controversy, but only upon the ground that the award to which the applicant
may be entitled may be rendered ineffectual without provisional relief.” (§ 1281.8, subd.
(b); see Trivedi, at p. 396.) But the court concluded that the provision in question
15
nevertheless favored the employer because it was more likely that the employer would
seek injunctive relief. (Id. at p. 397.)5
Here, we conclude that, although the carve-out for injunctive and similar equitable
relief is nominally mutual, the trial court correctly found that it in fact favors claims the
employer is likely to bring and is therefore substantively unconscionable. (See
Armendariz, supra, 24 Cal.4th at p. 120.) The provision in the agreement requiring that
all claims related to Barnum’s “hiring, employment or the termination of employment
with Ryan (including without limitation any statutory or common law claims against
Ryan or any of its agents or employees)” are subject to binding arbitration, refers to
claims that will primarily be pursued by Barnum. (See, e.g., O’Hare, supra, 107
Cal.App.4th at p. 274; Mercuro, supra, 96 Cal.App.4th at pp. 175-176.) Moreover, any
injunctive or other equitable relief pertaining to those claims that Barnum might seek in
the trial court would most likely be the type of “provisional” equitable relief authorized
by section 1281.8, subdivision (b), in all arbitration cases. (See Stirlen, supra, 51
Cal.App.4th at pp. 1528, 1537.) As the trial court noted, the carve-out in this case “goes
far beyond merely acknowledging the statutory availability of interim relief” pursuant to
section 1281.8 in that it permits any and all claims for injunctive or similar equitable
relief to be litigated in court.
While, as Ryan points out, there are statutes that permit an employee to seek more
permanent equitable relief (see, e.g., 29 U.S.C. §§ 626(c), 633a(c) [age discrimination];
42 U.S.C. § 2000e-5(g)(1) [employment discrimination]), it is improbable that individual
employees would have the incentive or wherewithal to bring a separate action in the trial
court under such a statute solely for equitable relief, without the possibility of also
pursuing a claim for damages. An employer, on the other hand, is plainly more likely
5
Our Supreme Court has granted review in two cases in which the Second
District Court of Appeal disagreed with the mutuality analysis in Trivedi, given the
availability of the provisional remedies in section 1281.8, subdivision (b), to both parties.
(Leos v. Darden Restaurants, Inc. (2013) 217 Cal.App.4th 473, review granted
September 11, 2013, S212511; Baltazar v. Forever 21, Inc. (2012) 212 Cal.App.4th 221,
review granted March 20, 2013, S208345.)
16
than an employee to pursue claims for permanent injunctive or other equitable relief,
whether or not the types of claims likely to be so-litigated are explicitly spelled out in the
arbitration agreement. (See, e.g., Martinez, supra, 118 Cal.App.4th at p. 115; Mercuro,
supra, 96 Cal.App.4th at pp. 175-176; compare Trivedi, supra, 189 Cal.App.4th at pp.
396-397 [finding arbitration agreement substantively unconscionable because it permitted
parties to litigate claims for provisional injunctive relief].)6
In short, the provision in this case requiring that all claims related to Barnum’s
hiring, employment, or termination—“including without limitation any statutory or
common law claims against Ryan”—be resolved through binding arbitration, coupled
with the inclusion of a carve-out provision solely for claims related to injunctive or other
equitable relief, demonstrates a bias toward arbitration of claims Barnum is more likely to
bring and litigation of claims more likely to be pursued by Ryan. We therefore conclude
that, because the carve-out provision in question lacks a “ ‘modicum of bilaterality’ ” or
any business justification for its inclusion, it is substantively unconscionable and cannot
be enforced. (Armendariz, supra, 24 Cal.4th at pp. 117, 118; Stirlen, supra, 51
Cal.App.4th at p. 1541, 1542.)
B. Pre-Arbitration Internal Dispute Resolution Procedures
The parties also disagree about whether other language in the arbitration
agreement contributes to its substantive unconscionability. That language provides that,
“[b]efore commencing any arbitration proceedings, any dispute between me and Ryan or
any of its agents or employees shall first be submitted, in writing, to one of Ryan’s Senior
Vice Presidents for a good faith attempt at resolution under Ryan’s internal dispute
resolution procedures.”
6
Although not raised by the parties and therefore not a basis for our finding of
non-mutuality, we observe that other language in the arbitration agreement further adds
to the appearance of one-sidedness by providing that “any and all disputes, claims or
controversies of any kind arising out of or related in any way to hiring, employment or
the termination of employment with Ryan (including without limitation any statutory or
common law claims against Ryan or any of its agents or employees) shall be fully and
finally resolved through binding arbitration . . . .” (Italics added.)
17
In Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1282-1283
(Nyulassy), the appellate court addressed this same question in similar circumstances:
“The employment agreement—in addition to compelling plaintiff to arbitrate all of his
disputes with defendant—requires him to submit to discussions with his supervisors in
advance of, and as a condition precedent to, having his dispute resolved through binding
arbitration. While on its face, this provision may present a laudable mechanism for
resolving employment disputes informally, it connotes a less benign goal. Given the
unilateral nature of the arbitration agreement, requiring plaintiff to submit to an
employer-controlled dispute resolution mechanism (i.e., one without a neutral mediator)
suggests that defendant would receive a ‘free peek’ at plaintiff’s case, thereby obtaining
an advantage if and when plaintiff were to later demand arbitration.”7
Similarly, in Pokorny v. Quixtar, Inc. (9th Cir. 2010) 601 F.3d 987, 999
(Pokorny), the Ninth Circuit Court of Appeal, applying California law, found, with
respect to a non-mutual arbitration agreement, the requirement that a plaintiff’s potential
claims be submitted to an employer-controlled dispute resolution process before
proceeding to arbitration “amount[ed] to little more than an exploratory evidentiary
hearing” for the defendant, which clearly gave it “an unfair advantage” if the plaintiff
subsequently demanded arbitration.
As in Nyulassy and Pokorny, and as discussed, ante, the arbitration provision here
lacks mutuality. We agree with those courts’ analyses and likewise conclude that, taken
together with the carve-out for injunctive and other equitable relief, the pre-arbitration
dispute resolution requirement provides Ryan with an unfair advantage and is therefore
7
In addition to finding that the arbitration agreement was unfair because it was
both unilateral and required the employee to submit to the employer’s internal dispute
resolution process, the court in Nyulassy discussed a third factor that supported its finding
of substantive unconscionability: the time limitations placed on the plaintiff’s assertion
of any claims against the defendant. (Nyulassy, supra, 120 Cal.App.4th at p. 1283.)
18
substantively unconscionable. (See Nyulassy, supra, 120 Cal.App.4th at pp. 1283-1284,
Pokorny, supra, 601 F.3d at p. 999.)8
Severance
The trial court declined to sever the unconscionable carve-out provision exempting
injunctive and other equitable relief from the arbitration requirement because it found that
this term was “integral to the agreement the parties reached concerning the scope of what
would be arbitrated, and its severance would impose on the parties obligations to which
they did not agree. This is true even though injunctive relief is not at issue in this case
because an employer cannot impose unconscionable terms only to back away once
challenged.”
Ryan contends the court should have severed the offending provision instead of
refusing to enforce the entire agreement.
We review the trial court’s refusal to sever the unconscionable provisions for an
abuse of discretion. (Armendariz, supra, 24 Cal.4th at p. 122, Ajamian v. CantorCO2e,
8
Cases cited by Ryan for the proposition that inclusion of a pre-arbitration
dispute resolution procedure is not substantively unconscionable are distinguishable. In
Serpa, supra, 215 Cal.App.4th at pages 704-705, 710, the appellate court found that the
obligation to arbitrate was mutual and distinguished the agreement there from “the
provisions in Nyulassy, which the court found unacceptable primarily because it was yet
another employer-based mechanism in an agreement permeated by unilateral provisions
favoring the employer.” Moreover, to the extent the language in question went beyond
merely requiring an “informal notice of grievance,” “a requirement that internal
grievance procedures be exhausted before proceeding to arbitration is both reasonable
and laudable in an agreement containing a mutual obligation to arbitrate.” (Serpa, at p.
710; accord, Quevedo v. Macy’s, Inc. (C.D.Cal. 2011) 798 F.Supp.2d 1122, 1140 [noting
that Nyulassy did not indicate that a required preliminary internal dispute resolution
procedure, without more, rendered an arbitration agreement unconscionable]; cf. Sanchez
v. CarMax Auto Superstores California, LLC (2014) 224 Cal.App.4th 398, 406
[arbitration provision requiring employee, upon initiating arbitration, to complete two-
page form that was not part of a grievance procedure, stating basis of claim and listing
names of witnesses and employee’s attorney, was not unconscionable].) Here, unlike in
Serpa, the internal dispute resolution process requires more than a mere notice of
grievance and, moreover, the obligation to arbitrate is not mutual.
19
L.P. (2012) 203 Cal.App.4th 771, 802 (Ajamian); see also Civ. Code, § 1670.5, subd. (a)
[recognizing judicial discretion to sever unconscionable provisions of a contract].)
“In deciding whether to sever terms rather than to preclude enforcement of the
provision altogether, the overarching inquiry is whether the interests of justice would be
furthered by severance; the strong preference is to sever unless the agreement is
“permeated” by unconscionability. [Citations.]
“ ‘An employment arbitration agreement can be considered permeated by
unconscionability if it “contains more than one unlawful provision. . . . Such multiple
defects indicate a systematic effort to impose arbitration on an employee not simply as an
alternative to litigation, but as an inferior forum that works to the employer’s advantage.”
[Citation.]’ [Citations.]” (Ajamian, supra, 203 Cal.App.4th at pp. 802-803.)
In the present case, we have found that the arbitration agreement is procedurally
unconscionable and also includes two provisions that are substantively unconscionable.
Given the presence of these unconscionable provisions, we conclude the trial court did
not abuse its discretion in determining that the agreement is permeated with
unconscionability and cannot be enforced. (See Armendariz, supra, 24 Cal.4th at p. 124
[where arbitration agreement contained more than one unlawful provision, “[s]uch
multiple defects indicate a systematic effort to impose arbitration on an employee not
simply as an alternative to litigation, but as an inferior forum that works to the
employer’s advantage”]; accord, Ajamian, supra, 203 Cal.App.4th at pp. 802-803.)9
9
We note that the trial court did not address whether the provision requiring
submission of claims to an internal dispute resolution process was substantively
unconscionable. The existence of that second unconscionable provision only adds to the
reasonableness of the court’s conclusion that the agreement could not be enforced. (See
Carnes v. Superior Court (2005) 126 Cal.App.4th 688, 694 [appellate court examines
record independently to determine whether trial court’s decision is correct, without
deference to trial court’s ruling or reasoning].)
20
DISPOSITION
The order is affirmed.10
_________________________
Kline, P.J.
We concur:
_________________________
Richman, J.
_________________________
Brick, J.*
* Judge of the Alameda County Superior Court, assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.
10
In light of our conclusion that the trial court properly denied Ryan’s motion to
compel arbitration based on the combination of procedural and substantive
unconscionability already discussed ante, we need not address the parties’ arguments
regarding additional possible bases for finding the arbitration agreement unconscionable.
Likewise, we need not address Barnum’s claim that Ryan forfeited its right to arbitration
by pursuing discovery in the trial court while the matter was stayed pending appeal.
For that reason, we shall deny each party’s motion to augment the record to
include evidence related to this latter issue.
21