Tamanaha v. DroneBase CA2/3

Filed 2/10/22 Tamanaha v. DroneBase CA2/3
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for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
SECOND APPELLATE DISTRICT
DIVISION THREE
ELI TAMANAHA, B307866
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC705004)
v.
DRONEBASE, INC., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Lia Martin, Judge. Affirmed.
Miller Barondess, Christopher D. Beatty and Minh-Van T.
Do for Plaintiff and Appellant.
Prospera Law, Victor T. Fu and Shane W. Tseng for
Defendants and Respondents.
‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗‗
Plaintiff/appellant Eli Tamanaha (plaintiff) appeals from a
judgment confirming an arbitration award in favor of
defendants/respondents Daniel Burton (Burton) and DroneBase
Inc. (DroneBase; collectively, defendants). Plaintiff contends the
trial court erred in entering judgment on the arbitration award
because his claims were not covered by the parties’ arbitration
agreement, the arbitration agreement was substantively and
procedurally unconscionable, and the arbitrator exceeded his
authority by excluding plaintiff from portions of the arbitration
hearing. We conclude that while the arbitration agreement was
substantively unconscionable, it was not procedurally
unconscionable, and its broad language encompassed plaintiff’s
claims. We further conclude that plaintiff’s exclusion from a
small portion of the hearing, even if erroneous, was not
prejudicial. We therefore will affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
A. Backgound
Plaintiff is an electrical engineer with 15 years of
experience working as a senior software engineer at large
technology companies such as Amazon, Netflix, and Microsoft.
Plaintiff left Microsoft in 2014, and thereafter received offers
from several large technology companies, including Google and
Roku. In August 2014,1 a mutual friend introduced plaintiff to
Burton, who had recently founded DroneBase, a drone services
company. Plaintiff and Burton thereafter discussed the
possibility of plaintiff joining DroneBase to design and build its
technical systems, including its website, server, and apps.
1 All dates are in 2014 unless otherwise indicated.
2
In a series of meetings and emails in September and
October, plaintiff and Burton discussed plaintiff’s potential
compensation, including his salary and equity in the company.
On September 17, Burton proposed meeting in-person to “go over
the details” so plaintiff could “walk away confident that you can
indeed support your family.” Plaintiff and Burton apparently
met a few days later, after which Burton emailed plaintiff that
there was “[n]o rush on the information we discussed today, and I
look forward to discussing that and other steps forward next
Monday.” Several days later, plaintiff emailed Burton that he
“like[d] the direction we’re headed in” and was “about to reject
Google and Roku’s offers that are currently on the table.”
Plaintiff asked what Burton’s salary expectations were, noting
that he would need to earn at least $200,000 a year to meet his
current expenses, but was “willing to live off of savings for a
while if necessary.” The following day, Burton responded that he
was open to a “detailed discussion around finances, investors,
salary and equity” so plaintiff could feel “happy and confident in
the path forward” before turning down other job offers.
After a September 29 meeting, Burton emailed that he was
glad to have had “an honest, if a bit tough, conversation today”
and set out his thoughts regarding “the salary versus equity
split.” Burton followed up on October 2 that “we need to find the
balance of equity versus salary for you,” and proposed “either
$95k salary with 40% founder’s equity or $125k salary with 30%
founder’s equity.” Burton asked plaintiff to “[l]et me know how
those numbers sound, and if those equity levels are adequate for
you to feel like a true partner and co-founder (which you will be).”
Burton also set out “what the equity upside for DroneBase might
look like” under a variety of different scenarios.
3
Plaintiff responded by email that “[o]f the two options
outlined, I prefer the 95k salary with 40% founder’s equity,” and
stated that he was “ready to sign an official agreement to solidify
everything we’ve discussed.” Burton responded that he, too, was
ready “to make a formal commitment to our partnership and to
DroneBase.” He proposed to contact his law firm to “have them
start all official paperwork (including your equity shares, etc.).
At the same time, I will ask them to work up a simple one-pager
in writing (that we can both sign) that spells out what we
discussed so you can be confident in the terms of our partnership.
If possible, I would also like to meet briefly on Friday morning to
shake your hand as my word is as important as formal paperwork
to me.” Plaintiff responded that “[t]he process you outlined
sounds great,” and he agreed “to meet on Friday morning to sign
documents and shake hands.”
On October 8, Burton emailed plaintiff a formal offer letter
(offer letter), to which a “Proprietary Information Agreement”
(PIA) was attached. Burton’s email said as follows: “This
document reflects our previous discussions and I would be more
than happy to walk you through the entire document if helpful.
Please read through it and let me know if you have any
questions. [¶] . . . [¶] On the first page or two, you will find the
salary level, equity issuance (that reflects 40% of Founder’s
Equity), and health care coverage as we discussed. For your
information, only you and I will have Class E shares (which have
special rights)—hired employees will be issued Class A shares.
[¶] The rest of the document outlines some IP and non-disclosure
issues drafted by our law firm. Again, please let me know of any
issues. [¶] If this document works for you, please sign and send
back to me, and we can consider it executed. If you have any
4
questions whatsoever, I am happy to get on the phone . . . or
answer via email. If you would prefer to review in person Friday
morning, that works too. [¶] Regardless, I hope that we can
shake hands Friday morning and start this partnership
together.”
Plaintiff responded the following day, October 9, as follows:
“I know you’ll be traveling today, but do you have to time to talk
briefly on the phone? I have a few questions about the equity
classes for DroneBase and my start date.” Burton responded:
“Of course. . . . I am happy to clarify any questions you might
have and can reach out to the law firm if we have any remaining
questions after our call.”
Later on October 9, plaintiff emailed Burton, “I am so
happy to accept the offer to work at DroneBase as your partner.
Attached is the signed offer letter. Let’s conquer the world!”
B. The Offer Letter and PIA
1. Offer Letter
The offer letter provided that plaintiff would join
DroneBase as “Co-Founder and Chief Technology Officer” and
would “be responsible for such duties and responsibilities
consistent with your title of Co-Founder and Chief Technology
Officer, and any other areas of responsibility as determined or
assigned to you by the Company from time to time.” Plaintiff
would receive compensation in the form of a base salary of
$95,000 per year and benefits, plus equity in the form of
4,382,895 shares of the company’s Class E common stock.
Twenty-five percent of plaintiff’s stock would vest on the first
anniversary of plaintiff’s start date, and the remaining 75 percent
would vest in equal monthly installments, such that it would be
fully vested by the fourth anniversary of plaintiff’s start date.
5
The offer letter provided that plaintiff would be required to
execute the attached PIA “[a]s a condition of your employment
with the Company.” It also said that plaintiff’s employment with
the company was at-will, and that the offer letter and PIA
reflected “the entire agreement regarding the terms and
conditions of [plaintiff’s] employment. Finally, the offer letter
contained a “Disputes” provision, which provided as follows:
“To ensure rapid and economical resolution of any disputes
which may arise under this letter agreement, the Company and
you agree that any and all disputes or controversies of any nature
whatsoever, arising from or regarding the interpretation,
performance, enforcement, or breach of this letter agreement
shall be resolved by confidential, final and binding arbitration
(rather than trial by jury or court or resolution in some other
forum) to the fullest extent permitted by law. Any arbitration
proceeding pursuant to this Agreement shall be conducted by the
American Arbitration Association (‘AAA’) in San Diego County,
California under the then existing employment-related AAA
arbitration rules. You acknowledge that by agreeing to this
arbitration procedure, both you and the Company waive
the right to resolve any such dispute through a trial by
jury or judge or by administrative proceeding. The
arbitrator shall: (a) have the authority to compel adequate
discovery for the resolution of the dispute and to award such
relief as would otherwise be permitted by law; and (b) issue a
written arbitration decision including the arbitrator’s essential
findings and conclusions and a statement of the award. The
arbitrator shall be authorized to award any or all remedies that
you or the Company would be entitled to seek in a court of law.
The Company shall pay all AAA arbitration fees in excess of
6
those which would be required if the dispute were decided in a
court of law. Nothing in this Agreement is intended to prevent
either you or the Company from obtaining injunctive relief in
court to prevent irreparable harm pending the conclusion of any
such arbitration. Notwithstanding the foregoing, you and the
Company each have the right to resolve any issue or dispute
arising under the Proprietary Information Agreement by court
action instead of mediation or arbitration. If for any reason all or
part of this arbitration provision is held to be invalid, illegal, or
unenforceable in any respect under any applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other portion of this arbitration provision or any
other jurisdiction, but this provision will be reformed, construed,
and enforced in such jurisdiction as if such invalid, illegal or
unenforceable part or parts of this provision had never been
contained herein, consistent with the general intent of the parties
insofar as possible. This letter agreement shall be construed and
interpreted in accordance with the laws of the State of
California.”
“I have read this paragraph . . . and irrevocably
agree to arbitrate any dispute as identified above. (Your
initials.)”
Plaintiff placed his initials after the above paragraph.
2. Proprietary Information Agreement
The Proprietary Information Agreement attached to the
offer letter stated that “[i]n consideration of my employment or
continued employment by DroneBase, Inc. and its affiliates
and/or subsidiaries (the ‘Company’), and the compensation now
and hereafter paid to me,” plaintiff agreed to a variety of terms,
including to hold the company’s propriety information in strictest
7
confidence, to assign to DroneBase the rights to any inventions
made or conceived by him during the period of his employment,
and to assist DroneBase in obtaining proprietary rights to
company inventions. Plaintiff also agreed not to solicit any
company employee to leave the company, and to return to the
company all drawings, notes, customer lists, devices, and other
materials when he left the company’s employ.
Section 7 of the PIA, entitled “Legal and Equitable
Remedies,” stated as follows: “In order to prevent irrevocable
harm to myself or the Company from any breach of this
Agreement, the Company and I shall both have the right to
enforce this Agreement and any of its provisions by injunction,
specific performance or other equitable relief, without bond and
without prejudice to any other rights and remedies that the
parties may have for a breach of this Agreement.” Additionally,
section 10.1, “Governing Law; Consent to Personal Jurisdiction,”
stated as follows: “This Agreement will be governed by and
construed according to the laws of the State of California, as such
laws are applied to agreements entered into and to be performed
entirely within California between California residents. Subject
to the Arbitration Agreement, if any, between the parties, the
parties hereby expressly consent to the personal jurisdiction of
the state and federal courts located in San Diego, California for
any action filed there pursuant to Section 7 herein.”
C. Plaintiff’s Termination; Present Action
DroneBase terminated plaintiff’s employment in
April 2018. Thereafter, plaintiff filed a complaint against
DroneBase and Burton for actual and constructive fraud,
concealment, breach of fiduciary duty, negligent
misrepresentation, promissory estoppel, and breach of
8
partnership agreement. In brief, the complaint alleged that
before Burton began negotiating with plaintiff in 2014, he had
already committed a substantial portion of the company’s equity
to investors through “Simple Agreements for Future Equity,” or
SAFEs. Burton concealed the SAFEs from plaintiff and
“continued to mislead [plaintiff] into thinking he had received the
40% equity in DroneBase he had been promised.” Plaintiff
learned of the SAFEs for the first time in 2016, when he
discovered that he owned only about 13 percent of DroneBase.
Burton promised to restore plaintiff’s equity, but he never did so,
and thus plaintiff currently held only about seven percent of the
company’s equity. Plaintiff alleged that DroneBase was worth
about $200 million, and thus that he had been damaged in excess
of $65 million.
D. Defendants’ Motion to Compel Arbitration
Defendants filed a motion to compel arbitration of
plaintiff’s claim. Defendants urged that all of plaintiff’s claims
were subject to the arbitration provision of the offer letter and,
further, that the arbitration provisions satisfied the requirement
of “ ‘essential fairness.’ ”
Plaintiff opposed the motion to compel. He urged, first,
that his claims were not within the scope of the arbitration
provision because “[n]owhere does [plaintiff] allege a breach of
the Offer Letter or make any allegations about his termination
from DroneBase . . . . Instead, [plaintiff’s] causes of action arise
from the partnership he entered into with Burton, which was
memorialized in a handshake deal.” Next, plaintiff contended the
arbitration agreement was substantively unconscionable because
it excluded virtually any claim DroneBase might bring against
plaintiff; defendants did not initial the arbitration provisions; the
9
selected forum (San Diego) had no relationship to the parties or
the dispute; the arbitration provision was procured by fraud; and
the arbitration rules were not attached to the offer letter.
Finally, plaintiff urged that the agreement was one of adhesion
and thus was procedurally unconscionable.
In a supporting declaration, plaintiff said Burton had not
disclosed that the offer letter contained an arbitration provision,
instead representing that it contained the terms the parties had
previously discussed. Plaintiff, who is not a lawyer, “[was] not
readily familiar with legal terminology or what rights [he] would
be giving up by signing the agreement.” He therefore had a
further telephone conversation with Burton the next day, during
which he said he was considering retaining legal counsel. Burton
“represented to [plaintiff] that any contracts that [he] signed
were a mere formality, and that the emails [they] exchanged and
oral agreements [they] made governed the terms of [their]
partnership.” Burton also “discouraged [plaintiff] from retaining
legal counsel . . . and reemphasized that he was a man of
integrity and [plaintiff] could trust him.” Accordingly, “[i]n
reliance on [Burton’s] representations,” plaintiff signed the offer
letter.
The trial court granted defendants’ petition to compel
arbitration. The court said it was not persuaded plaintiff had not
read the offer letter and was not aware that it contained an
arbitration provision; alternatively, even if plaintiff failed to read
the offer letter before signing it, that would not be a ground to
avoid arbitration. Further, the court found the dispute was
within the scope of the arbitration provision. The court noted
that the offer letter provided that plaintiff would have shares in
the company, would be a company co-founder, and would hold the
10
position of Chief Technology Officer. Because “the gravamen of
the complaint is plaintiff’s position in the company, whether he is
a partner, and the share of equity to which he is entitled,” the
complaint thus arose under the offer letter and was within the
scope of the arbitration provision.
The court also found the arbitration provision was not
procedurally or substantively unconscionable. The court found
the provision was not procedurally unconscionable because
plaintiff negotiated the terms of his employment offer and could
readily have accessed the AAA arbitration rules, and it was not
substantively unconscionable because both parties potentially
could have claims under the PIA that would not be subject to
arbitration. The court explained: “Because the issues in [the
PIA] concern a large part of plaintiff’s duties at the company, it is
not clear that he would never have a claim under that contract.
It is also not clear there was an intent to exclude employer claims
as much as an intent to exclude claims under the [PIA].” Finally,
the court found that requiring the arbitration to take place in
San Diego raised unconscionability concerns, but that provision
could be severed from the agreement.
E. Arbitration and Award
The case was tried to an arbitrator over five days in
July and August 2019. Among other things, plaintiff contended
that Burton intentionally or negligently misled him about the
real value of the 40 percent equity plaintiff was promised for
joining DroneBase. Plaintiff asserted that Burton never disclosed
to him that DroneBase had already entered into SAFEs, which
had the effect of diluting plaintiff’s 40 percent interest in
DroneBase.
11
On September 23, 2019, the arbitrator issued a Partial
Final Award, ruling against plaintiff on each of his causes of
action. In brief, the arbitrator concluded that while both plaintiff
and Burton made assumptions that led to mutual
misunderstandings, the evidence failed to demonstrate that
Burton made any statements to plaintiff that were intentionally
false or likely to deceive. He explained that a SAFE “does not
create an ownership interest in the conventional sense, and it is
not a debt subject to repayment or with specific maturity dates
upon which repayment is due.” Instead, an investor “receives the
right to purchase stock in a future equity round (when and if one
occurs) subject to certain parameters set in advance in the
SAFE.” The relevant question, therefore, was whether plaintiff
“understood or should have understood that [his founder’s stock]
was subject to dilution without further infusion of capital because
of the previous utilization of SAFEs.” The arbitrator concluded
that although Burton “did not expressly disclose the existence of
the SAFEs by using that term or explaining precisely what a
SAFE does,” there was no evidence that plaintiff “was precluded
in any way from information about the company or that access to
financial information was expressly withheld from him in his due
diligence.” Further, the arbitrator concluded, “there is no
persuasive basis to conclude Burton intended to mislead,
concealed information, precluded access to information or
otherwise sought to induce [plaintiff] to join DroneBase through
artifice.” The arbitrator thus concluded that plaintiff should take
nothing by way of his demand.
On November 7, 2019, the arbitrator issued a final award
that awarded DroneBase costs of $63,156 as the prevailing party,
and provided that plaintiff would take nothing on his claims.
12
F. Petitions to Confirm and Vacate Arbitration Award
Defendants filed a petition to confirm the arbitration
award, and plaintiff filed a petition to vacate. As relevant here,
plaintiff contended the award should be vacated because (1) the
arbitrator exceeded his authority by excluding plaintiff from
portions of the arbitration proceedings; (2) the arbitration
provision was substantively unconscionable because it required
arbitration in San Diego and excluded claims arising under the
PIA, which are claims that only defendants would be likely to
bring; (3) the arbitration provision was procedurally
unconscionable because it was a contract of adhesion, Burton
misled plaintiff about the contents of the offer letter, and plaintiff
was not provided with a copy of the AAA rules; and (4) plaintiff’s
claims fell outside the scope of the arbitration clause.
The trial court denied the petition to vacate and granted
the petition to confirm. The court declined to revisit the order
compelling arbitration, saying that “is a matter for an appellate
court.” The court further concluded that the arbitrator did not
exceed his powers by excluding plaintiff from portions of the
arbitration hearing. The court noted that plaintiff was excluded
only when his attorney questioned Burton about “Attorneys Eyes
Only” documents, and thus the exclusion was consistent with the
parties’ stipulated protective order, which gave the arbitrator
authority to determine the extent of the disclosure of such
materials at the hearing.
The court entered judgment confirming the arbitration
award on July 15, 2020. Plaintiff timely appealed.
DISCUSSION
On appeal, plaintiff contends: (1) the arbitration agreement
is substantively and procedurally unconscionable; (2) plaintiff’s
13
claims are outside the scope of the arbitration agreement; and
(3) the arbitrator exceeded his authority by excluding plaintiff
from portions of the arbitration proceeding. We consider these
issues below.
I.
The Arbitration Agreement Is Not Unconscionable
Plaintiff contends the trial court erred by ordering the
dispute to arbitration because the arbitration agreement is both
substantively and procedurally unconscionable, and the
unconscionable provisions cannot be severed. For the reasons
that follow, we conclude plaintiff’s contention lacks merit.
We begin by reviewing general principles of
unconscionability. “ ‘One common formulation of
unconscionability is that it refers to “ ‘an absence of meaningful
choice on the part of one of the parties together with contract
terms which are unreasonably favorable to the other party.’ ”
[Citation.] As that formulation implicitly recognizes, the doctrine
of unconscionability has both a procedural and a substantive
element.’ ” (Sonic–Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th
1109, 1133.)
“ ‘ “The prevailing view is that [procedural and substantive
unconscionability] must both be present in order for a court to
exercise its discretion to refuse to enforce a contract or clause
under the doctrine of unconscionability.” [Citation.] But they
need not 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.’ (Armendariz v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83,
14
114 (Armendariz).)” (Baltazar v. Forever 21, Inc. (2016)
62 Cal.4th 1237, 1243–1244 (Baltazar).)
On appeal, unconscionability findings are reviewed de novo
if they are based on declarations that raise no meaningful factual
disputes. If an unconscionability determination is based on the
trial court’s resolution of conflicts in the evidence, we consider the
evidence in the light most favorable to the court’s determination
and review those aspects of the determination for substantial
evidence. (Samaniego v. Empire Today, LLC (2012)
205 Cal.App.4th 1138, 1144.)
A. Substantive Unconscionability
Plaintiff contends the arbitration agreement is
substantively unconscionable because it requires him to arbitrate
his most likely claims against defendants, but allows defendants
to litigate their most likely claims against him. We agree.
“Substantive unconscionability focuses on overly harsh or
one-sided results. (See Armendariz, supra, 24 Cal.4th at p. 114.)
‘In assessing substantive unconscionability, the paramount
consideration is mutuality.’ [Citation.] This does not mean that
parties may not choose to exclude particular types of claims from
the terms of arbitration. However, ‘an arbitration agreement
imposed in an adhesive context lacks basic fairness and
mutuality if it requires one contracting party, but not the other,
to arbitrate all claims arising out of the same transaction or
occurrence or series of transactions or occurrences.’ (Armendariz,
supra, 24 Cal.4th at p. 120.)” (Fitz v. NCR Corp. (2004)
118 Cal.App.4th 702, 723.)
In Fitz v. NCR Corp., supra, 118 Cal.App.4th 702 (Fitz), the
court considered the enforceability of an arbitration agreement
that required arbitration of most disputes between an employer
15
and employee, but exempted “ ‘disputes over confidentiality/non-
compete agreements or intellectual property rights.’ ” (Id. at
p. 709.) The court concluded that this provision was
substantively unconscionable because “it compels arbitration of
the claims more likely to be brought by Fitz, the weaker party,
but exempts from arbitration the types of claims that are more
likely to be brought by NCR, the stronger party.” (Id. at p. 725.)
It explained that the mandatory arbitration provision “ ‘can only
realistically be seen as applying primarily if not exclusively to
claims arising out of the termination of employment, which are
virtually certain to be filed against, not by, [the employer].’ ”
(Ibid.) In contrast, “[a] substantial portion of the claims NCR is
most likely to initiate against employees, ‘such as claims that an
employee violated a non-competition agreement or divulged
confidential information—need not be arbitrated.’ ” (Ibid.) Thus,
although the arbitration exclusion was facially bilateral, it was
unfairly one-sided in practice. (Ibid.)
The court similarly concluded in Davis v. Kozak (2020)
53 Cal.App.5th 897, 903 (Davis). There, an arbitration
agreement required an employee to arbitrate “ ‘[a]ny and all
disputes which involve or relate in any way to [his] employment
(or termination of employment) with Red Bull, except for
obligations under the Employee Confidentiality Agreement with
Red Bull.’ ” (Italics added.) The court concluded the agreement
was substantively unconscionable because it required the
employee to arbitrate the claims he was most likely to bring
against the employer, but effectively exempted from arbitration
the types of claims Red Bull was most likely to bring against an
employee. (Id. at p. 916.) The court explained that the
confidentiality agreement required employees to maintain the
16
confidentiality of the company’s confidential information, but
contained no corresponding obligation by the company to protect
employees’ confidential information. Thus, although the carve-
out for claims under the confidentiality agreement facially
applied to both employee and employer, any theoretical claim the
employee might have against the employer for misuse of his
intellectual property “is not a dispute involving the breach of any
‘obligations’ under the confidentiality agreement and would
therefore fall within the scope of the parties’ arbitration
agreement.” (Ibid.) Further, “and in a broader sense, the
arbitration agreement effectively exempts from arbitration the
types of claims Red Bull is most likely to bring against an
employee such as [the plaintiff].” (Ibid.) Finally, the company
failed to articulate any legitimate business reasons for the
exemption. (Id. at p. 917.) Accordingly, the court said, the
arbitration agreement contained “a ‘high’ degree of substantive
unconscionability.” (Ibid.; see also Mercuro v. Superior Court
(2002) 96 Cal.App.4th 167, 175 [agreement which required
arbitration of most employment-related claims, but not unfair
competition or intellectual property claims, was substantively
unconscionable because it “require[ed] arbitration of most claims
of interest to employees but exempt[ed] from arbitration most
claims of interest to [employer]”].)
The present case is analogous to Davis and Fitz. The offer
letter executed by plaintiff and defendants required arbitration of
“any and all disputes or controversies of any nature whatsoever,
arising from or regarding the interpretation, performance,
enforcement or breach of this letter agreement,” but excluded
from arbitration “any issue or dispute arising under the
Proprietary Information Agreement.” As in Davis and Fitz, the
17
PIA imposed obligations only on plaintiff, not on defendants.
Thus, as in those cases, although the arbitration exclusion here
appeared to apply bilaterally, its effect was to require plaintiff to
arbitrate any claims he might have against defendants, but to
permit defendants to litigate many potential claims against
plaintiff. As in Davis and Fitz, therefore, the parties’ agreement
required arbitration of employment-related claims most likely to
be brought by plaintiff, but excluded from arbitration intellectual
property and proprietary information claims most likely to be
brought by defendants.
Defendants contend the arbitration agreement is not
unfairly one-sided because “intellectual property rights are
critical to both [plaintiff] and [defendants].” We do not agree.
Although the arbitration provision on its face excluded from
arbitration claims brought by either party under the PIA, the PIA
imposed obligations only on plaintiff. Thus, as a practical
matter, plaintiff could not have a claim against defendant for
breach of the PIA.
For these reasons, we conclude that the arbitration
agreement is substantively unconscionable.2
B. Procedural Unconscionability
As noted above, substantive unconscionability, alone, is
insufficient to disregard an arbitration agreement; procedural
unconscionability must be present as well. “ ‘Procedural
unconscionability focuses on “ ‘ “oppression” ’ ” or “ ‘ “surprise” ’ ”
2 Having concluded that the arbitration agreement is
substantively unconscionable because it is not bilateral, we need
not consider whether it also was substantively unconscionable for
other reasons.
18
due to unequal bargaining power. [Citation.] “Oppression arises
from an inequality of bargaining power that results in no real
negotiation and an absence of meaningful choice. Surprise
involves the extent to which the supposedly agreed-upon terms
are hidden in a prolix printed form drafted by the party seeking
to enforce them.” ’ [Citation.]” (Davis, supra, 53 Cal.App.5th at
p. 906.)
Plaintiff contends the arbitration agreement is procedurally
unconscionable for three separate reasons: (1) it is a contract of
adhesion; (2) Burton misrepresented the contents of the offer
letter; and (3) Burton failed to provide plaintiff with a copy of the
AAA rules.3 As we discuss, these claims lack merit.
1. Adhesive Nature of Offer Letter
Plaintiff contends that the arbitration agreement is
procedurally unconscionable because it is a contract of
adhesion—i.e., a “ ‘standardized contract, which, imposed and
drafted by the party of superior bargaining strength, relegates to
the subscribing party only the opportunity to adhere to the
contract or reject it.’ ” (Armendariz, supra, 24 Cal.4th at p. 113.)
Our Supreme Court has explained that although contracts of
adhesion are “ ‘indispensable facts of modern life that are
generally enforced,’ ” they contain a “ ‘degree of procedural
unconscionability even without any notable surprises, and “bear
within them the clear danger of oppression and overreaching.” ’ ”
3 Plaintiff does not argue any “surprise” based on the terms
of the arbitration agreement being hidden in a prolix printed
form, nor could he. The offer letter was only three pages, the
arbitration agreement was in the same size font as the rest of the
document and was in part in bolded print, and plaintiff initialed
it.
19
(Baltazar, supra, 62 Cal.4th 1237, 1244.) This danger is
particularly acute in the employment setting, “where ‘economic
pressure exerted by employers on all but the most sought-after
employees may be particularly acute.’ ” (Ibid.)
Plaintiff contends the arbitration agreement in the present
case was adhesive because it was prepared by Burton’s lawyers
and was not negotiated. We do not agree. Our Supreme Court
has said that a contract is adhesive if it is “imposed on employees
as a condition of employment and there [is] no opportunity to
negotiate.” (Armendariz, supra, 24 Cal.4th at p. 115.) Whether a
contract is adhesive thus turn on whether an employee had the
opportunity to negotiate—not whether he actually did so. (See
Spinello v. Amblin Entertainment (1994) 29 Cal.App.4th 1390,
1397 [contract was not adhesive because plaintiff “had the
opportunity to negotiate and simply failed to do so”].)
Plaintiff cites no evidence for the proposition that the
arbitration provision was not negotiable—and, indeed, the record
suggests otherwise. In the email to which Burton attached the
offer letter, he offered to “walk you through the entire document
if helpful,” to answer “any questions,” and to “edit if required.”
Specifically with regard to provisions “drafted by our law firm,”
Burton invited plaintiff to “let me know of any issues.” Burton
concluded that the offer letter could be signed and returned “[if it]
works for you,” but said that if plaintiff had any questions, “I am
happy to get on the phone . . . or answer via email . . . [or] review
in person Friday morning.” In short, nothing in this email or any
of the other communications between the parties suggests either
that Burton would not have been willing to negotiate the
arbitration provision or that such provision was a condition of
plaintiff’s employment. To the contrary, the tenor of the
20
correspondence suggested that Burton intended the offer letter as
a starting point for discussion, which could be edited if necessary.
Nor do we agree with plaintiff that the offer letter and PIA
are contracts of adhesion because they “were standard contracts
employees were required to sign if they wanted to work at
DroneBase.” As defendants correctly note, when plaintiff signed
the offer letter in October 2014, DroneBase could not yet have
had a “standard” employee contract because plaintiff was
DroneBase’s first employee. Nor was plaintiff a typical employee:
as the co-founder and chief technology officer, plaintiff
unquestionably had more bargaining power than most hirees.
We also reject plaintiff’s suggestion that the arbitration
provision was adhesive because Burton presented the offer letter
to plaintiff at the conclusion of their negotiations, after plaintiff
had turned down other job offers. While the September 27, 2014
email to which plaintiff cites states that plaintiff was “about to
reject Google and Roku’s offers that are currently on the table”
(italics added), there is no evidence either that plaintiff turned
down these offers before he received the offer letter on October 8
or that he did not have other pending job offers. As such, we
cannot conclude that the arbitration provision was adhesive.
(Compare Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519,
1534 [employee presented with arbitration agreement more than
a month after he signed the employment contract].)
Finally, we reject plaintiff’s contention that the
circumstances of his hiring were analogous to those in Stirlen v.
Supercuts, Inc., supra, 51 Cal.App.4th 1519 (Stirlen), in which an
arbitration agreement entered into by a high-level corporate
executive was found to be procedurally unconscionable. Stirlen
concerned an arbitration agreement entered into between a large
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corporation and plaintiff Stirlen, who was hired as the
corporation’s vice-president and chief financial officer. (Id. at
p. 1525.) The corporation contended the arbitration agreement
was not adhesive because the plaintiff “was not a person
desperately seeking employment but a successful and
sophisticated corporate executive Supercuts sought out and ‘hired
away’ from a highly paid position with a major corporation ‘by
offering him an annual salary of $150,000, and then agreeing to
remunerative “extras” not included in the standard executive
employment agreement,’ such as generous stock options, a bonus
plan, a supplemental retirement plan, and a $10,000 ‘signing
bonus.’ ” (Id. at p. 1533.) The court was unpersuaded. It noted
that the contract was presented to the plaintiff after he accepted
employment and was described as containing standard provisions
that were not negotiable. Further, while the parties negotiated
the terms of the plaintiff’s salary, stock options, bonus, and
retirement plan, those matters were the subject of a separate
letter agreement the plaintiff signed more than a month before
he signed the employment contract. Finally, the corporation did
not dispute the plaintiff’s assertion that the employment contract
was presented to him on a “ ‘take it or leave it basis.’ ” (Id. at
p. 1533–1534.) Under these circumstances, the court concluded
that the agreement to arbitrate was adhesive. (Id. at p. 1534.)
There are significant differences between the present case
and Stirlen. Unlike Stirlen, who was not presented with the
arbitration agreement until a month after he signed a letter
agreement accepting the job, the arbitration agreement in the
present case was part of plaintiff’s offer letter. The arbitration
agreement thus was not a provision foisted on the plaintiff after
he accepted the position with DroneBase, but a part of the vehicle
22
by which he accepted that employment. Further, unlike in
Stirlen, the arbitration provision was not part of a standard
employment contract “that every other corporate officer was
required to and had signed” (id. at p. 1534); to the contrary, as we
have said, because plaintiff was DroneBase’s first employee, the
company could not yet have created a “standard” employment
contract. We therefore do not detect in the present case the
procedural unconscionability the court identified in Stirlen.
2. Burton’s Alleged Misrepresentation Regarding
the Offer Letter’s Contents
Plaintiff next contends that the arbitration provision is
procedurally unconscionable because Burton misled plaintiff
about the offer letter’s contents. Plaintiff notes that Burton
described the offer letter as “ ‘reflect[ing] our previous
discussions’ ” and downplayed the offer letter’s significance,
telling plaintiff that “my word is as important as formal
paperwork to me.” Plaintiff thus suggests that he should not be
bound by the arbitration provision because a “ ‘plaintiff’s failure
to read a contract is excusable where reliance is placed on the
misrepresentations of the other party.’ ”
There are several problems with plaintiff’s contention,
including that it is clear that plaintiff did read the offer letter.
On October 8, plaintiff emailed Burton “I will review the offer
letter tonight and try to get it back to you tomorrow.” The next
day, he asked Burton in an email whether they could set up a
phone call because he had “a few questions about the equity
classes for DroneBase and my start date.” Plainly, plaintiff could
not have had questions about provisions of the offer letter had he
not read it.
23
Nor do we agree with plaintiff’s suggestion that Burton
misled him by describing the offer letter as “ ‘reflect[ing] our
previous discussions.’ ” While Burton’s October 8 email does
refer to the parties’ previous discussions, it also notes that the
offer letter contains some additional provisions “drafted by our
law firm,” and it invited plaintiff to “please let me know of any
issues” with those provisions. Plaintiff thus could not have been
misled into believing that the offer letter contained only the
contents of the parties’ previous discussions because Burton’s
email explicitly said otherwise.
Finally, we do not agree with plaintiff that the present case
is analogous to Lynch v. Cruttenden & Co. (1993) 18 Cal.App.4th
802 (Lynch), where the Court of Appeal affirmed an order
denying a petition to compel arbitration because the defendant
misled the plaintiffs about the legal effect of an arbitration
agreement. Lynch concerned an arbitration provision in a
brokerage contract entered into between a licensed security
broker and his clients, who were also his personal friends. (Id. at
p. 805.) The Lynch plaintiffs alleged that after they opened
brokerage accounts with the defendant, defendant periodically
instructed them to sign various documents, but told them that
the documents “did not affect legal rights” and need not be read.
(Ibid.) In fact, the documents required the plaintiffs to submit
disputes to arbitration. (Id. at p. 806.) The Court of Appeal held
that the plaintiffs could not be compelled to arbitrate because
they alleged that they “were so deceived they did not understand
they were contracting.” (Id. at p. 811, italics added.)
The present case is distinguishable. Unlike the plaintiffs in
Lynch, plaintiff does not contend that he did not know he was
signing a contract; he asserts only that he was unaware that the
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contract into which he was entering contained an arbitration
provision. The result in this case, therefore, is not governed by
Lynch. (Contrast Rosenthal v. Great Western Fin. Securities
Corp. (1996) 14 Cal.4th 394, 419–420 [“California law supports
[the] position that fraud does not render a written contract void
where the defrauded party had a reasonable opportunity to
discover the real terms of the contract. A contract may, however,
be held wholly void, despite the parties’ apparent assent to it,
when, ‘ “without negligence on his part, a signer attaches his
signature to a paper assuming it to be a paper of a different
character” ’ ”].)
3. Failure to Provide Plaintiff With Copy of AAA
Rules
Finally, plaintiff contends the arbitration agreement is
procedurally unconscionable because defendants did not provide
him with a copy of the AAA rules. Our Supreme Court rejected a
similar contention in Baltazar, supra, 62 Cal.4th 1237. There,
the plaintiff urged that an arbitration agreement was
procedurally unconscionable because the defendant had not
provided her with a copy of AAA’s arbitration rules. (Id. at
p. 1246.) The Supreme Court disagreed, explaining as follows:
“[Plaintiff] relies on Trivedi [v. Curexo Technology Corp. (2010)
189 Cal.App.4th 387], which notes that ‘[n]umerous cases have
held that the failure to provide a copy of the arbitration rules to
which the employee would be bound supported a finding of
procedural unconscionability.’ (Trivedi, supra, 189 Cal.App.4th
at p. 393, citing cases.) But in Trivedi itself and in each of the
Court of Appeal decisions cited therein, the plaintiff’s
unconscionability claim depended in some manner on the
arbitration rules in question. [Citations.] These cases thus stand
25
for the proposition that courts will more closely scrutinize the
substantive unconscionability of terms that were ‘artfully hidden’
by the simple expedient of incorporating them by reference rather
than including them in or attaching them to the arbitration
agreement. [Citation.] Baltazar’s argument accordingly might
have force if her unconscionability challenge concerned some
element of the AAA rules of which she had been unaware when
she signed the arbitration agreement. But her challenge to the
enforcement of the agreement has nothing to do with the AAA
rules; her challenge concerns only matters that were clearly
delineated in the agreement she signed. Forever 21’s failure to
attach the AAA rules therefore does not affect our consideration
of Baltazar’s claims.” (Baltazar, supra, 62 Cal.4th at p. 1246.)
As in Baltazar, plaintiff’s challenge is to the arbitration
clause itself, not to any particular provisions of the AAA rules.
As such, Burton’s failure to provide plaintiff with a copy of those
rules does not affect our consideration of plaintiff’s
unconscionability claims.
II.
This Lawsuit Is Within the Scope of the
Arbitration Provision
Plaintiff contends the present litigation falls outside the
scope of the arbitration provision. We do not agree.
“ ‘The scope of arbitration is . . . a matter of agreement
between the parties . . . .’ (Ericksen, Arbuthnot, McCarthy,
Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312,
323.)” (In re Tobacco Cases I (2004) 124 Cal.App.4th 1095, 1104.)
“ ‘When deciding whether the parties agreed to arbitrate a
certain matter . . . courts generally . . . should apply ordinary
state-law principles that govern the formation of contracts.’ ”
26
(Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233, 244.)
However, “ ‘doubts concerning the scope of arbitrable issues are
to be resolved in favor of arbitration. [Citations.] Therefore, in
the absence of indication of contrary intent, and where the
arbitration clause is reasonably susceptible of such an
interpretation, claims . . . will be deemed subject to arbitration.’ ”
(In re Tobacco Cases I, supra, 124 Cal.App.4th at p. 1104.)
In the present case, the arbitration provision required
arbitration of “any and all disputes or controversies of any nature
whatsoever, arising from or regarding the interpretation,
performance, enforcement or breach of this letter agreement.”
Plaintiff contends the present case is outside the scope of this
provision because his claims “did not ask the Court to construe
the employment agreement,” but instead were based on Burton’s
alleged oral misrepresentations.
It is true, as plaintiff suggests, that the arbitration
provision facially applies to disputes arising out the letter
agreement and does not specifically reference tort claims.
However, several appellate courts have held that arbitration
provisions similar to the one at issue here embrace tort claims, as
well as contract claims. For example, in EFund Capital Partners
v. Pless (2007) 150 Cal.App.4th 1311, 1325 (EFund Capital), the
plaintiff alleged that the defendants fraudulently induced it to
invest in a new technology company, but then diverted the
company’s capital and intellectual property for defendants’ own
financial gain. The defendants moved to compel arbitration
under a contract requiring arbitration of “[a]ny dispute or other
disagreement arising from or out of this Consulting Agreement.”
(Id. at p. 1317.) The trial court denied the motion to compel, but
the Court of Appeal reversed, concluding that plaintiff’s tort
27
claims reasonably could be characterized as arising from or out
of’ the contract because the contract “established and governed
plaintiff’s relationship with [defendant].” (Id. at p. 1325.) The
court explained: “In this case, plaintiff alleges defendants
defrauded it out of its investment in RAP Technologies and any
financial return on its moneys invested in the Loan Vibe software
program. Plaintiff further asserts defendants harmed RAP
Technologies by diverting the Loan Vibe software program to
their own use for their own financial gain. . . . None of
defendants is a named party to the strategic relationship
agreement. But the strategic relationship agreement is the basis
for plaintiff’s contractual obligations to RAP Technologies and, by
extension, to defendants. . . . If plaintiff and RAP Technologies
had never entered into the strategic relationship agreement, the
present disputes would never have arisen. . . . Therefore, the
arbitration agreement extends to the disputes alleged in
plaintiff's second amended complaint.” (Id. at pp. 1325–1326.)
Similarly, in Coast Plaza Doctors Hospital v. Blue Cross of
California (2000) 83 Cal.App.4th 677 (Coast Plaza), the court
considered whether a hospital’s tort claims arising out of an
insurer’s termination of the parties’ service agreement were
subject to mandatory arbitration under a clause requiring
arbitration of “[a]ny problem or dispute arising under this
Agreement and/or concerning the terms of this Agreement.” The
plaintiff contended the claims were not arbitrable because the
services agreement had been terminated prior to the filing of the
action, and none of the plaintiff’s claims were directed toward
enforcing the contract. (Id. at p. 685.) The court disagreed,
noting that it had “long been the rule in California that a broadly
worded arbitration clause, such as we have here, may extend to
28
tort claims that may arise under or from the contractual
relationship.” (Id. at p. 686.)
The present case is analogous to Efund Capital and Coast
Plaza. As in those cases, the arbitration provision was broadly
worded, extending to any and all disputes arising out of the offer
letter. The dispute between the parties unquestionably arose out
of the business relationship created by the offer letter, and the
dispute cannot be resolved without reference to the offer letter,
including to its integration clause. Accordingly, the present
dispute is subject to arbitration.
III.
The Arbitrator Did Not Exceed His Authority by
Excluding Plaintiff from Portions of the
Arbitration Proceeding
Plaintiff contends finally that the arbitrator exceeded his
authority by excluding plaintiff from portions of the arbitration
proceeding. For the reasons that follow, we disagree.
A. Additional Facts
During the arbitration proceeding, defendants requested
that plaintiff be excluded from plaintiff’s counsel’s questioning of
certain witnesses, including Burton, about financial projections
designated “Attorneys Eyes Only” under the parties’ stipulated
protective order. Defendants’ counsel argued that while
plaintiff’s counsel should be permitted to question Burton about
those projections, plaintiff should not be permitted to hear such
questioning because he was currently employed by a company
evaluating drone services providers, including DroneBase.
Plaintiff’s counsel disagreed, contending that excluding plaintiff
from the arbitration hearing raised due process concerns.
29
After reviewing the parties’ protective order and relevant
case law, the arbitrator ruled that he would not exclude plaintiff
from the hearing, but that witnesses could not be examined on
protected material in plaintiff’s presence. The arbitrator
explained: “[T]here’s only one way that I think I can resolve this,
Counsel, and that is I’m not going to exclude [plaintiff] because I
do not believe that I have the authority to do it. I don’t think
that the protective order so provides. However, I am not going to
permit the examination on the protected material [in plaintiff’s
presence] . . . because the [protective] order does provide that it
shall not be disseminated to a party. And, therefore, it seems to
me there is a choice . . . . [If plaintiff] wants to be present, that’s
fine. If [plaintiff] chooses not to be present, that’s fine. If he’s not
present, I will permit inquiry with respect to the material. If he
is present, then I will abide by the terms of the protective order.”
After this ruling, plaintiff left the hearing during his
counsel’s examination of Burton about “Attorneys Eyes Only”
documents. That examination occupied approximately 15 pages
of the reporter’s transcript, and it addressed only then-current
discussions with other companies about strategic investments or
acquisitions.
B. Analysis
Plaintiff contends that he had the right to be present
during all portions of the arbitration hearing, and that the
arbitrator violated that right by excluding him during the
examination of Burton on “Attorneys Eyes Only” documents. We
conclude that we need not decide whether the arbitrator erred
because any such error was not prejudicial.
Defendants contend, and plaintiff does not dispute, that the
only questions posed to Burton in plaintiff’s absence concerned
30
DroneBase’s then-current strategic, financial, and operational
situation—issues that were relevant only to the issue of damages.
However, because the arbitrator found for defendants on liability,
he did not reach the issue of damages. Any error with regard to
damages testimony therefore could not have prejudiced plaintiff.
Although plaintiff concedes that the testimony from which
he was excluded pertained to damages, he contends that “the
Arbitrator’s liability decision was influenced by damages issues,”
and thus that plaintiff’s exclusion from the hearing was
prejudicial. In support, he urges that “the Arbitrator found that
[plaintiff’s] expert’s valuation of DroneBase was ‘untenable’ and
rejected it, and that “[defendants’] expert testimony was
‘persuasive’ and that he ‘used reliable methodology to conclude
the fair market value of DroneBase was $20,284,000.” In fact,
while the arbitrator did make these findings, he also explicitly
held that, “[i]n light of the Arbitrator’s conclusions regarding the
merits of the asserted causes of action, damages are not found.”
(Italics added.) We can conceive of no way in which the
arbitrator’s damages finding could have influenced his decision
regarding liability, and thus we conclude that plaintiff’s exclusion
from some portions of the hearing, even if erroneous, was not
prejudicial.
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DISPOSITION
The judgment is affirmed. Respondents are awarded their
appellate costs.
NOT TO BE PUBLISHED IN THE OFFICIAL
REPORTS
EDMON, P. J.
We concur:
LAVIN, J.
EGERTON, J.
32