Steven Burnett v. Pagliacci Pizza

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
STEVEN BURNETT, individually and on)
behalf of all others similarly situated, ) No. 78356-4-1
)
Respondent, ) DIVISION ONE
)
v. )
) PUBLISHED OPINION
PAGLIACCI PIZZA, INC., a )
Washington corporation, ) FILED: June 17, 2019
)
Appellant. )
)
SMITH, J. —When Steven Burnett was hired as a delivery driver by
Pagliacci Pizza Inc., he was required to sign an "Employee Relationship
Agreement" to begin work. He was also given an employee handbook containing
a mandatory arbitration policy and told to read it at home. When Burnett later
sued Pagliacci for various wage-related claims, Pagliacci moved to compel
arbitration under the policy printed in its handbook. Pagliacci appeals the trial
court's denial of that motion.
We hold that because Burnett did not have a reasonable opportunity to
review the arbitration policy before he was required to sign the Employee
Relationship Agreement, the circumstances surrounding the formation of the
parties' agreement to arbitrate were procedurally unconscionable. We hold
further that the mandatory arbitration policy is substantively unconscionable
because certain prerequisites to arbitration required by the policy unreasonably
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favor Pagliacci by limiting employees' access to substantive remedies and
discouraging them from pursuing valid claims. Therefore, we affirm.
FACTS
Pagliacci hired Burnett as a delivery driver for Pagliacci's Valley Street
location in October 2015. Upon hire, Burnett attended a mandatory orientation,
which took between 40 minutes and an hour. At the orientation, Burnett was
shown around the store, given Pagliacci T-shirts, and told about Pagliacci's
history and values. He also watched some videos about how to succeed as a
delivery driver. Additionally, Burnett was given some forms and told to sign them
so that he could start working. One of those forms was an Employee
Relationship Agreement(ERA), which Burnett signed. Burnett was also given a
copy of Pagliacci's "Little Book of Answers" (Little Book) and told to read it at
home. Although the ERA directs the employee to "learn and comply with the
rules and policies outlined in our Little Book. . . , including those that relate to
positive attitude, public safety, company funds, tips and FAIR [Fair and Amicable
Internal Resolution] Policy," the ERA does not mention arbitration.
Pagliacci terminated Burnett's employment on January 22, 2017. In
October 2017, Burnett filed a putative class action against Pagliacci, alleging
among other things that Pagliacci failed to provide delivery drivers with required
rest and meal periods, failed to pay all wages due to delivery drivers, wrongfully
retained delivery charges, and made unlawful deductions from delivery drivers'
wages.
Pagliacci moved to compel arbitration of Burnett's claims under its
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mandatory arbitration policy, which is printed in the Little Book. That policy
provides:
The company has a mandatory arbitration policy with which you
must comply for the binding resolution of disputes without lawsuits.
If you believe you have been a victim of illegal harassment or
discrimination or that you have not been paid for all hours worked
or at less than the rate of pay required by law or that the
termination of your employment was wrongful, you submit the
dispute to resolution in accordance with the F.A.I.R. Policy and if
those procedures are not successful in resolving the dispute, you
then submit the dispute to binding arbitration before a neutral
arbitrator pursuant to the Washington Arbitration Act.
The "F.A.I.R. Policy" referred to in the mandatory arbitration policy requires that
before commencing arbitration, the employee first "report the matter and all
details" to his or her supervisor (Supervisor Review). If Supervisor Review does
not resolve the matter to the employee's satisfaction, he or she may initiate
nonbinding conciliation, wherein the "F.A.I.R. Administrator will designate a
responsible person at Pagliacci Pizza (who may be its owner) to meet face-to-
face with you in a non-binding Conciliation." The F.A.I.R. Policy also includes the
following limitations provision:
You may not commence an arbitration of a claim that is covered by
the Pagliacci Pizza Arbitration Policy or commence a lawsuit on a
claim that is not covered by the Pagliacci Pizza Arbitration Policy
unless you have first submitted the claim to resolution in conformity
with the F.A.I.R. Policy and fully complied with the steps and
procedures in the F.A.I.R. Policy. If you do not comply with a step,
rule or procedure in the F.A.I.R. Policy with respect to a claim, you
waive any right to raise the claim in any court or other forum,
including arbitration. The limitations set forth in this paragraph shall
not be subject to tolling, equitable or otherwise.
Burnett opposed Pagliacci's motion to compel arbitration. He argued that
the mandatory arbitration policy was both procedurally and substantively
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unconscionable, but the trial court did not reach those arguments. Instead, it
concluded that although Burnett agreed under the ERA to "learn and comply with
the rules and policies outlined in our Little Book," the Little Book was not
incorporated by reference into the ERA. The court therefore denied Pagliacci's
motion, finding there was no agreement to arbitrate.1
Pagliacci moved for reconsideration, arguing that the Little Book was
incorporated by reference into the ERA. Pagliacci also argued that regardless of
whether it was incorporated by reference into the ERA, the Little Book created an
agreement to arbitrate because Burnett received a copy of it and then continued
his employment thereafter. The court denied Pagliacci's motion for
reconsideration. Pagliacci appeals.2
ANALYSIS
Pagliacci argues that the trial court erred by denying its motion to compel
arbitration and its subsequent motion for reconsideration. We disagree.
Arbitrability is a question of law that we review de novo. McKee v. AT&T
Corp., 164 Wn.2d 372, 383, 191 P.3d 845 (2008). "The burden of proof is on the
party seeking to avoid arbitration." McKee, 164 Wn.2d at 383. "Regardless of
'Although the trial court did not reach Pagliacci's unconscionability
arguments in its written order, it indicated in its oral ruling that it had concerns
regarding the Little Book both in terms of procedural unconscionability and
substantive unconscionability.
2 A superior court's order denying a motion to compel arbitration is not
expressly listed as an appealable decision under RAP 2.2, and Pagliacci did not
seek discretionary review under RAP 2.3. But in Stein v. Geonerco, Inc., 105
Wn. App. 41, 43-45, 17 P.3d 1266 (2001), we recognized that the right to
arbitrate is a "substantial right" under RAP 2.2(a)(3) and held that an order
denying a motion to compel arbitration is appealable on an interlocutory basis.
Burnett does not argue otherwise.
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whether the Federal Arbitration Act[3]. . . or the Washington uniform arbitration
act[4]. . . applies, our analysis as to whether. . . claims are subject to arbitration
begins in the same manner." Weiss v. Lonnquist, 153 Wn. App. 502, 510, 224
P.3d 787(2009).5 Specifically, lais arbitration is a matter of contract, parties
cannot be compelled to arbitrate unless they agreed to do so." Weiss, 153 Wn.
App. at 510.
In determining whether an agreement to arbitrate exists, we first determine
whether the parties have agreed to arbitrate a particular matter by applying
ordinary contract principles. Weiss, 153 Wn. App. at 511; see also Tiart v. Smith
Barney, Inc., 107 Wn. App. 885, 895-97, 28 P.3d 823(2001)(considering
whether an arbitration agreement existed before analyzing whether the
arbitration agreement was enforceable). Where, as here, no material facts are in
dispute, contract interpretation is a question of law that we review de novo. Dave
Johnson Ins. v. Wright, 167 Wn. App. 758, 769, 275 P.3d 339 (2012).
Additionally, if an agreement to arbitrate exists, "[g]eneral contract defenses such
as unconscionability may invalidate arbitration agreements." McKee, 164 Wn.2d
at 383. Unconscionability is also a question of law reviewed de novo. McKee,
164 Wn.2d at 383.
For the reasons that follow, we conclude that an agreement to arbitrate
exists here but that the agreement is unconscionable and unenforceable.
39 U.S.C. §§ 1-16.
4 Chapter 7.04A RCW.
5 For this reason, we do not decide whether the Federal Arbitration Act
applies, an issue that was raised below but not argued on appeal.
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Existence of Arbitration Agreement
Pagliacci argues that the trial court erred by concluding that the mandatory
arbitration policy was not incorporated into the ERA and consequently there was
no agreement to arbitrate. We agree.
"Incorporation by reference allows the parties to 'incorporate contractual
terms by reference to a separate. . . agreement to which they are not parties,
and including a separate document which is unsigned." W. Wash. Corn. of
Seventh-Day Adventists v. Ferrellqas, Inc., 102 Wn. App. 488, 494, 7 P.3d 861(2000)(alteration in original)(quoting 11 SAMUEL WILLISTON & RICHARD A. LORD, A
TREATISE ON THE LAW OF CONTRACTS § 30:25, at 233-34 (4th ed. 1999)). "'But
incorporation by reference is ineffective to accomplish its intended purpose
where the provisions to which reference is made do not have a reasonably clear
and ascertainable meaning." Seventh-Day Adventists, 102 Wn. App. at 494
(quoting 11 WILLISTON & LORD,§ 30:25, at 234). "[1]t must be clear that the
parties to the agreement had knowledge of and assented to the incorporated
terms[.]" Seventh-Day Adventists, 102 Wn. App. at 494-95 (alterations in
original)(quoting 11 WILLISTON & LORD,§ 30:25, at 234).
In Seventh-Day Adventists, the court held that a "Trade Contract" "clearly
and unequivocally incorporate[d] the 'Contract Project Documents' and the
'Contract Documents" by stating that work would be performed "in accordance
with the 'Project Contract Documents" and "in accordance with Contract
Documents." Seventh-Day Adventists, 102 Wn. App. at 492, 495. Here, like the
Trade Contract in Seventh-Day Adventists, the ERA clearly and unequivocally
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No. 78356-4-1/7
incorporates the Little Book. Specifically, the ERA expressly provides that
employees will, on their own initiative, "learn and comply with the rules and
policies outlined in our Little Book of Answers." Furthermore, Burnett does not
argue that there was any lack of clarity that the Little Book described in the ERA
is the same Little Book that he received at orientation. For these reasons, the
rules and policies in the Little Book were incorporated by reference into the ERA.
Burnett makes no attempt to distinguish Seventh-Day Adventists even
though he cites that case for the proposition that incorporation by reference must
be clear and unequivocal. Instead, he argues that "an employment contract
telling an employee to read 'on your own time' a separate employment handbook
is not 'clear and unequivocal' incorporation by reference." But the ERA not only
directs the employee to read the Little Book on his or her own time, it also
requires the employee to comply with the rules and policies outlined therein.
Therefore, Burnett's argument is not persuasive, and we conclude that an
agreement to arbitrate exists here.6
Enforceability of Arbitration Agreement
Having concluded that the parties agreed to arbitrate, we next consider
whether the parties' agreement is enforceable. For the reasons that follow, we
conclude that the circumstances surrounding the formation of the parties'
6 Pagliacci argues in the alternative that the Little Book itself created an
arbitration agreement regardless of whether it was incorporated into the ERA.
Because we conclude that the mandatory arbitration policy was incorporated by
reference into the ERA, we do not address Pagliacci's alternative argument here.
But because Pagliacci raises that argument again in the context of procedural
unconscionability, we address it in the next section.
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No. 78356-4-1/8
arbitration agreement were procedurally unconscionable and that the mandatory
arbitration policy is substantively unconscionable. We also conclude that
severance of the substantively unconscionable provisions is inappropriate here
and thus hold that the mandatory arbitration policy is unenforceable.7
Procedural Unconscionability
Washington law recognizes two categories of unconscionability:
substantive and procedural. Zuver v. Airtouch Commc'ns, Inc., 153 Wn.2d 293,
303, 103 P.3d 753 (2004). "Procedural unconscionability is 'the lack of
meaningful choice, considering all the circumstances surrounding the
transaction." Zuver, 153 Wn.2d at 303 (quoting Nelson v. McGoldrick, 127
Wn.2d 124, 131, 896 P.2d 1258 (1995)). To determine whether an agreement is
procedurally unconscionable, we look to the following circumstances surrounding
the parties' transaction to determine whether the party claiming unconscionability
lacked meaningful choice:(1) the manner in which the contract was entered,(2)
whether the party claiming procedural unconscionability had a reasonable
opportunity to understand the terms of the contract, and (3) whether the
important terms were hidden in a maze of fine print. Zuver, 153 Wn.2d at 303.
Our Supreme Court has cautioned that "these three factors [should] not be
applied mechanically without regard to whether in truth a meaningful choice
existed." Zuver, 153 Wn.2d at 303 (alteration in original)(quoting Nelson, 127
7 Pagliacci suggests that Burnett was required to file a cross appeal to
argue that the parties' agreement to arbitrate is unconscionable. But this
suggestion has no merit because we can affirm on any basis supported by the
record. Bavand v. OneWest Bank, 196 Wn. App. 813, 825, 385 P.3d 233(2016).
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No. 78356-4-1/9 .
Wn.2d at 131).
Although not determinative, if an agreement constitutes an adhesion
contract, that supports a finding that the agreement is procedurally
unconscionable. See Zuver, 153 Wn.2d at 305 (analyzing whether an arbitration
agreement was an adhesion contract but observing that "the fact that [the]
arbitration agreement is an adhesion contract does not end our inquiry").
Washington courts have adopted the following factors to determine whether an
adhesion contract exists: "(1) whether the contract is a standard form printed
contract,(2) whether it was prepared by one party and submitted to the other on
a 'take it or leave it' basis, and (3) whether there was no true equality of
bargaining power between the parties." Zuver, 153 Wn.2d at 304 (internal
quotation marks omitted)(quoting Yakima County(W. Valley) Fire Prot. Dist. No.
12 v. City of Yakima, 122 Wn.2d 371, 393, 858 P.2d 245 (1993)).
Here, the ERA, including the Little Book and Pagliacci's mandatory
arbitration policy, constitutes an adhesion contract. Specifically, the ERA is a
standard form printed contract that Burnett was required to sign to begin
employment, i.e., on a "take it or leave it" basis. Moreover, Pagliacci does not
argue that the ERA is not an adhesion contract. Rather, Pagliacci argues that
even if the ERA is an adhesion contract, the circumstances surrounding its
formation—and specifically the formation of the parties' agreement to arbitrate—
were not procedurally unconscionable. But we disagree.
Mattingly v. Palmer Ridge Homes, LLC, 157 Wn. App. 376, 238 P.3d 505(2010), is instructive. In Mattingly, Steven and Deborah Mattingly entered an
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No. 78356-4-1/10
agreement with Palmer Ridge Homes LLC under which Palmer Ridge would
construct a custom home for the Mattinglys. Mattingly, 157 Wn. App. at 382. Six
months later, the Mattinglys signed an application to enroll in Palmer Ridge's "2-
10 Home Buyers Warranty new home warranty program"(2-10 HBW warranty).
Mattingly, 157 Wn. App. at 383. As part of the enrollment, the Mattinglys
acknowledged that they read a sample copy of the "Warranty Booklet" and
understood that their claims and liabilities were limited by the terms and
conditions in the booklet. Mattingly, 157 Wn. App. at 383. However, the
Mattinglys did not in fact see a copy of the warranty booklet before they signed
the enrollment application. Mattingly, 157 Wn. App. at 383.
After discovering problems with the construction of their home, the
Mattinglys sued Palmer Ridge. Mattingly, 157 Wn. App. at 386. Palmer Ridge
moved for summary judgment, arguing that the Mattinglys' claims were barred by
the 2-10 HBW warranty's limitations provisions. Mattingly, 157 Wn. App. at 386.
The trial court agreed and dismissed the Mattinglys' claims. Mattingly, 157 Wn.
App. at 386.
On appeal, Division Two of this court concluded that the 2-10 HBW
warranty limitations were unenforceable. Mattingly, 157 Wn. App. at 392. It held
that the circumstances surrounding the 2-10 HBW warranty are "suspect, as
there is no evidence in the record that the Mattinglys had a reasonable
opportunity to understand the terms contained within the booklet, and the terms
remain buried in the booklet." Mattingly, 157 Wn. App. at 392. Specifically, the
court observed that the Mattinglys did not receive a sample copy of the booklet
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No. 78356-4-1/11
before signing the warranty enrollment and that even if the Mattinglys had
received the booklet, the limitations provisions—though in bold and larger
typeface than surrounding text—were on page 7 of a 32-page booklet. Mattingly,
157 Wn. App. at 391-92.
Here, as in Mattingly, the circumstances surrounding the formation of the
parties' arbitration agreement are suspect. As in Mattingly, there is no evidence
in the record that Burnett had a reasonable opportunity to understand the terms
contained in the Little Book—and specifically the mandatory arbitration policy—
before he signed the ERA. Instead, the record reflects that Burnett was not
afforded an opportunity to review the Little Book before signing the ERA: Burnett
testified that he was told to sign the ERA to begin work and instructed to read the
Little Book at home. Furthermore, like the warranty limitations in Mattingly,
Pagliacci's mandatory arbitration policy is buried in a booklet: Although it is
written in plain English, it appears on page 18 of the 23-page Little Book, in the
same font size and with the same formatting as surrounding sections. For these
reasons, we conclude that Burnett lacked meaningful choice in agreeing to
arbitrate, and thus the circumstances surrounding the formation of the parties'
arbitration agreement were procedurally unconscionable.
Pagliacci argues that Mattingly is distinguishable because it does not
concern an employment relationship. It also points out that while the Mattinglys
did not receive the warranty booklet until well after they signed the agreement
that incorporated it, the Little Book was reasonably available to Burnett
throughout his employment. But the fact that Mattingly was not an employment
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No. 78356-4-1/12
case is not a relevant distinguishing factor because, as discussed, we apply
ordinary contract law to determine the validity of an agreement to arbitrate.
McKee, 164 Wn.2d at 383. And it is irrelevant that the mandatory arbitration
policy was available to Burnett after he signed the ERA if he did not have a
reasonable opportunity to review it before he signed the ERA into which it was
incorporated. Pagliacci's arguments are not persuasive.
Pagliacci also contends that the mandatory arbitration policy is not
"'hidden in a maze of fine print" and that Burnett's failure to read it is not a
defense to enforcement. Pagliacci relies on Tiart to support its arguments. But
in Tiart, the employee completed an employment application which itself
contained an arbitration provision. Tiart, 107 Wn. App. at 891-92. Indeed, in
concluding that the employee had a reasonable opportunity to understand that
she was agreeing to arbitrate her future claims, we observed that "the arbitration
provision was obvious in the fairly short contract." Tiart, 107 Wn. App. at 898:99.
Here, by contrast, the arbitration policy is not printed—or even mentioned—in the
ERA itself. Instead, it is buried in a separate booklet that, as discussed, Burnett
did not have a reasonable opportunity to review before signing the ERA. Indeed,
nothing in the ERA suggests that the Little Book contains an arbitration clause,
and even the Little Book's own table of contents describes the section in which
the arbitration policy appears as the "Mutual Fairness Benefits"8 section, giving
no indication to the reader that it might contain a one-way arbitration clause.
-flail is not persuasive and neither is Pagliacci's argument that the mandatory
8(Emphasis added.)
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No. 78356-4-1/13
arbitration policy is not hidden. Cf. Romney v. Franciscan Med. Grp., 186 Wn.
App. 728, 349 P.3d 32(2015)(holding that arbitration clause was not
procedurally unconscionable where employees signed multiple employment
contracts that contained the same arbitration agreement addendum).
Pagliacci next argues that the mandatory arbitration policy is not
procedurally unconscionable because "the case law shows that an employer can
impose new terms of employment on existing employees at any time, simply by
amending a handbook and giving employees notice that the conditions of their
employment have changed." Pagliacci asserts that the Little Book itself was
enough to create a binding arbitration agreement even if not incorporated into the
ERA, and that Burnett became bound by the mandatory arbitration policy
because he received a copy of the Little Book and continued his employment
thereafter. Pagliacci chiefly relies on Gaglidari v. Denny's Restaurants, Inc., 117
Wn.2d 426, 815 P.2d 1362(1991), to support this assertion, but that reliance is
misplaced.
In Gaglidari, the plaintiff, Ronda Gaglidari, was hired as a bartender by
Denny's Restaurants Inc.(Denny's) in 1980. Gaglidari, 117 Wn.2d at 428. On
her first day of work, Gaglidari received a copy of the 1979 employee handbook,
which described Denny's termination procedures. Gaglidari, 117 Wn.2d at 428.
The handbook stated that "fighting on duty was grounds for immediate dismissal"
but provided for counseling review and review by a certain level of manager for
infractions not covered by the immediate dismissal provision. Gaglidari, 117
Wn.2d at 428. In 1986, Denny's gave Gaglidari an alcoholic beverage handbook
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No. 78356-4-1/14
stating that fighting on company premises, regardless of whether on duty or not,
was grounds for immediate dismissal. Gaglidari, 117 Wn.2d at 429, 436.
In 1987, Denny's fired Gaglidari after she was involved in a fight on
company premises while off duty. Gaqlidari, 117 Wn.2d at 429-30. Gaglidari
sued Denny's for failing to comply with the termination procedures in its 1979
employee handbook. Gaglidari, 117 Wn.2d at 430. A jury returned a verdict in
Gaglidari's favor. Gacilidari, 117 Wn.2d at 431.
On appeal, our Supreme Court observed that although employment
relationships are traditionally terminable at will, "an employment relationship
terminable at will can be modified by statements contained in policy manuals or
handbooks." Gaolidari, 117 Wn.2d at 433. The court also stated that "[a]n
employer may unilaterally amend or revoke policies and procedures established
in an employee handbook" but that "an employer's unilateral change in policy will
not be effective until employees receive reasonable notice of the change."
Gaglidari, 117 Wn.2d at 434. The Supreme Court explained, based on these
principles, that the 1979 employee handbook formed a contract pursuant to
which Denny's would have been required to follow certain procedures before
terminating Gaglidari for fighting while off duty. Gaolidari, 117 Wn.2d at 433. But
the court held that the 1986 alcoholic beverage handbook achieved a
modification to the 1979 handbook such that on-premises fighting, regardless of
duty status, became grounds for immediate dismissal. Gaglidari, 117 Wn.2d at
436. The court then remanded for a new trial on whether Denny's conclusion
that Gaglidari was guilty of fighting was reasonable, in good faith, and supported
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No. 78356-4-1/15
by substantial evidence such that immediate dismissal was warranted. Gaglidari,
117 Wn.2d at 436, 451.
In short, the Gaglidari court considered whether a contract was formed
between Denny's and Gaglidari solely to determine what, if any, procedures an
employer had agreed to follow before terminating an employee and whether the
employer had complied with those procedures. Gaglidari, 117 Wn.2d at 431.
Gaglidari does not, as Pagliacci contends, stand for the proposition that an
employee handbook can create an arbitration agreement enforceable by the
employer against its employee. Furthermore, Pagliacci cites no Washington
authority holding that an employer can foist an arbitration agreement on an
employee simply by including an arbitration clause in an employee handbook that
is provided to the employee. Therefore, we are not persuaded by Pagliacci's
argument that the Little Book created an arbitration agreement merely because
Burnett received a copy of it and continued his employment thereafter.
Pagliacci concedes that "[n]o reported Washington decision specifically
addresses arbitration policies in the context of employee handbooks" but argues
that under Gacilidari, employee handbooks create obligations that are binding on
employees and the mandatory arbitration policy should be no exception.
Specifically, Pagliacci attempts to analogize the Little Book to the handbook in
Gaglidari, which Pagliacci observes "imposed a 'contractual' obligation on the
employee not to fight on company premises as a condition of her employment."
But this argument ignores the context in which the contract analysis in Gaglidari
arose. The Gaglidari court did conclude that Denny's employee handbook, as
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No. 78356-4-1/16
modified by the alcoholic beverage handbook, created a contract between
Gaglidari and Denny's, wherein Gaglidari agreed to abide by the policies and
procedures outlined in the handbook. Gaglidari, 117 Wn.2d at 435-36. But as
discussed, the court reached this conclusion in the context of determining
whether Gaglidari's behavior was grounds for immediate dismissal. An
employee's agreement to comply with a policy or risk immediate dismissal is
readily distinguishable from an employee's agreement to submit his or her claims
to arbitration. That the former agreement can be secured by providing the
employee with a handbook does not mean that the latter agreement can be
secured in the same manner. Pagliacci's argument is not persuasive.
Pagliacci also relies on Govier v. North Sound Bank, 91 Wn. App. 493,
957 P.2d 811 (1998), to argue that an employer may unilaterally bind its
employee to obligations via an employee handbook. Again, its reliance is
misplaced. In Govier, the plaintiff, Deborah Govier, was hired by North Sound
Bank in 1991 as a loan originator. Govier, 91 Wn. App. at 495. On Govier's first
day of work, she received a copy of the bank's personnel handbook, which
provided that after Govier reached the end of a 90-day probationary period, she
would be considered a "'permanent employee" and dismissed "only after a
thorough review of the performance record by the supervisor and the President
or Vice President." Govier, 91 Wn. App. at 495(emphasis omitted).
In 1993, North Sound Bank presented its loan originators, including
Govier, with a new employment agreement. Govier, 91 Wn. App. at 496. The
new agreement was for a 1-year period, changed the compensation structure for
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No. 78356-4-1/17
loan originators, eliminated sick leave and holiday and vacation pay, and allowed
either party to terminate on 20 days' written notice. Govier, 91 Wn. App. at 496-
97. Loan originators were directed to sign the new employment agreement or be
terminated. Govier, 91 Wn. App. at 496. Govier, who was unhappy with the new
terms, refused to sign the agreement and consequently was terminated. Govier,
91 Wn. App. at 497.
Govier sued, alleging that North Sound Bank had breached the
employment contract embodied in the original personnel handbook. Govier, 91
Wn. App. at 497. Division Two of this court disagreed, holding that the personnel
handbook had the force of a unilateral contract, i.e., "one in which the promisor
does not receive a promise in return as consideration." Govier, 91 Wn. App. at
499. It recognized that in the handbook context, an employer that promises
specific treatment in specific situations can revoke or modify those promises
without mutual assent. Govier, 91 Wn. App. at 500. The court thus held that by
receiving a new agreement changing the duration of her employment from
indefinite to one year and eliminating other benefits, Govier could no longer
enforce the former handbook terms against the bank. Govier, 91 Wn. App. at
501-02.
Like the Gaglidari court, the Govier court conducted its analysis in the
context of determining whether an employer was bound by the promises it made
to its employee. But as discussed, that is not the case here, where Pagliacci
seeks to bind its employee. Neither Govier nor Gaolidari supports Pagliacci's
argument that because an arbitration clause appeared in an employee handbook
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No. 78356-4-1/18
that was provided to Burnett, the parties' arbitration agreement is procedurally
conscionable.
Pagliacci next observes that "[n]umerous state and federal courts have
found binding agreements to arbitrate based on employee handbooks," citing—
without discussion—to a number of federal and out-of-state cases. These cases
are not binding, and we decline to address them.
Because we hold that Pagliacci's mandatory arbitration policy is
procedurally unconscionable, we must next address Burnett's argument that
procedural unconscionability alone is sufficient to render Pagliacci's mandatory
arbitration policy unenforceable. He relies on Gandee v. LDL Freedom
Enterprises, Inc., 176 Wn.2d 598, 603, 293 P.3d 1197 (2013), for the proposition
that "either substantive or procedural unconscionability is sufficient to void a
contract." Although Pagliacci does not argue otherwise, we note that this
proposition, while accurately excerpted from Gandee, is not a complete
statement of the law. Specifically, the Gandee court cited Adler v. Fred Lind
Manor, 153 Wn.2d 331, 347, 103 P.3d 773(2004), but in Adler, the Supreme
Court expressly reserved ruling on whether procedural unconscionability—as
opposed to substantive unconscionability—alone is sufficient to void a contract.
Adler, 153 Wn.2d at 346-47. And in Gandee, only substantive unconscionability
was alleged. Gandee, 176 Wn.2d at 603.
That said, both Division Two and Division Three of this court have
invalidated agreements based on procedural unconscionability alone.
Specifically, in Mattingly, discussed above, Division Two invalidated the 2-10
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No. 78356-4-1/19
HBW warranty limitations based solely on its conclusion that the circumstances
surrounding the warranty's formation were procedurally unconscionable.
Mattingly, 157 Wn. App. at 392. And in Gorden v. Lloyd Ward & Associates, PC,
180 Wn. App. 552, 323 P.3d 1074 (2014), Division Three invalidated an
arbitration agreement based solely on procedural unconscionability.
Furthermore, and as discussed, Burnett was not afforded an opportunity to
review the Little Book before signing the agreement into which it was
incorporated. Indeed, even the ERA itself states that the employee loin your
own initiative. . . will learn. .. the rules and policies outlined in our Little Book of
Answers,"9 suggesting that employees are not expected to have had an
opportunity to fully comprehend the Little Book's contents before signing the
ERA. And as discussed, the ERA does not even mention the arbitration policy,
which is buried toward the end of the Little Book. In short, it is apparent from this
record that Burnett lacked meaningful choice in agreeing to arbitrate. Therefore,
we hold that procedural unconscionability alone renders Pagliacci's mandatory
arbitration policy unenforceable.
Finally, and although not necessary to our conclusion that procedural
unconscionability alone renders Pagliacci's mandatory arbitration policy void, we
observe that Pagliacci's mandatory arbitration policy requires employees to
arbitrate discrimination, unlawful termination, and wage-related claims, which
include claims with respect to which employees have a statutory right to maintain
a civil action. See, ext., RCW 49.60.030(2)(providing that any person deeming
9(Emphasis added.)
19
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himself or herself injured by a violation of the Washington State Civil Rights Act
"shall have a civil action in a court of competent jurisdiction"); RCW 49.52.070
(providing that any employer that willfully deprives an employee of any part of his
or her wages "shall be liable in a civil action by the aggrieved employee"). And
although not addressed by either party, waiver requires "6n intentional and
voluntary relinquishment of a known right." Jones v. Best, 134 Wn.2d 232, 241,
950 P.2d 1 (1998). Here, as discussed, Burnett did not have a reasonable
opportunity to understand that he was agreeing to arbitrate—much less to
understand the types of claims he was agreeing to arbitrate or to intentionally
and voluntarily relinquish his right to pursue those claims in court. Therefore, we
are very skeptical that under the circumstances presented here, Burnett
effectively waived any statutorily conferred right to maintain a civil action.
Substantive Unconscionability
"Substantive unconscionability involves those cases where a clause or
term in the contract is alleged to be one-sided or overly harsh." Zuver, 153
Wn.2d at 303(quoting Schroeder v. Fageol Motors, Inc., 86 Wn.2d 256, 260, 544
P.2d 20 (1975)). "Shocking to the conscience','monstrously harsh', and
'exceedingly calloused' are terms sometimes used to define substantive
unconscionability." Nelson, 127 Wn.2d at 131 (quoting Montgomery Ward & Co.
v. Annuity Bd. of S. Baptist Convention, 16 Wn. App. 439, 444, 556 P.2d 552(1976)).
Here, Burnett argues that Pagliacci's mandatory arbitration policy is
substantively unconscionable because (1) it requires employees, but not
20
No. 78356-4-1/21
Pagliacci, to submit certain claims to arbitration and (2) the F.A.I.R. Policy, which
is a prerequisite to arbitration, contains a limitations provision that is overly harsh.
Although we disagree that the mandatory arbitration policy is substantively
unconscionable merely because its arbitration requirement is not mutual, we
agree that the F.A.I.R. Policy's overly harsh limitations provision renders the
mandatory arbitration substantively unconscionable.
Zuver is instructive here. There, the court evaluated an employment
arbitration agreement that included:(1) a confidentiality provision stating that all
arbitration proceedings, including settlements and awards, would be confidential
and (2) a remedy limitations provision under which the employee waived the right
to seek punitive damages. Zuver, 153 Wn.2d at 298-99. Our Supreme Court
held that these provisions were substantively unconscionable. Specifically, the
court concluded that the confidentiality provision was substantively
unconscionable because it "hampers an employee's ability to prove a pattern of
discrimination or to take advantage of findings in past arbitrations." Zuver, 153
Wn.2d at 315. Additionally, "keeping past findings secret undermines an
employee's confidence in the fairness and honesty of the arbitration process,"
potentially discouraging employees from pursuing valid discrimination claims.
Zuver, 153 Wn.2d at 315. The court also concluded that the remedies limitation
provision was substantively unconscionable because the provision "blatantly and
excessively favors the employer" by barring the employee from collecting punitive
or exemplary damages while allowing the employer to collect such damages in
its claims against the employee. Zuver, 153 Wn.2d at 318.
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No. 78356-4-1/22
In discussing the remedies limitation provision, the Zuver court also
expressly rejected the concurrence/dissent's assertion that the plaintiff in Zuver
was "seeking invalidity based simply on a lack of mutuality of obligations." Zuver,
153 Wn.2d at 317 n.16. The court instead explained that the plaintiff was not
complaining about mere lack of mutuality and stated, "[W]e are not concerned
here with whether the parties have mirror obligations under the agreement, but
rather whether the effect of the provision is so 'one-sided' as to render it patently
'overly harsh' in this case." Zuver, 153 Wn.2d at 317 n.16 (emphasis added)
(quoting Schroeder, 86 Wn.2d at 260).
In short, the Zuver court's analysis demonstrates that arbitration
agreements are not substantively unconscionable merely because they are not
mutual. Therefore, we reject Burnett's argument that Pagliacci's mandatory
arbitration policy is substantively unconscionable merely because it requires
Burnett, but not Pagliacci, to arbitrate certain claims. Cf. hart, 107 Wn. App. at
901 (explaining that by agreeing to arbitrate, party does not give up substantive
right but only the ability to raise it in court).
But Zuver also demonstrates that nonmutual provisions in an arbitration
agreement are substantively unconscionable when, like the confidentiality and
remedies limitations provisions in Zuver, they have the effect of limiting an
employee's ability to access substantive remedies or discouraging an employee
from pursuing valid claims. To that end, we conclude for the reasons that follow
that the mandatory arbitration policy is substantively unconscionable because the
F.A.I.R. Policy, which is a prerequisite to arbitration, contains a limitations
22
No. 78356-4-1/23
provision that is substantively unconscionable.
First, as Burnett points out, the limitations provision "effectively shortens
the statute of limitations for any claim by an employee who no longer works for
[Pagliacci]" because a terminated employee has no way to "[i]nformally report the
matter and all details to your supervisor," as required by the F.A.I.R. Policy's
Supervisor Review procedure. In other words, the limitations provision acts as a
complete bar to arbitration and suit for employees who do not become aware that
they have a potential claim until after their employment with Pagliacci ends.
Such a bar "blatantly and excessively favors" Pagliacci and is substantively
unconscionable. Zuver, 153 Wn.2d at 318-19.
Pagliacci argues that "Mlle only reasonable interpretation of the F.A.I.R.
policy is that it is intended to apply to current employees" and not to former
employees. But Pagliacci's proffered interpretation would require us to read into
the F.A.I.R. Policy an exception that is not expressed therein. Pagliacci's
proffered interpretation also contradicts the F.A.I.R. Policy's unambiguous
limitations provision, which states: "If you do not comply with a step, rule or
procedure in the F.A.I.R. Policy with respect to a claim, you waive any right to
raise the claim in any court or other forum, including arbitration." We are not
persuaded by Pagliacci's liberal interpretation of this limitations provision, which
Pagliacci itself drafted in unambiguous terms.1° Cf. Sales Creators, Inc. v. Little
10 Indeed, Pagliacci itself pointed out below that Burnett "never requested
resolution via Pagliacci's internal F.A.I.R. Policy," suggesting that even Pagliacci
believed at one time that the F.A.I.R. Policy applied to terminated employees like
Burnett.
23
No. 78356-4-1/24
Loan Shoppe, LLC, 150 Wn. App. 527, 531, 208 P.3d 1133(2009)("In
interpreting an arbitration clause, the intentions of the parties as expressed in the
contract control.")(emphasis added).
Next, although not raised by Burnett, the limitations provision not only bars
claims for terminated employees, but also effectively shortens the time period for
any employee to assert claims against Pagliacci. Specifically, the F.A.I.R.
Policy's limitations provision prohibits an employee from commencing arbitration
(or filing suit) until he or she has fully complied with the policy's steps and
procedures. And "a claim sought to be arbitrated is subject to the same
limitations of time for the commencement of actions as if the claim had been
asserted in a court." RCW 7.04A.090(3). Therefore, the F.A.I.R. Policy's
limitations provision has the effect of shortening, by whatever time it takes to
complete the procedures set out in the F.A.I.R. Policy, the period during which
employees may assert their claims under Pagliacci's two-step arbitration policy.
To this end, our Supreme Court has repeatedly held that arbitration
provisions that contain unreasonable contractual limitations periods are
substantively unconscionable. For example, in Adler, the court held that an
arbitration agreement's 180-day limitations period was substantively
unconscionable because it provided the employer with unfair advantages. Adler,
153 Wn.2d at 357. Specifically, the Adler court observed that the limitations
period could require employees to forgo the opportunity to file discrimination
complaints with and have them investigated by the Equal Employment
Opportunity Commission or the Washington Human Rights Commission. Adler,
24
No. 78356-4-1/25
153 Wn.2d at 357. The limitations period in Adler also deprived employees of
continuing violation and tolling doctrines under federal and state discrimination
laws. Adler, 153 Wn.2d at 356-57. In Gandee, the court held that a provision
shortening the statute of limitations from the 4 years provided by the Consumer
Protection Actll to 30 days was substantively unconscionable. Gandee, 176
Wn.2d at 607. And in Hill v. Garda CL Northwest, Inc., 179 Wn.2d 47, 55, 308
P.3d 635 (2013), the court concluded that an arbitration clause's 14-day
limitations provision was substantively unconscionable where employees would
otherwise have a 3-year period to bring the type of claims contemplated.
Here, the mandatory arbitration policy does not contain a specified
limitations period. But because the time required for F.A.I.R. Policy compliance
is entirely indeterminate, it—like the contractual limitations periods in Adler,
Gandee, and Hill—is substantively unconscionable because it provides Pagliacci
with unfair advantages. Specifically, and as discussed, the F.A.I.R. Policy, which
is a prerequisite to arbitration, acts as a complete bar to arbitration unless an
employee has "fully complied with the steps and procedures in the F.A.I.R.
Policy." Therefore, an employee must anticipate and build in time to fully comply
with the F.A.I.R. Policy before the applicable limitations period expires. But the
time required for compliance is not within the employee's control. Under the
F.A.I.R. Policy, Pagliacci makes no commitment to address disputes or schedule
nonbinding conciliation within a specified period of time after the employee has
reported the matter or initiated conciliation. Nor does the policy provide any
11 Chapter 19.86 RCW.
25
No. 78356-4-1/26
"release valve" that allows employees to commence arbitration if conciliation
under the F.A.I.R. Policy takes more than a specified amount of time, or if the
applicable statute of limitations is set to expire while the employee is attempting
to comply with the F.A.I.R. Policy. Indeed, the F.A.I.R. Policy's limitations
provision provides just the opposite: Regardless of how long the conciliation
procedure takes, the bar to arbitration "shall not be subject to tolling, equitable or
otherwise."
Finally, Pagliacci does not dispute that the F.A.I.R. Policy contains no
exception to Supervisor Review even when the employee's supervisor is the
person subjecting the employee to unfair conduct or harassment. In such cases,
Supervisor Review, like the confidentiality provision in Zuver,"undermines an
employee's confidence in the fairness and honesty of the arbitration process and
thus potentially discourages that employee from pursuing a valid'. . . claim."
Zuver, 153 Wn.2d at 315.
For these reasons and because full compliance with the F.A.I.R. Policy is
a prerequisite to arbitration, the limitations provision in the F.A.I.R. Policy renders
the mandatory arbitration policy substantively unconscionable.12
Pagliacci argues that its mandatory arbitration policy is not substantively
unconscionable because it does not contain any of the specific types of
12 Burnett also argues that the mandatory arbitration policy is substantively
unconscionable because (1) the procedure prescribed by the F.A.I.R. Policy
conflicts with the ERA and (2) Pagliacci reserves for itself a unilateral right to
amend the Little Book (and therefore the mandatory arbitration policy). But
because we conclude that the mandatory arbitration policy is substantively
unconscionable on other grounds, we do not consider these arguments.
26
No. 78356-4-1/27
provisions that our Supreme Court has found to be substantively unconscionable,
such as contractual limitations periods, fee-splitting requirements, or limitations
on the amount or types of damages recoverable. But we are not limited by the
specific types of provisions that the Supreme Court has already deemed
substantively unconscionable. Rather, our inquiry is whether the effect of
Pagliacci's two-step mandatory arbitration policy is "so one-sided and harsh that
it is substantively unconscionable." Zuver, 153 Wn.2d at 318. For the reasons
discussed, we conclude that it is.
Severance
As a final matter, Pagliacci argues that even if the mandatory arbitration
policy is substantively unconscionable due to the F.A.I.R. Policy's limitations
provision, the F.A.I.R. Policy must be severed from the mandatory arbitration
policy, leaving the agreement to arbitrate intact. We disagree.
"'Severance is the usual remedy for substantively unconscionable terms,
but where such terms pervade an arbitration agreement,[this court] refuse[s] to
sever those provisions and declare[s] the entire agreement void." Woodward v.
Emeritus Corp., 192 Wn. App. 584, 602, 368 P.3d 487(2016)(alterations in
original)(quoting Gandee, 176 Wn.2d at 603). "Stated differently, when
severance will 'significantly alter both the tone of the arbitration clause and the
nature of the arbitration contemplated by the clause,' the appropriate remedy is
to invalidate the entire agreement." Woodward, 192 Wn. App. at 602(quoting
Gandee, 176 Wn.2d at 607). Nevertheless, severance cannot cure the
procedural deficiencies concerning the formation of an arbitration agreement.
27
No. 78356-4-1/28
Gorden, 180 Wn. App. at 565.
Here, Pagliacci's mandatory arbitration policy is both substantively and
procedurally unconscionable, so severance is inappropriate. Cf. Adler, 153
Wn.2d at 350 n.9, 351 (remanding to trial court for further proceedings regarding
procedural unconscionability and noting that if the employee proved his
procedural unconscionability claim on remand, "the arbitration agreement would
be void").
Pagliacci chiefly relies on Zuver to argue that severance is required here,
but that reliance is misplaced. In Zuver, the court did sever the substantively
unconscionable terms from the arbitration agreement. Zuver, 153 Wn.2d at 320-
21. But Zuver is distinguishable because there, the court concluded that the
arbitration agreement in question was not procedurally unconscionable. Zuver,
153 Wn.2d at 306. Additionally, the Zuver court relied in part on the fact that the
parties' arbitration agreement contained a severability clause. Zuver, 153 Wn.2d
at 320. Here, severance cannot cure the arbitration policy's procedural
deficiencies, and there is no severability clause in the ERA. Therefore, Zuver
does not require severance.
We affirm.
WE CONCUR:
l.11h0b4vv, 9-• l aw, 1.4'4"
28