Opinion
A148405
02-21-2018
HAROLD DEGRAFF, Plaintiff and Respondent, v. PERKINS COIE CALIFORNIA P.C. et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Super. Ct. No. CIV534202)
Defendants Perkins Coie California P.C. (California PC) and Perkins Coie LLP (Perkins LLP) appeal an order denying their petition to compel plaintiff Harold DeGraff to arbitrate his claims against defendants and staying trial court proceedings pending arbitration. Applying Washington state law, the trial court concluded the parties' contractual arbitration provision was both procedurally and substantively unconscionable. We conclude the provision is not procedurally unconscionable under Washington law. We also conclude that while certain portions of the provision are substantively unconscionable, the offending portions can be severed. Accordingly, we reverse.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Defendant Perkins LLP is a law firm based in Seattle, Washington. Perkins LLP consists of both individual partners and various professional corporations that are its "corporate partners." One of those corporate partners is California PC.
From 2004 to 2007, plaintiff worked for the law firm of Greenberg Traurig. After one of his colleagues left the firm to join defendants' Menlo Park office, attorneys from that firm began recruiting plaintiff. During these discussions, he was told that he could join the firm either as an individual partner of Perkins LLP or as an employee of its corporate partner, namely, California PC. If he joined as an employee, he would not receive income from Perkins LLP and would therefore not receive a Schedule K-1. Instead, he would receive W-2 wages from California PC and, at some point in the future, would be expected to contribute capital to it in exchange for shares of its stock.
In a letter dated March 7, 2007, defendants sent plaintiff an offer letter, inviting him to join the firm "as a voting, full-equity partner in our Menlo Park office." He was given the choice of joining the firm as an individual partner or as a shareholder of California PC: "You may join Perkins Coie either as an individual partner or a shareholder/employee of an existing multi-shareholder professional service corporation. Regardless of the form your partnership takes, your total income is equivalent to the income you would receive as an individual partner." Plaintiff chose to join as a "shareholder/employee" partner. The offer letter included a copy of a "Partnership Agreement," the execution of which was a requirement for membership.
On March 9, 2007, plaintiff signed the offer letter.
On July 3, 2007, plaintiff began work at the Menlo Park office. He was required to complete a form W-9.
On July 5, 2007, Perkins LLP executed an employment eligibility verification form I-9 for plaintiff.
In 2007 (in the month of November, according to plaintiff), plaintiff signed the Partnership Agreement. The Partnership Agreement contains a choice-of-law clause providing that the contract shall be governed by Washington state law. It also contains a mandatory arbitration provision, applicable to "[a]ny dispute arising out of this Agreement, or out of the relationship between any Partner or Shareholder and the Firm or any Corporate Partner . . . ." The arbitration provision provides, among other things, that any arbitration is to be strictly confidential and must be completed within 90 days of written notice. Also, if the parties cannot agree on the appointment of an arbitrator, the president of the Washington State Bar Association will select as arbitrator a partner from a large Seattle law firm. Under the provision, the parties are jointly responsible for the arbitrator's fees, and the prevailing party is entitled to an award of attorney fees and costs from the losing party.
Plaintiff also signed an "Employment Agreement," pursuant to which he became a "shareholder/employee" of California PC. In that agreement (Employment Agreement), he is identified as the "Employee" and California PC is identified as the "Employer." In signing the Employment Agreement, plaintiff expressly acknowledged he was also bound by the terms of the Partnership Agreement: "Employee and Employer acknowledge that the provisions of the partnership agreement of Perkins Coie LLP, as it may be amended from time to time in accordance with its terms . . ., are binding on Employer and Employee . . . . Employee acknowledges receipt of a copy of the Partnership Agreement and agrees that all the provisions therein applicable to shareholders of multi-shareholder corporate partners of Perkins Coie (including Employer) are applicable to Employee." The Employment Agreement states it is governed by California law.
During the course of his work with defendants, plaintiff received a form W-2 for each year, which showed California PC as his employer. He filled out a form W-4 for withholdings and did not receive a schedule K-1 from Perkins LLP.
On November 26, 2008, Perkins LLP filed a limited liability partnership annual renewal statement with the State of Washington, indicating that it had 21 partners only.
In the annual renewal filed on November 25, 2014, Perkins LLP stated that it had 50 partners.
On January 1, 2009, defendants revised the Partnership Agreement. The 2009 version contains the same arbitration clause as the prior version. Plaintiff voted to approve the revisions and signed this version of the agreement.
Plaintiff resigned in May 2010.
In August 2011, plaintiff filed a claim with the California Labor Commissioner, claiming a right to reimbursement from defendants for various allegedly unauthorized deductions totaling $60,194.
On March 20, 2012, plaintiff withdrew his claim and cancelled a scheduled hearing before the Labor Commissioner.
On May 4, 2012, plaintiff filed a class action complaint in the United States District Court for the Northern District of California, asserting essentially the same claims as the ones at issue in the present case, which we describe below.
On July 30, 2012, the district court issued an order enforcing the arbitration provision and granting a motion to dismiss filed by defendants.
On August 28, 2012, plaintiff filed a notice of appeal in the United States Court of Appeals, Ninth Circuit.
On December 9, 2014, the Ninth Circuit concluded it did not have original jurisdiction over the case.
On June 10, 2015, the federal case was dismissed without prejudice.
On June 11, 2015, plaintiff filed the underlying lawsuit as a class action, alleging claims for (1) unlawful deductions under Labor Code sections 221 and 223, (2) failure to reimburse business expenses under Labor Code section 2802, (3) failure to pay all wages due under Labor Code sections 201 to 203, (4) failure to provide accurate, itemized wage statements under Labor Code section 226, and unfair competition under Business and Professions Code section 17200 et seq. He defined the class as " '[a]ll attorneys who have been treated as "shareholder/employees" of Perkins Coie California, PC at any time from May 5, 2008 through the date of final judgment.' "
In the complaint, plaintiff alleges that during his employment defendants made several improper deductions from his wages to fund their business expenses, including deductions for workers' compensation insurance, unemployment insurance, accounting fees, Medicare, Social Security, shareholder loans, and retirement expenses. Plaintiff sought declaratory and injunctive relief, as well as restitution, statutory penalties, damages, and attorney fees.
On September 3, 2015, defendants filed a motion to compel arbitration.
On October 9, 2015, plaintiff filed an opposition to defendants' motion to compel arbitration. He asserted that California law, not Washington law, applied to the dispute. He also claimed the arbitration provision is unenforceable because it fails to comply with public policy and because it is unconscionable. In his accompanying declaration, he stated that he signed both the Employment Agreement and the Partnership Agreement in or around November 2007. He understood that he would not be able to continue working for defendants if he did not sign both documents exactly as presented, and he had no opportunity to negotiate the terms in either agreement.
On November 10, 2015, the trial court ordered the parties to file supplemental briefs concerning choice-of-law and unconscionability (or not) of the arbitration provision and its terms.
On December 7, 2015, defendants filed a supplemental brief in support of their motion to compel arbitration.
On January 6, 2016, plaintiff filed a supplemental opposition.
On April 14, 2016, the trial court filed its order denying defendants' motion to compel arbitration. The court elected to consider the issue under Washington State law, as advocated by defendants, reasoning that if the clause is not enforceable under that state's laws there would be no need to engage in an analysis under California law. For purposes of the motion, the court declined to make a determination on the merits as to whether plaintiff was an "employee," accepting at face value plaintiff's claim that he was defendants' employee for purposes of ruling on the enforceability of the arbitration clause.
Applying Washington law, the trial court concluded the arbitration provision was unconscionable due to procedural and/or substantive unconscionability. Specifically, the court found that the provision was procedurally unconscionable because the Partnership Agreement was an adhesion contract, and because plaintiff was not afforded a reasonable opportunity to understand its terms such that he had a "meaningful choice." The court also found the contract was substantively unconscionable because (1) the arbitration provision provides that the prevailing party is entitled to attorney fees, (2) the arbitration is to be "strictly confidential," (3) the provision limits the class of persons eligible to be chosen as the arbitrator, (4) the arbitration has a 90-day time limit, and (5) there is no requirement for the arbitrator to make written findings. The court also concluded severance was not appropriate under the circumstances, given the multiple unconscionable provisions. This appeal followed.
DISCUSSION
I. Standard of Review
"Absent conflicting extrinsic evidence, the validity of an arbitration clause, including whether it is subject to revocation on unconscionability grounds, is a question of law subject to de novo review." (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1468-1469; see Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1277.) II. Whether Washington State Law Governs Arbitrability
The standard of review under Washington law is similar: "We engage in de novo review of a trial court's decision to grant a motion to compel or deny arbitration." (Zuver v. Airtouch Communications, Inc. (2004) 153 Wn.2d 293, 302 [103 P.3d 753, 759] (Zuver).)
The contract containing the arbitration provision provides that it is to be governed by the laws of the State of Washington. Under Washington law, arbitration agreements are "valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of contract." (RCW 7.04A.060(1).) Strong public policy favors arbitration. (Perez v. Mid-Century Ins. Co. (1997) 85 Wn.App. 760, 765 .) "The party opposing arbitration bears the burden of showing that the agreement is not enforceable." (Zuver, supra, 103 P.3d at p. 759.)
As our Supreme Court stated in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-465 (Nedlloyd): "In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement [Second of Conflict of Laws (Restatement)] section 187, which reflects a strong policy favoring enforcement of such provisions. [¶] . . . Restatement section 187, subdivision (2) sets forth the following standards: 'The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either [¶] (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the [parties'] choice, or [¶] (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which . . . would be the state of the applicable law in the absence of an effective choice of law by the parties.' " (Fn. omitted.)
Plaintiff contends that California law governs the arbitrability of his claims because the Employment Agreement contains a California choice-of-law provision and because the Partnership Agreement "does not control the employment relationship between [him] and the California PC, which is the subject of this suit." He also contends the arbitration clause is unconscionable under both Washington and California law. Because the contract containing the arbitration provision specifies that it is governed by the laws of Washington State, and because plaintiff has not satisfactorily demonstrated the existence of either of the two exceptions to the general presumption in favor of applying the parties' choice of law under Nedlloyd, we will analyze this appeal under Washington law. III. Whether the Trial Court Erred in Presuming Plaintiff Was an Employee
Our ruling on choice-of-law is limited to the arbitration provision at issue. We express no opinion as to which state's law applies to the merits of plaintiff's complaint, or to any other issue.
Defendants first assert the trial court erred in failing to make a finding as to whether plaintiff was a partner, and instead presuming that he was an employee for purposes of the motion to compel arbitration. They acknowledge, however, that courts are required to resolve the threshold legal question of arbitrability by examining the arbitration agreement without inquiry into the merits of the underlying dispute. Nevertheless, they assert "a trial court is required to affirmatively determine whether the parties actually agreed to arbitrate the dispute at issue, and cannot sidestep any findings that need to be made in reading [sic] that decision."
As plaintiff observes, a party waives its right to arbitration by engaging in "litigation of the merits of arbitrable issues." (Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205 Cal.App.4th 436, 450.)
The trial court concluded the arbitration clause was broad enough to encompass all of plaintiff's claims. Thus, the court did "affirmatively determine" that the parties "actually agreed to arbitrate the dispute at issue." As the party seeking to compel arbitration, it is odd that defendants would assert the court "sidestepped" any necessary factual findings in this regard. Instead, they appear to take issue with the court's alleged decision to accept as true for all purposes plaintiff's allegation that he was an employee. Specifically, they assert the court's view of plaintiff's status prejudiced them by creating "a false standard for the court's unconscionability analysis." They also claim the court committed prejudicial error in failing to apply Washington's strong public policy in favor of arbitration.
"The existence of an unconscionable bargain is a question of law for the courts." (Nelson v. McGoldrick (1995) 127 Wn.2d 124, 131 [896 P.2d 1258, 1262], citing Mieske v. Bartell Drug Co. (1979) 92 Wn.2d 40, 50 [593 P.2d 1308, 1313].) As our review of the trial court's legal determination of unconscionability is de novo, we need not decide whether the lower court erred in either of these aspects of its analysis. However, we agree with the court's decision to defer any determination as to plaintiff's employment status.
"In determining whether the two parties agreed to arbitrate the particular dispute, we consider four guiding principles: 1) the duty to arbitrate arises from the contract; 2) a question of arbitrability is a judicial question unless the parties clearly provide otherwise; 3) a court should not reach the underlying merits of the controversy when determining arbitrability; and 4) as a matter of policy, courts favor arbitration of disputes. [Citation.] As a rule, a contractual dispute is arbitrable unless the court can say with positive assurance that no interpretation of the arbitration clause could cover the particular dispute." (Stein v. Geonerco, Inc. (2001) 105 Wn.App. 41, 45-46 [17 P.3d 1266, 1269], italics added.)
Under Washington law, "[c]ourts resolve the threshold legal question of arbitrability of the dispute by examining the arbitration agreement without inquiry into the merits of the dispute. If the dispute can fairly be said to invoke a claim covered by the agreement, any inquiry by the courts must end." (Heights at Issaquah v. Burton Landscape Group, Inc. (2009) 148 Wn.App. 400, 403 [200 P.3d 254, 255] (Heights).) " 'Although it is the court's duty to determine whether the parties have agreed to arbitrate a particular dispute, the court cannot decide the merits of the controversy, but may determine only whether the grievant has made a claim which on its face is governed by the contract.' " (Id. p. 256.) "If the reviewing court 'can fairly say that the parties' arbitration agreement covers the dispute, the inquiry ends because Washington strongly favors arbitration.' " (In re Marriage of Pascale (2013) 173 Wn.App. 836, 842 [295 P.3d 805, 809].) Here, there is no real dispute that the arbitration provision applies to plaintiff's claims.
Whether plaintiff is a partner or an employee goes to the heart of this lawsuit. For purposes of this appeal, that determination is an issue for the arbitrator, not the courts. Again, "[a]lthough it is the court's duty to determine whether the parties have agreed to arbitrate a particular dispute, the court cannot decide the merits of the controversy, but may determine only whether the grievant has made a claim which on its face is governed by the contract." (Peninsula Sch. Dist. v. Public Sch. Emp. (1996) 130 Wn.2d 401, 413 [924 P.2d 13, 19].) IV. Unconscionability
California and Washington differ in their analysis of unconscionability. As Washington courts have observed: "California, unlike Washington, requires both procedural and substantive unconscionability to overturn an arbitration agreement. Because of this, California is more likely to find procedural unconscionability without also finding such procedure to be egregious. In other words, procedural and substantive unconscionability need not be present in the same degree and are considered on a sliding scale." (Romney v. Franciscan Medical Group (2015) 186 Wn.App. 728, 739 [349 P.3d 32, 38] (Romney).) The Washington Supreme Court has "distinguished between 'procedural' unconscionability, involving blatant unfairness in the bargaining process and a lack of meaningful choice, and 'substantive' unconscionability, or unfairness of the terms or results." (Torgerson v. One Lincoln Tower, LLC (2009) 166 Wn.2d 510, 518 [210 P.3d 318, 322] (Torgerson).) Under Washington law, an agreement may be invalidated if it is either substantively or procedurally unconscionable. (Hill v. Garda CL Northwest, Inc. (2013) 179 Wn.2d 47, 55 [308 P.3d 635, 638].)
A. Procedural unconscionability
Defendants assert the arbitration provision is not procedurally unconscionable because plaintiff, "a seasoned corporate attorney," understood the terms of the provision and had the ability to negotiate its terms if he had chosen to do so. Irrespective of plaintiff's status as an experienced attorney, we agree the arbitration provision is not procedurally unconscionable under Washington law.
1. Legal Standards
In Washington, procedural unconscionability refers to the lack of meaningful choice, considering all the circumstances surrounding a transaction, including factors such as the manner in which the contract was entered, whether each party had a reasonable opportunity to understand the terms of the contract, and whether the important terms were hidden in fine print. (Torgerson, supra, 210 P.3d at p. 322.) The Washington Supreme Court has "stressed that ' "these three factors [should] not be applied mechanically without regard to whether in truth a meaningful choice existed." ' " (Ibid., italics omitted.)
2. Contracts of Adhesion
While relevant, the fact that an arbitration provision exists in a contract of adhesion does not necessarily render such a provision procedurally unconscionable. (Zuver, supra, 103 P.3d at p. 760.) In determining whether a contract is one of adhesion, the following factors must be analyzed: " '(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.' " (Adler v. Fred Lind Manor (2004) 153 Wn.2d 331, 347 [103 P.3d 773, 782-783] (Adler).)
Here, the Partnership Agreement containing the arbitration provision is a standard form printed contract. The contract was prepared by defendants, and substantial evidence supports the conclusion that it was offered to plaintiff on a "take it or leave it basis." The evidence also supports the conclusion that there was no true equality of bargaining power between the parties as to the terms contained in this contract. Thus, the contract is one of adhesion. As noted, however, this factor is not determinative because in Washington adhesion contracts are not inevitably deemed procedurally unconscionable. Instead, "[t]he key inquiry under Washington law is whether the employees lacked a meaningful choice." (Romney, supra, 349 P.3d at p. 38.)
Defendants appear to concede that the contract is an adhesion contract. They emphasize that the contract can only be deemed procedurally unconscionable "by applying the false assumption that [plaintiff] was an unsophisticated 'employee.' "
3. The Arbitration Provision Is Not Procedurally Unconscionable
In Zuver, the Washington Supreme Court found that an adhesion contract of employment was not procedurally unconscionable in a case in which the employee's argument rested solely on a lack of bargaining power. The court stated that more was needed: "At minimum, an employee who asserts an arbitration agreement is procedurally unconscionable must show some evidence that the employer refused to respond to her questions or concerns, placed undue pressure on her to sign the agreement without providing her with a reasonable opportunity to consider its terms, and/or that the terms of the agreement were set forth in such a way that an average person could not understand them." (Zuver, supra, 103 P.3d at p. 761.) The court concluded that an employment agreement offered to an employee on a "take it or leave it" basis was insufficient to negate an arbitration agreement where the employee had a reasonable opportunity to inspect the agreement and the terms were fully disclosed. (Ibid.)
Defendants admit that plaintiff "could not negotiate the arbitration provision of the Partnership Agreement." Relying on Zuver, they claim plaintiff "made no showing that [defendants] refused to respond to any questions or concerns," and also assert that he "had ample time to consider the terms of the Partnership Agreement." It is apparent that the terms of the agreement were fully disclosed and plaintiff was afforded a reasonable opportunity to inspect the document. Furthermore, none of the paragraphs contained in the Partnership Agreement are of small type or buried in a sea of fine print, nor is there any evidence that plaintiff was not afforded sufficient time to read and understand the substance of what he was signing. Plaintiff simply states in his declaration that in November 2007 he understood he had to sign the agreements or he would be terminated. He chose to sign.
While defendants assert that "as a partner he had the opportunity to negotiate to amend the terms of the Partnership Agreement," that opportunity would only arise after he entered into the agreement, and thus is not relevant to our analysis.
Plaintiff's suggestion that he signed only because he thought he would lose his job does not support a finding of procedural unconscionability under Washington law because he was presented with the contract containing the arbitration provision before he accepted the job, and thereafter made the choice to commence working for California PC notwithstanding the contract's terms.
On the one hand, because plaintiff had no ability to influence the terms of the Partnership Agreement, it is difficult to see how he had any choice, as it appears his sole real choice was to not join the firm at all. However, as noted, the key inquiry under Washington law is whether an employee lacked a meaningful choice. Courts in that state have stated that such a "choice" can always include the pursuit of alternative employment. (Romney, supra, 349 P.3d at p. 38 ["Here, as in other cases of employment, the employees could choose employment elsewhere."].) Like the plaintiffs in Romney, plaintiff could have chosen employment elsewhere. Thus, we conclude the arbitration provision is not procedurally unconscionable.
Additionally, while it is true as the trial court found that no existing rules or procedures by an established arbitration organization are used or referenced in the arbitration provision, it is unclear to us that this constitutes grounds for finding procedural unconscionability under Washington law. The only case we have uncovered so holding is a case applying California law. (Brown v. MHN Government Services, Inc. (2013) 178 Wn.2d 258, 267-268 [306 P.3d 948, 954].) Further, at least one California court has stated, "[W]e are not convinced that California courts would agree with the Brown court's application of California law [on this point]." (Brinkley v. Monterey Financial Services, Inc. (2015) 242 Cal.App.4th 314, 342.)
The trial court also disagreed with defendants' assertion that any missing procedural terms are supplied and impliedly included by Washington arbitration laws, specifically RCW Chapter 7.04A. The court concluded that RCW section 7.04A.030(4) is to the contrary. That section states that "[t]his chapter does not apply to any arbitration agreement between employers and employees or between employers and associations of employees." However, courts interpreting Washington law have held that the exception is intended to apply to mandatory statutory arbitration, and does not prohibit contractual arbitration of employment disputes. (See Brooks v. Robert Larson Auto. Group, Inc. (W.D. Wn., Sept. 1, 2009, Civ. No. C09-5016 FDB) 2009 U.S. Dist. LEXIS 86508, *4 [" RCW 7.04A.030(4) excludes employment disputes from the mandatory application of arbitration. There is no prohibition of contractual arbitration of employment disputes, nor the incorporation of statutory provisions into an arbitration agreement."].) In sum, we conclude the arbitration provision is not procedurally unconscionable under Washington law.
B. Substantive Unconscionability
In contrast to procedural unconscionability, substantive unconscionability involves cases " ' "where a clause or term in the contract is . . . one-sided or overly harsh . . . ." ' [Citation.] However, such unfairness must truly stand out. ' " 'Shocking to the conscience,' 'monstrously harsh,' and 'exceedingly calloused' are terms sometimes used to define substantive unconscionability." ' " (Torgerson, supra, 210 P.3d at p. 323.) The existence of substantive unconscionability, alone, is sufficient to support a finding of unconscionability, such that a contract provision may not be enforced. (Adler, supra, 103 P.3d at p. 346.)
1. The Attorney Fees Provision
The relevant part of the provision regarding attorney fees states: "The prevailing party in the arbitration shall be paid by the other parties an amount equal to the prevailing party's attorneys' fees and costs. To the extent the Firm is the prevailing party, such attorneys['] fees shall include but not be limited to the value of legal services that the Firm's attorneys and other professionals perform in connection with the arbitration. The arbitrator shall determine the prevailing party and, as appropriate, the share of the prevailing party's attorneys' fees and costs to be paid by each of the other parties, and shall resolve any disputes with respect to attorneys' fees and costs." (Italics added.)
The trial court found this provision unconscionable because it does not correspond to California Labor Code provisions that allow the recovery of attorney fees to a prevailing employee but not to a prevailing employer. Defendants argue on appeal that the "simple explanation for why that is the case" is that the Partnership Agreement is not an employer/employee contract. However, unconscionability "is an issue that courts approach both in law and equity, exercising the power to prevent enforcement of a legal right when to do so would be inequitable under the circumstances." (Woodward v. Emeritus Corp. (2015) 192 Wn.App. 584, 607 [368 P.3d 487, 498], italics added.) Here, under the circumstances of this case, it would be inequitable to mandate that plaintiff pay defendants' attorney fees if he loses when he would not be subject to that same burden in a court action.
Washington law on this point is similar. (See, e.g., Walters v. A.A.A. Waterproofing, Inc. (2009) 151 Wn.App. 316, 321-322 [211 P.3d 454, 458] (Walters).)
Defendants next attempt to soften the attorney fee language, asserting it merely gives discretion to the arbitrator to only award attorney fees to the prevailing party if he or she deems it "appropriate." They claim the arbitrator has discretion not to make an award. They argue this is the same situation as addressed by the Washington Supreme Court in Zuver. We are not persuaded.
In Zuver, the relevant provision stated: "The prevailing party in any arbitration may be entitled to receive reasonable attorney's fees." (Zuver, supra, 103 P.3d at p. 757, italics added.) The court found "the effect of . . . [this] attorney fees provision . . . is, at this point, purely speculative. The provision does not use the directive 'shall' but rather, uses the permissive word 'may.' [Citation.] Thus, Zuver merely speculates that an arbitrator might construe this provision to deny her attorney fees if she prevails on her discrimination claim. [Citation.] Likewise, it is mere speculation to assume that the arbitrator would disregard case law holding that a prevailing defendant may receive attorney fees only if a plaintiff's discrimination claim was 'frivolous, unreasonable, or without foundation.' [Citations.] Consequently, we conclude that this attorney fees provision is not substantively unconscionable." (Zuver, at p. 764.)
In contrast, the arbitration agreement here explicitly requires that the prevailing party "shall be paid . . . an amount equal to the prevailing party's attorneys' fees and costs." The most reasonable understanding of this language is that the nonprevailing party will be required to pay any and all of the fees and costs incurred by the prevailing party in arbitrating the matter before the arbitrator, which would include the attorney fees incurred by that party. Further, while the provision expressly states that defendants are to be compensated if they serve as attorneys on their own behalf, plaintiff is not afforded a similar benefit under the terms of this arbitration provision.
The California Supreme Court has held that "an attorney who chooses to litigate in propria persona and therefore does not pay or become liable to pay consideration in exchange for legal representation cannot recover 'reasonable attorney's fees' under [Civil Code] section 1717 as compensation for the time and effort he expends on his own behalf or for the professional business opportunities he forgoes as a result of his decision." (Trope v. Katz (1995) 11 Cal.4th 274, 292.) The rule appears to be the opposite in Washington State: "The better reasoning supports an award of attorney fees to lawyers who represent themselves. . . . [L]awyers who represent themselves must take time from their practices to prepare and appear as would any other lawyer. Furthermore, overall costs may be saved because lawyers who represent themselves are more likely to be familiar with the facts of their cases." (Leen v. Demopolis (1991) 62 Wn.App. 473, 487 [815 P.2d 269, 277].)
The Washington Supreme Court has concluded that a similar fee- and cost-shifting provision was substantively unconscionable. In Gandee v. LDL Freedom Enters., Inc. (2013) 176 Wn.2d 598 (Gandee), the relevant fee-shifting provision was as follows: " 'The prevailing party in any action or proceeding related to this Agreement shall be entitled to recover reasonable legal fees and costs, including attorney's fees which may be incurred.' " (Id. at p. 1199.) The plaintiff in Gandee argued that the " 'loser pays' provision" was "one sided and harsh because if she prevails she is already entitled to costs and fees under the [Consumer Protection Act (RCW tit. 19, ch. 19.86 et seq.)] but is forced to bear the risk of a negative outcome, despite the legislature's intent to encourage consumers to vindicate their rights" by not allowing prevailing defendants to obtain their costs and fees under the relevant statute. (Gandee, at pp. 1200-1201.) The Gandee court agreed, stating: "Because the 'loser pays' provision serves to benefit only [the defendant] and, contrary to the legislature's intent, effectively chills [the plaintiff's] ability to bring suit under the [Consumer Protection Act], it is one sided and overly harsh. Therefore, we hold it to be substantively unconscionable." (Gandee, at p. 1201; see Adler, supra, 103 P.3d at p. 786 [clause requiring each party to bear his or her own costs and fees was substantively unconscionable in context of a fee-shifting statute], and Walters, supra, 211 P.3d at p. 459 ["loser pays" provision substantively unconscionable because one-sided and harsh, and therefore unenforceable].)
Plaintiff does not set forth evidence to support his claim that splitting the arbitration fees is unconscionable as a hardship. The Washington Supreme Court has held that the party opposed to arbitration must provide sufficient evidence to prove that a fee-splitting provision in his or her arbitration agreement was substantively unconscionable. Failure to provide any specific information about the arbitration fees and why such fees would effectively prohibit a plaintiff from bringing his or her claims will thwart the claim of substantive unconscionability. (Adler, supra, 103 P.3d at p. 785.)
The cost-shifting provision in the Partnership Agreement also effectively undermines a plaintiff's statutory right to bring an action under the Labor Code and collect attorney fees if he or she prevails without having to bear the corresponding risk of liability for the defendant's fees if he or she does not prevail. By undermining an injured plaintiff's right to attorney fees, the arbitration agreement benefits " 'the party with a substantially stronger bargaining position and more resources.' " (Adler, supra, 103 P.3d at p. 786.) We therefore conclude that the arbitration provision's attorney fee- and cost-shifting provision is substantively unconscionable.
In their reply brief, defendants erroneously rely on Romney. In that case, the court considered an attorney fee provision that, unlike the one at issue here, specifically provided, "Except as otherwise required by law, each party shall bear his/her own attorneys' fees and other costs associated with any Claims between the parties." (Romney, supra, 349 P.3d at p. 41.) The clause at issue here does not contain any exceptions, and also requires more than that each party should bear their own fees. Instead, it requires the losing party to pay the prevailing party's fees under all circumstances. Romney is inapposite.
2. The Confidentiality Provision
The arbitration provision states, in part, that "[t]he arbitration shall be initiated by written notice to all the other parties to the dispute, shall be conducted in Seattle, shall be strictly confidential and shall be completed within 90 days of the written notice." (Italics added.) We agree with the trial court that the confidentiality clause is substantively unconscionable.
In Zuver, the Washington State Supreme Court considered the following confidentiality provision: "All arbitration proceedings, including settlements and awards, under the Agreement will be confidential." (Zuver, supra, 103 P.3d at p. 757, italics added.) The court stated: "The effect of the provision here benefits only Airtouch. As written, the provision hampers an employee's ability to prove a pattern of discrimination or to take advantage of findings in past arbitrations. Moreover, keeping past findings secret undermines an employee's confidence in the fairness and honesty of the arbitration process and thus, potentially discourages that employee from pursuing a valid discrimination claim. Therefore, we hold that this confidentiality provision is substantively unconscionable." (Id. at p. 765.) The provision at issue in Zuver is essentially identical to the one at issue here. Accordingly, we conclude the arbitration provision in the Partnership Agreement is similarly unconscionable.
In arguing to the contrary, defendants rely on two cases that are inapposite. In Romney, the court found that a confidentiality provision was not so one-sided as to be unconscionable because it provided for a release of confidentiality when the parties otherwise agreed, and also prohibited confidentiality when the law would prohibit it. (Romney, supra, 349 P.3d at pp. 40-41.) The provision in the Partnership Agreement does not include any such contingencies. And, in Barnett v. Hicks (1992) 119 Wn.2d 151 , also cited by defendants, the court found that a confidential arbitration proceeding was consistent with the parties' stated intent to preserve confidentiality. (Id. at p. 1093.) That case did not concern a contractual arbitration clause, but rather a joint stipulation to have the matter heard by a private judge. (Ibid.)
Defendants also contend the confidentiality provision is flexible because it states that "the parties to any confirmation, challenge or enforcement action shall ensure that as much information as is possible shall be kept confidential and under seal." We fail to see how this provision inserts any flexibility into the mandatory confidentiality provision. In sum, the confidentiality provision is substantively unconscionable under Washington law.
3. Arbitrator Selection Provision
The arbitration agreement provides, in part: "The arbitrator shall be a lawyer agreed upon by the parties within 10 days of the written notice or, if the parties cannot agree, by a partner in a law firm having a Seattle office with at least 100 lawyers, chosen by the President of the Washington State Bar Association within 20 days of the written notice."
According to plaintiff, there are only five firms of this size in Seattle, one of which is defendants' firm.
The trial court concluded the "unique individualized terms for selection of an arbitrator" were all designed to benefit defendants only. The court reasoned that limiting the class of arbitrators to lawyers, combined with defendants' unilateral right to refuse to stipulate to an arbitrator proposed by plaintiff, narrowed the pool of eligible arbitrators to those who would be biased in defendants' favor. In light of defendants' status as the largest firm in the state of Washington, the court also questioned the neutrality of the president of the Washington State Bar, to whom the Agreement gives final power to select an arbitrator should all other mechanisms fail. Defendants argue the court's conclusions were speculative and that this "parade of horribles" would never occur. In support, they rely on Zuver for the proposition that such speculation is akin to the argument that an arbitrator might not follow the law, an argument that the Zuver court rejected.
Washington courts have stated that "arbitration can substitute for litigation only if we have confidence in the ability of the arbitrators to make fair, unbiased decisions. The choice of arbitrators has serious implications because ' "arbitrators are, when acting under unlimited authority, . . . final judges of both the law and the facts, and . . . no review will lie for a mistake in either." ' [Citations.] Washington law prevents those with 'known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party' from serving as a neutral arbitrator." (Rodriguez v. Windermere Real Estate/Wall St., Inc. (2008) 142 Wn.App. 833, 841 [175 P.3d 604, 608].) In Rodriguez, the parties' contract set forth internal arbitration procedures governing the appointment of a three-person arbitration panel, which was to be selected by an entity with business ties to the defendant, namely, its franchisor. (Id. at p. 606.) The appellate court affirmed the trial court's denial of the motion to compel arbitration on the ground that the selection process did not satisfy neutrality requirements of Washington's arbitration statutes. (Id. at p. 608.)
Here, we cannot say that the arbitration selection provision, on its face, is substantively unconscionable. There is nothing to suggest that it will necessarily result in an arbitrator who has a "known, direct, and material interest in the outcome of the arbitration proceeding" or a "known, existing, and substantial relationship" with defendants. Presumably, in the event the Washington State Bar president is called upon to select an arbitrator, he or she will not select an individual who is affiliated with defendants. While the arbitrator will necessarily be a partner at a large Seattle law firm, it is premature at this stage to assume that the selected individual will favor defendants.
Further, in the event the chosen arbitrator does exhibit bias, this would give the losing party grounds to seek to vacate the award. Trial courts are directed to vacate an arbitration award if it determined there was "[e]vident partiality by an arbitrator appointed as a neutral." (RCW 7.04A.230(1)(b)(i).) In addition, an arbitrator's failure to make a mandatory arbitrator disclosure is grounds to vacate an arbitration award. (RCW 7.04A.120.) In light of these safeguards, we conclude the selection provision is not substantively unconscionable on its face.
4. Time Limitation Provision
The trial court found that the 90-day completion period specified in the arbitration provision imposes unconscionable limitations that favor defendants. That provision states that any arbitration "shall be completed within 90 days of the written notice [initiating arbitration]." Defendants assert the time-limitation provision is reasonable and applies equally to both plaintiff and defendants.
Defendants rely on Heights, supra, 200 P.3d 254 for the proposition that the 90-day time limit constitutes a procedural matter for the arbitrator to decide. However, that case concerned the time limitations in a notice provision, not the time limit on the completion of an arbitration proceeding. In any event, our research has not disclosed a Washington state case concerning time limitations on the completion of contractual arbitration. Accordingly, we cannot conclude that this provision is substantively unconscionable under Washington law. We turn to whether the arbitration provision's two substantively unconscionable terms are severable. V. Severability
The trial court also found the arbitration provision's failure to provide for written findings was unconscionable. Defendants do not substantively address this point in their opening brief. We therefore decline to consider it.
Under Washington law, "[s]everance is the usual remedy for substantively unconscionable terms, but where such terms 'pervade' an arbitration agreement, [Washington courts] 'refuse to sever those provisions and declare the entire agreement void.' " (Gandee, supra, 293 P.3d at pp. 1199-1200.) The Gandee court had to consider whether three unconscionable provisions in an arbitration clause were severable, or, instead, whether the entire arbitration provision as a whole was invalid as a result of the unconscionability. (Id. at pp. 1201-1202.) The Gandee court explained that the arbitration clause was relatively short, in that it was a "four-sentence arbitration clause" and that it contained "three unconscionable provisions" (id. at p. 1201). The court concluded: "Severing all three provisions would significantly alter both the tone of the arbitration clause and the nature of the arbitration contemplated by the clause. The location, fee structure, and timing of the arbitration would be changed. Little would be left of the arbitration 'agreed' to by the parties. On these facts, the unconscionable terms pervade the entire clause and severing three out of four provisions would require essentially a rewriting of the arbitration agreement. Thus, the arbitration clause cannot be severed from the overall contract." (Id. at pp. 1201-1202.)
We have concluded that the arbitration provision is unconscionable in two respects, one less than in Gandee. The agreement is substantively unconscionable with respect to the awarding of attorney fees and the imposition of confidentiality. "When a court finds a provision in an employment arbitration agreement to be unconscionable, the court may enforce the remainder of the contract without the unconscionable clause. [Citation.] Severability is particularly likely when the agreement includes a severability clause. [Citation.] A court will declare the entire arbitration agreement unenforceable only when unconscionable provisions are pervasive." (Walters, supra, 211 P.3d at p. 462.)
The Partnership Agreement does not contain a severability clause. However, our research has not uncovered any Washington state cases holding that there cannot be severance in the absence of a clause in the contract explicitly providing for it. Unlike the contract at issue in Gandee, the provision here is relatively long and contains only two unconscionable aspects. Accordingly, we conclude the offending provisions may be severed.
The revised version (edits shown) would read: "Any dispute arising out of this Agreement, or out of the relationship between any Partner or Shareholder and the Firm or any Corporate Partner, or out of the relationship between or among two or more Partners or Shareholders shall be resolved by arbitration. The arbitration shall be initiated by written notice to all the other parties to the dispute, shall be conducted in Seattle, shall be strictly confidential and shall be completed within 90 days of the written notice. The arbitrator shall be a lawyer agreed upon by the parties within 10 days of the written notice or, if the parties cannot agree, by a partner in a law firm having a Seattle office with at least 100 lawyers, chosen by the President of the Washington State Bar Association within 20 days of the written notice. The parties to the arbitration shall split the arbitrator's fee equally. The prevailing party in the arbitration shall be paid by the other parties an amount equal to the prevailing party's attorneys' fees and costs. To the extent the Firm is the prevailing party, such attorney's fees shall include but not be limited to the value of legal services that the Firm's attorneys and other professionals perform in connection with the arbitration. The arbitrator shall determine the prevailing party and, as appropriate, the share of the prevailing party's attorneys' fees and costs to be paid by each of the other parties, and shall resolve any disputes with respect to attorneys' fees and costs. The arbitration award may be confirmed or challenged only in the Superior Court of King County, Washington., and the parties to any confirmation, challenge or enforcement action shall ensure that as much information as is possible shall be kept confidential and under seal. --------
DISPOSITION
The order denying defendants' motion to compel arbitration is reversed. On remand, the trial court shall take action consistent with this opinion.
/s/_________
Dondero, J. We concur: /s/_________
Humes, P. J. /s/_________
Banke, J.