Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. BC378128, Soussan G. Bruguera, Judge. Affirmed.
Shea Stokes Roberts & Wagner, Paul Wagner, Peter B. Miaretz, and Shirley Shu for Defendant and Appellant.
Lavi & Ebrahimian, N. Nick Ebrahimian, and Jordan D. Bello; The deRubertis Law Firm and David M. deRubertis for Plaintiff and Respondent.
SUZUKAWA, J.
INTRODUCTION
Defendant F.S. Hotels (L.A.) Inc. (FS Hotels) appeals from an order denying its petition to compel arbitration of a dispute involving a former employee, plaintiff Jose I. Aguilar. The trial court found that the arbitration agreement was procedurally and substantively unconscionable. FS Hotels contends that the trial court erred in so finding. It also asserts that to the extent certain provisions of the agreement were unconscionable, the court should have severed them and enforced the remainder of the agreement. We affirm the trial court’s order.
FACTUAL AND PROCEDURAL BACKGROUND
FS Hotels operates the Four Seasons hotel chain. It hired Aguilar as a guestroom attendant on January 2, 2006. During employee training, a human resources representative presented Aguilar with the “EmPactSM,” a 75-page standard form employee handbook that sets forth such information as company history, hotel policies, and employee benefits.
The handbook outlines the policies regarding the hotel’s dispute resolution mechanism, entitled C.A.R.E. (Complaint, Arbitration & Review for Employees), on pages 68 to 70. C.A.R.E. consists of a six-step procedure for resolving problems and complaints. Step 1 requires the employee to discuss the matter informally with his or her immediate supervisor. If step 1 does not resolve the issue, step 2 requires the employee to file a written complaint with the human resources office. Step 3 consists of an investigation and hearing conducted by the director of human resources, which leads to step 4, a written decision issued by the director at the conclusion of the investigation. If the employee is dissatisfied with the written decision in step 4, step 5 allows the employee to appeal to and meet with the general manager, who will then issue his or her own written decision after the meeting.
If the employee is dissatisfied with the general manager’s decision, step 6 requires the employee to submit the complaint to arbitration if it is based on “employment discrimination (as defined by law) or harassment as it relates to [the employee’s] employment with the Four Seasons Hotel Los Angeles, or the decision results in [the employee’s] termination from the Hotel (including constructive discharge but not a permanent lay-off)....”
The employee handbook provides on pages 73 and 74 a sample form of the arbitration agreement, entitled EmPact Summary and Understanding. The agreement is a standard form document created by FS Hotels. The relevant provision of the agreement states: “I have read EmPactSM and promise to:... [u]se C.A.R.E. first for all complaints even if I have exercised my right to opt out of the arbitration provisions of C.A.R.E.; and [u]nless I have exercised my right to opt out, use the arbitration procedure described in C.A.R.E. as the exclusive method of resolving any dispute I may have relating to termination of my employment (including constructive discharge) and/or claims of employment discrimination or harassment.” The sample form also states that the employee will be given an opportunity to sign the actual arbitration agreement on or before the last day of his or her probationary period, which is 90 days. Aguilar was presented with the actual arbitration agreement and signed it on January 5, 2006.
The employee handbook provides on page 75 an opt-out form for employees who wish to opt out of the arbitration provisions of C.A.R.E. The form states that employees must sign and date the form at the time the employee handbook is first presented in order for the opt-out to be effective. It states, in part: “I understand that if I wish to exercise my right to opt out of the arbitration provisions of C.A.R.E., I must do so either at the time my EmPactSM agreement is first presented to me by signing and dating this form, or within ten (10) calendar days of the date I am notified of any written amendment to my EmPactSM....” Aguilar did not sign the opt out form.
Approximately six months after he was hired, Aguilar suffered a knee injury from a non-work related accident. Aguilar was terminated from employment and reapplied six months later for another position at the hotel. FS Hotels declined Aguilar’s application. On September 26, 2007, Aguilar sued FS Hotels alleging disability discrimination. FS Hotels filed a petition to compel arbitration.
The trial court denied FS Hotels’ petition, finding that the arbitration agreement was unenforceable. It concluded that the opt-out procedure was procedurally unconscionable and the lack of mutuality with respect to the obligation to arbitrate disputes was substantively unconscionable. The court also found the agreement substantively unconscionable because it required Aguilar to utilize the informal dispute resolution process outlined in C.A.R.E. even though he exercised the right to opt out of arbitration, thereby allowing FS Hotels to obtain a “free peek” at his case prior to litigation.
FS Hotels timely appealed.
DISCUSSION
I. Standard of Review
On an appeal from a denial of a motion to compel arbitration, we review the arbitration agreement de novo to determine whether the agreement is legally enforceable, applying general principles of California contract law. (Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 502.) “Unconscionability findings are reviewed de novo if they are based on declarations that raise ‘no meaningful factual disputes.’ [Citation.]” (Murphy v. Check ‘N Go of California, Inc. (2007)156 Cal.App.4th 138, 144.)
II. Governing Law on Unconscionability
A contract is unconscionable if there is “‘“an absence of meaningful choice on the part of one of the parties[,] together with contract terms which are unreasonably favorable to the other party.”’” (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1328 (Kinney).) “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.” (Civ. Code, §1670.5, subd. (a).) In the context of arbitration agreements, a court shall not enforce an arbitration agreement if “[g]rounds exist for the revocation of the agreement.” (Code Civ. Proc., § 1281.2, subd. (b).)
Unconscionability has both a procedural and substantive element. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).) In order to find a contract unenforceable, a court must conclude it is both procedurally and substantively defective. However, the two elements need not be present in the same degree. “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.)
Procedural unconscionability focuses on oppression and surprise due to unequal bargaining power. (Kinney, supra, 70 Cal.App.4th at p. 1329.) Oppression arises from an inequality of bargaining power that results in an absence of real negotiation or meaningful choice on the part of the weaker party. (Ibid.) Surprise arises from “‘“‘“the extent to which the terms of the bargain are hidden in a ‘prolix printed form’ drafted by a party in a superior bargaining position.”’”’” (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1469 (Roman).)
Substantive unconscionability is present where the actual terms of the agreement are “so one-sided as to ‘shock the conscience.’” (American Software, Inc. v. Ali (1996) 46 Cal.App.4th 1386, 1391.) “Substantive unconscionability ‘may take various forms,’ but typically is found in the employment context when the arbitration agreement is ‘one-sided’ in favor of the employer without sufficient justification, for example, when ‘the employee’s claims against the employer, but not the employer’s claims against the employee, are subject to arbitration.’” (Roman, supra, 172 Cal.App.4th at p. 1470.)
III. The Agreement Is Procedurally Unconscionable
FS Hotels asserts that the agreement cannot be procedurally defective because the arbitration program was completely voluntary. We disagree. Although it may appear as though FS Hotels provided its employees with a meaningful opportunity to opt out of the arbitration provisions of C.A.R.E., closer examination of the opt-out procedure reveals otherwise. The manner in which an employee had to communicate his or her desire to avoid the arbitration process left the employee with no meaningful choice.
The opt-out form, located on the last page of the 75-page employee handbook, clearly states that employees must sign and date the opt-out form at the time the employee handbook is first presented in order for the opt-out to be effective. A second deadline, triggered by a written amendment to the agreement, does not apply here.
The provision requiring an employee who wishes to opt out to sign the form at the time the handbook is presented is problematic. It is unlikely that an employee will read the entire handbook and reach the opt-out form on the last page at the time the handbook is presented. Moreover, there was no evidence the employee in this case was directed to the opt-out form, which would have highlighted the need for an immediate decision. By burying the opt-out provision in the back of the employee handbook, FS Hotels successfully hid the terms of the bargain. This defect is highlighted by the fact that by the time an employee receives the actual arbitration agreement to sign (which could be as long as 90 days after the employee begins work), the choice to opt out has already lapsed because that choice had to be made when the handbook was first presented. Although the presentation of the arbitration agreement suggests to the employee that he or she has retained the right to accept or reject its terms, the time to opt out has come and gone.
Taken together, the manner in which the opt-out form and arbitration agreement provisions are placed in the handbook and the process by which the handbook and arbitration agreement are presented to an employee create only an illusion of choice. The trial court correctly found the agreement procedurally unconscionable.
IV. The Agreement Is Substantively Unconscionable
A. Lack of Mutuality
In Mercuro v. Superior Court (2002) 96 Cal.App.4th 167 (Mercuro),the arbitration agreement compelled the parties to arbitrate disputes involving claims for breach of contract, tort liability, discrimination based on sex, age, or disability, and claims for violation of any federal, state, or other governmental constitution, statute, ordinance, regulation, or public policy. (Id. at pp. 175-176.) The agreement excluded claims for intellectual property violations, unfair competition, and unauthorized use or disclosure of trade secrets or confidential information. (Id. at p. 176.)
Our colleagues in Division Seven held the arbitration agreement unconscionable in part because “the agreement compels arbitration of the claims employees are most likely to bring against [their employer]” while exempting from arbitration “the claims [the employer] is most likely to bring against its employees.” (Mercuro, supra, 96 Cal.App.4th at p. 176 .) The court concluded that the employer “require[d] the weaker parties—its employees—to arbitrate their most common claims while choosing to litigate in the courts its own claims against its employees.” (Ibid.)
So it is in our case. The relevant provisions regarding the types of claims subject to arbitration state: “I have read EmPactSM and promise to:... use the arbitration procedure described in C.A.R.E. as the exclusive method of resolving any dispute I may have relating to termination of my employment (including constructive discharge) and/or claims of employment discrimination or harassment. [¶] Four Seasons Hotel Los Angeles promises to comply with its obligations under EmPactSM by:... [u]tilizing C.A.R.E. as its exclusive remedy for resolving any disputes relating to my termination (including claims of constructive discharge) and/or claims of employment discrimination or harassment.”
Disputes relating to termination and claims of employment discrimination or harassment are brought exclusively by the employee against the employer. According to the contract at issue here, such disputes must be arbitrated. On the other hand, the agreement makes no mention of, and therefore implicitly exempts from arbitration, such claims as breach of fiduciary duty, breach of contract, breach of confidentiality, libel, and slander, which are claims that an employer would likely bring against an employee.
In its reply brief, FS Hotels argues for the first time that if it “wished to press a claim against an employee that related to his termination, such as destruction of property or theft of confidential information, it would be obligated, under EmPact, to follow C.A.R.E. and [arbitrate] its claims, even if the employee had not initiated any lawsuit or arbitration.” Initially, we may reject the argument, as it was improper for FS Hotels to raise it for the first time in a reply brief. (American Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453.) In any event, FS Hotel’s reading of the arbitration clause is belied by its plain language. The agreement provides that the employee promises he or she will use the arbitration procedure “as the exclusive method of resolving any dispute I may have relating to termination of my employment.” (Italics added.) It is clear the only dispute required to be arbitrated is an employee’s claim he or she should not have been terminated. Contrary to FS Hotel’s assertion, the language does not say the employer is required to arbitrate a dispute because its subject matter might have been the cause of an employee’s discharge.
We conclude the lack of mutuality regarding the obligation to arbitrate contributes to the substantive unconscionability of the agreement.
B. The Informal Dispute Resolution as a Precondition to Arbitration
In Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267 (Nyulassy), the employee and employer signed a standard form employment agreement. (Id. at p. 1273.) The agreement required the employee (but not the employer) to arbitrate any and all employment disputes, required employees to attempt to resolve disputes with management as a precondition to arbitration, and set time limitations for arbitration. (Id. at pp. 1273, 1282-1283.) The appellate court affirmed the trial court’s finding that the agreement was unconscionable. (Id. at p. 1288.)
The Nyulassy court found the agreement substantively unconscionable in part because it required the employee to resolve any disputes through discussions with various levels of management as a precondition to arbitration. (Nyulassy, supra, 120 Cal.App.4th at pp. 1273, 1282.) The court reasoned that “[w]hile on its face, this provision may present a laudable mechanism for resolving employment disputes informally, it connotes a less benign goal. Given the unilateral nature of the arbitration agreement, requiring plaintiff to submit to an employer-controlled dispute resolution mechanism (i.e., one without a neutral mediator) suggests that defendant would receive a ‘free peek’ at plaintiff’s case, thereby obtaining an advantage if and when plaintiff were to later demand arbitration.” (Id. at pp. 1282-1283.)
FS Hotels makes two claims. First, the informal dispute resolution procedure is not part of the arbitration agreement. The form which serves as the employee’s acceptance of the contract states: “I have read EmPactSM and promise to:... [u]se C.A.R.E. first for all complaints even if I have exercised my right to opt out of the arbitration provisions of C.A.R.E.; and [u]nless I have exercised my right to opt out, use the arbitration procedure described in C.A.R.E. as the exclusive method of resolving any dispute I may have.... ” This clearly establishes that the dispute resolution provisions are an integral part of the arbitration process. Second, it points out that Aguilar did not participate in the dispute resolution process prior to filing his lawsuit. This fact has no bearing on whether the agreement requires otherwise.
FS Hotels contends that the trial court misapplied the rationale set forth in Nyulassy by basing its decision solely on the internal resolution provision. It argues that the Nyulassy court found the arbitration agreement unconscionable because of a collection of factors, such as the lack of mutuality and time limitations for asserting claims. It asserts that a flawed internal resolution provision alone does not render an agreement substantively unconscionable. However, FS Hotels ignores the fact that the trial court also found the agreement substantively unconscionable because of a lack of mutuality with respect to the obligation to arbitrate.
Standing alone, we find nothing wrong with the concept of an informal dispute resolution procedure. Here, however, the procedure is an integral part of an arbitration process that lacks mutuality. Thus, the employee bears an unequal burden to utilize the procedure because, as we have discussed, the claims the employer is most likely to bring are not subject to arbitration.
We agree with the trial court that the lack of mutuality and the informal dispute resolution process render the arbitration agreement substantively unconscionable.
V. FS Hotels’ Remaining Contentions Are Without Merit
FS Hotels argues that the trial court erred in finding the internal resolution provision of C.A.R.E. substantively unconscionable because it had already decided that the agreement met the requirements of Armendariz. We disagree.
In Armendariz,the California Supreme Court set forth minimum requirements for mandatory employment arbitration agreements in order to protect an employee’s unwaivable statutory rights created by the California Fair Employment and Housing Act. (Armendariz, supra,24 Cal.4th at p. 103.) These include requiring neutral arbitrators, providing for adequate discovery, requiring a written award, and limiting the costs of arbitration. (Ibid.)
However, the fact that an arbitration agreement meets the minimum requirements test does not render it enforceable. In Armendariz, the court focused first on the minimum requirements for the arbitration of unwaivable statutory claims and then separately applied general principles of unconscionability in considering objections to arbitration “that apply more generally to any type of arbitration imposed on the employee by the employer as a condition of employment, regardless of the type of claim being arbitrated.” (24 Cal.4thatp. 113.) Therefore, the analysis for minimum requirements and unconscionability are separate. Although the trial court found FS Hotels’ agreement satisfied Armendariz’s minimum requirements, it was not compelled to find it enforceable.
FS Hotels contends that should we find that the internal resolution provision in steps 1 through 5 of C.A.R.E. constitute part of the arbitration agreement and are substantively unconscionable, we should sever that provision and enforce the remainder of the arbitration agreement. We do not agree.
A ruling on severing unconscionable provisions of an arbitration agreement is reviewed for abuse of discretion. (Murphy v. Check ‘N Go of California, Inc., supra, 156 Cal.App.4th at p. 144.) “‘Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason, all of the circumstances before it being considered... and unless a clear case of abuse is shown and unless there has been a miscarriage of justice a reviewing court will not substitute its opinion and thereby divest the trial court of its discretionary power.’” (Denham v. Superior Court (1970) 2 Cal.3d 557, 566.)
In Armendariz, the court did not sever the unconscionable provisions of the arbitration agreement. It held severance was inappropriate because the agreement contained more than one unconscionable provision. (Armendariz, supra, 24 Cal.4th at p. 124.) “Such multiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer’s advantage.” (Ibid.) Furthermore, it determined that a court is not permitted to cure unconscionability by reforming and augmenting the contract. Therefore, if a court cannot cure unconscionability through severance, it must void the entire agreement. (Ibid.)
In the instant case, severance would not have cured the defects in the agreement. If the trial court removed the informal dispute resolution process, it would have had no effect on the lack of mutuality. The only way the trial court could remedy that flaw would be to reform the agreement by changing its definition of disputes subject to arbitration. That it could not do. The trial court did not abuse its discretion by refusing to sever the dispute resolution procedure and to enforce the remainder of the arbitration agreement.
DISPOSITION
We affirm the trial court’s order denying appellant’s petition to compel arbitration. Respondent shall recover his costs on appeal.
We concur: EPSTEIN, P.J., WILLHITE, J.