Opinion
NOT TO BE PUBLISHED
Alameda County Super. Ct. No. RG 07-327031
Jenkins, J.
Defendants and appellants Processing Solutions, LLC et al. (defendants), appeal the trial court’s order denying their motion for stay pending arbitration. The trial court concluded defendants could not compel plaintiff and respondent Amy Lynn Baillie (plaintiff) to arbitrate her dispute because the arbitration agreement in the contract between the parties is unconscionable. Defendants contend: (1) the trial court was not empowered to decide the issue of the enforceability of the arbitration agreement and should have referred that matter to the arbitrator; (2) the arbitration agreement is not unconscionable; (3) even if the arbitration agreement is unconscionable in part, the trial court should have severed the unconscionable terms and sent the matter to arbitration. Finding appellants’ contentions unpersuasive, we affirm.
Background
Defendant Processing Solutions, LLC is a Delaware company that acts as a servicing company for defendant MTE Financial Services, doing business as Instant Cash USA (MTE). Processing Solutions assists MTE in marketing loans over the internet and processes loan applications submitted electronically to MTE online.
In early July 2006, plaintiff submitted an application via the internet for a short-term loan in the amount of $300 from MTE. The terms of the Loan Note and Disclosure (Note) issued to and accepted by plaintiff stated that the borrower was required to repay the $300 advanced plus a $90 finance charge in one single payment due on July 14, 2006, unless the loan was renewed. If the loan was renewed, the borrower paid only the finance charge of $90 on July 14, 2006, and would accrue a new finance charge of $90. On the fifth renewal of the loan, and every renewal thereafter, the borrower had to pay the $90 finance charge and pay the loan down by $50, to continue until the loan was paid in full. The Note discloses that the annual percentage rate under the terms of the loan agreement is 1, 216.667% and authorizes the lender to debit the borrower’s bank account automatically in order to collect payments due under the Note. Additionally, the Note states that, “By electronically signing this Agreement, you acknowledge that you have read, understand, and agree to all of the terms and conditions of the Loan Note and Disclosure and the ACH Authorization. Plaintiff signed the Note electronically by typing “I agree” next to her name when she submitted the loan application on July 2, 2006.
The Note contains an “AGREEMENT TO ARBITRATE ALL DISPUTES, ” which states, “By signing below and to induce us, MTE Financial Services dba Instant Cash USA, to process your application for a loan, you and we agree that any and all claims, disputes or controversies that we or our servicers or agents have against you or that you have against us, ... that arise out of your application for one or more loans, the Loan Agreements that govern your repayment obligations, the loan for which you are applying or any other loan we previously made or later make to you, this Agreement To Arbitrate All Disputes, collection of the loan or loans, or alleging fraud or misrepresentation, whether under the common law or pursuant to federal or state statute or regulation, or otherwise, including disputes as to the matters subject to arbitration shall be resolved by binding individual (and not class) arbitration by and under the Code of Procedure of the National Arbitration Forum (“NAF”) in effect at the time the claim is filed. THEREFORE, THE ARBITRATOR SHALL NOT CONDUCT CLASS ARBITRATION; THAT IS, THE ARBITRATOR SHALL NOT ALLOW YOU TO SERVE AS A REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL, OR IN ANY OTHER REPRESENTATIVE CAPACITY FOR OTHERS IN THE ARBITRATION.”
While the arbitration agreement does not specify the costs or fees associated with the process, it states that “[i]f you are unable to pay the costs of arbitration, your arbitration fees may be waived by the NAF.” Also, the agreement provides that the cost of a “participatory hearing” will be borne by the lender for claims under $15,000 and shared equally by borrower and lender if the claim is more than $15,000 and less than $75,000. It further provides that the participatory hearing will be held at a location near the borrower’s residence. The final provision in the arbitration agreement states in capital letters: “NOTICE: YOU AND WE WOULD HAVE HAD A RIGHT OR OPPORTUNITY TO LITIGATE DISPUTES THROUGH A COURT AND HAVE A JUDGE OR JURY DECIDE THE DISPUTES BUT HAVE AGREED INSTEAD TO RESOLVE DISPUTES THROUGH BINDING ARBITRATION.”
In addition to the arbitration agreement, the Note includes a provision entitled, “AGREEMENT NOT TO BRING OR JOIN OR PARTICIPATE IN CLASS ACTIONS, ” which states, “To the extent permitted by law, by signing below you agree that you will not bring, join or participate in any class action as to any claim, dispute or controversy you may have against us.... You agree to the entry of injunctive relief to stop such a lawsuit or remove you as a participant in the suit. You agree to pay the costs we incur, including our court costs and attorney’s fees, in seeking such relief. This agreement is not a waiver of any of your rights and remedies to pursue a claim individually and not as a class action in binding arbitration as provided above. This agreement not to bring, join or participate in class action suits is an independent agreement and shall survive the closing, funding, repayment and/or default of the loan for which you are applying.”
On August 13, 2007, plaintiff filed her second amended complaint (SAC), a putative class action, against Processing Solutions, MTE and others. In the SAC, plaintiff alleged that between July 14, 2006 and December 1, 2006, defendants automatically debited a total of $977 from her bank account and then transferred the Note to a debt collection agency reflecting an amount due of $430. As a representative party on behalf of others similarly situated, plaintiff asserted causes of action for Usury and Unconscionable Lending, Injunctive Relief and Restitution pursuant to Business and Professions Code section 17200 et seq., Unjust Enrichment, and An Accounting.
On or about March 9, 2009, defendants filed a Notice of Motion and Motion for Stay Pending Arbitration. Plaintiff filed a memorandum of points and authorities in opposition on or about March 25, 2009. After issuing a tentative ruling, the trial court entertained oral argument on April 10, 2009. Following argument, the trial court confirmed its tentative ruling and filed its order denying defendants’ motion to compel arbitration. In its order, the trial court concluded the court, and not an arbitrator, should decide the issue of whether the arbitration clause is valid. The trial court also analyzed the arbitration agreement under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz) and concluded that although “ ‘the evidence of procedural unconscionability is limited, the evidence of substantive unconscionability is strong enough to tip the scale and render the arbitration provision unconscionable.’ [citation omitted] In the absence of an enforceable arbitration provision, there is no basis to stay the case pending arbitration.” Notice of Entry of the court’s order denying defendants’ motion to compel arbitration is dated April 15, 2009. Defendants filed a timely notice of appeal on May 7, 2009.
An order denying a motion to compel arbitration is appealable pursuant Code of Civil Procedure section 1294, subdivision (a).
Discussion
A. The Trial Court Properly Decided Enforceability of the Arbitration Agreement
Defendants contend that the trial court should have referred the question of arbitrability to the arbitrator. On this point, defendants rely on “basic principles of arbitration” set forth in Dream Theatre, Inc. v. Dream Theatre (2004) 124 Cal.App.4th 547, 552 (Dream Theatre) and several other California appellate decisions. In Dream Theatre, the appellate court addressed the question of whether the court or the arbitrator should decide which disputes were subject to arbitration. (Id. at pp. 552-553.) The court’s analysis was guided by several principles governing the review of arbitration agreements, specifically, (1) “ ‘ “ arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.’ [Citation.]’ (Citation)” and (2) “the question of arbitrability is for judicial determination ‘unless the parties clearly and unmistakably provide otherwise.’ (Citation.)” (Dream Theatre, supra, 124 Cal.App.4th at p. 552 [italics added].)
Applying these principles to the arbitration agreement at bar, defendants assert that plaintiff agreed to submit the question of unconscionability to arbitration, consistent with the language of the arbitration agreement stating that “any and all claims, ... including disputes as to the matters subject to arbitration, shall be resolved by binding individual (and not class) arbitration.” According to defendants, this language clearly and unmistakably gives the arbitrator the authority to decide the issue of the enforceability of the arbitration agreement. We respectfully disagree. Even assuming that parties may legally contract to arbitrate the issue of whether an arbitration agreement is unconscionable, the contractual language relied upon by defendants does not warrant the conclusion that they did so here.
We note in passing that it is unclear whether Dream Theatre’s broad pronouncement, that the question of arbitrability is for judicial determination unless the parties clearly and unmistakably provide otherwise, includes fundamental questions of contract formation. (Cf. Dream Theatre, supra, 124 Cal.App.4th at pp. 552-553 with Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972-973 [pursuant to the summary procedure set forth in [Code of Civil Procedure] sections 1281.2 and 1290.2 for resolving petitions to compel arbitration, the trial court must decide whether there was fraud in the inducement of the arbitration agreement] and Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 402 [concluding that questions about the existence or validity of an arbitration agreement “are to be resolved by the trial court in the manner provided for the hearing and decision of motions (Code Civ. Proc., § 1290.2), either on the basis of affidavits or declarations or, in the exercise of the court’s discretion where necessary to resolve material conflicts in the written evidence, upon live testimony”].) We need not resolve this issue here because the specific language relied upon by defendant does not constitute a provision which clearly and unmistakably grants the arbitrator the power to resolve fundamental issues of contract formation, (see discussion, post).
First, we note that, as stated in First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938 (Kaplan), any doubt about whether the court or the arbitrator should decide matters of arbitrability should be resolved in favor of the court deciding the issue. (Id. at pp. 944-945 [stating that “the law treats... ambiguity about the question “ ‘who (primarily) should decide arbitrability’ ” differently from the way it treats silence or ambiguity about the question ‘whether a particular merits-related dispute is... within the scope of a valid arbitration agreement’ ” because it reverses the usual presumption that doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration].) Next, we turn to the pertinent language in the arbitration agreement at issue, which states that “you and we agree that any and all claims, disputes or controversies that we... have against you or that you have against us, ... including disputes as to the matters subject to arbitration, shall be resolved by binding individual (and not class) arbitration.” While the language of the agreement referencing “any and all claims, disputes and controversies” is broad, it nevertheless fails to establish an agreement between the parties to submit to the arbitrator the questions of whether the arbitration agreement is unconscionable. Moreover, the language referencing claims or disputes that “we... have against you or that you have against us” contemplates a dispute between the parties arising from the terms of their contract rather than an attempt to avoid the contract entirely. In other words, the language of the agreement before us does not reflect a clear and unmistakable understanding that such fundamental matters of contract formation as unconscionability (Civil Code section 1670.5), mistake, duress, fraud or undue influence (Civil Code section 1689) would be subject to arbitration.
Our conclusion in this regard is supported by a recent decision by our colleagues in the Court of Appeal, Second District, in Sanchez v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154, 166 (Sanchez). In Sanchez, the arbitration agreement at issue provided that “the arbitrator will resolve ‘any disputes over the interpretation or application of this Arbitration Agreement.’ ” The critical language relied upon in Sanchez is broader than the language in the arbitration agreement before us. Nevertheless, the Sanchez court rejected the claim that the issue of whether the arbitration agreement was unconscionable should be submitted to the arbitrator, ruling instead that this language “does not appear to encompass disputes concerning the enforceability of the arbitration agreement based on unconscionability, public policy or other grounds.” (Id. at p. 166.) We conclude, just as the court in Sanchez, that the language of the arbitration agreement before us does not clearly and unmistakably provide that matters of contract formation would be decided by the arbitrator.
Moreover, important factual distinctions between this case and Dream Theatre lend further support for our conclusion that the principles of arbitration set forth in Dream Theatre do not control here. Dream Theatre involved an arbitration agreement between the buyer and seller of an internet-based multimedia and entertainment company. The contract contained comprehensive dispute resolution provisions in which the parties “used broad language to express their agreement to avoid litigation as a means of dispute resolution.” (Dream Theatre, 124 Cal.App.4th at p. 550.) Also, the contract identified “the parties’ respective obligations to indemnify one another from any and all losses, including those arising from either party’s breach of the Contract as well as those arising from third party claims.” (Ibid.) Subsequent to the sale, buyers discovered that sellers’ largest customer gave notice of termination of its contract with sellers some days before the sale of the company to buyers. Buyers served sellers with an indemnification notice claiming losses of about one million dollars as a result of sellers’ failure to disclose the loss of its principal customer. Sellers filed a motion to determine the arbitrability of buyers’ claim. The trial court ordered the claim was not arbitrable and stayed arbitration. Buyers appealed. (Id. at p. 551.)
Against this background, the appellate court in Dream Theatre applied the two basic principles of arbitration set forth above, and relied upon by defendants here, to guide its conclusion: The court stated that: “It is difficult to imagine how parties could state any more comprehensively than they did in the Contract the intent to avoid litigation at every step of the dispute resolution process. The Contract provides that if a contested claim is not settled within the contractual deadline, then it must be submitted to binding arbitration in accordance with the AAA Commercial Arbitration Rules. These rules specify that the arbitrator will decide disputes over the scope of the arbitration agreement. We conclude that the parties’ agreement to arbitrate according to this rule is clear and unmistakable evidence of the intent that the arbitrator will decide whether a Contested Claim is arbitrable.” (Dream Theatre, 124 Cal.App.4th at p. 557.) In Dream Theatre, therefore, the parties’ express desire to avoid litigation as a means of resolving any disputes arising from their contract, the fact that the contract contained mutual obligations to indemnify the other from any losses arising from breach of the contract, and the provision that a contested claim not settled within the contractual deadline must be submitted to binding arbitration, all made it manifestly clear that the parties had agreed to submit any claim for indemnity under the contract to arbitration.
By contrast, the dispute here is not one arising from a provision in the contract (like the dispute arising from the indemnification provision in Dream Theatre) which the parties’ arbitration agreement specifies must be decided by the arbitrator. Indeed, the dispute here does not arise out of the terms of the Note at all: Rather, it concerns a foundational issue of contract formation - is the arbitration agreement itself unconscionable?-and whether the court or the arbitrator resolves that issue. The arbitration agreement here simply does not address disputes over contractual formation issues in a manner that would support a finding that the parties “clearly and unmistakably” agreed to submit disputes of this nature to the arbitrator for resolution. (Dream Theatre, supra, 124 Cal.App.4th at p. 552 [stating that “the question of arbitrability is for judicial determination ‘unless the parties clearly and unmistakably provide otherwise.’ (Citation)” [italics added]].)
In sum, for all the reasons discussed above, the principles of arbitration that were dispositive in Dream Theatre do not control here. Thus, in light of the presumption that any doubt about whether the court or the arbitrator should decide matters of arbitrability should be resolved in favor of the court deciding the issue (see Kaplan, supra, 514 U.S. at pp. 944-945), we conclude that the trial court did not err by concluding it should decide the issue of whether the arbitration agreement is unconscionable.
Other courts have distinguished Dream Theatre on the basis it involved an arbitration agreement freely negotiated between two sophisticated business parties and therefore did not involve a contract of adhesion: Those courts held that language in the parties’ arbitration agreement which “clearly and unmistakably” allowed the arbitrator to decide the validity of the agreement was not dispositive where the contract was one of adhesion. (See Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138, 144 (Murphy) [language in arbitration agreement allowing arbitrator to decide issue of unconscionabilty “could not be clearer, ... [but] was vitiated by the fact that it was set forth in a contract of adhesion”]; Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 504-505 [agreeing with analysis in Murphy, supra, and finding that provision in an arbitration agreement embedded in a contract of adhesion “giving the arbitrator exclusive authority to decide enforceability issues is unconscionable and, therefore, unenforceable”].)
B. The Arbitration Agreement Is Unconscionable
On appeal from the denial of a motion to compel arbitration, “[u]nconscionability findings are reviewed de novo if they are based on declarations that raise ‘no meaningful factual disputes.’ [Citation.] However, where an unconscionability determination ‘is based upon the trial court’s resolution of conflicts in the evidence, or on the factual inferences which may be drawn therefrom, we consider the evidence in the light most favorable to the court’s determination and review those aspects of the determination for substantial evidence.’ [Citation.]” (Murphy, supra, 156 Cal.App.4th at p. 144.)
The basic legal framework for assessing unconscionability is well established. “ ‘[U]nconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.’ [Citation.] Phrased another way, unconscionability has both a ‘procedural’ and a ‘substantive’ element.” (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486.) “ ‘The procedural element requires oppression or surprise. [Citation.] Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form. [Citation.] The substantive element concerns whether a contractual provision reallocates risks in an objectively unreasonable or unexpected manner.’ [Citation.] Under this approach, both the procedural and substantive elements must be met before a contract or term will be deemed unconscionable. Both, however, need not be present to the same degree. A sliding scale is applied so that ‘the 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.’ ” (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1317, quoting Armendariz, supra, 24 Cal.4th at p. 114.)
1. Procedural Unconscionability
“The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, ‘ “which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” [Citation.]’ ” (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 [noting that in the case of pre-employment arbitration contracts was adhesive because “the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement”]; see also Gentry v. Superior Court (2007) 42 Cal.4th 443, 469 (Gentry) [noting that whereas contracts of adhesion “are indispensible facts of modern life that are generally enforced (citation), [they] contain a degree of procedural unconscionability even without any notable surprises, and ‘bear within them the clear danger of oppression and over-reaching.’ (Citations.)”].)
As our Supreme Court has recently stated, an element of procedural unconscionability is normally inherent in a contract of adhesion where the party with inferior bargaining power is presented with the contract on a “take-it-or-leave-it” basis. (See Discover Bank, supra, 36 Cal.4th at p. 160 [element of procedural unconscionability present where “consumer is given an amendment to its cardholder agreement in the form of a ‘bill stuffer’ that he would be deemed to accept if he did not close his account]; Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100 [“When the weaker party is presented the clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present]; Murphy, supra, 156 Cal.App.4th at p. 144-145 [where plaintiff thought she was required to sign dispute resolution agreement as a condition of continued employment, substantial evidence supported the trial court’s determination that the agreement was a contract of adhesion, and thus procedurally unconscionable].)
Similarly, in this case the arbitration agreement and the class action waiver were embedded in a contract of adhesion drafted by defendants, the party of superior bargaining strength, and plaintiff was faced with the choice of either accepting those terms or foregoing the loan. The loan application gave plaintiff no ability to opt out of the arbitration agreement or to otherwise reject any of the particular terms in the contract. If plaintiff wanted the loan, she had to agree to the arbitration clause. Under these circumstances, we conclude that the trial court did not err in finding an element of procedural unconscionability in the arbitration agreement.
We emphasize that in reaching this conclusion, we considered the fact that the arbitration agreement is embedded within a contract of adhesion for purposes of assessing whether the arbitration agreement is unconscionable: Whether the Note as a whole is unconscionable is an entirely separate issue that was not before the trial court and is not before us now on appeal. Thus, our conclusion today does not violate the holding in Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440, 449 [holding that “a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator”].)
2. Substantive Unconscionability
“[C]lass action waivers found in [] contracts [of adhesion] may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy.... [¶] Class action... waivers are not, in the abstract, exculpatory clauses. But because... damages in consumer cases are often small and because ‘ “[a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit” ’ (citation), ‘ “the class action is often the only effective way to halt and redress such exploitation.” ’ (Citation.) Moreover, such class action or arbitration waivers are indisputably one-sided. ‘Although styled as a mutual prohibition on representative or class actions, it is difficult to envision the circumstances under which the provision might negatively impact Discover [Bank], because credit card companies typically do not sue their customers in class action lawsuits.’ (Citation.) Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.” (Discover Bank, supra, 36 Cal.4th at p. 161.)
While the court in Discover Bank stopped short of holding that all class action waivers in consumer contracts are unconscionable, the court concluded that “when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” (Discover Bank, supra, 36 Cal.4th at p. 162-163.)
Asserting that MTE stands for “Modoc Tribal Enterprises, Inc.” and that MTE is located on tribal land in Oklahoma, defendants suggest the trial court failed to consider adequately the question of whether Modoc Tribal Law should apply to the issue of unconscionability. In this regard, defendants make sweeping generalizations such as “Indian tribes have the power to make their own laws and to enforce those laws in their own forum” and “Tribal laws must be recognized by the courts.” However, leaving aside any notice considerations (i.e. whether the Note properly disclosed that tribal law applied), defendants fail to show how the application of Modoc Tribal Law on the issue of unconscionability would pose any conflict with California law. Assuming arguendo that such a conflict exists, we agree with the trial court that California has a “materially greater interest than the chosen state in the determination of the particular issue.” (See Klussman v. Cross Country Bank (2005) 134 Cal.App.4th 1283, 1291, [holding that “the fundamental nature of California’s concern with protecting consumers” outweighs Delaware’s interest in “uniform regulation of business practices of banks incorporated under its laws, ” therefore California law of unconscionability applies to class action waiver in credit card agreement, id. at p. 1300].)
The class action waiver in this case has all the hallmarks of unconscionability described in Discover Bank, supra. As already noted, the class action waiver here is included in an arbitration agreement that is integral to and embedded within a contract of adhesion. The complaint here involves a dispute over the terms of a loan for the modest sum of only $300. The complaint alleged that defendants, the party with the superior bargaining power, “specifically targeted the poorest and most vulnerable members of society such as single parents, pensioners, persons on social assistance, the working poor, [and] the chronically underemployed” and “profited illegally” at the expense of these vulnerable members of society by charging usurious and unconscionable rates of interest. Under these circumstances, we conclude that the class action waiver in the arbitration agreement is unconscionable under the rationale of Discover Bank, supra.
We reject defendants’ assertion that Gentry, supra, requires a higher showing than the one made here before a court may find a class action waiver in a consumer contract unconscionable. Rather, the court held that in the context of deciding if a class arbitration waiver in an employment agreement violates public policy, the trial court should conduct an enquiry, “similar to the one it already makes to determine whether class actions are appropriate” (Gentry, supra, 42 Cal.4th at p. 463), in order to assess whether, in the “particular case, class arbitration would be a significantly more effective means than individual arbitration actions” to vindicate the statutory rights of the affected group of employees, (id. at p. 466). The inquiry referenced in Gentry is different from that undertaken in Discover Bank, where the Supreme Court was concerned with consumer contracts under which companies are alleged to have “cheat[ed] large numbers of consumers out of individually small amounts of money” and seek to avoid the consequences of their actions by means of class action waivers. (Discover Bank, supra, 36 Cal.4th at p. 163.) In short, defendants’ assertion conflates two separate and distinct legal theories under which courts may invalidate a class action waiver-as we do here under Discover Bank on the grounds that such a waiver is unconscionable, or under Gentry because a class action is a significantly more effective practical means of vindicating unwaivable statutory rights, which is not at issue here.
C. Severance.
Defendant contends that even if the class action waiver is deemed unconscionable, the rest of the arbitration agreement is fair and mutual. Thus, according to defendant, the class action waiver provision should be severed and balance of the arbitration agreement enforced.
The record shows defendants raised the severability issue below. At the close of oral argument, the trial court stated, “All right. Then the court will as indicated confirm its tentative ruling. And I’ll have to review the text to make sure that the severability issue is addressed.” However, the order subsequently issued by the trial court and now appealed by defendants did not address the issue of severability. Defendants did not move for reconsideration or otherwise bring this omission to the trial court’s attention. Under these circumstances, we infer that the trial court found that severance was inappropriate and will sustain that finding if it is supported by substantial evidence. (See Shaw v. County of Santa Cruz (2008) 170 Cal.App.4th 229, 269 [“A failure to request a statement of decision results in a waiver of findings and conclusions necessary to support the judgment and we will accordingly infer such conclusions.”]; and SFPP v. Burlington Northern & Santa Fe Ry. Co. (2004) 121 Cal.App.4th 452, 462 [under doctrine of implied findings, a party must object to any deficiencies in the trial court’s statement of decision otherwise “the appellate court will imply findings to support the judgment” where supported by substantial evidence].)
The decision whether to sever or restrict an unconscionable provision in an arbitration agreement is one that falls with a trial court’s exercise of “reasonable discretion.” (Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1411; see also Armendariz, supra, 24 Cal.4th at p. 122 (noting that the unconscionability statute [Civil Code, § 1670.5] “appears to give the trial court some discretion as to whether to sever or restrict the unconscionable provision”].) In this regard, “[t]he overarching inquiry is whether ‘ “the interests of justice [] would be furthered’ ” by severance. (Citation.)” (Armendariz, supra, 24 Cal.4th at p. 124.) Here, we cannot say that the trial court’s refusal to sever the unconscionable term was an abuse of its reasonable discretion.
In Armendariz, our Supreme Court set forth the basic principles of severability applicable to the doctrine of unconscionability as follows: “If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate.” (Armendariz, supra, 24 Cal.4th at p. 124.) However, where a court cannot cure an unconscionable contract through severance or restriction, the court “is not permitted to cure it through reformation and augmentation, [but] must void the entire agreement. (Citation.)” (Id. at p. 125.) The court applied these principles to an arbitration agreement that was unconscionable on two grounds, namely, the limitations placed on the employee’s rights to damages and the lack of mutuality (“because it requires only the arbitration of employee-but not employer-claims arising out of a wrongful termination”). (Id. at p. 120.) The court concluded the trial court “did not abuse its discretion in concluding that the arbitration agreement is permeated by an unlawful purpose” because the “multiple defects [in the arbitration agreement] 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.” (Id. p. 124.)
The arbitration agreement at issue here, like the one in Armendariz, is tainted with illegality. As we have already discussed, the class action waiver provision is unconscionable as contrary to public policy. (Discover Bank, supra, 36 Cal.4th at p. 162-163.) Also troubling is the provision in the arbitration agreement stating that disputes shall be governed by “the Code of Procedure of the National Arbitration Forum (“NAF”) in effect at the time the claim is filed.” However, the arbitration agreement did not include the NAF rules, it merely listed a web address (but did not provide a link to that address) and a physical address where plaintiff could obtain a copy of the NAF rules. However, even if plaintiff obtained a copy of the NAF rules in that way, the rules could have changed by the time any dispute arose. Thus, this provision, as drafted, provided plaintiff with no real notice at the time it was executed of what rules were actually being incorporated into the agreement. Rather, the provision merely specified that whatever NAF rules were current when the dispute arose would be enforced. The court in in Harper v. Ultimo, supra, found a similar provision oppressive because it “pegs both the scope and procedure of the arbitration to rules which might change”. (Harper v. Ultimo, supra, 113 Cal.App.4th at p. 1407.)
In sum, the multiple defects contained in the arbitration agreement “indicate a systematic effort to impose arbitration on [a borrower] not simply as an alternative to litigation, but as an inferior forum that works to the [lender’s] advantage.” (Armendariz, supra, 24 Cal.4th at p. 124.) Thus, we conclude that substantial evidence supports a finding by the trial court that severance is inappropriate in this case. (Cf. id. [declining a request to sever based on two unconscionable arbitration provisions]; Murphy, supra, 156 Cal.App.4th at p. 149 [same]; Sanchez, supra, 172 Cal.App.4th at p. 179 [same].) Accordingly, the trial court did not abuse its discretion by denying defendants’ motion to compel arbitration and to stay court proceedings. (In re Daniel C.H. (1990) 220 Cal.App.3d 814, 839 [no abuse of discretion where substantial evidence supports the order].)
Disposition
The trial court’s order denying defendants’ motion to stay court proceedings and compel arbitration is affirmed. Defendants and appellants Processing Solutions, LLC et al., shall bear costs of appeal.
We concur: McGuiness, P. J.Siggins, J.