Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from an order of the Superior Court of Fresno County. Alan M. Simpson, Judge, No. 07CECG02071
John J. Freni for Defendants and Appellants.
McCormick, Barstow, Sheppard, Wayte & Carruth and Timothy J. Buchanan for Plaintiff and Respondent.
OPINION
Gomes, Acting P.J.
Plaintiff John Kalmbach (Kalmbach) sued his employer, Sportsmobile West, Inc., and its president, shareholder and director, Alan Feld (Feld) (collectively SWI), for breach of contract, breach of fiduciary duty, and declaratory and injunctive relief, claiming SWI underpaid bonuses throughout his employment and refused to deliver SWI stock to him that he allegedly owns. SWI filed a motion to compel arbitration based on an arbitration agreement that was part of SWI’s employee handbook, which the trial court denied. SWI appeals. We shall affirm the order.
FACTUAL AND PROCEDURAL BACKGROUND
SWI manufactures and sells custom vans and van options on a nationwide basis. In 1999, SWI hired Kalmbach as its vice president of operations. Kalmbach’s yearly compensation consisted of a base salary of $80,000 and a bonus based on five percent of SWI’s yearly net profit. According to Kalmbach, SWI also agreed to give him an immediate five percent ownership in SWI and the opportunity to purchase stock options over a four year period.
The Complaint
In June 2007, Kalmbach filed suit against SWI. In his complaint, Kalmbach alleged that pursuant to agreements he reached with Feld when he was hired in 1999, he had a contractual right to ownership of 490,000 shares of stock in SWI, but he had not taken delivery of the stock certificates because Feld told him he would incur substantial tax liability if he did so. Kalmbach further alleged that in 2005, he and Feld signed a letter of intent confirming his right to an ownership interest in SWI and the stock options. Kalmbach claimed he learned for the first time in October 2006 that SWI had underpaid his 2005 bonus, and an accountant he retained advised him in December 2006 that all of his bonuses had been underpaid and his receipt of the stock certificates would not result in the tax consequences Feld said would occur. According to Kalmbach, he and Feld reached an oral agreement in February 2007 regarding payment of the bonus arrearages and stock certificate delivery, but Feld later denied the agreement and SWI refused to deliver the stock or pay the arrearages. The complaint alleges causes of action for specific performance of the 1999 and 2005 contracts, breach of the 1999 and 2005 contracts, declaratory relief, breach of fiduciary duty, and injunctive relief. The complaint seeks: (1) a decree of specific performance requiring SWI to deliver the stocks comprising the ownership interest in SWI Kalmbach acquired when he was hired in 1999; (2) a declaration that he is entitled to the stocks; (3) injunctive relief requiring transfer of the stocks, restraining SWI from altering the corporate structure or transferring any significant portion of SWI’s assets or stock pending resolution of the lawsuit; and (4) damages and exemplary damages.
The Motion for Preliminary Injunction
In July 2007, Kalmbach filed a motion for preliminary injunction to compel SWI to issue 50,000 shares of SWI stock, enjoin SWI from denying his status as a shareholder in SWI, and allow him to inspect SWI’s book and records. SWI opposed the motion, asserting, inter alia, that he was required to arbitrate his claims under SWI’s alternative dispute resolution (ADR) policy. On August 7, the trial court issued a tentative ruling, which partially granted the motion for preliminary injunction. A hearing on the motion was held that same day. On August 13, the court issued a written ruling granting in part and denying in part the motion for preliminary injunction. The court further found the ADR policy unenforceable.
The Motion to Compel Arbitration
On August 10, SWI filed a motion to compel arbitration and stay the lawsuit pending the outcome of the arbitration. SWI argued the ADR policy contained in its employee handbook required Kalmbach to arbitrate his claims because he agreed to the policy as a condition of his employment on both November 11, 2003, and May 17, 2007. Kalmbach opposed the motion, arguing the ADR policy violates the minimum requirements for arbitration provisions in employment agreements set forth in Armendariz v. Foundation Health Psychare Services (2000) 24 Cal.4th 83 (Armendariz); suffers from substantive unconscionability because it compels him, but not SWI, to arbitrate claims; and is procedurally unconscionable as a contract of adhesion.
The evidence presented in support of and opposition to the motion established that SWI hired the Evans HR Group to prepare its employee handbook, which included an ADR policy. In November 2003, Kalmbach signed an “Acknowledgement of Receipt for Employee Handbook,” which stated, inter alia: (1) he had received a copy of SWI’s employee handbook, and understood and agreed he was responsible to read and familiarize himself with the policies and procedures contained therein; (2) except for the at-will employment policy, SWI could modify, add to, or delete any and all of the policies or practices in the handbook; and (3) he “understood that by accepting or continuing employment with [SWI], that I am agreeing to all policies in this Handbook, including Alternative Dispute Resolution, Privacy, Conflict of Interest and At-Will Employment.” Kalmbach understood that all employees were required to sign the acknowledgement.
The ADR policy contained in the handbook states, in pertinent part: “All employment disputes between [SWI] and all of its employees (management, supervisory, salaried and hourly employees alike) will be resolved through [SWI]’s alternative dispute resolution policy. This policy is aimed at resolving employment disputes as quickly and as fairly as possible, to the benefit of everyone involved. This includes, but is not limited to, disputes arising out of or related to termination of employment, alleged sexual or unlawful harassment, and/or alleged discrimination.” The ADR policy further provides that if an “employment dispute” arises, SWI and the employee will attempt to resolve the dispute through “informal means.” If the informal attempts at resolution fail, the policy requires the parties to submit the dispute to mediation and if mediation fails, to “final and binding arbitration.”
The ADR policy states that arbitration proceedings shall be held at a mutually agreeable location in Fresno County, and contains the following procedure for selecting an arbitrator: “If you and [SWI] are unable to agree on a neutral arbitrator, the employer will obtain a list of arbitrators from a state or federal mediation service. You and the employer will ultimately strike names from the list until only one name remains. The remaining person[]shall be the arbitrator ….” The ADR policy further states that “[t]he arbitrator shall be bound by the provisions and procedures set forth in the American Arbitration Association’s ‘Commercial Arbitration Rules,’ and as amended and effective on July 1, 1996.” The ADR policy: (1) entitles both parties to “discovery sufficient to adequately arbitrate the claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review pursuant to California Code of Civil Procedure section 1286.2”; (2) requires the arbitrator to apply the substantive law, including the law of remedies, of California or federal law, or both, as applicable to the claims asserted; (3) requires the arbitrator to issue a written decision that will provide essential findings and conclusions on which any award is based; (4) states the arbitration is final and binding upon all the parties and enforceable to the extent permitted by law; (5) unless the arbitrator orders otherwise, “each party shall be responsible for compensating their attorneys and witnesses and bearing any other costs incurred by them”; and (6) “[t]he Company shall be responsible for the cost of the arbitration, hearing room and official transcript.”
The ADR policy lists the following disputes as being subject to arbitration: “As an employee, you and the Company agree that the exclusive remedy for any dispute arising out of the employment relationship between the Company and you shall be this arbitration, to the extent permitted by law. All such disputes shall be submitted to arbitration pursuant to the provisions of the Federal Arbitration Act (9 U.S.C. Section 1 and following), if applicable, or the provisions of Title 9 of Part III of the California Code of Civil Procedure beginning at Section 1280, or any later successor or replacement statutes. [¶] Disputes arising out of the employment relationship shall include all events occurring between the Company and you, occurring during your employment relationship, including the termination of the employment relationship for any reason. By agreeing to arbitrate these disputes, you and the Company are waiving the right to a jury trial on these issues and forego any right to bring claims on a representative, class member basis. [¶] The Company and you agree that this arbitration provision shall apply whether the dispute involves a cause of action in contract or in tort or is based on any other legal theory or statute, including, but not limited to the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act or any other federal, state or local act or statute.” The ADR policy excludes some disputes from arbitration: “The only disputes between the Company and you that shall not be subject to final and binding arbitration are claims and disputes under the California workers’ compensation laws, the California unemployment insurance laws and the Uniform Trade Secrets Act.”
In January 2007, the Evans HR Group revised SWI’s employee handbook to comply with certain new laws, but did not change the ADR policy. In April 2007, less than two months after disputes developed between Feld and Kalmbach regarding the bonuses and stock ownership, Feld presented Kalmbach with a revised employee handbook and an acknowledgement like the one he signed in November 2003. Kalmbach was reluctant to sign the acknowledgement because of the pending disputes. In mid-May 2007, Feld asked Kalmbach if he planned to sign the form. Kalmbach told Feld he preferred not to, as they had pending legal disputes that might be impacted by whatever the revised policies may be. Feld made it clear to Kalmbach that he had no choice but to sign the acknowledgement or he would be asked to leave the company. According to Kalmbach, Feld said his lawyer had told him it was up to Kalmbach – if he did not want to sign the acknowledgement, he could simply leave the company. This conveyed to Kalmbach that he would be fired if he did not sign the acknowledgement. Consequently, on May 17, 2007, Kalmbach signed an “Acknowledgement of Receipt for Employee Handbook,” which was identical to the acknowledgement he signed in November 2003.
SWI’s board of directors removed Kalmbach as vice president on August 17, 2007. Kalmbach knew nothing about his removal as an officer until August 21. According to Feld, Kalmbach’s status as an executive of SWI “remains intact.” Feld denied Kalmbach’s removal was done to punish Kalmbach or prevent him from having access to corporation information.
The Trial Court’s Ruling on the Motion to Compel Arbitration
Following oral argument on the motion on January 16, 2008, the trial court denied it. The trial court noted the parties agree that Kalmbach’s claims involved an employment dispute that is subject to the ADR policy. The trial court concluded, however, that the ADR policy was unenforceable because (1) Kalmbach’s claims fell within the definition of “wages” contained in California law since they dealt with compensation for work; (2) as claims for wages, they sought to enforce public policy carefully tethered to fundamental policies delineated in Labor Code sections 200, et seq. and therefore the minimal protections for arbitration of claims involving public policy set forth in Armendariz governed the case; (3) the ADR policy does not meet these minimal protections because under that policy, SWI does not have a duty to pay the arbitrator’s fee; and (4) general contract law also barred enforcement because the ADR policy allows only SWI meaningful access to the courts, as it exempts from arbitration claims under the Uniform Trade Secrets Act.
During oral argument on the motion, SWI’s attorney informed the court that Kalmbach’s employment had been terminated the previous Friday. The parties agreed below that the termination was completely irrelevant to the motion to compel arbitration.
The trial court refused to sever the provision stating SWI could litigate any Uniform Trade Secrets Act claim, and refused to construe the arbitration costs language as requiring SWI to pay the arbitrator’s fee. The trial court reasoned the ADR policy was permeated with one-sidedness because SWI inserted these provisions into the ADR policy in contravention of established case law, SWI had the sole authority to choose the arbitration service, and the ADR policy incorporated commercial rules which required sharing of the arbitrator’s fee instead of employment dispute rules.
DISCUSSION
I. Standard of Review
Arbitrability is a legal question subject to our de novo review. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1527 (Stirlen).) A trial court’s resolution of disputed facts will be upheld if support by substantial evidence. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1277.) Where no disputed extrinsic evidence is presented concerning an arbitration agreement, the arbitrability decision is reviewed de novo. (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 650 (Abramson).) Finally, refusal to enforce an arbitration agreement containing an unconscionable provision is reviewed under an abuse of discretion standard. (Armendariz, supra, 24 Cal.4th at p. 122.)
SWI contends we should review the trial court’s severance ruling in this case under a de novo standard of review because the trial court’s justifications for its ruling concern questions of law, not questions of fact, citing Ruiz v. Sysco Food Services (2004) 122 Cal.App.4th 520, 528. This case, however, does not stand for the proposition that severance rulings are subject to de novo review.
II. Enforcement of Arbitration Agreements
A. Policy
Under the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.), arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The FAA manifests a strong public policy of enforcing arbitration agreements, including agreements to arbitrate statutory rights. (Broughton v. Cigna Heathplans of California (1999) 21 Cal.4th 1066, 1074-1075.) This policy is also embodied in the California Arbitration Act (Code Civ. Proc., § 1280 et seq.). The strong policy in favor of enforcing arbitration agreements, however, does not arise until an enforceable agreement is established. (Mitchell v. American Fair Credit Assn., Inc. (2002) 99 Cal.App.4th 1345, 1355.) In determining the enforceability of an arbitration agreement, generally applicable contract defenses, such as fraud, duress, and unconscionability apply. (Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.) Unconscionability is one ground upon which a court may refuse to enforce an arbitration agreement. (Civ. Code, § 1670.5; Code Civ. Proc., § 1281.)
B. Analytical Framework
“In deciding whether an agreement to arbitrate is enforceable, the first step in the analysis is to determine whether the agreement implicates public or private rights.” (Abramson, supra, 115 Cal.App.4th at pp. 651-652.) “Where the plaintiff’s claims arise from unwaivable public rights, whether statutory or nonstatutory, the arbitration agreement must satisfy the minimum requirements set forth in Armendariz. [Citation.] Assuming it satisfies the Armendariz requirements, an agreement to arbitrate public claims also must be conscionable.” (Abramson, supra, at p. 652.) “Where the plaintiff asserts private rights rather than (or in addition to) unwaivable public rights, the agreement to arbitrate those claims is tested only against conscionability standards.” (Ibid.; see also Armendariz, supra, 24 Cal.4th at p. 113.)
The parties here dispute whether Kalmbach’s claims arise from unwaivable public rights. SWI asserts the trial court erred when it determined the minimum requirements of Armendariz applied to Kalmbach’s claims because Kalmbach is a high level executive who is pursuing “garden variety common law claims” that do not involve statutory or nonstatutory public rights. In support of its assertion, SWI cites Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276. In that case, the appellate court held the arbitration agreement at issue need not satisfy the minimum requirements set forth in Armendariz, concluding that because the plaintiff’s claims involved a breach of contract claim for a multimillion dollar bonus and severance payment, not claims for federally mandated overtime and minimum wage payments, they did not involve unwaivable statutory claims. (Giuliano, supra, 149 Cal.App.4th at pp. 1289-1290.) Kalmbach, however, argues Guiliano is distinguishable from his case and the minimum requirements of Armendariz apply here because his claim for unpaid bonuses is a claim for wages that is protected by fundamental public policy and therefore an unwaivable statutory right.
The parties also disagree on whether, assuming the minimum requirements stated in Armendariz apply, the minimum requirements have been satisfied. “To be lawful under Armendariz, an agreement to arbitrate public policy employment claims must satisfy five requirements. (1) The agreement must provide for adequate discovery. (2) It must require a written decision allowing limited judicial review. (3) The agreement must permit the types of relief that would be available in court. (4) It must limit the employee’s forum costs. [Citations.] (5) Finally, as with all contractual arbitration, an agreement to arbitrate a public policy claim must provide for a neutral arbitrator.” (Abramson, supra, 115 Cal.App.4th at pp. 653-654.)
The trial court found that only one of these requirements was not satisfied, i.e. that the ADR policy imposes forum costs on an employee that the employee would not have to pay if the case were being litigated. Specifically, the trial court found that while the ADR policy requires SWI to pay the administrative fees of the arbitration, the hearing room and the official transcript, it does not require SWI to pay the arbitrator’s fee. SWI contends the trial court erred in so finding because the ADR policy specifically states that SWI is responsible for the “cost of arbitration, hearing room and transcript” and the “cost of arbitration” naturally includes all of the costs of arbitration, including the arbitration fees and the arbitrator’s compensation. Kalmbach, on the other hand, asserts that the ADR policy does not satisfy two of the five requirements, in that it does not provide for a neutral arbitrator and it exposed him to payment for all or some part of the arbitrator’s fee.
We need not decide whether the minimum requirements set forth in Armendariz apply to Kalmbach’s claims, or whether those requirements have been satisfied, because even if find in SWI’s favor on those issues, the ADR policy is unconscionable.
III. Unconscionability
Both procedural and substantive unconscionability must be present in order for a court to refuse to enforce a contract as unconscionable. (Armendariz, supra, 24 Cal.4th at p. 114.) Courts apply a sliding scale: the greater the degree of one type of unconscionability, the lesser of the other is required in order to render the contract unenforceable. (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.) We will discuss each type of unconscionability in turn.
A. Procedural Unconscionability
“‘“Procedural unconscionability” concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citation.]’ [Citation.] The relevant factors are oppression and surprise.” (Abramson, supra, 115 Cal.App.4th at p. 656.) “‘The oppression component arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party.’” (Ibid.) It generally takes the form of a contract of adhesion (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071), a “standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” (Neal v. State Farm Ins. Companies (1961) 188 Cal.App.2d 690, 694.) “Where an adhesive contract is oppressive, surprise need not be shown.” (Abramson, supra, at p. 656.)
The ADR policy, drafted by SWI and offered to Kalmbach without negotiation, is a classic example of a procedurally unconscionable agreement. (See Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 499, 505, 509-510 [concluding arbitration agreement employee signed without explanation at her manager’s direction so she could start her new job is undisputedly an adhesion contract and therefore procedurally unconscionable].) Not only did Kalmbach sign an acknowledgement of receipt of the employee handbook that contained the ADR policy in November 2003, SWI presented Kalmbach with a new acknowledgement of receipt of employee handbook to sign after it revised the handbook in January 2007. While Kalmbach was reluctant to sign the acknowledgement due to the ongoing dispute over his bonuses and stock ownership and told Feld he preferred not to sign it, Feld told Kalmbach that he could either sign the second acknowledgement or leave SWI. It was only after being threatened with termination that Kalmbach signed the second acknowledgement in May 2007.
By requiring Kalmbach to sign the second acknowledgement under threat of termination, SWI engaged in oppressive tactics constituting a strong showing of procedural unconscionability. (See Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174-175 (Mercuro) [finding employer engaged in highly oppressive conduct to secure the employee’s signature on an arbitration agreement, resulting in a high level of procedural unconscionability, when the employer told the employee that if he did not sign the agreement he would be driven out of the company and have difficulty obtaining other employment].)
SWI asserts it did not engage in coercive conduct in May 2007 because the effect of the second acknowledgement was simply to remind Kalmbach that the ADR policy was a condition of his employment. The May 2007 acknowledgement, however, does not state that it is a reminder of SWI’s ADR policy; it states that by continuing employment with SWI, Kalmbach is agreeing to all policies in the employee handbook, including the ADR policy. SWI further argues that Kalmbach could not be coerced into agreeing to a policy by which he was already bound, namely the ADR policy he acknowledged in November 2003. However, in bringing its motion to compel arbitration, SWI relied on both the November 2003 and May 2007 acknowledgements to argue that Kalmbach was required to arbitrate his claims. Even if Kalmbach remained bound by the ADR policy in the 2003 handbook, SWI’s reliance on the 2007 acknowledgement in seeking to compel arbitration demonstrates that the 2007 acknowledgement was not just a reminder of the ADR policy, but a way of ensuring Kalmbach would be bound thereby.
Under these circumstances, the ADR policy was indisputably procedurally unconscionable.
B. Substantive Unconscionability
A procedurally unconscionable contract may be valid, depending on the extent to which it is also substantively unconscionable. (Armendariz, supra, 24 Cal.4th at p. 114.) The substantive prong of unconscionability encompasses overly harsh or one-sided results. (Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 722-723.) “Courts have identified a number of factors that may result in substantive unconscionability.” (Abramson, supra, 115 Cal.App.4th at p. 656.) “But the paramount consideration in assessing conscionability is mutuality.” (Id. at p. 657.)
Here, the ADR policy lacks mutuality because claims an employee is most likely to bring are subject to arbitration, but claims SWI is most likely to bring are not. Arbitration agreements in the employment context must be bilateral. “Given the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on ‘business realities.’” (Armendariz, supra, 24 Cal.4th at p. 117.) “If the arbitration system established by the employer is indeed fair, then the employer as well as the employee should be willing to submit claims to arbitration.” (Id. at p. 118; see also Abramson, supra, 115 Cal.App.4th at p. 657 [“When only the weaker party’s claims are subject to arbitration, and there is no reasonable justification for that lack of symmetry, the agreement lacks the requisite degree of mutuality.”].)
By definition, “all employment disputes” are subject to arbitration under the ADR policy. Covered claims include disputes involving termination of employment, harassment or discrimination, as well as disputes based on contract or tort, or “any other legal theory or statute,” such as alleged violations of the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family Medical Leave Act, and any other federal, state or local act or statute. All of these claims are ones an employee, not an employer, is most likely to assert. (See Mercuro, supra, 96 Cal.App.4th at pp. 175-176.)
At the same time the ADR policy requires employees to arbitrate their employment-related claims, it exempts from arbitration “claims and disputes under … the Uniform Trade Secrets Act.” This is a claim that SWI, not its employee, is more likely to pursue. “Under California law, everything that an employee acquires by virtue of his or her employment (other than compensation for services) belongs to the employer ‘whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.’ [Lab. C. §2860(a)]. [¶] This clearly includes the employer’s trade secrets; and misappropriation of the employer’s trade secrets is an intentional tort under both the common law and statute ….” (Chin, et. al., Cal. Practice Guide: Employment Litigation (The Rutter Group 2007) ¶ 14:80.) The Uniform Trade Secrets Act, Civil Code sections 3426 through 3426.10 (UTSA), “authorizes certain remedies for misappropriation of trade secrets, as defined in the UTSA, including injunctive relief, damages, unjust enrichment, a reasonable royalty and, in certain cases, exemplary damages and attorney fees. [Civ. C. §§3426.3, 3426.4].” (Chin, et. al., Cal. Practice Guide: Employment Litigation, supra, ¶ 14:81.) The UTSA preempts California common law claims for misappropriation of trade secrets, but does not affect “contractual remedies, whether or not based upon misappropriation of a trade secret” or “other civil remedies that are not based upon misappropriation of a trade secret.” (Civ. Code, § 3426.7; see Chin, et. al., Cal. Practice Guide: Employment Litigation, supra, ¶¶ 14:81.5, 14:81.10.)
Thus, the UTSA is aimed at providing remedies for misappropriation of trade secrets. It is certainly unlikely that an employee would bring suit against his or her employer under the UTSA for the employer’s misappropriation of the employee’s trade secrets. Although SWI correctly points out that the ADR policy does not specifically state that only SWI may bring a claim or dispute under the UTSA, the reality is that only SWI would ever bring such a claim. (See Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 725 (Fitz) [noting it is far more likely that employers, not employees, will file intellectual property claims].) SWI does not cite any authority to the contrary. Meanwhile, the ADR policy coverage statement, while not an exclusive list, includes only the type of complaints that are predominately, if not solely, of concern to employees. (Ibid.)
Numerous cases have concluded that arbitration provisions in which the employer reserves for itself litigation of intellectual property claims but requires employees to arbitrate claims they are most likely to assert against the employer lack mutuality and therefore are substantively unconscionable. (See Fitz, supra, 118 Cal.App.4th at pp. 709, 723-725, & fn. 6 [arbitration policy that exempted “‘disputes over confidentiality/non-compete agreements or intellectual property rights’” but required arbitration of “workplace concerns”]; Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107, 114-115 [arbitration agreement that required the employer and employee to arbitrate claims for wages, compensation, state and federal statutory claims, contract and tort claims, and discrimination claims, but exempted the employer’s claims “‘for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information”]; Mercuro, supra, 96 Cal.App.4th at pp. 175-177 [arbitration agreement specifically covered claims for breach of contract, tort, discrimination, and violation of any federal, state or other governmental statute or policy, but “specifically exclude[d] ‘claims for injunctive and/or other equitable relief for intellectual property violations, unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information”]; Stirlen, supra, 51 Cal.App.4th at pp. 1528-1529, 1536-1542 [arbitration agreement reserved for employer the right to bring equitable claims for patent infringement and improper use of confidential information in state or federal court, but required arbitration of any dispute arising out of employment].)
SWI argues that since the exemption at issue applies to “claims and disputes under” the UTSA, an employee who is terminated based on the UTSA is not required to arbitrate his wrongful termination claim. We disagree. As the trial court pointed out, the only claims for relief available “under” the UTSA are for the owner of the trade secret; the UTSA does not provide any relief for the person who allegedly stole the trade secret. (See Civ. Code, §§ 3426.2 [providing for injunction to prevent actual or threatened misappropriation]; 3426.3 [allowing a complainant to recover damages for actual loss caused by misappropriation].) Moreover, the UTSA does not apply to contract claims, even if misappropriation of a trade secret is involved. (Civ. Code, § 3426.7, subd. (b).) An employee, therefore, could not have a wrongful termination claim “under” the UTSA.
SWI asserts the ADR policy is not unconscionable because its terms are not so one-sided as to “‘shock the conscience,’” citing to Stirlen, supra, 51 Cal.App.4th at p. 1532. Our Supreme Court has recognized, however, that “it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on ‘business realities,’” and concluded that “such a one-sided term is unconscionable.” (Armendariz, supra, 24 Cal.4th at pp. 117-118.) SWI does not make any attempt to provide a reasonable justification for excluding UTSA claims from arbitration. Accordingly, we must assume the provision is unconscionable. (Id. at p. 120 [explaining that if an employer has a reasonable justification for exempting certain employer claims from arbitration the agreement would not be unconscionable, but absent “such justification, we must assume it is”].)
In sum, we agree with the trial court’s assessment that the ADR policy subjects employment disputes to arbitration but allows for legal recourse in disputes under the UTSA. As such, the ADR policy lacks mutuality and is substantively unconscionable.
We note that the fact these excluded claims are not at issue in this action is irrelevant because the unconscionability of a contract is determined at the time the parties entered into it. (Civ. Code, § 1670.5; American Software, Inc. v. Ali (1996) 46 Cal.App.4th 1386, 1391.) Moreover, exempting workers’ compensation or unemployment compensation benefits from arbitration does not make the ADR policy bilateral as these claims are governed by their own adjudicatory systems and are not subject to arbitration. (Mercuro, supra, 96 Cal.App.4th at p. 176 & fn. 12.)
C. Severability
Civil Code section 1670.5 permits a court to determine that only a portion of a contract is unconscionable and to delete or amend that portion to make the remainder of the contract enforceable. There are two reasons for severing or restricting illegal terms rather than voiding the entire contract: (1) “to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement – particularly when there has been full or partial performance of the contract”; or (2) to “attempt[] to conserve a contractual relationship if to do so would not be condoning an illegal scheme.” (Armendariz, supra, 24 Cal.4th at pp. 123-124.)
The basic principles of severability are summarized in Mercuro as follows: “As a general rule, if the central purpose of the contract is ‘permeated’ or ‘tainted’ with unconscionability or illegality then the contract as a whole cannot be enforced. If, on the other hand, the unconscionability or illegality is collateral to the main purpose of the contract, and the offending provisions can be excised from the contract by means of severance or limitation, then the remainder of the contract can be enforced.” (Mercuro, supra, 96 Cal.App.4th at pp. 184-185; see also Armendariz, supra, 24 Cal.4th at pp. 122, 124.)
SWI contends that even if the ADR policy is construed as unconscionable in light of the provision providing for litigation of claims and disputes under the UTSA, the proper remedy was for the trial court to sever the problematic clause. As explained in Armendariz, though, severance is not always appropriate, particularly where the problem is one which permeates the entire agreement: “[I]n the case of the agreement’s lack of mutuality, . . . permeation [by an unlawful purpose] is indicated by the fact that there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. Rather, the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms. Civil Code section 1670.5 does not authorize such reformation by augmentation, nor does the arbitration statute. Code of Civil Procedure section 1281.2 authorizes the court to refuse arbitration if grounds for revocation exist, not to reform the agreement to make it lawful. Nor do courts have any such power under their inherent limited authority to reform contracts.” (Armendariz, supra, 24 Cal.4th at pp. 124-125.)
In this case, the unconscionable taint permeates the entire agreement, in that it stems from a provision which gives SWI the right to avoid arbitration on claims it is most likely to bring against an employee. On the other hand, unlike the agreement in Armendariz, the offending provision is contained in a distinct clause which could be simply excised, leaving the remainder of the document intact. Severing that provision would not require us to rewrite the provision, or any other aspect of the agreement. Simply removing the passage would arguably leave the parties to arbitrate any claims and disputes related to employment, including claims under the UTSA, with the exception of workers’ compensation and unemployment insurance claims.
Under Armendariz, however, a court can refuse to enforce an arbitration agreement based upon a single unconscionable term, which might otherwise appear severable, if it concludes the term was drafted in bad faith. As the court explained, “[t]he overarching inquiry is whether ‘“the interests of justice . . . would be furthered”’ by severance.” (Armendariz, supra, 24 Cal.4th at p. 124.) It also noted that “[a]n employer will not be deterred from routinely inserting . . . a deliberately illegal clause into the arbitration agreements it mandates for its employees if it knows that the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter.” (Id. at pp. 124-125, fn. 13.)
In determining the bona fides of a contract clause, we look to whether the law was “sufficiently clear at the time the arbitration agreement was signed to lead to the conclusion that this [provision] was drafted in bad faith.” (Armendariz, supra, 24 Cal.4th at pp. 124-125, fn. 13.) Kalmbach signed the acknowledgements of the employee handbook, which incorporated the ADR policy, in November 2003 and May 2007. This was well after our Supreme Court’s August 2000 decision in Armendariz that an arbitration provision that requires one contracting party, but not the other, to arbitrate all claims arising out of a series of transactions or occurrences was unconscionable when contained in an adhesive employment contract. (Armendariz, supra, 24 Cal.4th at p. 120.) It was also after appellate decisions that, applying this principle, concluded that an arbitration provision that exempts the employer’s intellectual property claims from arbitration but requires employees to arbitrate the claims they are most likely to bring against the employer is unconscionable. (See Fitz, supra, 118 Cal.App.4th at pp. 709, 723-725, & fn. 6; Martinez, supra, 118 Cal.App.4th at pp. 114-115; Mercuro, supra, 96 Cal.App.4th at pp. 175-177; Stirlen, supra, 51 Cal.App.4th at pp. 1528-1529, 1536-1542.)
SWI asserts it could not have known the provision at issue was unconscionable because Stirlen, supra, and Mercuro, supra, prohibit the employer from reserving a unilateral right to pursue UTSA claims; they do not prohibit the mutual exclusion of claims and disputes under the UTSA. SWI, however, is reading these decisions too narrowly. Although those cases involved arbitration provisions that specifically stated the employer’s intellectual property claims were exempt from arbitration, they also recognize that substantive unconscionability may be present if the arbitration agreement requires arbitration only for the weaker party’s claims but a choice of forums for the stronger party’s claims. (Mercuro, supra, 96 Cal.App.4th at p. 176; see Stirlen, supra, 51 Cal.App.4th at p. 1541-1542 [concluding arbitration provision lacks “‘modicum of bilaterality’” where employer claims may be brought in court or submitted to arbitration while claims for violation of employee rights must be arbitrated.]) From these cases, it should have been clear to SWI that it could not require its employees to litigate those claims the employees were most likely to bring against it but exempt from arbitration those claims SWI was most likely to bring against its employees, despite the apparent mutuality contained in the ADR policy.
SWI also contends it could not have acted in bad faith because it did not draft the ADR policy – its hired consultant did. Apparently, SWI believes that an employer may escape the consequences of an unconscionable agreement by hiring a third party to draft the agreement and disclaiming any responsibility for the unconscionable language. SWI, however, does not cite any authority to support this contention. We need not consider points unsupported by legal analysis or authority (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785; In re Marriage of Nichols (1994) 27 Cal.App.4th 661, 672-673, fn. 3) and decline to do so here.
We agree with the trial court’s conclusion that the clause was drafted in bad faith, and its decision that the clause should not have been severed from the rest of the agreement. The trial court certainly did not abuse its discretion by refusing to enforce the ADR policy. Accordingly, the motion to compel arbitration was properly denied. Having concluded that the motion to compel arbitration was properly denied based upon the unilateral nature of the ADR policy, we need not address the alternative bases for invalidation of the ADR policy.
DISPOSITION
The trial court’s order denying the motion to compel arbitration is affirmed. Respondent is awarded his costs on appeal.
WE CONCUR: Dawson, J., Hill, J.