Opinion
D047530
12-5-2006
JOSE SAN MARTIN, Plaintiff and Respondent, v. CALIFORNIA COLLEGE SAN DIEGO, Defendant and Appellant.
Plaintiff José San Martin brought a complaint against a professional school in which he was formerly enrolled, defendant and appellant California College San Diego (College), seeking damages for fraud and related theories of breach of statutory duties under the Education Code. (Ed. Code, §§ 94832 [regulating disclosures of material facts in the enrollment process]; 94877 [authorizing civil actions for such violations]; all further statutory references are to the Education Code unless otherwise noted.)
In response to the filing of the complaint, College brought a motion to compel arbitration, asserting that the terms of the enrollment agreement which plaintiff had signed required arbitration of these claims. (Code Civ. Proc., § 1281.2.) The trial court denied the motion, ruling that (1) College had not met its burden of showing the existence of an arbitration agreement, and (2) the arbitration provisions in the enrollment agreement were procedurally and substantively unconscionable, and therefore unenforceable.
College appeals, first contending that it sufficiently pleaded and authenticated the existence of the arbitration provisions in the enrollment agreement. We agree with that threshold contention. (Code Civ. Proc., § 1281.2, Cal. Rules of Court, rule 371, all further rule references are to the Cal. Rules of Court.) Notwithstanding that conclusion, we determine that the order denying the motion to compel arbitration is well grounded in the record and in the authorities, on the basis that the arbitration agreement is unenforceable due to procedural and substantive unconscionability. Moreover, the trial courts implied ruling that there is no basis to sever any unconscionable portions from the remainder of the arbitration provisions, while enforcing the remainder, was appropriate. We affirm the order denying the request to compel arbitration.
FACTUAL AND PROCEDURAL BACKGROUND
A
Contentions
In November 2003, plaintiff signed an enrollment agreement with College to study for a radiology technician position. Plaintiff claims he discussed his career plans with College officials and was told the College was in the process of getting its accreditation from the American Registry of Radiology Technologists (ARRT). He enrolled and took out student loans (approximately $28,000) because of this representation, but later learned that College was not accredited and he would not be able to take a state licensing exam with its degree. Around August 2004, plaintiff dropped out of school.
In May 2005, plaintiff filed his complaint alleging causes of action for damages for common law fraud and breach of statutory disclosure duties under certain provisions of the Education Code. He relies on section 94832, prohibiting misrepresentations of an institutions accreditation status and curriculum information. In sections 94876 and 94877, certain procedural rights are created for pursuit of a students claims against institutions such as College, and by statute, these protections are not waivable. (§ 94876.) Plaintiff contends that during the enrollment process, College officials did not explain any arbitration process to him, nor did he read in any detail the preprinted language on the papers, which included the arbitration provisions now alleged to be unconscionable.
B
Motion and Ruling Regarding Arbitration
After plaintiff filed his complaint, College brought this motion to compel arbitration. (Code Civ. Proc., § 1281.2.) College quoted the text of the arbitration provision in its points and authorities and provided a redacted copy of the enrollment agreement, attached as an exhibit to the declaration of its president, Barbara Thomas (omitting the students social security number and birth date from the agreement). College contended arbitration was the appropriate forum for plaintiffs claims under both the federal and state arbitration acts, since plaintiff had taken out federal student loans and the school was engaged in interstate commerce. (Code Civ. Proc., § 1280 et seq.; 9 U.S.C. §1 et seq.) Under the provision, College would "bear the cost of the mediator and/or arbitrator," while the student would bear all other costs and attorney fees under the following circumstances: "If you file a lawsuit or take some other action despite your obligation to arbitrate and you are ultimately required to arbitrate or you do not win on the merits, then you agree to pay for all costs incurred by the college, including attorney fees, to contest your actions in court or any other forum."
In response, plaintiff filed points and authorities and his opposing declaration, first contending College had not met its burden of showing the existence of an arbitration agreement, because Thomass declaration was insufficient to authenticate it; he cited her lack of personal knowledge about it, since she was not yet at the school when he enrolled. (Evid. Code, § 403, subd. (a)(2) [lack of foundation].) Specifically, in plaintiffs declaration and in his evidentiary objections, he stated that Colleges copy of the agreement, exhibit A, was not an accurate copy of the enrollment documents he had signed, because "The documents I received were double-sided (both front and back containing typing) and contained dates on them which do not appear on the documents submitted by Barbara Thomas."
Plaintiff further objected that he did not have adequate notice of the arbitration provisions, and they would be unduly burdensome financially, as shown by his attorneys declaration, which attached rules of the American Arbitration Association (AAA). The arbitration provision does not describe whether the "cost of the arbitrator" to be paid by College would include administrative or case management fees (at least $ 750), or room rental costs, such as are set forth in the AAA rules. Plaintiff contended that due to his limited means at the time of his enrollment, he would not have agreed to any dispute resolution process that would require him to pay fees exceeding the costs of bringing a court action (about $303) and would penalize him for seeking relief in court, where, in addition, he would have greater rights to conduct discovery.
At the hearing, the parties discussed their respective positions on the issues, and the trial court clarified that Colleges papers had not included any discussion or authority for severability of any unenforceable portions of the agreement, although College was now contending at the hearing that severance was appropriate. The enrollment agreement contained a standard severability clause. On November 4, 2005, the trial court confirmed its telephonic ruling denying the petition to compel arbitration, first, on the basis that College had not met its burden of showing the existence of an arbitration agreement, because the Thomas declaration was insufficient to establish its terms. The court rejected the efforts of College at the hearing to present the original copy, since no advance notice had been given. (Rule 323.)
Next, the court ruled that even if the existence of such an agreement were accepted, plaintiff had carried his burden of showing the arbitration provisions were procedurally and substantively unconscionable. Specifically, the court stated:
"As to substantive unconscionability, the following provision is unfairly one-sided: `If you file a lawsuit or take some other action despite your obligation to arbitrate and you are ultimately required to arbitrate or you do not win on the merits, then you agree to pay for all costs incurred by the college, including attorney fees, to contest your actions in court or any other forum. [¶] The substantively unconscionable provision is sufficiently oppressive that Plaintiffs evidence of procedural unconscionability is enough to support the conclusion that the arbitration agreement is not enforceable."
The trial court did not expressly rule on the severability of the challenged provisions, nor did it address the other defenses plaintiff raised against enforcement of the arbitration agreement, such as alleged illegality of the contract under the Education Code for lack of proper disclosures in the enrollment process. (§ 94832.)
College appeals the order denying its motion to compel arbitration.
DISCUSSION
We first address the foundational issue in this record, the existence of the enrollment agreement and the arbitration provisions within it. We then turn to the contentions raised regarding enforceability of these provisions.
I
AGREEMENT TO ARBITRATE
Colleges motion for an order compelling arbitration was brought under Code of Civil Procedure section 1281.2, alleging the existence of a written agreement to arbitrate a controversy and the refusal of a party to arbitrate. The trial court was first required to determine whether an agreement to arbitrate the controversy exists. It ruled that the exhibit attached to the college presidents declaration was insufficient to demonstrate the existence of such an agreement, and it refused to accept the original at the hearing for lack of good cause shown or adequate notice given. (Rule 323.)
Ordinarily, we would review such evidentiary rulings under an abuse of discretion standard. (City of Ripon v. Sweetin (2002) 100 Cal.App.4th 887, 900-901.) However, in this summary proceeding on whether to compel arbitration, special procedural rules apply. College as the petitioner had the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and plaintiff had a similar burden to show any fact necessary to a defense against enforceability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972 .) The trial court, acting as a trier of fact, considered all the declarations and other documentary evidence. (Ibid.) In doing so, however, the court should have evaluated the parties respective showings in light of the policies and procedures applicable to the petition to compel arbitration with respect to pleading requirements. Rule 371 provides that it is sufficient in such a petition to "set forth, in addition to other required allegations, the provisions of the written agreement and the paragraph that provides for arbitration. The provisions shall be set forth verbatim or a copy shall be attached to the petition and incorporated by reference."
On this record, the existence of the enrollment agreement and its arbitration provisions have been sufficiently established by a preponderance of the evidence, based on the allegations set forth by College in its petition, as well as plaintiffs own acknowledgment that he signed such an enrollment agreement. We agree with the analysis in a comparable case, Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219: "For purposes of a petition to compel arbitration, it is not necessary to follow the normal procedures of document authentication. . . . The statute [Code Civ. Proc., § 1281.2] does not require the petitioner to introduce the agreement into evidence. A plain reading of the statute indicates that as a preliminary matter the court is only required to make a finding of the agreements existence, not an evidentiary determination of its validity. [¶] This conclusion is bolstered by California Rules of Court, rule 371. A petitioner must attach a copy of the agreement to the petition, or its `provisions . . . shall be set forth in the petition. (Cal. Rules of Court, rule 371.) As with section 1281.2, what the rule does not say is significant. [Citation.] Rule 371 does not require the petitioner to introduce the agreement into evidence or provide the court with anything more than a copy or recitation of its terms. Petitioner need only allege the existence of an agreement and support the allegation as provided in rule 371."
Here too, Code of Civil Procedure section 1281.2 contemplates that once College alleged that the agreement existed and set forth its terms or a copy, the burden shifted to plaintiff to prove the falsity of the purported agreement. He has failed to carry this burden, by alleging that the College president could not properly authenticate such an enrollment agreement, simply because her employment began later than the events alleged in the complaint. In doing so, he ignores the pleading rules of Code of Civil Procedure section 1281.2 and rule 371 described above.
Moreover, plaintiffs objections that the copy supplied by College was not an accurate copy of the enrollment documents he signed do not raise any significant possibility that the enrollment agreement did not exist or did not actually contain such an arbitration provision. He merely states, "The documents I received were double-sided (both front and back containing typing) and contained dates on them which do not appear on the documents submitted by Barbara Thomas." Although College was in compliance with rule 201(a) in providing moving papers printed on one side only, it could also have provided a double-sided copy of the document as an exhibit to its papers, but the failure to do so does not undermine its otherwise sufficient pleading of the terms of the arbitration provisions. The trial court was not required to accept a belated effort to provide an original document, because the pleading of the subject terms was sufficient to present the necessary issues regarding the motion to compel arbitration, without any need for further proceedings under rule 323.
Also, the copy provided by College contained redactions of dates and numbers, but these did not interfere with a fair reading of the arbitration clause, which was the subject issue, nor did those redactions materially interfere with the authenticity of the document. In any case, we do not believe that plaintiff is seriously challenging the facts that he signed and initialed an enrollment agreement nor that it contained an arbitration provision, but chiefly raises legal issues regarding its enforceability.
In these respects, the trial court erred in denying the petition to arbitrate by relying on the theory the agreement itself was not properly authenticated. However, alternative grounds for the ruling were stated, and we therefore turn to those findings that the arbitration provisions were unenforceable for procedural and substantive unconscionability.
II
ENFORCEABILITY OF ARBITRATION PROVISIONS
A
Applicable Standards
On review of the ruling denying the motion to compel arbitration, we are initially presented with questions of law subject to de novo review. "Under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. [Citations.] In other words, under California law, as under federal law, an arbitration agreement may only be invalidated for the same reasons as other contracts." (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 98, fn. omitted (Armendariz).) These principles apply when enforcement of an arbitration clause is sought under Code of Civil Procedure sections 1281 and 1281.2. The courts review these questions of law de novo. (Armendariz, supra, at p. 98; CPI Builders, Inc. v. Impco Technologies, Inc. (2001) 94 Cal.App.4th 1167, 1171-1172.)
In general, claims of fraud in the inducement in entering into a contract may be subject to an arbitration provision contained within that contract, if there is no evidence that the parties intended to withhold such a dispute on contract interpretation from resolution by an arbitrator. (See Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, 415-419.) We may assume in this case that all of these substantive claims, including statutory rights asserted under the Education Code, would normally be subject to resolution in arbitration, in the same manner as are comparable statutory claims under the Fair Employment and Housing Act (FEHA, Gov. Code, § 12900 et seq.). The merits of any of those claims are beyond the scope of this opinion, and the issues before us are limited to those represented by the denial of the motion to compel arbitration.
An additional standard of review comes into play in view of the severability issue now argued by College, that the subject costs provision, even if invalidated, could have been subject to severance, with the remainder of the arbitration provisions enforced. That issue is subject to appellate consideration under "a sort of heightened-scrutiny abuse of discretion" standard of review. (Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1411 (Harper), citing Armendariz, supra, 24 Cal.4th at pp. 121-127.) "[T]he unconscionability statute (Civ. Code, § 1670.5, subd. (a)) `appears to give a trial court some discretion as to whether to sever or restrict the unconscionable provision or whether to refuse to enforce the entire agreement, but with the proviso that refusing to enforce the entire agreement is an option `only when an agreement is "permeated" by unconscionability. [Citation.] Armendariz further explained that the reasons to merely sever or restrict derive from the need to avoid parties from gaining undeserved benefits or suffering undeserved detriments. [Citation.]" (Harper, supra, at p. 1411.) In the Harper case, involving a consumer contract, the appellate court determined that the trial courts refusal to sever arbitral from nonarbitral claims was well within its reasonable discretion. (Ibid.) Here, the issues framed are whether the trial courts unconscionability ruling and its implied determination that the cost provision was not severable were appropriate exercises of discretion in light of the record and applicable law.
B
Statutory Scheme/Common Law Fraud
Before addressing the validity of the trial courts conclusions regarding unconscionability of the arbitration provisions, we set forth the background of plaintiffs statutory claims about the enrollment agreements violations of the Education Code. He is asserting that College did not comply with those requirements for maintaining minimum standards with regards to curriculum and licensing preparation. (Ed. Code, ch. 7, § 94700 et seq., ["Private Postsecondary and Vocational Education Reform Act of 1989," containing 16 articles that are effective through July 1, 2007 unless extended]; § 94999; see § 94800, art. 6 [setting forth general standards for such institutions].) Under that statutory scheme, section 94832, subdivisions (a) and (b) prohibit institutions such as College from misrepresenting or falsely advertising information about their courses of instruction and job placement information, among other things, and also provide for civil or criminal liability for violations of the article. (§ 94832, subd. (c).)
To enforce these protections, section 94850 et seq., the Maxine Waters School Reform and Student Protection Act of 1989 (Ed. Code, ch. 7, art. 7 [regulating private postsecondary and vocational education]; § 94700 et seq.), creates performance standards and procedures to provide appropriate state control of the business and operational standards of such educational institutions, and to prevent misrepresentations from being made about them to students. (§ 94850, subd. (d).) The overall article 7 student protection scheme is to be construed liberally to effectuate its purposes. (§ 94850, subd. (e).) Under section 94876, it is provided, "No student may waive any provision of this article. Any waiver or limitation of any substantive or procedural right or remedy is in violation of this section and is void and unenforceable." Section 94877 authorizes students to bring actions for violations of the article or section 94832, such as refusals to refund tuition where appropriate, and to recover damages and other relief, including reasonable attorney fees and costs. (§ 94877, subds. (b) & (c).) In section 94877, subdivision (f), it is provided that an institution may not require a student to invoke any grievance dispute procedure established by the institution or other procedure before bringing an action to enforce any rights and remedies.
In this case, plaintiffs challenges to the overall enrollment agreement are based on both common law fraud and statutory claims under these provisions of the Education Code. On appeal, he has additionally raised arguments regarding arbitrability that were not before the trial court, concerning the invalidity of other portions of the arbitration provisions, dealing with concepts other than costs. For example, he now argues the arbitration provisions should be set aside for inclusion of unconscionable liquidated damages provisions, a shortened statute of limitations that includes a waiver of claims for failure to comply, and/or a requirement for nonbinding arbitration as a prerequisite to filing a lawsuit, should the arbitration requirement be invalidated. Several Education Code protections are potentially implicated by those provisions: The right to sue for damages and civil penalties even in excess of a refund of tuition (§ 94877, subds. (b) & (c)); the right of a student not to be sent to an internal institution grievance dispute procedure before bringing a court action (§ 94877, subd. (f)); and a designated three-year statute of limitations (§ 94877, subd. (e)).
Under Armendariz, in making an unconscionability determination, a court may properly take into account the presence of multiple defects in an arbitration agreement. (Armendariz, supra, 24 Cal.4th at p. 124.) This can show permeation of the agreement by an unlawful purpose. (Ibid.) Plaintiffs opposition filed in the trial court generally contended all the arbitration provisions were unconscionable, as adversely affecting both statutory and private rights, and by imposing extra costs and changing attorney fee entitlement in a manner not provided by statute. The trial court was made aware of plaintiffs general statutory arguments and that the court could properly take into account the Legislatures stated purpose in enacting these portions of the Education Code, in an effort to construe them liberally to accomplish those purposes. (§ 94850, subd. (e).) However, we need not specifically address plaintiffs new arguments on appeal to analyze the validity of the trial courts ruling.
We next consider whether College has demonstrated error in the trial courts decision that the arbitration provisions are unenforceable, based on plaintiffs objections to those portions that govern the procedures and costs for such prospective arbitration.
C
Standards for Determining Unconscionability
"The doctrine of unconscionability is a judicially created doctrine which was codified in 1979 when the Legislature enacted Civil Code section 1670.5. [Citation.] . . . While the statute does not attempt to precisely define `unconscionable, there is a large body of case law recognizing the term has `both a procedural and a substantive element, both of which must be present to render a contract unenforceable. [Citation.] The procedural element focuses on the unequal bargaining positions and hidden terms common in the context of adhesion contracts. [Citation.] While courts have defined the substantive element in various ways, it traditionally involves contract terms that are so one-sided as to "shock the conscience," or that impose harsh or oppressive terms. [Citation.] [Citation.]" (Bolter v. Superior Court (2001) 87 Cal.App.4th 900, 906-907.) Comparatively speaking, "[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." (Armendariz, supra, 24 Cal.4th 83, 114.)
Civil Code section 1670.5, subdivision (a), authorizes the courts to decline to enforce an unconscionable provision in a contract: "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."
In Armendariz, the Supreme Court relied on the basic principles of severability applicable to illegal contracts and found them equally applicable to the doctrine of unconscionable contracts: "Courts are to look to the various purposes of the contract. 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, the court is not authorized by either Civil Code section 1670.5 or Code of Civil Procedure section 1281.2 to reform a contract or include additional terms in it. (Armendariz, supra, at pp. 124-125.)
D
Special Considerations Applicable to Costs-Shifting in Arbitration
Led by Armendariz, several subsequent cases have applied these unconscionability and severance rules where the subject arbitration agreements contained provisions regulating costs. Armendariz, supra, 24 Cal.4th at page 109 represents the rule that unwaivable public rights, expressed by statute, "may be transgressed as much by the imposition of undue costs as by outright denial." (Ibid.) Accordingly, an employee "seeking to vindicate unwaivable rights may not be compelled to pay forum costs that are unique to arbitration." (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 661.) The same is true when an employee sues upon a violation of public policy rights not directly expressed in statute but nevertheless sufficiently tethered to such a public policy statement. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1077, 1084-1085 [Tameny [v. Atlantic Richfield Company (1980) 27 Cal.3d 167] claims subject to arbitration under Little are necessarily "`based on policies "carefully tethered to fundamental policies . . . delineated in constitutional or statutory provisions. . . ." [Citation.]"])
These strict rules, as developed in the employment context, that an arbitration agreement may not require an employee to pay unreasonable costs or arbitration fees and expenses as a condition of access to the arbitration forum have not yet been extended "to cover other types of unwaivable claims based on or tethered to statutes." (Boghos v. Certain Underwriters at Lloyds of London (2005) 36 Cal.4th 495, 506-507 (Boghos).) For example, an insureds claims for nonpayment of benefits and breach of the covenant of good faith and fair dealing were found not to qualify for status as "an unwaivable statutory right" subject to protection from the insureds being held liable to pay "`all types of cost that are unique to arbitration. " (Id. at p. 508.) Rather, under Code of Civil Procedure section 1284.2, the parties to an arbitration agreement will normally be required to share costs "`[u]nless the arbitration agreement otherwise provides or the parties to the arbitration otherwise agree . . . . " (Boghos, supra, at pp. 507-508, quoting Code Civ. Proc., § 1284.2.)
Thus, the mere fact that plaintiff is asserting statutory rights under the Education Code does not require a finding that these costs-shifting provisions are unconscionable. However, additional considerations apply. In Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 92 (Gutierrez), the appellate court found that the main purpose of the subject arbitration agreement, in a consumer contract, "was not to regulate costs, but to provide a mechanism to resolve disputes." (Ibid.) There, the provision regulating costs was deemed to be collateral to that main purpose, and could have been severed upon a finding of unconscionability, and the remainder of the agreement enforced. (Ibid.) The appellate court adopted a case-by-case approach for the determination of when cost shifting should be ordered in arbitration, and held that those plaintiffs suing under consumer protection statutes (e.g., the Consumers Legal Remedies Act, Civ. Code, § 1750 et seq.) "may resist enforcement of an arbitration agreement that imposes unaffordable fees." (Gutierrez, supra, at pp. 86-87, 98-99.) The fee-shifting issue was therefore returned to the trial court for a hearing and discretionary determination on whether it should sever a particular costs provision in the arbitration clause that required those consumer plaintiffs to post administrative fees at the outset of the arbitration proceedings. (Id. at pp. 86-87, 98-100; see also Independent Assn of Mailbox Center Owners, Inc. v. Superior Court (2005) 133 Cal.App.4th 396, 415-416 [common law claims are ordinarily not subject to a fee-shifting rule in arbitration, because that would be contrary to the usual costs-sharing rules of § 1284.2; citing Boghos, supra, 36 Cal.4th 495, 505-508].)
Since the trend of the case law is not to extend, outside of employment law, the availability of a categorical rule against mandatory costs-shifting provisions that would impair the right to redress statutory claims, we should analyze these arbitration provisions separately to determine if they nevertheless unconscionably interfere with access to dispute resolution on the part of the complaining party. The question should be whether the arbitration agreement unfairly requires the student to bear a particular type of expense of such proceedings that would not apply if the same action could be pursued in court, instead of arbitration. (See Armendariz, supra, 24 Cal.4th 83, 110-111.) As in Gutierrez, supra, 114 Cal.App.4th 77, 96-97, the student should carry the burden of proof of whether the arbitration agreement imposes arbitral fees that are unreasonable or oppressive. We adopt this case-by-case approach for resolving unconscionability claims about costs provisions in arbitration, in this factual context involving the assertion of statutory rights other than employment rights, as well as common law fraud.
E
Application to Fraud Cause of Action and Statutory Claims
Regarding costs-sharing, the trial court focused in particular on the following provision as unfairly one-sided: "If you file a lawsuit or take some other action despite your obligation to arbitrate and you are ultimately required to arbitrate or you do not win on the merits, then you agree to pay for all costs incurred by the college, including attorney fees, to contest your actions in court or any other forum." The trial court ruled this provision was oppressive and substantively unconscionable, and additionally, the evidence of procedural unconscionability supported a finding that the entire arbitration agreement was not enforceable.
We first examine the record for criteria of either procedural or substantive unconscionability in this provision, that would represent "an arbitration agreement that imposes unaffordable fees." (Gutierrez, supra, 114 Cal.App.4th at p. 98.) We then address whether the trial courts ruling represents an implied determination, appropriate on this record, that the costs provisions found to be unconscionable could not properly be severed from the remainder of the agreement, in a manner to allow arbitration to be ordered as to the balance of the dispute.
1. Substantive Unconscionability
The substantive element of unconscionability may be found in "overly harsh" or "one-sided" provisions. (Armendariz, supra, 24 Cal.4th 83, 114-121.) These might include one-sided limitations on damages or one-sided waivers of jurisdictional objections. (Ibid.) Normally, both procedural and substantive unconscionability must be present to justify an exercise of discretion to refuse enforcement of a contract or provision. (Id. at pp. 117-118.) Courts may use a sliding scale to evaluate contract terms, and where one is clearly substantively oppressive, "the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." (Id. at p. 114.)
Plaintiff here made a convincing showing that this arbitration provision regarding fees and costs is particularly one-sided, imposing but not disclosing the extent of costs on the student from any AAA arbitration, and apparently without regard to whether he or she might ultimately prevail in arbitration. The provision says, "If you file a lawsuit or take some other action despite your obligation to arbitrate and you are ultimately required to arbitrate or you do not win on the merits, then you agree to pay for all costs incurred by the college, including attorney fees, to contest your actions in court or any other forum." Apparently, College interprets this as requiring plaintiff to pay all costs after arbitration, if he had filed a lawsuit first, even if he was the prevailing party after arbitration. It is intended to penalize the student for challenging the arbitration clause, regardless of the result, by imposing unique and extra costs and changing attorney fee entitlements in a manner not provided by statute. (§§ 94877, 94832.) Plaintiffs declaration attested to his limited means at the time of his enrollment, and stated he would not have agreed to any dispute resolution process that would require him to pay fees in arbitration exceeding the costs of bringing a court action.
For example, a plaintiff who, after an unsuccessful challenge to the arbitration forum, was required to arbitrate but who ultimately won in arbitration would still have to pay the colleges costs and attorney fees. If a student succeeded in setting aside the arbitration clause and litigated the matter in court, but did not win on the merits of the case, the student would then have to pay additional costs as a penalty for challenging the arbitration clause, even though that portion of the students claims about the agreement was successful.
Although College would nominally bear "the cost of the arbitrator" under the provision, all other costs and attorney fees were to be paid by the student. College claims on appeal that the language, "will bear the cost of the arbitrator" means that it will also cover arbitration administrative, case management, and rental expenses, but based on the AAA rules in the record, it is not clear from the face of the agreement whether "the cost of the arbitrator" is separate from or additional to those other categories of expenses. This provision effectively would require plaintiff to pay fees that are unique to arbitration and that exceed the costs of bringing a court action, and would unduly penalize him for seeking relief in court for statutory claims. At the very least, the provisions are so unclear about the extent of costs-shifting that would apply, that they could reasonably be construed as constituting a surprise to the student, if not an effort by College to discourage or intimidate students from seeking to resolve any disputes under the enrollment agreement.
Similarly, College cannot cure the invalidity of the costs provision by referring to Civil Code section 1717, as conceivably imposing mutual contractual attorney fees obligations as a matter of law. It remains unclear from the overall enrollment agreement what type and extent of costs and fees would be subject to such a reciprocity provision, and whether California law must be applied in order to impose such a mutuality requirement, as no choice of law is stated. This factor does not weigh in favor of enforcing these arbitration provisions, and the court was not required to rewrite the contract. The trial court correctly found the substantive unconscionability arguments were strong.
2. Procedural Unconscionability
Procedural unconscionability may be found where a contract provision constitutes "`oppression " or "`surprise "due to unequal bargaining power. (Armendariz, supra, 24 Cal.4th 83, 114-115.) For example, contracts of adhesion entered into without an opportunity to negotiate may be found to be procedurally unconscionable under some circumstances. (Independent Association of Mailbox Owners, Inc. v. Superior Court, supra, 133 Cal.App.4th 396, 407.) Although adhesion contracts are not per se unconscionable, the trial court could properly take the nature of the contract into account along with other relevant factors. (Harper, supra, 113 Cal.App.4th at pp. 1408-1410.) A "`modicum of bilaterality" is required in any arbitration agreement. (Armendariz, supra, 24 Cal.4th 83, 117.) As has been recognized, "`"unconscionability turns not only on a `one-sided result, but also on an absence of `justification for it." [Citation.]" (Ibid.)
Plaintiff characterizes himself as an unsophisticated layperson of limited means, who signed this contract of adhesion that was presented to him on a take it or leave it basis, without any explanation of its hidden consequences, such as the effect of the AAA rules. With respect to a lack of opportunity to negotiate, this enrollment agreement is somewhat comparable to an employment or franchise agreement and its arbitration provisions may be analyzed in a similar light, since neither a prospective employee nor a prospective student is in a particularly strong bargaining position as opposed to the employer or school they seek to join.
We disagree with College that at this stage of litigation, plaintiff was required to make a more complete financial showing of his inability to pay the prospective costs of arbitration. College claims that plaintiff could proceed under Code of Civil Procedure section 1284.3 to seek a fee waiver from the arbitrators of this consumer contract dispute, but that question is not now before us.
Rather, in reviewing the ruling denying the motion to compel arbitration, we may appropriately consider the nature of the contract, the purpose of the statutory scheme applicable to this kind of institution, and the kinds of disputes that can arise about its enrollment agreements. The trial court conducted the same type of analysis and it had a sufficient basis to find these arbitration provisions, read in context, were unjustifiably one-sided and financially disadvantageous to the student. Even though these procedural considerations are not as strong as the substantive arguments, together they support a finding that the arbitration provisions are unconscionable with regard to allocating costs and fees to the student, if he or she files a lawsuit or otherwise challenges the arbitration clause, even if the students position is ultimately found to have some justification.
3. Severability
It is a discretionary determination whether the arbitration agreement as a whole should be deemed unenforceable, because it is "permeated" by unconscionability. (Armendariz, supra, 24 Cal.4th 83, 122.) Alternatively, the court in such a proceeding may strike a particular provision or limit its application to avoid unconscionable results. (Ibid.) We are presented with only an implied ruling that the record did not justify a finding of severability as to the fees and costs provision, along with a related determination that the remainder of the arbitration provisions should not be enforced, even though the enrollment agreement contains a standard severability clause.
At the hearing, counsel for College argued for application of the severability concept, but admitted that his moving and reply papers did not include any authority on that point. Thus, the trial court was not provided with meaningful assistance in ruling on any severability claim. However, the judge stated at the hearing that he understood the issues and the ruling impliedly determines that the subject fees and costs clause was so interrelated with the remainder of the arbitration provisions that it could not appropriately be severed, such that arbitration could be ordered.
In general, the trial court would not have been prevented from enforcing an arbitration agreement that lacked any specific provisions on allocating the costs of arbitration. (Armendariz, supra, 24 Cal.4th 83, 113.) In such a case, the default provisions of Code of Civil Procedure section 1284.2 will apply to provide costs sharing. Here, however, strict costs allocation provisions were otherwise stated in the arbitration agreement. We think the trial court had an adequate basis to agree with plaintiff that in light of all the circumstances of the case, it would not be appropriate to sever the costs provision and therefore to order the balance of the arbitration provisions to be enforced. To do so would allow College the undeserved benefit of continuing to pursue arbitration while penalizing plaintiff from bringing a potentially valid challenge to a one-sided and oppressive costs and fees provision, with attendant litigation costs and delay. (Armendariz, supra, 24 Cal.4th at pp. 112-113; Harper, supra, 113 Cal.App.4th at p. 1411.) As to both the common law fraud and Education Code claims, regarding lack of proper disclosures by College during the enrollment process, the trial court had a sufficient basis in the record for its ruling and did not err or abuse its discretion in denying the entire motion to compel arbitration.
DISPOSITION
The order is affirmed. Costs are awarded to respondent.
WE CONCUR:
McDONALD, J.
IRION, J.