Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County No. 37-2007-00065082- CU-WT-CTL, Jay M. Bloom, Judge.
NARES, J.
INTRODUCTION
This case arises out of the termination of plaintiff Janet Masterson's employment with defendant Robbins Research International, Inc. (RRI), and Masterson's complaint against RRI for age discrimination in violation of California Fair Employment and Housing Act, Government Code section 12900 et seq. (FEHA) and retaliation for complaints of age discrimination. RRI filed a petition to compel arbitration under the terms of the arbitration agreement in RRI's employee dispute resolution policy. The court denied the petition, finding the arbitration agreement unconscionable and therefore unenforceable.
RRI contends that the court erred in its ruling because it misinterpreted the arbitration agreement as limiting the types of relief available to Masterson and misapplied the substantive unconscionability analysis established in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). We affirm the order.
FACTUAL AND PROCEDURAL BACKGROUND
RRI hired Masterson to work as a product sales manager in April 2005. At the time of hiring, RRI provided Masterson with an "Agreement to Arbitrate Disputes" (Agreement). Masterson had no opportunity to negotiate the terms of the Agreement or to review the rules of arbitration. She felt forced to sign the Agreement or lose her new job with RRI.
The Agreement compels arbitration for "any dispute, controversy or claim arising out of or relating to Employee's employment with RRI or regarding the termination of employment," with the exception "that either party may file a request of a court of competent jurisdiction for equitable relief, including but not limited to injunctive relief." The Agreement further provides that "[c]ivil discovery shall be permitted for production of documents and the taking of depositions" and that "each party shall bear the expense of its own counsel, experts, witnesses, and the preparation and presentation of evidence." It also provides that arbitration will be conducted "in accordance with the National Rules for the Resolution of Employment Disputes" of the American Arbitration Association (AAA rules), but RRI did not attach the AAA rules to the Agreement.
RRI terminated Masterson one year after hiring her. A year after her termination, Masterson sued RRI, claiming age discrimination and retaliation for complaints of age discrimination. In response, RRI filed a petition to compel arbitration in accordance with the Agreement.
The superior court denied the petition for three reasons: (1) the Agreement restricted Masterson's remedies by denying attorney fees in all situations; (2) RRI's failure to attach the AAA rules made it unclear "what the applicable rules provide and whether the rules conflict with the express provisions" of the Agreement; and (3) because Masterson has "alleged claims against . . . a non-signatory to the arbitration agreement[,] there is a possibility of conflicting rulings."
DISCUSSION
I. Summary of Governing Legal Principles
Under California law, a contract or provision within a contract can be rendered unenforceable if it is unconscionable. (Civ. Code, § 1670.5.) Unconscionability is a question of both law and fact. (Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 851.) However, "[u]nconscionability findings are reviewed de novo if they are based on declarations that raise 'no meaningful factual disputes.' [Citation.]" (Murphy v. Check 'N Go of California, Inc. (2007) 156 Cal.App.4th 138, 144 (Murphy).) Thus, where evidence extrinsic to the contract is undisputed, the issue is purely one of law, and the court applies a de novo review to the decision of the trial court. (Ibid.)
Unconscionability has both a procedural and a substantive element. (Ellis v. McKinnon Broadcasting Co. (1993) 18 Cal.App.4th 1796, 1803-1804.) Although both elements must be present for a contract to be deemed unconscionable, a sliding scale approach is used 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." (Armendariz, supra, 24 Cal.4th at p. 114.)
II. Procedural Unconscionability
"Procedural unconscionability" focuses on the circumstances and negotiations of the parties at the time they entered into the contract. (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174 (Mercuro).) It exists where the stronger party uses either oppression or surprise to compel the weaker party to agree to a contract. (Armendariz, supra, 24 Cal.4th at p. 114.)
Here, the Agreement is procedurally unconscionable. To paraphrase Armendariz, the Agreement "was imposed on [Masterson] as a condition of employment and there was no opportunity to negotiate." (Armendariz, supra, 24 Cal.4th at p. 115.) As the employer, RRI was in the superior bargaining position, and Masterson understood that she must sign the Agreement in order to be hired. The Agreement is a contract of adhesion, having been "drafted by the stronger party and presented to the weaker party on a take it or leave it basis [citation]." (Murphy, supra, 156 Cal.App.4th at p. 144.)
The Agreement further suffers from procedural unconscionability by not including the AAA rules. The Agreement makes reference to and incorporates the AAA rules throughout. Despite the incorporation of the AAA rules, RRI did not attach the AAA rules to the Agreement and did not provide Masterson with the opportunity to review the rules before signing. These undisclosed provisions support Masterson's claims of procedural unconscionability. (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 820, fn. 18 [stating that provisions contrary to a party's reasonable expectations will be denied enforcement in the absence of "plain and clear notification"].)
RRI cites Lucas v. Gund, Inc. (C.D.Cal. 2006) 450 F.Supp.2d 1125 for the proposition that the failure to attach the AAA rules to the Agreement should not bar arbitration. It is true that such an omission, standing alone, would not make the Agreement both procedurally and substantively unconscionable. However, the holding in Lucas is consistent with our determination of procedural unconscionability because it states that, "while it may have been procedurally unfair to have [the employee] sign an agreement referencing rules which were not attached at the time, it would only render the agreement unenforceable if those rules were substantively unconscionable." (Id. at p. 1131.) As we discuss, post, there is ample evidence of substantive unconscionability.
III. Substantive Unconscionability
"Substantive unconscionability" assesses the provisions of the agreement and whether these provisions are so one-sided as to make the contract void. (Armendariz, supra, 24 Cal.4th at p. 114.)
Masterson asserts that three aspects of the Agreement are substantively unconscionable: (1) the Agreement does not provide for adequate discovery; (2) the Agreement does not allow for attorney fees awards under FEHA; and (3) the Agreement compels arbitration for most types of claims an employee is likely to bring while exempting from arbitration the types of claims an employer is likely to bring.
A. Discovery
The Agreement provides: "Civil discovery shall be permitted for production of documents and the taking of depositions." Although this discovery provision appears neutral on its face, courts must look at the practical effects of a contract provision to ensure mutuality. (See, e.g., Saika v. Gold (1996) 49 Cal.App.4th 1074, 1076-1077 [refusing to enforce arbitration agreement allowing "trial de novo" for awards greater than $25,000].)
Although the Agreement restricts both parties' discovery to depositions and document requests, this provision provides a significant practical advantage to RRI. In the vast majority of employment disputes, it is the employer who possesses the important documents and knowledge as to which documents are important. (See, e.g., Armendariz, supra,24 Cal.4th at p. 104.) In contrast, Masterson "will not have access to . . . the benefit of initial interrogatories when requesting additional information to vindicate her statutory claim." (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 717.) Similarly, she will not be able to use requests for admissions during discovery. Under the Agreement, Masterson is at a disadvantage; deprived of critical information, she may not discover who she needs to depose or what documents to request. Meanwhile, RRI knows precisely who it needs to depose (Masterson) and is likely to already possess the necessary documents to make its case. "Therefore, compared to the employee, the employer has far less need for discovery in order to prepare for arbitration." (Mercuro, supra, 96 Cal.App.4th at p. 183.)
B. Attorney Fees
The Agreement also requires that "each party shall bear the expense of its own counsel." Similar to the discovery provision, the attorney fees clause appears to be neutral, but in practice removes an important remedy otherwise available to employees. Under the provisions of FEHA, courts, in their discretion, may award a prevailing employee attorney fees. (Gov. Code, § 12965, subd. (b).) The Agreement compels Masterson to waive this right and is thereby "contrary to public policy and unlawful." (Armendariz, supra, 24 Cal.4th at p. 101.) "The principle that an arbitration agreement may not limit statutorily imposed remedies such as punitive damages and attorney fees appears to be undisputed." (Id. at p. 103.)
C. Legal Versus Equitable Claims
The Agreement mandates that all legal disputes ("with the exception of claims for workers' compensation, unemployment insurance and any matter within the jurisdiction of the State Labor Commissioner or equivalent State Official") must go to arbitration, while equitable claims are exempted from arbitration. Once again, this provision favors the employer. The Agreement "is unfairly one-sided because it compels arbitration of the claims more likely to be brought by . . . the weaker party, but exempts from arbitration the types of claims that are more likely to be brought by . . . the stronger party." (Fitz, supra, 118 Cal.App.4th at p. 725.) Employees routinely bring claims for monetary damages against their employers. (Mercuro, supra, 96 Cal.App.4th at p. 176.) In contrast, employers primarily bring claims for injunctive relief against employees, such as prohibitions of violating trade secrets. (Ibid.) Thus, although this provision of the Agreement is facially neutral, in practice it favors the employer.
IV. Ambiguity of the Contract
RRI contends the Agreement cannot be substantively unconscionable because it states all discovery will be conducted in accordance with the AAA rules, allowing the arbitrator to "award any remedy or relief that a court of California could order." We reject this contention.
The Agreement is replete with ambiguity. For every explicit limitation, there is a blanket reference to the governance of the AAA rules. The Agreement's provisions on discovery are a case in point. While specifying that only depositions and discovery requests are allowed, the Agreement then provides that all discovery disputes will be resolved in accordance with the AAA rules. This contradictory draftsmanship has allowed RRI to claim that the AAA rules trump the specific provisions of the contract. RRI's assertions beg the question why such contract provisions were included, if they are only to be discarded in favor of the AAA rules. The answer is that the limiting provisions do in fact have significance and that they restrict both the means of discovery and the possible remedies for Masterson. Our reading is consistent with the rule that contracts "are to be construed to avoid rendering terms surplusage." (Farmers Ins. Exchange v. Knopp (1996) 50 Cal.App.4th 1415, 1421.)
Despite RRI's liberal reading of the Agreement, there is no guarantee that its interpretation will remain consistent if this claim is sent to arbitration. More specifically, RRI asserts the Agreement entirely adheres to AAA rules, but once RRI comes before an arbitrator, it can change its position and argue for the most restrictive reading of the Agreement. For this reason, and because RRI drafted the Agreement, we construe the provisions of the Agreement by the most restrictive interpretation in order to safeguard the rights of Masterson, who faced a "take it or leave without a job" agreement. (Victoria v. Superior Court (1985) 40 Cal.3d 734, 739.)
There are additional reasons to not ignore the implications of the express provisions of the Agreement. The AAA rules can be changed without notice.
The AAA rules, under the subheading "Employment Mediation Procedures," provide:
1. Agreement of Parties [¶] Whenever, by provision in an employment dispute resolution program, or by separate submission, the parties have provided for mediation or conciliation of existing or future disputes under the auspices of the [AAA] or under these procedures, they shall be deemed to have made these procedures, as amended and in effect as of the date of the submission of the dispute, a part of their agreement. (American Arbitration Association, Inc., Employment Arbitration Rules and Mediation Procedures (July 1, 2006) <http://www.adr.org/sp.asp?id=32904#emp.html> (as of Oct. 22, 2008).)
Although the parties did not include the AAA rules in the record, "[w]e may properly take judicial notice of the AAA's rules in resolving this dispute. 'Matters that cannot be brought before the appellate court through the record on appeal (initially or by augmentation) may still be considered on appeal by judicial notice.' [Citation.]" (Fitz, supra, 118 Cal.App.4th at p. 719, fn. 4.)
Even had Masterson been provided with the AAA rules at the time she signed the Agreement, she could not have known what these rules would be in the future, were there ever a need for arbitration. "[A]llowing the rules of the AAA to trump [the Agreement] would fail to provide employees with adequate notice of the applicable rules of discovery." (Fitz, supra,118 Cal.App.4th at p. 721.)
V. Severability
Civil Code section 1670.5, subdivision (a) provides: "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." Where a contract is "permeated" by unconscionability, a court may discard the entire contract. (Armendariz, supra, 24 Cal.4th at p. 122.) A contract that has multiple unconscionable provisions may be considered to be permeated by unconscionability. (Id. at p. 124.) "Such multiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage." (Ibid.)
The Agreement is procedurally unconscionable and contains multiple substantively unconscionable provisions. Therefore, we hold that the entire Agreement is unconscionable and thereby unenforceable. The permeation of unconscionability is indicated by the absence of any "single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement." (Armendariz, supra, 24 Cal.4th at pp. 124-125.)
DISPOSITION
The order is affirmed.
WE CONCUR: HUFFMAN, Acting P. J., IRION, J.