Opinion
No. C 04-02654 FMS.
September 29, 2004
ORDER ON MOTION TO STAY ACTION PENDING ARBITRATION OR ALTERNATIVELY TO DISMISS
INTRODUCTION
This action arises from plaintiff Kevin Semcken's termination as Chief Executive Officer (CEO) of defendant Genesis Medical Interventional, Inc. Genesis submitted Mr. Semcken's post-employment dispute regarding the compensation due to him to arbitration per a mandatory arbitration clause contained in Mr. Semcken's employment contract. Mr. Semcken filed this action soon thereafter. Genesis then moved to stay the action pending arbitration or alternatively to dismiss. Mr. Semcken argued in opposition that the arbitration agreement was unconscionable and should not be enforced. With this order, the Court decides that the arbitration agreement between Mr. Semcken and Genesis is fully enforceable and grants Genesis's motion to dismiss.
FACTUAL BACKGROUND
Genesis Medical Interventional, Inc., ("Genesis") is a start-up company founded in California by, inter alia, defendants William Dubrul and Andrew Manoliu. Pursuant to an offer letter dated November 11th, 2002, Genesis hired plaintiff Kevin Semcken ("Semcken") as CEO. This offer letter, which was never executed, governed the employment relationship until a second offer letter, dated June 16, 2003, was signed by Dubrul and countersigned by Semcken on July 31, 2003. This second offer letter contains the arbitration provision which is the subject of the present dispute. This arbitration provision states:
In the event any dispute arises between you and the Company or any employee of the Company, then, to the extent permitted by law, it will be settled exclusively by binding arbitration before a single arbitrator in accordance with the Employment ADR Rules of the American Arbitration Association. The arbitrator's decision shall be final and binding upon the parties, and may be entered and enforced in any court of competent jurisdiction by either of the parties. The arbitrator shall have the power to grant temporary, preliminary and permanent relief, including, without limitation, injunctive relief and specific performance. The Company will pay the direct costs and expenses of arbitration. You and the Company are responsible for your respective attorney's fees incurred in connection with enforcing this letter, provided that, except as may be prohibited by law, the arbitrator may, in his or her discretion, award reasonable attorney's fees to the prevailing party.
In April 2004, Semcken was terminated by Genesis. Semcken refused to sign the required release to receive his severance package because of disputes about his compensation. On May 21, 2004, Genesis filed a Demand for Arbitration with the American Arbitration Association. After making an appearance in the arbitration proceedings in the person of his attorney, Semcken filed his complaint on July 1, 2004. The complaint alleges breach of contract, breach of fiduciary duty, breach of covenant of good faith and fair dealing, fraudulent inducement, negligent representation, tortious wrongful termination, intentional infliction of emotional distress, negligent infliction of emotional distress, civil conspiracy, claims under labor statutes pertaining to wages, and tortious interference with contract.
Genesis moved this Court on August 5, 2004 to stay or alternatively dismiss Semcken's action, arguing that the employment contract's arbitration provision requires Semcken to submit his claims to arbitration. The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1332(a)(1) because the parties are citizens of different states and the amount in controversy exceeds $75,000.
DISCUSSION
Genesis moved the Court to either stay Semcken's action or dismiss it for a failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Under the FAA, a party to a lawsuit pending in federal court may seek a stay of the action pending arbitration of one or more issues raised by the litigation.Wagner v. Stratton Oakmont, Inc. 83 F.3d 1046 (9th Cir. 1996). The FAA "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985).
When all claims made in the litigation are subject to arbitration, courts may also choose to dismiss the action in its entirety for the failure to state a claim under Rule 12(b)(6);Sparling v. Hoffman Constr. Co., 864 F2d 635, 638 (9th Cir. 1988); see also Martin Marietta Aluminum, Inc. v. Gen. Elec. Co., 586 F2d 143 (9th Cir. 1978) (holding that the judge had discretion to grant summary judgment when all the plaintiff's claims were barred by an arbitration clause). Cf. Underwriters Reinsurance Co. v. Ace Am. Ins. Co., 2003 U.S. Dist. LEXIS 24814 (D. Cal., 2003) (dismissing plaintiff's action where all claims were arbitrable). Dismissal for failure to state a claim is appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135, 1138 (9th Cir. 2003).
To decide whether to stay or alternatively to dismiss Semcken's action in this case, the Court must determine (A) whether there is an arbitration agreement that covers the dispute in the pending action; (B) whether the arbitration agreement is enforceable under the unconscionability doctrine of California law.
A. Existence of an Arbitration Agreement
The Federal Arbitration Act (FAA) provides that arbitration agreements generally "shall be valid, irrevocable, and enforceable" except when grounds "exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2 (2002); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003). The FAA applies to individual employment contracts such as the one at issue in this dispute. Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 109 (2001). The arbitration clause contained in the June 16, 2003 offer letter executed by Genesis and Semcken is broadly worded to cover "any dispute [that arises] between you and the Company or any employee of the company." Plaintiff does not dispute that the FAA applies to the arbitration clause in his employment contract or that the arbitration clause covers all the claims raised in his complaint. The Court concludes that there is indeed an arbitration provision subject to the FAA that covers all of Semcken's causes of actions.
B. Unconscionability Analysis
Semcken contends that Genesis's arbitration agreement is unconscionable under California contract law and therefore should not be enforced by the Court. To evaluate the validity of an arbitration agreement, federal courts "should apply ordinary state-law principles that govern the formation of contracts."Ingle, supra, at 1170, quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 at 944 (1995). Semcken was employed by a California company, so we evaluate his claims under the contract law of that state. Cf. Circuit City Stores, Inc. v. Adams, 279 F.3d 889 at 892 (9th Cir. 2002) [hereinafter, Adams III].
In California, courts may refuse to enforce an arbitration agreement if it is unconscionable. Cal. Civ. Code § 1670.5 (1999). Under California law, an agreement to arbitrate is unconscionable only if it is both procedurally and substantively unconscionable.Circuit City Stores v. Ahmed, 283 F.3d 1198 (9th Cir. 2002);Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83 (Cal. 2000). Procedural unconscionability focuses on "oppression or surprise due to unequal bargaining power." Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1071 (2003) quotingArmendariz, supra, at 114. Substantive unconscionability centers on the "terms of the agreement and whether those terms are so one-sided as to shock the conscience." Ingle, supra, at 1172, quoting Kinney v. United Healthcare Servs., Inc., 70 Cal. App. 4th 1322, 1330 (1999) (internal quotation marks omitted).
The Court first addresses the question of whether the arbitration agreement in this case is procedurally unconscionable. In Ingle, supra, the Ninth Circuit laid out the legal standard under California law for procedural unconscionability:
To determine whether the arbitration agreement is procedurally unconscionable the court must examine "the manner in which the contract was negotiated and the circumstances of the parties at that time." Kinney v. United Healthcare Servs., Inc., 70 Cal. App. 4th 1322 at 1329 (1999). . . . A contract is oppressive if an inequality of bargaining power between the parties precludes the weaker party from enjoying a meaningful opportunity to negotiate and choose the terms of the contract. Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519 at 1532 (1997) (citation omitted). "Surprise involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Id. (internal quotation marks omitted). Ingle, supra, at 1171.
A threshold question in an analysis of procedural unconscionability is whether the arbitration clause is part of a contract of adhesion. Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1533, accord Armendariz, supra, 24 Cal.4th at 113. A contract of adhesion is "a standard-form contract, drafted by the party with superior bargaining power, which relegates to the other party the option of either adhering to its terms without modification or rejecting the contract entirely" Adams III, supra, at 893.
The factual record in this case does not support Semcken's claim that the arbitration provision is procedurally unconscionable. First, the arbitration provision was not part of a contract of adhesion. The employment contract which contained the arbitration clause was a personalized "offer letter," drafted specifically for Semcken and personally addressed to him. The contract was not standardized or "cast in generic and gender-neutral language". Cf. Stirlen, supra, at 1534. Nor was the contract containing the arbitration provision presented with only the option of either adhering or rejecting it. Rather, the contract presented to Semcken was, as both parties agree, subject to negotiation and actually negotiated. (Semcken Decl. ¶ 24; Manoliu Decl. ¶ 7.)
Second, Semcken had a meaningful opportunity to "negotiate and choose the terms of the contract." Stirlen, supra, at 1532. It is undisputed that Semcken had an opportunity to negotiate the employment agreement as a whole. (Semcken Decl. ¶ 24; Manoliu Decl. ¶ 7.) Semcken, however, argues that he was told that the arbitration clause was not negotiable. He states that soon after receiving the second offer letter, he told defendant Manoliu by telephone that he "did not want this arbitration clause" and that Manoliu told him "it was not negotiable." (Semcken Decl. ¶ 24.) Manoliu, in contrast, alleges that Semcken "never raised any concerns about the arbitration clause." (Manoliu Decl. ¶ 8.) The parties agree that Semcken did not raise it again in the course of the negotiations on the employment contract that ensued. Even if the Court accepts Semcken's claim that Manoliu told him initially that the term was not negotiable, the Court finds that Semcken still had a realistic ability to modify the terms of the employment contract, including the arbitration agreement. In Stirlen and Abramson, upon which Semcken relies to support his argument that the Court must consider his ability to negotiate the arbitration provision as opposed to other aspects of the employment agreement, employees were presented with contracts containing arbitration agreements on a "take it or leave it basis." Abramson v. Juniper Networks, Inc., 115 Cal. App. 4th 638, 663; Stirlen, supra, at 1533. In contrast, the contract in this case was fully negotiable on its face. Semcken had a choice regarding which terms to bring up for negotiation and which to leave outside his negotiations, giving him a meaningful opportunity to negotiate the terms of his contract.
Third, the Court does not find the requisite degree of inequality in the bargaining power of the parties. Semcken argues there was a "vast difference" in the bargaining parties of the two parties which constituted "oppression" (Pl.'s Opp'n ¶ 73), but the weight of the facts are not on his side. Courts have defined oppression as involving "an inequality of bargaining power [that] results in no real negotiation and an absence of meaningful choice." Circuit City v. Mantor 335 F.3d 1101, 1106 (9th Cir. 2003), quoting Stirlen, supra, at 1532. Semcken, as discussed above, had a meaningful opportunity to negotiate his contract. In contrast to the situation of potential employees that are asked to sign mandatory arbitration agreements as a prerequisite to employment, cf. Adams III, supra, at 893 (employer required employee to sign arbitration agreement as a "prerequisite to employment"), Semcken was already employed by Genesis at the time that this provision was proposed and agreed upon. Moreover, Semcken's continued employment was not conditioned on his agreement to the arbitration clause. Cf. Armarendiz, supra, at 90 and 113 (employer imposed arbitration as a condition of employment). The factual record in this case does not conform with the degree of inequality in bargaining power required for a finding of procedural unconscionability.
Finally, the element of "surprise" is not in evidence as the arbitration provision was not "hidden in the prolix printed form," Stirlen, supra, at 1532, but rather included prominently as the concluding paragraph to the two-page offer letter. Semcken undermines his argument that the arbitration provision is procedurally unconscionable when he declares to the Court, "At that time, during these discussions [negotiations on his employment contract], I was knowledgeable enough to realize that arbitrations truly only benefit both sides when the amount in controversy is low." (Semcken Decl. ¶ 25.) Semcken cannot, based on these facts, persuade the Court that the agreed-upon arbitration provision "surprised" him.
There is a factual dispute between the parties regarding whether Semcken had the option of executing and abiding by the first offer letter, which did not include an arbitration provision. (Manoliu Supplemental Decl. ¶ 3; Semcken Decl. ¶ 28.) It is uncontroverted that on May 28th, 2003, during the course of negotiations on the second offer letter, Manoliu offered Semcken the option of signing the first offer letter, which had never been executed. (Def.'s Reply, Ex. A.) Semcken argues, however, that he tried to exercise that option after negotiating the second letter but was told he had to sign the second offer letter. (Semcken's Decl. ¶ 28.) Defendant argues that Semcken ultimately chose to sign the second offer letter because it had "better terms." (Def.'s Mot. at 8). This factual dispute is unnecessary to resolve. Even if Semcken's final proposal to sign the first offer letter instead of the second offer letter was ultimately refused, the meaningful opportunity that Semcken had to negotiate the second offer letter allows the conclusion that the arbitration provision that it contained was not procedurally unconscionable.
Because the arbitration provision at issue in this case was not part of a contract of adhesion and because Semcken enjoyed sufficient bargaining power and a meaningful opportunity to negotiate his contract, the arbitration agreement is not procedurally unconscionable. Semcken fails to satisfy even the procedural unconscionability prong; therefore, we need not reach his arguments that the agreement is substantively unconscionable.Cf. Ahmed, supra, at 1200.
CONCLUSION
For the reasons stated herein, the Court decides that the arbitration clause contained in the contract executed by Genesis and Semcken is fully enforceable and that all of Semcken's claims are covered under this arbitration agreement. Because nothing will remain for the Court to resolve after arbitration, the Court sees no advantage to either party in retaining jurisdiction. In the interests of judicial economy and efficiency, the Court GRANTS Genesis's motion and dismisses Semcken's action without prejudice. The hearing set for September 30, 2004 is VACATED.
IT IS SO ORDERED.