Opinion
No. B156220.
11-24-2003
HENRY ADAMANY, JR., Petitioner, v. THE SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent; BENY ALAGEM et al., Real Parties in Interest.
John H. Upton for Petitioner. No appearance for Respondent. Rosoff, Schiffres & Barta and H. Steven Schiffres for Real Parties in Interest.
Henry Adamany, Jr. challenges an order by the trial court compelling arbitration of his action against his former employer, AST Computers, LLC (AST) and Beny Alagem, alleged to be an owner of AST. We conclude that Adamany is estopped from denying the applicability of the arbitration clause because he has sued on the written contract which contained the clause, and that real parties in interest have ratified the contract by petitioning to compel arbitration under its provisions. We also conclude the punitive damages limitation in the arbitration clause is unenforceable, as is the cost-sharing provision. The prohibition on punitive damages is severable, rendering the remainder of the agreement intact and enforceable. Real parties have filed a notice with the trial court stating their intent to bear the expenses of arbitration, thus curing the illegal cost-sharing provision.
FACTUAL AND PROCEDURAL SUMMARY
According to the allegations of the first amended complaint, in early 2000, Adamany was a highly compensated executive and partner in the Orange County office of PricewaterhouseCoopers. He was approached at that time by a recruiter acting on behalf of Beny Alagem. Alagem represented that he wanted petitioner to join Vault Technologies, an existing company that was going to move to Orange County to accommodate Adamany. Alagem was personally financing Vault and was committed to making it a viable business. Adamany was told that he would be the chief executive officer of Vault and would have full management of strategy, marketing, sales, expenditure and personnel.
The complaint alleges that Adamany and Alagem orally agreed that Adamany would leave his current employment and join Vault. The terms were that Adamany would receive a base salary of $ 300,000, annual bonuses of up to $300,000 with $120,000 of that guaranteed, a hiring bonus of $50,000, and, upon termination without good cause, a severance benefit of $150,000 to be personally paid by Alagem. Adamany also was to have stock options.
In reliance on this oral agreement, Adamany resigned his position at PricewaterhouseCoopers. On June 19, 2000, Alagem sent him an e-mail agreeing to guarantee the severance package. A copy of this e-mail is attached and incorporated into the complaint as Exhibit A.
In late June 2000, Adamany received a written employment agreement from AST Computers, LLC (incorporated by reference and attached to the complaint as Exh. B). The agreement was not signed.
It contains an arbitration clause: "Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles, California, in accordance with the employment rules of the American Arbitration Association then in effect by an arbitrator selected by both parties within 10 days after either party has notified the other in writing that it desires a dispute between them to be settled by arbitration. . . . Each party shall pay its own expenses associated with such arbitration, including the expense of any arbitrator selected by such party and the Company will pay the expenses of the jointly selected arbitrator. The decision of the arbitrator shall be binding upon the parties and judgment in accordance with that decision may be entered in any court having jurisdiction thereover [sic]. Punitive damages shall not be awarded."
After resigning from his employment at PricewaterhouseCoopers, Adamany learned that Vault was not a separate entity. Alagem told him that he owned AST, that AST owned technology essential to the Vault venture, that Alagem intended to spin-off the AST technology into a company to be formed and called Vault, and that Adamany would be an employee of AST until Vault was formed. Adamany alleges that Alagem failed to disclose that AST was partially owned by a third party and that Alagem did not have authority to spin-off the AST technology to form Vault without the other owners approval.
Adamany began his employment with AST in July 2000. He was not paid the promised signing bonus. He was told that, because of a provision relating to stock options, the written employment agreement could not be executed until Vault was formed. Adamany alleges that there was an implied in fact contract between the parties incorporating the terms contained in the written agreement. On October 16, 2000, real parties in interest terminated Adamany. He was owed the hiring bonus, monies due under the written agreement, and a severance benefit.
Adamany sued Alagem and AST in superior court. His first amended complaint, the charging pleading, alleges causes of action for fraud, negligent misrepresentation, willful failure to pay wages and breach of contract. Real parties in interest petitioned to compel arbitration. Their petition asserted: "This Petition is made upon the grounds that all the purported claims asserted by plaintiff in the First Amended Complaint filed herein are all premised upon a written `Employment Agreement attached hereto as Exhibit 1. Same provides for arbitration of the dispute which is the subject of this action." Like the written agreement attached to the first amended complaint, this copy of the written agreement was unsigned. Real parties also alleged that the claims asserted in the first amended complaint "`arise under or in connection with [Adamanys] alleged employment" by real parties and thus fall within the arbitration clause of the agreement. Real parties also asserted that their right to compel arbitration had not been waived; rather that they had "consistently asserted that inasmuch as [Adamany] pleads claims for relief premised on said writing, then the exclusive arbitration provision therein controls, even if, as [real parties allege], said writing is ultimately held to be unenforceable."
In their petition to compel arbitration, real parties reserved all defenses, including the defense that the unsigned writing is not binding, is unenforceable, and does not memorialize the terms of Adamanys employment.
Adamany opposed the petition to compel arbitration, denying that the arbitration clause is controlling. He argued that the unsigned agreement is enforceable, but that real parties had denied ever entering into the agreement. Adamany asserted: "[Real parties in interest] can not [sic] contend that it never entered into the Agreement containing the arbitration clause and simultaneously seek to enforce the arbitration clause." In addition, Adamany argued that the arbitration clause is not enforceable because it violates public policy by precluding him from seeking punitive damages, citing Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). In response, real parties argued that Adamany could not "cherry-pick" the provisions of the agreement by seeking relief based on the agreement but denying the enforceability of the arbitration clause.
The trial court granted the petition to compel arbitration. It found: "that an agreement to arbitrate the controversy exists." It also ruled that Armendariz does not apply. Adamany filed a petition for writ of mandate with this court. We issued an order to show cause, and a stay on March 8, 2002.
After we filed our unpublished opinion in this matter, the parties sent a joint letter requesting clarification of the opinion on the enforceability of the contractual bar of an award of punitive damages. While we concluded there was merit to this request, we received this letter after we had lost jurisdiction to modify the opinion. We requested the Supreme Court to grant review and to transfer the matter to this court to allow us to issue a new opinion. It did so.
In this second opinion, section I of the discussion is unchanged. In section II, we clarify that the bar on an award of punitive damages is unconscionable and thus unenforceable, as is the cost-sharing clause. As we shall discuss, real parties in interest have agreed to cure the unconscionability of the cost-sharing clause as suggested in our original opinion. We conclude that the unenforceable punitive damages bar is severable, and thus the dispute may be arbitrated.
DISCUSSION
I
The primary issue in this proceeding is whether there was an enforceable agreement to arbitrate, since the employment agreement was not signed by either party.
Code of Civil Procedure section 1281 provides: "A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." (Emphasis added; all statutory references are to the Code of Civil Procedure.) Section 1280, subdivision (f) provides that a "`Written agreement shall be deemed to include a written agreement which has been extended or renewed by an oral or implied agreement."
"`"On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy . . . , the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists . . . ." . . . Thus, "[t]he right to arbitration depends upon contract; a petition to compel arbitration is simply a suit in equity seeking specific performance of that contract. [Citations.]" . . . There is no public policy in favor of forcing arbitration of issues the parties have not agreed to arbitrate. [Citation.] It follows that when presented with a petition to compel arbitration, the trial courts first task is to determine whether the parties have in fact agreed to arbitrate the dispute. [¶] We apply general California contract law to determine whether the parties formed a valid agreement to arbitrate. [Citations.]" (Romo v. Y-3 Holdings, Inc. (2001) 87 Cal.App.4th 1153, 1158, quoting Marcus & Millichap Real Estate Investment Brokerage Co. v. Hock Investment Co. (1998) 68 Cal.App.4th 83, 88-89, italics added by Marcus & Millichap.)
Adamany and real parties take inconsistent positions on the enforceability of the contract and the arbitration clause. Adamany sues to enforce the unsigned written agreement, but denies the validity of the arbitration clause it contains. Real parties deny the existence of the agreement, but petition to enforce the arbitration clause. Neither side can have it both ways.
Under principles of judicial estoppel, once Adamany sued on the contract, he was estopped from maintaining, that as an unsigned writing, the arbitration clause it contains is unenforceable. (See International Billing Services, Inc. v. Emigh (2000) 84 Cal.App.4th 1175, 1188-1191 [partys claim for attorneys fees based on breach of contract judicially estops that party from contending the provision does not authorize an award of fees]; Berman v. Renart Sportswear Corp. (1963) 222 Cal.App.2d 385.)
Real parties are estopped from denying the existence of the agreement sued on because they petitioned to enforce the arbitration clause in the written agreement. (See Kurinij v. Hanna & Morton (1997) 55 Cal.App.4th 853, 870-871; c.f. Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348.)
We conclude that the parties agreed to arbitrate the claims between them. The next question is whether the language in the arbitration clause precluding an award of punitive damages renders the clause unenforceable.
II
Adamany argues that the arbitration provision is unenforceable because it contravenes public policy, relying on Armendariz, supra, 24 Cal.4th 83. He relies on two aspects of the arbitration clause for this argument: the prohibition on an award of punitive damages, and the sharing of costs of arbitration. We begin with the punitive damages issue.
In Armendariz, our Supreme Court held that an arbitration agreement may not limit statutorily imposed remedies, such as punitive damages under the Fair Employment and Housing Act (Gov. Code, § 12965). (Armendariz, supra, 24 Cal.4th at pp. 103-104.) Here, Adamanys claim for punitive damages is based on a common law cause of action for fraud. In Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064 (Little), the Supreme Court decided that a common law claim for wrongful termination in violation of public policy under Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, is subject to the minimal procedural requirements set forth in Armendariz. The Little court cited the Armendariz requirements for arbitration of claims under FEHA. The first of these requirements is that an arbitration agreement may not limit the damages ordinarily available under the statute. (Little, supra, 29 Cal.4th at p. 1076.)
The Supreme Court held the Armendariz requirements are founded on the premise that certain statutory rights are unwaivable. "`This unwaivability derives from two statutes that are themselves derived from public policy. First, Civil Code section 1668 states: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." "Agreements whose object, directly or indirectly, is to exempt [their] parties from violation of the laws are against public policy and may not be enforced."" (Little, supra , 29 Cal.4th at p. 1076, quoting Armendariz, supra, 24 Cal.4th at p. 100.) This passage from Little also quotes a second basis for statutory unwaivability identified in Armendariz, Civil Code section 3513, which states "`"Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement." [Citation.] (Armendariz, supra, 24 Cal.4th at p. 100.)" (Little, supra, 29 Cal.4th at pp. 1076-1077.)
The Little court concluded that a Tameny claim is unwaivable because a legitimate Tameny claim is designed to protect a public interest and therefore cannot be contravened by a private agreement. (Little, supra, 29 Cal.4th at p. 1077.) "In other words, an employment agreement that required employees to waive claims that they were terminated in violation of public policy would itself be contrary to public policy. Accordingly, because an employer cannot ask the employee to waive Tameny claims, it also cannot impose on the arbitration of these claims such burdens or procedural shortcomings as to preclude their vindication. Thus, the Armendariz requirements are as appropriate to the arbitration of Tameny claims as to unwaivable statutory claims." (Id. at p. 1077.)
Similarly, an award of punitive damages is also designed to vindicate an unwaivable public interest. In Stevens v. Owens-Corning Fiberglas Corp. (1996) 49 Cal.App.4th 1645, the court held that the purpose of punitive damages is a public purpose: "The purpose of punitive damages is a public one—to punish wrongdoing and deter future misconduct by either the defendant or other potential wrongdoers. The essential question for the jury, the trial court, and the appellate courts is whether the amount of the award substantially serves the public interest in punishment and deterrence." (Id . at p. 1658.) Further, under Civil Code section 1668, the right to punitive damages for fraud or other intentional torts is not waivable. (Armendariz, supra, 24 Cal.4th at p. 100; Farnham v. Superior Court (1997) 60 Cal.App.4th 69, 71 ["contractual releases of future liability for fraud and other intentional wrongs are invariably invalidated"].)
Applying the reasoning of the Supreme Court in Little, supra, 29 Cal.4th at page 1077, an arbitration agreement that requires employees to waive claims for punitive damages based on fraud would improperly burden the vindication of a public interest in deterrence and punishment, and would allow an employer to subvert Civil Code section 1668. We therefore conclude that the portion of the arbitration clause prohibiting an award of punitive damages for fraud is unenforceable.
We are aware of Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal.App.4th 1105, in which a legal secretary claimed wrongful discharge in violation of public policy after he was fired for refusing to sign a predispute binding arbitration agreement. The proposed arbitration agreement did not limit the remedies available in arbitration. (Id. at p. 1109.) Lagatree argued that the arbitration agreement would have had the effect of lessening his employers liability for future wrongful conduct in violation of Civil Code section 1668, which prohibits exculpatory releases of liability for fraudulent or intentional acts, or for negligent violations of statutory law. The Lagatree court rejected the argument, observing that in agreeing to arbitration, a party does not forgo substantive rights, it only submits them to an arbitral, rather than judicial, forum. (Id. at pp. 1136-1137.)
Here, unlike the clause in Lagatree, the arbitration clause requires Adamany to give up his significant right to seek punitive damages on his claim for fraud. It requires him to give up significant rights. For Adamany, arbitration would mean more than a change in forum; it would mean relinquishing his right to seek punitive damages to punish real parties in interest and to deter similar misconduct in the future by others. The Supreme Court in Little observed: "[W]hile we recognize that a party compelled to arbitrate [public] rights does not waive them, but merely `"submits to their resolution in an arbitral, rather than a judicial, forum" . . . arbitration cannot be misused to accomplish a de facto waiver of these rights. Accordingly, although the Armendariz requirements specifically concern arbitration agreements, they do not do so out of a generalized mistrust of arbitration per se . . . , but from a recognition that some arbitration agreements and proceedings may harbor terms, conditions and practices that undermine the vindication of unwaivable rights. . . . [T]here is no reason under Armendarizs logic to distinguish between unwaivable statutory rights and unwaivable rights derived from common law." (29 Cal.4th at p. 1079, second italics added.)
We conclude that the prohibition on punitive damages in not enforceable. In a supplemental brief, Adamany argues that the arbitration provision is also unenforceable under Armendariz because it requires him to share the costs of arbitration. The clause states: "Each party shall pay its own expenses associated with such arbitration, including the expense of any arbitrator selected by such party and the Company will pay the expenses of the jointly selected arbitrator." In Armendariz, the Supreme Court held that an arbitration agreement may not require the employee to bear any type of expense that the employee would not be required to bear if he or she brought the action in court. (Armendariz, supra, 24 Cal.4th at pp. 110-111; see also Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 181-182.) We agree that the fee-sharing provision of the arbitration clause violates this principle and cannot be enforced.
After our original opinion was filed, real parties filed a notice with the trial court agreeing to bear the cost of arbitration, subject to being withdrawn upon the filing of our new opinion. In Little, the Supreme Court reaffirmed the approach to arbitration costs it adopted in Armendariz, and held that an employer is to pay "`all types of costs that are unique to arbitration." (Little, supra, 29 Cal.4th at p. 1085, quoting Armendariz, supra, 24 Cal.4th at p. 113.)
The issue becomes whether the unenforceable aspects of the arbitration agreement (punitive damages bar and cost sharing) may be severed, allowing arbitration. In Armendariz, the Supreme Court explained the standard for determining whether an unconscionable provision is severable: "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.)
The language barring an award of punitive damages appears at the end of the arbitration clause and, absent parol or other evidence on the point (there is none), is severable because its purpose is collateral to the purposes of the contract as a whole. Real parties have filed an intention to bear the costs of arbitration with the trial court. This in effect cures the illegality of the cost-sharing provision. (Little, supra, 29 Cal.4th at p. 1085.)
We conclude that the arbitration clause may be enforced, absent the provisions barring punitive damages and imposing improper costs on Adamany, without requiring reformation of the contract. The remainder of the agreement may be left intact and enforced. (Little , supra, 29 Cal.4th at pp. 1074-1076.)
DISPOSITION
The petition for writ of mandate is granted. The trial court is directed to vacate its order granting the petition to arbitrate and to issue a new and different order severing the portion of the arbitration clause prohibiting an award of punitive damages and ordering arbitration on the remaining issues. The order of the trial court should be consistent with the views expressed herein concerning cost-sharing and the agreement of real parties to bear those costs. The parties are to bear their own costs in this proceeding.
We concur: VOGEL (C.S.), P.J., HASTINGS, J.