Opinion
G030477.
10-24-2003
ANNIE HO, Plaintiff and Respondent, v. KNOX ASSOCIATES, INC., et al., Defendants and Appellants.
Wallin & Klarich and Harris E. Kershnar for Defendants and Appellants. Law Offices of Manuel H. Miller, Manuel H. Miller and Tracy Neal-Lopez, for Plaintiff and Respondent.
Knox Associates and Ricardo Mancia (Knox) appeal from an order denying their petition to compel arbitration of the lawsuit filed by Annie Ho, an employee of Knox. The trial court denied the petition, determining the arbitration provision in question was unconscionable and thus unenforceable pursuant to Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). We conclude the court was correct, and affirm the order.
* * *
Ho began working for Knox in 1993, as an "assembler." Consistent with Knoxs general practice, Ho was required to sign a standard individual employment agreement, with blanks for insertion of her name, position and salary.
The agreement included a provision for arbitration of disputes, which provided: "A. As a separate, essential and material term of this Agreement, Employer and Employee agree that any controversy or claim asserted against Employer (or its officers, agents, or employees) arising from or relating to this Agreement, employees employment, or the termination thereof, including, but not limited to, all claims and disputes (whether classified as contract, discrimination, tort, public policy, common law or statutory and whether arising under federal, state or local law) shall be resolved by binding arbitration in accordance with the then current Rules of the American Arbitration Association, except as modified herein, and any judgment on the arbitration award may be entered in any court having jurisdiction. Without limiting the generality of the foregoing, discrimination shall include, but is not limited to, any adverse employment action based upon age, race, sex, disability, sexual harassment, national origin, religion ancestry or marital status. This arbitration provision shall be enforceable pursuant to the Federal Arbitration Act. The Employer and the Employee shall each be responsible for payment of one-half of the arbitrators fees and one-half of the court reporters fees directly to said individuals. Pursuant to Paragraph 8, Subparagraph `A, the prevailing party shall be entitled to reasonable attorneys fees and other costs and necessary disbursements (including the portion of the arbitrators fee and the court reporters fee advanced by the prevailing party), in addition to any other relief to which that party may be entitled. The only exceptions to this arbitration provision are that it does not cover claims for Workers Compensation, claims for Unemployment Insurance Benefits or claims for injunctive relief by the employer pertaining to the unauthorized use or disclosure of trade secrets or confidential information. The parties expressly agree that arbitration decisions hereunder are not subject to appeal, to de novo review and may not be relitigated in any court or in any other forum. Further, the parties agree that the arbitration provisions of this Agreement are applicable only to judicially cognizable claims and that the existence of the arbitration provision does not create any substantive rights which, in the absence of this Agreement, would not be judicially cognizable. [¶] B. Arbitrator. Any Arbitrator presiding over any arbitration hereunder shall strictly apply the California Evidence Code, shall strictly adhere to the terms of this Agreement and shall render a decision in strict conformity with all applicable state, local and federal statutes, regulations and case law. The Arbitrator shall have no authority to amend, modify, add to or subtract from any provision of this Agreement or to make a decision on any issue not submitted to him. The arbitrator shall have no jurisdiction to base an award on any alleged practice or oral understanding which is not set forth in the Agreement."
In August of 2000, our Supreme Court decided Armendariz, concluding that certain arbitration provisions were unconscionable, and thus unenforceable, in the employment context. In September of 2000, Knox circulated an "Arbitration Addendum" to its employees, proposing certain changes to its arbitration agreements. In particular, the addendum specified "Employee and Employer are parties to an Employment and Trade Secrets Agreement (`the Agreement) and, by this Arbitration Addendum 2000 [`the Addendum], intend to modify the Agreement, in particular the Arbitration provision of the Agreement, so that it is in conformity with current law. Accordingly, Employer and Employee each agree that any controversy or claim asserted against (i) Employer (or its officers, agents, or employees) or (ii) against Employee, arising from or relating to the Agreement . . . shall be resolved by binding arbitration
. . . ." (Italics added.) Among other things, the addendum altered the list of the claims exempt from arbitration, and provided "Employer shall be responsible for the arbitrators fees."
The addendum contained a signature line for both the employee and the president of Knox. However, at the time the addendum was circulated, Ho was already out on disability leave. Consequently, the addendum was never provided to her and she never agreed to it.
In August of 2001, Ho filed this lawsuit against Knox and Mancio, her supervisor, alleging discrimination, harassment, and constructive termination in violation of public policy. They responded with a petition to compel arbitration. The trial court denied the petition, concluding the arbitration agreement between Knox and Ho was unconscionable. Applying the analysis of Armendariz, we agree.
I
An arbitration agreement in an employment contract is unenforceable if it has "both a procedural and a substantive element of unconscionability." (Armendariz, supra, 24 Cal.4th 83.) Procedural unconscionablity focuses on whether there is an inequality of bargaining power, i.e., whether the employee has any meaningful opportunity of negotiate the terms of the agreement. In this case, as in Armendariz itself, "[t]here is little dispute that it is. It was imposed on employees as a condition of employment and there was no opportunity to negotiate." (Id. at pp. 114-115.) Indeed, Knox counsel conceded in the trial court that the agreement was adhesive. The employment agreement was a standardized form, with blanks for insertion of the employees name, position, starting date and compensation rate. There is no evidence at all that Ho had any ability to effect changes in the standard terms. The "take it or leave it" form contract satisfies the procedural aspect of the unconscionability determination.
Knox attempts to ameliorate the extent of the procedural unconscionability by suggesting the bargaining power between the parties was not so different since it is but a small company, with approximately 65 employees. In our view, that makes Knox a pretty small player when compared to, say, General Motors, but we are not comparing to General Motors. As compared to Ho, who was employed as an "assembler," a company with 64 other employees stands in a pretty good position. "[I]n the case of preemployment arbitration contracts, the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement." (Armendariz, supra , at p. 115.)
Turning to the substantive element of unconscionability, the arbitration agreement here includes at least two of the provisions found to be unconscionable in Armendariz. "Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided. One such form, as in Armendariz, is the arbitration agreements lack of a `"modicum of bilaterality," wherein the employees claims against the employer, but not the employers claims against the employee, are subject to arbitration." (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071-1072.)
In this case, despite Knoxs efforts to interpret the agreement as containing a bilateral arbitration obligation, it does not. Specifically, the scope of the arbitration provision is "Employer and Employee agree that any controversy or claim asserted against Employer (or its officers, agents, or employees) arising from or relating to this Agreement, employees employment, or the termination thereof, including, but not limited to, all claims and disputes (whether classified as contract, discrimination, tort, public policy, common law or statutory and whether arising under federal, state or local law) shall be resolved by binding arbitration . . . ." (Italics added.)
Although Knox asserts the phrase "against the Employer (or its officers, agents or employees)" creates a bilateral obligation, and should be read as "against the Employer . . . or . . .[the] employee[]," we are not persuaded. Clearly, the phrase was intended to include all claims asserted "against the Employer (or [any person whose conduct might be imputed to the Employer].)" We acknowledge that a later phrase in the provision muddies the bilateralness issue a bit, stating that "The only exceptions to this arbitration provision are that it does not cover claims for Workers Compensation, claims for Unemployment Insurance Benefits or claims for injunctive relief by the employer pertaining to the unauthorized use or disclosure of trade secrets or confidential information." (Italics added.) That phrase, by creating an "exception" for injunctive claims brought by Knox, seems to imply that Knox would be required to arbitrate some other claim. The problem with that argument is that whatever is implied, the arbitration provision actually contains no such requirement. (OHare v. Municipal Resource Consultants (2003) 107 Cal.App.4th 267, 274 [provision lacks mutuality when it requires employee to arbitrate claims, allows employer to litigate claims for injunctive relief, but is otherwise silent as to employers claims].)
And, in any event, Knoxs current attempt to portray the provision as bilateral is seriously undercut by its own proposed revision of the clause, contained in the addendum offered to employees in the wake of Armendariz. In that addendum, the basic scope of arbitrable claims was changed from "any controversy or claim asserted against Employer (or its officers, agents, or employees)" to "any controversy or claim asserted against (i) Employer (or its officers, agents, or employees) or (ii) against Employee." (Italics added.) Clearly, Knox knew how to draft a bilateral clause, and chose to do so only after Armendariz mandated it.
We are likewise unpersuaded by Knoxs contention that the arbitration provision works evenly, because it exempts certain claims by each side from the arbitration requirement. As already explained, we do not interpret the agreement as requiring Knox to arbitrate any claims. But even if it did, the "exemptions" do not operate evenly. The only employee claims that are exempt from arbitration are workers compensation and unemployment insurance claims. Neither of these claims could be brought to arbitration, as they require specific other forums (e.g., the workers compensation system) and parties (e.g., insurers). By contrast, there is absolutely no reason Knox could not pursue its injunctive relief claims in an arbitration forum. (OHare v. Municipal Resource Consultants, supra, 107 Cal.App.4th at pp. 277-278.)
Moreover, and again assuming Knox had an obligation to pursue claims other than trade secret injunctions in arbitration, there is a serious question as to whether that would be merely an illusion of bilateralness, given the extreme unlikelihood of such other claims. Hos employment agreement is terminable at will, allowing her to leave her employment at any time, and she is not paid in advance. Besides stealing company property or committing vandalism, there seems little potential damage Ho might inflict upon Knox other than the revelation of trade secrets and thus little likelihood that Knox would even have any occasion to assert other claims against her. As this court has previously explained in Saika v. Gold (1996) 49 Cal.App.4th 1074, 1080, the evaluation of whether an arbitration provision is bilateral sometimes requires us to look behind the language and gauge the realistic effect of the clause. Here, giving Knox the right to litigate trade secret protection against Ho would, as a practical matter, be tantamount to completely exempting its claims from the arbitration requirement.
In Saika, we concluded that an arbitration provision between a physician and patient, which gave both parties the right to seek a trial de novo if the arbitrators award was over $25,000, was not truly bilateral, because there was very little chance the physician would ever sue the patient. Thus, the effect was to give the physician a unilateral right to reject a high award, while giving the patient no right to reject a very low one.
The arbitration provision at issue here is also problematic because of its requirement that Ho share the expense of the compulsory arbitration. "[W]hen an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court. This rule will ensure that employees bringing FEHA claims will not be deterred by costs greater than the usual costs incurred during litigation, costs that are essentially imposed on an employee by the employer." (Armendariz, supra , 24 Cal.4th at pp. 110-111.) The prohibition against imposing arbitration costs on employees is equally applicable to employee claims for wrongful termination in violation of public policy. (Little v. Auto Stiegler, Inc., supra, 29 Cal.4th at p. 1080.) Where the agreement is silent as to cost sharing, Armendariz concluded it would be appropriate to infer a requirement that the employer bear such costs (Armendariz, supra, 24 Cal.4th at p. 113), but in this case, where the agreement specifically requires the employee to share the costs, no such inference can be drawn.
Knox has asked us to take judicial notice of an amended Rule 42 promulgated by the American Arbitration Association (AAA), which provides in part that in disputes "arising out of employer-promulgated plans" the employee is not required to pay any part of the arbitrators compensation. Knox argues that this rule alters the fee splitting clause of the arbitration provision at issue here, since that provision states the arbitration must be conducted "in accordance with the then current Rules of the American Arbitration Association." However, as Ho points out in her opposition to the judicial notice request, Knox did not quote the entire relevant clause, which actually states the arbitration must be conducted "in accordance with the then current Rules of the American Arbitration Association, except as modified herein." (Italics added.) Because the specific language of the arbitration clause requires the parties to split the costs, it "modifies" any contrary rule of the AAA. The request for judicial notice is denied.
II
Knox suggests that even if the specific terms of the arbitration provision in this case appear to run afoul of Armendariz, the agreement is nonetheless saved by the clause requiring the arbitrator "to render a decision in strict conformity with all applicable state, local and federal statutes, regulations and case law." Indeed, Knox asserts that this clause "starkly distinguishes this case from all other unconscionability cases."
According to Knoxs theory, the clause requires the arbitrator to enforce the arbitration provision in a manner which conforms to the requirements of Armendariz. For example, because Armendariz concluded the employer must pay all arbitration costs in cases involving claims arising under the Fair Employment and Housing Act (FEHA), Knox contends that to the extent Ho is pursuing such claims, this clause would automatically require the arbitrator to shift those fees and costs to it.
But if that were the purpose of the clause, it is defeated by its very next words (ignored by Knox), which specify that "[t]he Arbitrator shall have no authority to amend, modify, add to or subtract from any provision of this Agreement . . . ." Because the problems which render the arbitration agreement unenforceable, including the lack of bilateralness and the fee sharing requirement, are contained within its express provisions, the mandate that the arbitrator follow "applicable" law does not allow him or her to ignore those provisions in an effort to make the agreement comply with Armendariz.
III
Knox next contends that even assuming the original arbitration provision included in Hos employment agreement is unenforceable, Ho should nonetheless be bound by the amended arbitration provision it circulated to its employees in the wake of Armendariz, "as a matter of logic and equity." According to Knox, it is a mere "fortuity" that Ho never signed the amendment, because she was out on disability when it was circulated. But the terms of Hos employment agreement are not a fortuity, and we are bound to interpret that agreement in accordance with contract law, not logical or equitable principles.
The original agreement, drafted by Knox, expressly provides that a modification to its terms will be effective "only if it is [in] writing that (i) is signed by both parties, (ii) specifically references this Agreement and (iii) specifically expresses an intent by both parties to modify this Agreement." That never happened, and consequently neither party can be held to the amendment. Moreover, the specific restrictions on modifications to Hos employment agreement make it irrelevant that Knox may have intended to implement a new arbitration "policy" applicable to all employees in the wake of Armendariz. Its contract with Ho specified the terms of her individual arbitration agreement, and those terms could only be altered with her written consent.
It is likewise irrelevant that Knox may have been acting in good faith when it proposed the amendment to its arbitration agreement. As Knox itself points out, "[w]hen analyzing unconscionability, the proper focus is upon whether the provision was unconscionable `at the time it was made." (Quoting Civ. Code, § 1670.5, subd. (a).) In any event, an employers offer to amend its arbitration provisions only after our Supreme Court specifically concludes that similar provisions are unenforceable in the employment context does not necessarily demonstrate good faith.
IV
Finally, Knox suggests that even if its arbitration agreement with Ho has some unconscionable provisions, the proper remedy is to simply sever those provisions and enforce the remainder of the agreement. However, as explained in Armendariz, severance is not always appropriate, particularly where the problem is a lack of mutuality: "[I]n the case of the agreements lack of mutuality, . . . permeation [by an unlawful purpose] is indicated by the fact that there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. Rather, the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms. Civil Code section 1670.5 does not authorize such reformation by augmentation, nor does the arbitration statute. Code of Civil Procedure section 1281.2 authorizes the court to refuse arbitration if grounds for revocation exist, not to reform the agreement to make it lawful. Nor do courts have any such power under their inherent limited authority to reform contracts. [Citations.]" (Armendariz, supra , 24 Cal.4th at pp. 124-125.)
The order is affirmed. Ho is to recover her costs on appeal.
WE CONCUR: ARONSON, J., and IKOLA, J.