Opinion
NOT TO BE PUBLISHED
petition for writ of mandate. James R. Dunn, Judge. Petition granted. Los Angeles County Super. Ct. No. BC352154
Anderson & Associates, Michael D. Anderson and Nina Poladian for Petitioner.
No appearance for Respondent.
Kirkpatrick & Lockhart Preston Gates Ellis, Thomas H. Petrides, Jennifer L. Wayne and Myra B. Villamor for Real Party in Interest.
ASHMANN-GERST, J.
Petitioner Antoria Louie (Louie) challenges an order compelling arbitration of her employment discrimination suit against her employer, real party in interest, PPG Industries, Incorporated (PPG). Assuming, without deciding, that the parties entered into a valid arbitration agreement, we conclude that that agreement is procedurally and substantively unconscionable. Accordingly, we grant the petition and issue a peremptory writ of mandate directing the trial court to set aside its order compelling arbitration.
BACKGROUND
Louie began her tenure with PPG’s predecessor in 1989. On December 16, 2003, PPG adopted and distributed to its employees a new dispute resolution program (Resolve) that required, as a condition of employment, employees who were not represented by a union to submit to final and binding arbitration of their employment-related claims. By its terms, the Resolve process became effective January 1, 2004, as the exclusive process for addressing covered claims. Among covered claims are those for employment discrimination.
On May 10, 2006, Louie filed this lawsuit, alleging employment-related violations of the California Fair Housing and Employment Act (FEHA) (Gov. Code, § 12940 et seq.) that purportedly commenced in 2003.
PPG moved to compel arbitration. In opposing, Louie denied that any arbitration agreement had been formed, and argued that Resolve was unenforceable under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz) because it was procedurally and substantively unconscionable. The trial court granted PPG’s motion, finding that an implied-in-fact contract to arbitrate had been created by Louie’s continued employment after Resolve’s effective date. The trial court’s order granting PPG’s motion did not address the enforceability of the arbitration agreement.
Louie filed a petition for writ of mandate in this court challenging the trial court’s ruling on numerous grounds. After considering the petition and opposition, we requested briefing to address whether the Resolve arbitration provision was unenforceable as unconscionable under Armendariz and Mercuro v. Superior Court (2002) 96 Cal.App.4th 167 (Mercuro). We subsequently issued an alternative writ of mandate, received additional briefing, and heard argument. Because the Resolve arbitration provisions are procedurally and substantively unconscionable, we grant the petition.
In granting Louie’s petition, we do not reach the issue of whether a valid implied-in-fact contract was formed between Louie and PPG. We assume, without deciding, that such an agreement was formed, yet conclude that that agreement is unconscionable and therefore unenforceable. Thus, we limit our discussion to the terms of the Resolve policies and procedures.
STANDARD OF REVIEW
In the absence of extrinsic evidence relevant to the enforceability of the arbitration agreement, we consider the issue of enforceability de novo. (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 650 (Abramson).)
DISCUSSION
I. Enforcement of Arbitration Agreements
A. Policy
Under the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.), arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The FAA manifests a strong public policy of enforcing arbitration agreements, including agreements to arbitrate statutory rights. (Broughton v. Cigna Heathplans (1999) 21 Cal.4th 1066, 1074–1075.) This policy is also embodied in the California Arbitration Act (Code Civ. Proc., § 1280 et seq.). But the strong policy in favor of enforcing arbitration agreements does not arise until an enforceable agreement is established. (Mitchell v. American Fair Credit Assn., Inc. (2002) 99 Cal.App.4th 1345, 1355.) In determining the enforceability of an arbitration agreement, generally applicable contract defenses, such as fraud, duress, and unconscionability apply. (Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.) Unconscionability is one ground upon which a court may refuse to enforce an arbitration agreement. (Civ. Code, § 1670.5; Code Civ. Proc., § 1281.)
B. Analytical Framework
“In deciding whether an agreement to arbitrate is enforceable, the first step in the analysis is to determine whether the agreement implicates public or private rights.” (Abramson, supra, 115 Cal.App.4th at pp. 651–652.) “Where the plaintiff’s claims arise from unwaivable public rights, whether statutory or nonstatutory, the arbitration agreement must satisfy the minimum requirements set forth in Armendariz. [Citation.] Assuming it satisfies the Armendariz requirements, an agreement to arbitrate public claims also must be conscionable.” (Abramson, supra, at p. 652.) “Where the plaintiff asserts private rights rather than (or in addition to) unwaivable public rights, the agreement to arbitrate those claims is tested only against conscionability standards.” (Ibid.; see also Armendariz, supra, 24 Cal.4th at p. 113.)
Here, Louie’s FEHA claims arise from unwaivable statutory public rights. (Armendariz, supra, 24 Cal.4th at pp. 100–103.) As such, we first assess whether the Resolve policies satisfy the minimum requirements set forth in Armendariz. (Armendariz, supra, at p. 102; Abramson, supra, 115 Cal.App.4th at pp. 653–654.) Then we determine whether the arbitration agreement is unconscionable.
II. Employee Not to Pay Unreasonable Costs
“To be lawful under Armendariz, an agreement to arbitrate public policy employment claims must satisfy five requirements. (1) The agreement must provide for adequate discovery. (2) It must require a written decision allowing limited judicial review. (3) The agreement must permit the types of relief that would be available in court. (4) It must limit the employee’s forum costs. [Citations.] (5) Finally, as with all contractual arbitration, an agreement to arbitrate a public policy claim must provide for a neutral arbitrator. [Citation.]” (Abramson, supra, 115 Cal.App.4th at pp. 653–654.) While Resolve satisfies four of these requirements, it fails in its provision that requires an employee who wants a recorded hearing to pay for the presence of a court reporter.
The discovery provisions, which limit written discovery to a combined total of 25 items, and nonexpert depositions to three deponents over eight hours of testimony, is subject to modification by the arbitrator, and is therefore sufficient. ‘“[A]dequate’ discovery does not mean unfettered discovery. . . Ultimately it is up to the arbitrator and the reviewing court to balance the need for simplicity in arbitration with the discovery needs of the parties.” (Mercuro, supra, 96 Cal.App.4th at p. 184, fn. omitted.)
Resolve provides with respect to recording the arbitration hearing: “Either party may arrange for a qualified court reporter to make a stenographic record and transcript of the arbitration hearing. If only one party requests that a record be made, then that party shall pay for the entire cost of the record, including providing a copy of the transcript to the arbitrator. If both parties want access to the record, the parties shall share the cost equally.”
“[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.)
Under some circumstances, Resolve improperly requires an employee who wants a recorded hearing to pay for the presence of a court reporter. Because a litigant in a judicial proceeding would not be required to pay for the mere attendance of a court reporter at court, this provision violates the “no additional cost” requirement of Armendariz.
As discussed below, we find this objectionable provision of Resolve severable. Thus, we turn to the question of whether the arbitration agreement is unconscionable.
III. Unconscionability
Both procedural and substantive unconscionability must be present in order for a court to refuse to enforce a contract as unconscionable. (Armendariz, supra, 24 Cal.4th at p. 114.) Courts apply a sliding scale: the greater the degree of one type of unconscionability, the lesser of the other is required in order to render the contract unenforceable. (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.)
A. Procedural Unconscionability
“‘“Procedural unconscionability” concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citation.]’ [Citation.] The relevant factors are oppression and surprise. [Citations.]” (Abramson, supra, 115 Cal.App.4th at p. 656.)
“‘The oppression component arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party. [Citations.]’ [Citation.]” (Abramson, supra, 115 Cal.App.4th at p. 656.) It generally takes the form of a contract of adhesion (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071), a “standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” (Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694.) “Where an adhesive contract is oppressive, surprise need not be shown.” (Abramson, supra, at p. 656.)
The Resolve policies and procedures, drafted by PPG and offered to Louie without negotiation, is a classic example of a procedurally unconscionable agreement. PPG was clearly in the superior bargaining position, and Louie had no meaningful choice. She could either accept the agreement, which became effective two weeks after it was announced, or immediately resign her employment of 14 years. Under these circumstances, the arbitration agreement was indisputably procedurally unconscionable. (Mercuro, supra, 96 Cal.App.4th at pp. 174–175.)
B. Substantive Unconscionability
A procedurally unconscionable contract may be valid, depending on the extent to which it is also substantively unconscionable. (Armendariz, supra, 24 Cal.4th at p. 114.) The substantive prong of unconscionability encompasses overly harsh or one-sided results. (Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 722–723.) “Courts have identified a number of factors that may result in substantive unconscionability.” (Abramson, supra, 115 Cal.App.4th at p. 656.) “But the paramount consideration in assessing conscionability is mutuality.” (Id. at p. 657.)
The Resolve agreement lacks mutuality in two respects: (1) an arbitration award is always final and binding as to an employee, but not as to PPG; and (2) claims an employee is most likely to bring are subject to arbitration, but claims PPG is most likely to bring are not.
1. The Binding Effect of the Arbitrator’s Decision
The Resolve policies and procedures provide that “[t]he arbitrator’s decision is the final, binding and exclusive remedy for the employee’s covered claim, and is equally final and binding upon PPG, except in rare, limited circumstances.” (Italics added.) In other words, an arbitration decision is always the final, binding, and exclusive remedy for the employee when a claim goes to arbitration. It is not always the final, binding, and exclusive remedy for PPG under the same circumstances. Furthermore, the arbitration agreement is silent concerning the circumstances that would exempt PPG from an arbitrator’s decision. No explanation or justification is offered for the exception. This provision renders the Resolve policies and procedures unfairly one-sided. (See, e.g., Abramson, supra, 115 Cal.App.4th at p. 657.)
2. Covered Claims
The Resolve policies and procedures are nonmutual as to the types of claims that are subject to arbitration. Arbitration agreements in the employment context must be bilateral. “Given the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on ‘business realities.’” (Armendariz, supra, 24 Cal.4th at p. 117.) “If the arbitration system established by the employer is indeed fair, then the employer as well as the employee should be willing to submit claims to arbitration.” (Id. at p. 118; see also Abramson, supra, 115 Cal.App.4th at p. 657 [“When only the weaker party’s claims are subject to arbitration, and there is no reasonable justification for that lack of symmetry, the agreement lacks the requisite degree of mutuality”].)
By definition, the claims subject to arbitration under the agreement are “civil employment-related claims by a present or former employee against PPG and/or individual managers or supervisors acting within the scope of their employment, which would be actionable in a court of law . . . . ” (Italics added.) Covered claims include alleged violations of FEHA, Title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000e et seq.), the Americans with Disabilities Act, the Fair Labor Standards Act, the Labor Code, the Family Medical Leave Act, and whistleblower statutes, all of which are most likely to be brought by an employee.
“Covered claims are civil employment-related claims by a present or former employee against PPG and/or individual managers or supervisors acting within the scope of their employment, which would be actionable in a court of law having jurisdiction over the claims. These include, for example, (without limitation):
At the same time that Resolve requires employees to arbitrate their employment-related claims, it exempts PPG from having to arbitrate numerous types of claims, among them: “[c]laims for injunctive or other equitable relief relating to an alleged breach of an employee’s non-competition, non-solicitation, non-disclosure or confidentiality obligations; [¶] [c]laims involving patents, trademarks or intellectual property;” and “[c]laims relating to the enforceability of a Release signed in exchange for severance or other consideration.” Each of these is a claim that PPG, not its employee, is most likely to pursue.
“The following claims are specifically excluded from the definition of ‘covered claims’ under Resolve and may not be brought through the Resolve process:
In an attempt to save its arbitration agreement, PPG argues that the obligation to arbitrate is bilateral, because the listing of covered claims includes torts, breach of contract, and promissory/estoppel, which could be brought by PPG as well as an employee. The preamble to listing of covered claims [“[c]overed claims are civil employment-related claims by a present or former employee against PPG”] belies that argument. (Italics added.) In fact, nowhere in the Resolve policies and procedures is there a comparable listing of claims that PPG, like its employees, is compelled to arbitrate.
PPG also suggests that because Resolve exempts workers’ compensation, unemployment insurance, occupational health and safety, and benefits claims from arbitration, excluded claims are as likely to be brought by an employee as by PPG. Not so. None of these statutory claims are proper subjects for arbitration. Accordingly, their exemption does not turn what is essentially a unilateral arbitration agreement into a bilateral one. (Mercuro, supra, 96 Cal.App.4th at p. 176.)
Workers’ compensation and unemployment insurance are covered by their own adjudicatory systems. Claims under the Employee Retirement Security Act (ERISA) (29 U.S.C. § 1001 et seq.), the National Labor Relations Act (NLRA) (29 U.S.C. § 151 et seq.), and the Occupational Health and Safety Act (OSHA) (29 U.S.C. § 651 et seq.) are improper subjects for arbitration for similar reasons. Suits by individual ERISA plan participants are brought against the employee benefit plan, not the employer. (29 U.S.C. § 1132(a)(1)(B).) NLRA claims by an employee against an employer are normally under the exclusive jurisdiction of the National Labor Relations Board (San Diego Unions v. Garmon (1959) 359 U.S. 236, 245–246.) Claims for violations of the OSHA are within the jurisdiction of the Occupational Health and Safety Administration, which has its own enforcement mechanisms. (29 U.S.C. § 657 et seq.)
In defense of the agreement, PPG contends that as a whole the Resolve policies and procedures are mutual, because the only excluded claim that it would bring, and that an employee would not, is one for injunctive relief related to an employee’s alleged breach of a noncompetition, nonsolicitation, nondisclosure, or confidentiality obligation. PPG argues that “this one excluded claim, standing alone, is not sufficient to invalidate the entire agreement.” We disagree for the same reasons set forth in Mercuro, supra, 96 Cal.App.4th at pages 176–177. Under the agreement here, as in Mercuro, an employee terminated for stealing trade secrets would have to arbitrate his wrongful termination claim but the employer could avoid arbitration by making the simple expedient request for injunctive or declaratory relief. (Id. at p. 176.) Such a one-sided agreement “lacks basic fairness and mutuality” and is thus unconscionable. (Armendariz, supra, 24 Cal.4th at p. 120.)
Furthermore, PPG argues that exclusions for intellectual property claims are justified by business necessity due to the often complex nature of the claims and the frequent involvement of a third party “such as a new employer or new business entity, that [sic] may be attempting to improperly use the employer’s protected trade secrets and confidential information.” Conceding that arbitration is no bar to injunctive relief, PPG argues that “it would not be reasonable, economical, or practical to require the employer and the employee to actively litigate [compliance and enforceability] disputes in court while they simultaneously arbitrate the same issues in front of a different fact-finder.”
A contracting party with superior bargaining strength may provide “extra protection” for itself within the terms of the arbitration agreement if “‘business realities’” create a special need for the advantage, “unless the ‘business realities’ that create the special need for such an advantage are explained in the contract itself . . . it must be factually established.” (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1536.) PPG failed to provide the trial court evidence of the “‘business necessity’” it relies on, and its argument is an insufficient substitute. (Mercuro, supra, 96 Cal.App.4th at p. 177.)
Moreover, while a trade secrets case may be more technical than an employment discrimination case, there is no basis for assuming that it is more complex, or that it involves more parties. PPG’s concern that arbitration of trade secrets disputes may not always meet its needs is not a proper business reason for excepting those claims from arbitration. Rather, the exception appears to be grounded in nothing more than PPG’s “‘desire to maximize its advantage based on the perceived superiority of the judicial forum’ and is therefore unconscionable.” (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 726.)
IV. Severance
Civil Code section 1670.5 permits a court to determine that only a portion of a contract is unconscionable and to delete or amend that portion to make the remainder of the contract enforceable. As summarized in Mercuro, supra, 96 Cal.App.4th at pages 184–185: “As a general rule, if the central purpose of the contract is ‘permeated’ or ‘tainted’ with unconscionability or illegality then the contract as a whole cannot be enforced. If, on the other hand, the unconscionability or illegality is collateral to the main purpose of the contract, and the offending provisions can be excised from the contract by means of severance or limitation, then the remainder of the contract can be enforced.” (See also Armendariz, supra, 24 Cal.4th at pp. 122, 124.)
PPG contends that the agreement as a whole is fair and bilateral, and if any provisions are offending, they should be excised or amended according to a severance clause in the agreement. We disagree.
The Resolve court reporter payment provision that violates Armendariz can be easily stricken. But the provisions that sometimes exempt PPG from the effect of an arbitration award, and that require an employee, but not PPG, to arbitrate the claims it is most likely to bring, are more significant. They render the arbitration agreement nonmutual. And two other terms of PPG’s arbitration policy add to its lack of mutuality. Resolve contains a prohibition against combining employee claims, which can only inure to PPG’s benefit and its employees’ detriment. It also affords PPG greater rights than an employee with respect to who may attend the arbitration hearing. An employee who is not represented by an attorney has no right to lay assistance at the hearing; PPG is entitled to an attorney as well as attendance of its management and human resources personnel. Under these circumstances, we cannot simply “extirpat[e]” or “hack[] off” the offending provisions, as PPG urges. (Mercuro, supra, 96 Cal.App.4th at p. 185.)
“At all steps of the Resolve process, employees’ claims will be reviewed and considered on an individual basis; therefore, claims of more than one employee cannot be combined together.”
“The employee may be represented by an attorney at [arbitration]. PPG will be represented by an attorney. The arbitration will be private. Unless the parties agree otherwise, no one may attend the arbitration hearing except for the arbitrator; a court reporter; the employee and his/her attorneys, experts, and witnesses; and the company’s management and human resources personnel, attorneys, experts, and witnesses.”
Finally, the interests of justice would not be served by simply striking the offending provisions because, as our Supreme Court observed in Armandariz, an employer will not be deterred from drafting unenforceable arbitration agreements it mandates for its employees if it knows that the worst penalty it risks is severance of offending clauses after the employee litigates the matter. (Armendariz, supra, 24 Cal.4th at pp. 124–125, fn. 13.) Moreover, “‘[s]everance is permissible only if the unconscionable portion is collateral to the main purpose of the contract.’” (Fitz v. NCR Corp., supra, 118 Cal.App.4th at p. 727.) Here, it appears that the Resolve policies and procedures involve “‘“a systematic effort to impose arbitration on an employee not . . . as an alternative to litigation, but as an inferior forum that works to the employer’s advantage.’” [Citation.] ‘If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced.’” (Fitz v. NCR Corp., supra, at p. 727.)
DISPOSITION
The alternative writ is discharged and the stay is dissolved. Let a peremptory writ of mandate issue directing the superior court to set aside and vacate its order of November 27, 2006, granting real party in interest PPG’s motion to compel arbitration, and to enter a new order, denying the motion. Petitioner is to recover the costs of this petition.
We concur:
BOREN, P. J.
CHAVEZ, J.
“• Employment discrimination, retaliation and harassment claims based on age, race, color, national origin, ancestry, religion, sex, pregnancy, disability, veteran status, or any other legally protected status; claims relating to the Family and Medical Leave Act;
“• Claims relating to the Fair Labor Standards Act and state wage payment and collection laws;
“• Whistle-blower claims;
“• Tort claims; claims for breach of contract and/or promissory estoppel; and
“• Claims relating to workplace accommodation of physical or mental disabilities or bona fide, sincerely held religious beliefs.”
“• Claims for benefits under a company-sponsored benefit plan covered by the Employment Retirement Income Security Act of 1971 (‘ERISA’), or any other claims covered by ERISA;
“• Claims for workers’ compensation or unemployment compensation benefits;
“• Claims under the National Labor Relations Act;
“• Claims under the Occupational Safety and Health Act;
“• Claims for injunctive or other equitable relief relating to an alleged breach of an employee’s non-competition, non-solicitation, non-disclosure or confidentiality obligations;
“• Claims involving patents, trademarks or intellectual property;
“• Claims challenging business decisions such as decisions to restructure, reorganize, downsize or divest in a business, unless such decision is alleged to have violated the employee’s legally protected right;
“• Claims relating to the enforceability of the Resolve process or the arbitrability of the dispute (i.e., whether the claim is a covered claim);
“• Claims related to the enforceability of a Release signed in exchange for severance or other consideration;
“• Claims against an individual supervisor not made against PPG that do not involve conduct within the scope of the manager’s employment;
“• Claims that seek to establish, modify or object to PPG’s policies, except for claims that allege discriminatory application or impact of such policies; and
“• Claims not raised in a timely manner under the Resolve policies and procedures [sic] other applicable time limitations.”