Opinion
NOT TO BE PUBLISHED
San Mateo County Super. Ct. No. CIV493031.
Bruiniers, J.
Appellant John R. McIntosh was a California-based employee of Powered, Inc. (Powered or the Company), a Delaware corporation with its principal place of business in Texas. MacIntosh sued Powered on claims including age discrimination, wrongful termination and California Labor Code violations. Powered moved to compel arbitration of the claims in Texas, as provided by the terms of Powered’s written employment agreements with MacIntosh. The trial court found both procedural and substantive unconscionability in at least two provisions of the employment agreements. The court declined to sever the objectionable provisions and denied the motion. We agree that one provision of the employment agreements is unconscionable, and thereby unenforceable, but find that the offending provision is severable. We therefore reverse and remand with directions to grant the motion.
I. Background
Powered is a social media software development company with its principal place of business in Austin, Texas. It is engaged in interstate commerce.
In October 2008, MacIntosh received from Powered a written offer of employment to be the director of business development. In addition to stating the financial terms of the offer, the letter stated that MacIntosh’s employment was “at-will” and that, “[a]s a condition to commencing employment with the Company, you will be required to complete, sign and return the Company’s standard form of Employee Proprietary Information Agreement” (EPIA). The letter, which was sent to MacIntosh referencing his California residence address, did not include the EPIA. MacIntosh executed the letter on October 20 and started work for Powered on October 27.
MacIntosh was first provided with the EPIA on or about October 30, 2008. The EPIA contained clauses on matters such as at-will employment status, treatment of confidential information, prohibitions on conflicting employment, and solicitation of employees and interference with customer relationships after leaving the company, a covenant not to compete, and return of company documents following termination. The EPIA also included a six-paragraph arbitration provision and a choice-of-law and forum selection clause, which we set forth verbatim:
“11. Arbitration and Equitable Relief.
“a. Arbitration.
In consideration of my employment with the Company, its promise to arbitrate all employment-related disputes and my receipt of the compensation, pay raises and other benefits paid to me by the Company, at present and in the future, I agree that, except as provided in subsection (b) below, any and all controversies, claims, or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from my employment with the Company or the termination of my employment with the Company, including any breach of this Agreement, shall be subject to binding arbitration shall be settled by [sic] arbitration to be held in Travis County, Texas in accordance with the rules then in effect of the American Arbitration Association. Disputes which I agree to arbitrate, and thereby agree to waive any right to a trial by jury, include any statutory claims under state or federal law, inclusding [sic], but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Texas Fair Employment and Housing Act, the Texas Labor Code, claims of harassment, discrimination or wrongful termination and any statutory claims. I further understand that his [sic] Agreement to arbitrate also applies to any disputes that the Company may have with me.
“b. Procedure.
I agree that any arbitration will be administered by the American Arbitration Association (‘AAA’) and that a neutral arbitrator will be selected in a manner consistent with its National Rules for the Resolution of Employment Disputes. I agree that any arbitration under this section shall be conducted in Travis County, Texas. The arbitration proceedings will allow for discovery according to the AAA National Rules for the Resolution of Employment Disputes. I agree that the arbitrator shall have the power to decide any motions brought by any party to the arbitration, including motions for summary judgment and/or adjudication and motions to dismiss and demurrers, prior to any arbitration hearing. I agree that the arbitrator shall issue a written decision on the merits. I also agree that the arbitrator shall have the power to award any remedies, including attorney’s fees and costs, available under applicable law. I understand the Company will pay for any administrative or hearing fees charged by the arbitrator or AAA except that I shall pay for the first $200.00 of any filing fees associated with any arbitration I initiate. I agree that the arbitrator shall administer and conduct any arbitration in a manner consistent with the AAA’s National Rules for the Resolution of Employment Disputes.
“c. Remedy.
Arbitration shall be the sole, exclusive and final remedy for any dispute between me and the Company. Accordingly, neither I nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding the foregoing, the arbitrator will not have the authority to disregard or refuse to enforce any lawful company policy, and the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law which the Company has not adopted.
“d. Equitable Remedies.
I agree that it would be impossible or inadequate to measure and calculate the Company’s damages from my breach of Sections 1, 3, 4, 5, 6, and 8 of this Agreement. Accordingly, I agree that if I breach any such Section, the Company will have available, in addition to any other right or remedy available, the right to obtain an injunction from a court of competent jurisdiction restraining such breach or threatened breach and to specific performance of any such provision of this Agreement. I gurther [sic] agree that no bond or other security shall be required in obtaining such equitable relief and I hereby consent to the issuance of such injunction and to the ordering of specific performance.
“e. Administrative Relief.
I understand that this Agreement does not prohibit me from pursuing an administrative claim with a local, state or federal administrative body such as the Equal Employment Opportunity Commission or the Workers’ Compensation Commission. This Agreement does, however, preclude me from pursuing court action regarding any such claim.
“f. Voluntary Nature of Agreement.
I acknowledge and agree that I am executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. I further acknowledge and agree that I have carefully read this Agreement and that I have asked questions needed for me to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that I AM WAIVING MY RIGHT TO A JURY TRIAL. Finally, I agree that I have been provided opportunity to seek the advice of an attorney of my choice before signing this Agreement.
“12. General Provisions
“a. Governing Law; Consent to Personal Jurisdiction.
THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD FOR CONFLICTS OF LAWS PRINCIPLES. I HEREBY EXPRESSLY CONSENT TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN TEXAS FOR ANY LAWSUIT FILED THERE AGAINST ME BY THE COMPANY CONCERNING MY EMPLOYMENT OR THE TERMINATION OF MY EMPLOYMENT OR ARISING OR RELATING TO THIS AGREEMENT.”
MacIntosh understood from the offer letter that execution of the EPIA was non-negotiable and he was not otherwise told that he could delete or modify any portion of the EPIA. He completed and signed the document.
Powered Chief Financial Officer David Settle averred that Powered had a policy and practice of presenting the EPIA to all new hires, but that Powered did not present it on a “take it or leave it” basis. Over a period of several years, some employees had successfully requested modifications to the agreement, particularly to an included covenant not to compete. Although no employee had ever requested a change to the arbitration clause in the agreement, the company would have considered such a request had MacIntosh made it.
In June 2009, MacIntosh was also presented with a document entitled, “Powered, Inc. 2009 Sales Commission Plan” (Commission Plan or Plan), which set forth the terms under which sales personnel could earn commissions during the calendar year 2009. Settle averred that the Commission Plan was “a negotiated document between the Company and the employee, ” that it was not presented to employees on a “take it or leave it” basis, and that the company would entertain employees’ requests for modification. MacIntosh was told he had to sign the Plan in order to receive commissions, which were a significant portion of his compensation, and he was not told that he could delete or modify any provision of the Plan. MacIntosh never requested modification of the Plan.
The Plan included the following choice of law and arbitration provisions:
“(1.) Enforcement.... This Plan will be governed by, and construed in accordance with, the laws of the State of Texas (excluding its conflicts or [sic] laws and rules).
“(2.) Resolution. All controversies, claims, or disputes arising out of, relating to, or resulting from the administration or execution of this Plan shall be subject to binding arbitration and shall be settled by arbitration to be held in Travis County, Texas in accordance with the rules then in effect of the [AAA].”
MacIntosh signed the Plan.
During MacIntosh’s employment, the company employed people in California, Texas and other states. While MacIntosh worked for Powered, he spent the vast majority of his working hours in Powered’s office in San Mateo, California. During most of the period of his employment, MacIntosh was the only employee who was a resident of California.
On January 25, 2010, MacIntosh’s supervisor informed him that he had been selected for layoff effective January 31, just prior to his receiving a commission for the renewal of a contract. MacIntosh contacted an attorney with respect to his termination. MacIntosh’s attorneys first contacted Powered in February 2010, regarding his claims for wrongful termination and unpaid commissions and accrued paid time off. On March 3, they told Powered that MacIntosh would pursue an administrative complaint and court action.
On March 4, 2010, Powered initiated an arbitration proceeding against MacIntosh with AAA pursuant to the EPIA and the Commission Plan, seeking declaratory relief regarding MacIntosh’s compensation claims. Powered requested arbitration in Travis County, Texas.
On March 10, 2010, MacIntosh filed a complaint for age discrimination with the Department of Fair Employment and Housing (DFEH) and informed Powered of the complaint. On March 12, MacIntosh received notice of the arbitration action filed by Powered. On March 16, MacIntosh filed a lawsuit against Powered in San Mateo County Superior Court alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, failure to pay wages, age discrimination, violation of Labor Code section 232, violation of Labor Code section 98.6, wrongful termination in violation of public policy, unjust enrichment, declaratory relief, and unfair business practices. Later that day, MacIntosh informed AAA that he did not consent to AAA jurisdiction or to venue in Texas.
On April 23, Powered filed a motion to compel arbitration. AAA stayed the arbitration proceeding over Powered’s objection pending resolution of the motion.
On June 29, 2010, the trial court denied the motion. Without specifically indicating whether it was referring to the EPIA or the Commission Plan, the court found that “the arbitration agreement” was procedurally unconscionable and that it contained substantively unconscionable provisions, “including requiring [MacIntosh], a California resident who worked for [Powered] in California, to arbitrate his claims in Texas, and an ‘Equitable Remedies’ provision that allowed only [Powered] to obtain an injunction from a court.” The court also found that the agreement was “so permeated with unconscionability that the agreement to arbitrate cannot be rendered enforceable by severing the offending provisions.” The court specified that its order was “as to the Right to Compel Arbitration only, and without prejudice to unconscionability issues otherwise raised by the parties.”
II. Discussion
Both the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) and the California Arbitration Act (Code Civ. Proc., § 1280 et seq.) favor enforcement of valid arbitration agreements. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 96–97 (Armendariz).) Our courts recognize a strong public policy in favor of arbitration. (Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 25–26; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) Thus, “doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration. [Citations.]” (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323.) “Despite the strong policy favoring arbitration, there are circumstances in which California courts may invalidate or limit agreements to arbitrate. Employing ‘general contract law principles, ’ courts will refuse to enforce arbitration provisions that are ‘unconscionable or contrary to public policy.’ [Citation.]” (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 651 (Abramson), quoting Armendariz, supra, 24 Cal.4th at p. 99.)
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.”
On April 27, 2011, the United States Supreme Court disapproved the decision of our Supreme Court in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank).) (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740] (AT&T Mobility).) Discover Bank held that a class action waiver in a consumer contract of adhesion is unconscionable where consumer claims against the defendant are predictably small and the plaintiff alleges a scheme to cheat consumers. In AT&T Mobility, the high court reversed a decision of the Ninth Circuit Court of Appeal which had relied upon Discover Bank in finding a similar class action waiver unconscionable, and an arbitration agreement consequently unenforceable. The Court held that the Discover Bank rule was preempted by the FAA “[b]ecause it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ [citation]....” (AT&T Mobility, supra, 131 S.Ct. at p. 1753.) The Supreme Court in AT&T Mobility did not purport to prohibit the type of contractual unconscionability analysis dictated by our Supreme Court in Armendariz. The Court acknowledged that the saving clause in § 2 of the FAA, “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability, ’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. [Citations.]” (AT&T Mobility, at p. 1746.) What the saving clause of § 2 does not permit, however, are “state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives. [Citations.]” (AT&T Mobility, at p. 1748.)
Where there are disputed facts, the trial court’s resolution of such disputed facts will be upheld if supported by substantial evidence, but if there is no disputed extrinsic evidence, the trial court’s decision on the arbitrability determination is reviewed de novo. (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1511.) “ ‘ “Whether an arbitration provision is unconscionable is ultimately a question of law.” ’ [Citations.]” (Ibid.) “ ‘On appeal, when the extrinsic evidence is undisputed... we review the contract de novo to determine unconscionability.’ [Citations.]” (Id. at p. 1512; Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 502 (Ontiveros).) A ruling on whether unconscionable terms may be severed from the agreement and the remainder enforced is reviewed for abuse of discretion. (Ontiveros, at p. 502.)
A. Choice of Law
Powered argues that EPIA’s Texas choice-of-law provision governs the enforceability of the arbitration provision. The Plan has a similar Texas choice-of-law provision. Applying California choice-of-law principles, Powered argues that the choice-of-law provision is independently enforceable. (See Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 466 (Nedlloyd).) Powered contends that the arbitration provision is enforceable under Texas law and its motion to compel should therefore have been granted. We do not discuss the Nedlloyd test in any detail because we conclude that Powered has forfeited this argument by failure to provide adequate discussion of substantive Texas law. Consequently, we rely solely on California law in determining whether the arbitration agreements are enforceable.
A narrowly drawn choice-of-law provision such as the provisions in the EPIA and the Plan applies only to interpretation and enforceability of the contract and not to other disputes between the parties. (Nayaran v. EGL, Inc. (9th Cir. 2010) 616 F.3d 895, 898.) Thus, MacIntosh’s statutory claims should be governed by California substantive law.
Powered does not argue that Texas choice-of-law principles apply. The Plan choice-of-law provision appears to waive any reliance on Texas choice-of-law principles (“This Plan will be governed by, and construed in accordance with, the laws of the State of Texas (excluding its conflicts or [sic] laws and rules), ” italics added) and the EPIA choice-of-law provision is susceptible to such an interpretation (“THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD FOR CONFLICTS OF LAWS PRINCIPLES, ” italics added).
Powered’s discussion of Texas law is brief and general. Powered provides no analysis of the specific arbitration agreements at issue here under Texas law to assess enforceability. (Cf. Discover Bank v. Superior Court (2005) 134 Cal.App.4th 886, 889–893 [applying Nedlloyd, the court first considered whether a class action waiver was enforceable under the contractual chosen law and, after finding that it was, then considered whether application of that law would violate a fundamental public policy of California].) Instead, Powered argues that Texas law on arbitration agreements “parallels” California law in some respects, and cites cases demonstrating that Texas recognizes defenses to the enforceability of arbitration agreements that are at least somewhat similar to defenses under California law. For example, Texas courts recognize the defense of unconscionability. (See In re Media Arts Group, Inc. (Tex.Ct.App. 2003) 116 S.W.3d 900, 910–911 (Media Arts).) Media Arts notes, however, that Texas imposes stricter requirements for a finding of substantive unconscionability, and that Texas specifically does not agree with California courts that a lack of mutuality in an employment arbitration agreement is unconscionable. (Id. at pp. 910–912 & fn. 21; cf. Armendariz, supra, 24 Cal.4th 83.) In a second cited case, the Texas Supreme Court upheld an arbitration agreement that included minimum requirements that have been imposed by our Supreme Court, at least in California FEHA cases—(1) a neutral arbitrator, (2) adequate discovery, (3) a written award, (4) providing all statutory remedies that would be available in court, and (5) not requiring the employee to pay either unreasonable costs or any arbitrator’s fees or expenses. (See In re Halliburton Co. (Tex. 2002) 80 S.W.3d 566, 572, citing Cole v. Burns Intern. Security Services (D.C. Cir. 1997) 105 F.3d 1465, 1482; Armendariz, supra, 24 Cal.4th at pp. 102–113 [same].) However, Powered acknowledges that Texas does not follow Armendariz in imposing those same minimum requirements with respect to employment arbitration agreements.
In short, Powered cites Texas law only to the limited extent necessary to, and for the limited purpose of, demonstrating the similarity of California and Texas law on the issue of arbitration. Powered then goes on to argue that the arbitration agreements are enforceable under California law. Under these circumstances, we conclude Powered has forfeited any argument that the agreements are enforceable under Texas law even if not enforceable under California law, and that Texas law controls on this issue. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564 [trial court ruling presumed correct and error must be affirmatively shown]; Guthrey v. State of California (1998) 63 Cal.App.4th 1108, 1115–1116 [appellate court may deny claim on appeal that is unsupported by legal argument applying legal principles to the particular facts of the case on appeal].)
Powered forfeited the issue in the trial court as well. In support of its motion to compel arbitration, Powered cited the Plan’s choice-of-law provision and general Texas legal principles favoring enforcement of arbitration agreements. In opposition, MacIntosh argued the choice-of-law provision was unenforceable under Nedlloyd, because under California law the arbitration agreements would be unenforceable. In reply, Powered argued that MacIntosh had effectively conceded that the arbitration agreement was enforceable under Texas law. On the issue of whether that result would conflict with a fundamental public policy of California, Powered argued that “Plaintiff simply assumes that enforcement of the Arbitration Agreement, regardless of whether under Texas or California law, would violate California’s public policy (which assumption is incorrect, as will be demonstrated below).” Powered then argued that the arbitration provisions were enforceable under California law. That is, to argue that the choice-of-law provision was enforceable under Nedlloyd, Powered argued that the arbitration agreement was enforceable under both Texas and California law and made no effort to draw any distinctions between the two states’ law or to show that the differences in Texas law would not violate California’s fundamental public policies or otherwise fail to satisfy the Nedlloyd test. In both the trial court and on appeal, therefore, Powered fundamentally relies on the enforceability of the agreement under California, not Texas, law.
We therefore analyze the agreements applying California law.
B. Unconscionability
MacIntosh argues the arbitration agreements are unconscionable under California law and thus unenforceable. Unconscionability is a defense to a mandatory employment arbitration agreement regardless of the type of claim being arbitrated. (Armendariz, supra, 24 Cal.4th at p. 113.) “Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. [Citation.] ‘The term [contract of adhesion] signifies 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.’ [Citation.] If the contract is adhesive, the court must then determine whether ‘other factors are present which, under established legal rules—legislative or judicial—operate to render it [unenforceable].’ [Citation.] ‘Generally speaking, ... such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him. [Citations.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive....’ [Citation.]” (Ibid.) “ ‘[U]nconscionability has both a “procedural” and a “substantive” element, ’ the former focusing on ‘ “oppression” ’ or ‘ “surprise” ’ due to unequal bargaining power, the latter on ‘ “overly harsh” ’ or ‘ “one-sided” ’ results. [Citation.] ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’ [Citation.] But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, 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.” (Id. at p. 114.)
1. Procedural Unconscionability
“[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, 24 Cal.4th at p. 115.) Moreover, “[w]hile arbitration may have its advantages in terms of greater expedition, informality, and lower cost, it also has, from the employee’s point of view, potential disadvantages: waiver of a right to a jury trial, limited discovery, and limited judicial review.... [¶]... Given the lack of choice and the potential disadvantages that even a fair arbitration system can harbor for employees, we must be particularly attuned to claims that employers with superior bargaining power have imposed one-sided, substantively unconscionable terms as part of an arbitration agreement.” (Ibid.)
Further, at least two of MacIntosh’s claims assert unwaivable rights under California law, his claim for age discrimination under the FEHA and his claim for wrongful termination in violation of public policy under California common law. (See Armendariz, supra, 24 Cal.4th at pp. 100–101; Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1077 (Little).) In Armendariz, the Supreme Court held that “arbitration agreements that encompass unwaivable... rights must be subject to particular scrutiny.” (Armendariz, at p. 100, citing Civ. Code, §§ 1668, 3513.)
Here, it is undisputed that Powered’s offer of employment to MacIntosh stated, in accordance with standard company practice, that “As a condition to commencing employment with the Company, you will be required to complete, sign and return the Company’s standard form of Employee Proprietary Information Agreement.” (Italics added.) The EPIA was not enclosed in the letter, but was only given to MacIntosh three days after he started work. Although Powered produced evidence that EPIA’s had been modified for other employees at their request, there was no evidence that MacIntosh had any notice of those modifications or was otherwise on notice that modification of the EPIA was possible. In light of the language of the offer letter and Powered’s delayed delivery of the EPIA until after MacIntosh had actually started work (i.e., after negotiations over other aspects of his employment were concluded), MacIntosh could reasonably conclude in the circumstances that the arbitration clause was nonnegotiable. (See Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107, 114 (Martinez) [employment offer letter stated that acceptance of arbitration agreement was a “ ‘condition of employment’ ” and employee was not told he could negotiate the arbitration term]; Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1534 (Stirlen) [arbitration agreement was on separate form from employment offer letter that included the negotiated terms of employment and was only presented to employee after he accepted employment]; Trivedi v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 392–393 (Trivedi) [finding arbitration agreement procedurally unconscionable based on employee declaration that agreement was prepared by employer, was never explained to him, and was mandatory condition of employment].) MacIntosh was not required to unsuccessfully seek a modification of the clause in order to assert that the EPIA was a contract of adhesion. The EPIA arbitration agreement was a contract of adhesion.
Powered notes that the Martinez court also wrote that, when the employee told management he preferred not to sign the arbitration agreement, he was told he could not work for the company unless he signed it. (Martinez, supra, 118 Cal.App.4th at p. 114.) However, the court did not rest its procedural unconscionability finding on this fact; on the contrary, the court mentioned it almost as an afterthought: “It is undisputed Martinez was required to execute the arbitration agreement as a prerequisite of his employment by FireMaster. The letter confirming FireMaster’s offer of employment states that Martinez’s signing and acceptance of the arbitration agreement was a specific ‘condition of employment.’ No evidence indicates Martinez had any opportunity to negotiate or refuse to sign the arbitration agreement. Indeed, when he informed FireMaster’s Human Resources representative he would prefer not to sign the agreement, Martinez was told ‘[he] could not work for FireMaster if [he] did not sign the document.’ ” (Ibid., italics added.) Powered also notes that in Mercuro v. Superior Court, where the court found an employment arbitration clause adhesive, the employee had repeatedly objected to and resisted signing the arbitration agreement and agreed only after he was expressly threatened with adverse consequences if he did not sign. (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 172–173, 174–175 (Mercuro).) However, the Mercuro court did not hold that the arbitration agreement was procedurally unconscionable only on this ground and Powered has cited no case holding that an employment arbitration agreement was not adhesive where the employee did not expressly object to signing it. We are aware of no case holding that an express protest or attempt to modify the arbitration agreement is a prerequisite to a finding of procedural unconscionability where the circumstances otherwise indicate that signing the agreement is a condition of employment.
We similarly conclude the Commission Plan was a contract of adhesion. While already employed by Powered, MacIntosh was presented with the Plan and told he had to sign it if he wanted to be eligible for and receive the commissions that were a substantial part of his compensation. Although Settle averred that the Commission Plan was “a negotiated document between the Company and the employee” and that it was not presented to employees on a “take it or leave it” basis, these conclusory allegations fail to contradict MacIntosh’s declaration about the circumstances in which the Plan was presented to him. Moreover, Settle’s statements that Powered would have entertained employees’ requests for modification of the Plan have little relevance, because MacIntosh was never so informed and in the circumstances he reasonably concluded the Plan terms were nonnegotiable. (See Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 708, 721 (Fitz) [plaintiff accepted two arbitration agreements by performance while employed with defendant and agreements held adhesive].)
The fact that MacIntosh may have been a fairly well-compensated employee does not alter our analysis. As Armendariz explained, only “the most sought-after employees” are free from acute economic pressure when they are asked to sign a mandatory arbitration agreement as a condition of employment (Armendariz, supra, 24 Cal.4th at p. 115), and several courts have held that such agreements may be contracts of adhesion even when the employees are well-paid professionals. (See, e.g., Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, 683, 685–686 (Sonic-Calabasas) [plaintiff had been earning $100,000]; Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 812, 819 [experienced concert promoter & producer Bill Graham]; Stirlen, supra, 51 Cal.App.4th at pp. 1525, 1533–1534 [vice president and chief financial officer]; Trivedi, supra, 189 Cal.App.4th at pp. 390, 393 [president and chief executive officer]; Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1285 [arbitration agreement is adhesive even though employee was able to negotiate other conditions of employment]; Abramson, supra, 115 Cal.App.4th at pp. 644, 662–663 [same, where employee was director of corporate communications].)
In sum, we find the arbitration provisions in the EPIA and the Plan to be procedurally unconscionable as adhesion contracts.
In concluding the arbitration agreements were procedurally unconscionable, we need not and do not rely on Powered’s failure to provide MacIntosh with a copy of the AAA arbitration rules. Failure to provide a copy of the arbitration rules to which the employee would be bound can support a finding of procedural unconscionability. (Trivedi, supra, 189 Cal.App.4th at p. 393.)
2. Substantive Unconscionability
a. Equitable Relief Carve-out
The EPIA arbitration provision states, “I agree that, except as provided in subsection (b) below, any and all controversies, claims, or disputes with anyone... arising out of, relating to, or resulting from my employment with the Company or the termination of my employment with the Company, including any breach of this Agreement, shall be subject to binding arbitration.... I further understand that his [sic] Agreement to arbitrate also applies to any disputes that the Company may have with me.” (Italics added.) MacIntosh and Powered agree that the reference to subdivision (b) is a typographical error because subdivision (b) describes the procedure for arbitrating disputes under the provision and does not set forth any exceptions to the employment-related disputes that are covered by the provision. Powered argues the intended reference was subdivision (e), which states that the agreement “does not prohibit the employee from pursuing an administrative claim with a local, state or federal administrative body such as the Equal Employment Opportunity Commission or the Workers’ Compensation Commission.” MacIntosh argues the intended reference was subdivision (d), which states that the employee agrees that if the employee breaches certain sections of the EPIA (including sections covering inventions, conflicting employment, solicitation of employees after termination, interference with customers after termination, and return of company property after termination), Powered would have the right to obtain an court injunction without posting security, with the employee consenting to issuance of an injunction and specific performance as a remedy.
Subdivision (d) also refers to Section 1, an at-will employment provision, but it is difficult to see how an employee could breach that provision. Section 2, which requires the employee to keep certain information confidential, and Section 7, a covenant not to compete, are not included in the subdivision (d) exception.
We hold that, regardless of whether “except as provided in subdivision (b)” was intended to refer to subdivision (d), subdivision (d) by its own terms creates an exception from arbitration for employer claims for injunctive relief which is substantively unconscionable.
We first reject Powered’s argument that subdivision (d) merely authorizes the arbitrator to order injunctive relief as an arbitral remedy and authorizes the prevailing party to seek enforcement of that arbitral order in court, or alternatively that subdivision (d) merely authorizes a party to seek provisional injunctive relief in court pending completion of an arbitration proceeding where authorized by state law. (See, e.g., Code Civ. Proc., § 1281.8.) Subdivision (c) of the EPIA, entitled “Remedy, ” states that the arbitration shall be the sole remedy for any covered dispute and that neither the employee nor the Company would be allowed to pursue court action with respect to such disputes. Subdivision (d), however, gives the Company “the right to obtain an injunction from a court of competent jurisdiction” “in addition to any other right or remedy available” to the Company under the agreement. (Italics added.) The plain language of the EPIA states that Powered can go to court to enjoin violations of most provisions of that agreement and is not restricted to arbitrating those claims or to seeing injunctive relief through the arbitrator.
In Armendariz, the court found that “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.’... 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. Without reasonable justification for this lack of mutuality, arbitration appears less as a forum for neutral dispute resolution and more as a means of maximizing employer advantage. Arbitration was not intended for this purpose. [Citation.]” (Armendariz, supra, 24 Cal.4th at pp. 117–118.) In Armendariz, the arbitration agreement only applied to employee claims against the company for wrongful termination. (Id. at p. 120.) Moreover, the agreement limited an employee’s remedies in the arbitral forum, while the employer was not subject to any comparable limitation since it was not even restricted to the arbitral forum. (Id. at p. 121.) The employer attempted to justify the lack of mutuality by the fact that the employees in question were relatively low in the organizational hierarchy and lacked access to proprietary information or company funds that might lead to an employer suit against them. (Ibid.) The court rejected the justification: “The fact that it is unlikely an employer will bring claims against a particular type of employee is not, ultimately, a justification for a unilateral arbitration agreement. It provides no reason for categorically exempting employer claims....” (Ibid.)
There is a striking similarity between the wording of subdivision (d) in the EPIA and a similar carve-out provision found to be substantively unconscionable in Abramson, supra, 115 Cal.App.4th at p. 666. In Abramson, the arbitration agreement first stated that it covered “ ‘all disputes relating to all aspects of the employer/employee relationship (except as provided in section 10(b) below)’ ” and then stated in section 10(b), “ ‘Equitable Remedies. I agree that it would be impossible or inadequate to measure and calculate the company’s damages from any breach of the covenants [protecting intellectual property]. Accordingly, I agree that if I breach any of [those covenants], both parties will have, in addition to any other right or remedy available, the right to obtain an injunction from a court of competent jurisdiction restraining such breach or threatened breach and to specific performance of any such provision of [this] agreement. Both parties further agree that no bond or other security shall be required in obtaining such equitable relief.’ ” (Abramson, supra, 115 Cal.App.4th at pp. 664–665, fn. 3.) The carve-out applied only if the employee breached the covenants and was justified by the difficulty of calculating the employer’s damages. (Ibid.) Noting that in assessing substantive unconscionability, “the paramount consideration is mutuality” (id. at p. 664), the Abramson court found the challenged provisions to be “entirely lacking in mutuality and basic fairness” and as a result, to be substantively unconscionable. (Id. at p. 666)
Here, the carve-out expressly applies only to the employer (and also applies only if the employee breaches the enumerated sections). The carve-out also appears to lighten the burden of seeking injunctive court relief for the employer—it waives the bond requirement and provides that the employee “consent[s] to the issuance of such injunction and to the ordering of specific performance”—thus furthering the employer advantages under the agreement. (See also Abramson, supra, 115 Cal.App.4th at p. 664–665, fn. 3 [waiving bond requirement for injunctive relief].)
Significantly, the employer carve-out is contained within a document specifically focused on “Proprietary Information.” Several courts have recognized that claims for injunctive relief based on violations of intellectual property, proprietary information, or noncompetition clauses are the employment-related claims most likely to be asserted by an employer against an employee. (See Fitz, supra, 118 Cal.App.4th at p. 725; Mercuro, supra, 96 Cal.App.4th at p. 176; Trivedi, supra, 189 Cal.App.4th at p. 397; Martinez, supra, 118 Cal.App.4th at p. 115.) Partly for this reason, business justifications for injunctive carve-outs have typically been found inadequate. In Stirlen, for example, the court rejected the business justification that violations of the aforementioned employee duties “pose ‘an immediate threat to business operations’ and therefore require immediate access to the courts.” (Stirlen, supra, 51 Cal.App.4th at p. 1536.) The court noted that California allows parties to arbitration to seek provisional relief while an arbitration is pending (Code Civ. Proc., § 1281.8, subd. (b)), and held the need for such relief could not justify the employer’s “unilateral right to litigate rather than arbitrate claims.” (Stirlen, at p. 1537; see also Fitz, at pp. 725–726; Mercuro, at p. 177.) In Fitz, the court rejected the argument that because the company had thousands of employees across the country “a bright line exception for confidentiality and intellectual property disputes is necessary because it would be impractical to have state-by-state provisions regarding which claims would be subject to arbitration.” (Fitz, at p. 726.)
We conclude that this provision is substantively unconscionable. As we discuss post, the question then becomes whether this objectionable provision is severable.
Applying the analysis of AT&T Mobility, we see nothing inconsistent with “accomplishment of the FAA’s objectives” in requiring that an employer arbitrate equitable issues on an equal footing with the employee. (See AT&T Mobility, supra, 131 S.Ct. at p. 1748.)
b. The Texas Forum Requirement
Powered argues the Texas forum selection clause is not unique to the arbitration provision in the EPIA, but applies generally to the EPIA. It argues that the clause should be evaluated under general California law regarding the enforcement of forum selection clauses and not under unconscionability principles applicable to other contract provisions.
Powered also argues, as an independent basis for reversal, that the trial judge exhibited “bias against the judicial system of Texas” in remarks made from the bench during oral argument on the motion. Relying on Hall v. Harker (1999) 69 Cal.App.4th 836, 843 (Harker), Powered contends that these comments created an appearance of judicial bias, mandating reversal and remand to a different judge for a rehearing.
First, we disagree that the forum selection clause of the EPIA can be considered separately from the arbitration provision. Powered relies on Section 12, subdivision (a) of the EPIA, which provides: “Governing Law; Consent to Personal Jurisdiction. THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD FOR CONFLICTS OF LAWS PRINCIPLES. I HEREBY EXPRESSLY CONSENT TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN TEXAS FOR ANY LAWSUIT FILED THERE AGAINST ME BY THE COMPANY CONCERNING MY EMPLOYMENT OR THE TERMINATION OF MY EMPLOYMENT OR ARISING OR RELATING TO THIS AGREEMENT.” In contrast, the forum selection clause in the arbitration provision states, “I agree that, except as provided in subsection (b) below, any and all controversies [related to my employment] shall be subject to binding arbitration shall be settled by arbitration [sic] to be held in Travis County, Texas....” The forum selection clause in the Plan’s arbitration provision is worded similarly.
We discussed in a prior opinion the difference between permissive and mandatory forum selection provisions. (Intershop Communications AG v. Superior Court (2004) 104 Cal.App.4th 191, 196–197 (Intershop).) Mandatory clauses use language like “ ‘shall be litigated, ’ ” “ ‘shall be prosecuted, ’ ” and “ ‘shall have exclusive jurisdiction.’ ” (Ibid.) Permissive clauses, on the other hand, use language such as “ ‘[a party] has expressly submitted to the jurisdiction of [a particular court]’ ” or “ ‘[a court] shall have jurisdiction over the parties... relating to the subject matter or the interpretation of the contract.’ ” (Id. at p. 197.) The distinction matters because “[a] mandatory clause will ordinarily be given effect without any analysis of convenience; the only question is whether enforcement of the clause would be unreasonable. On the other hand, when the clause merely provides for submission to jurisdiction and does not expressly mandate litigation exclusively in a particular forum, then the traditional forum non conveniens analysis applies. [Citation.]” (Id. at p. 196.)
Here, EPIA Section 12, subdivision (a) uses the language of a permissive forum selection clause. Under the EPIA provision, MacIntosh consents to the jurisdiction of the Texas state and federal courts—i.e., that he submits to the jurisdiction of those courts—with respect to any lawsuit filed against him by Powered, but it does not mandate that Powered files its lawsuit there. In contrast, EPIA Section 11, subdivision (a) and the “Resolution” paragraph of the Plan state that all disputes (except those exempted by the EPIA) “shall be subject to binding arbitration” and “shall be settled by arbitration to be held in Travis County, Texas.” Those provisions are mandatory forum selection clauses.
MacIntosh, therefore, correctly argues that the mandatory Texas forum selection clause applies only to those claims that are subject to mandatory arbitration under the EPIA and thus is properly considered as part of the unconscionability analysis of that provision. As already noted, the claims subject to arbitration are the claims most likely to be asserted by an employee, and the claims most likely to be asserted by Powered are not subject to mandatory arbitration. Under Section 12, subdivision (a) of the EPIA, the claims most likely to be asserted by Powered would also not be subject to the mandatory forum selection clause, thus compounding the lack of mutuality (and substantive unconscionability) in the arbitration provision.
It is clear that an arbitration clause that unduly burdens or deters a plaintiff’s pursuit of claims, particularly nonwaivable claims, by imposing costs greater than the usual costs incurred during litigation, are not permissible. (Armendariz, supra, 24 Cal.4th at p. 107; see also Trivedi, supra, 189 Cal.App.4th at p. 395 [employee’s greater potential liability for the employer’s attorney’s fees in an arbitration proceeding than under FEHA was substantively unconscionable because it placed the employee “ ‘at greater [financial] risk than if he brought his FEHA claims in court’ ”].) We disagree, however, with what seems to be MacIntosh’s assertion that the inherent financial burdens in litigation in a foreign forum necessarily means that such a contractual requirement is substantively unconscionable.
Powered correctly notes that contractual forum selection clauses are usually enforced in California regardless of the inherent additional expense and inconvenience of litigating claims in a distant forum, unless the party challenging enforcement of the clause can show it is unreasonable. (Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 495–496 (Smith).) Smith expressly applied this rule to an agreement where, in a commercial context, a plaintiff “freely and voluntarily negotiated away his right to a California forum.” (Id. at p. 495.) The same rule, however, has been applied to mandatory forum selection clauses where employment discrimination claims are presented, so long as the plaintiff has an adequate remedy in the selected forum. (Olinick v. BMG Entertainment (2006) 138 Cal.App.4th 1286 (Olinick).) In Olinick, the court rejected a claim that California’s public policy against age discrimination would be violated by a contractual requirement for litigation in New York, where there was no showing that the selected forum would not provide an adequate remedy for his claim. (Id. at pp. 1303, 1306.)
In cases with a contractual forum selection clause, the burden of proof is on the party resisting the forum. (Intershop, supra, 104 Cal.App.4th at p. 198.) The party’s burden is “to demonstrate that the contractually selected forum would be unavailable or unable to accomplish substantial justice or that no rational basis exists for the choice of forum. [Citations.] Neither inconvenience nor the additional expense of litigating in the selected forum is a factor to be considered. [Citations.] However, a forum selection clause will not be enforced if to do so would bring about a result contrary to the public policy of this state. [Citations.]” (Id. at pp. 199–200; see also Olinick, supra, 138 Cal.App.4th at p. 1294 [“ ‘ “ ‘[m]ere inconvenience or additional expense is not the test of unreasonableness...’ ” of a mandatory forum selection clause’ ”].)
In Aral v. Earthlink, Inc., the court reviewed the development of case law on the enforceability of forum selection clauses after Smith, supra, 17 Cal.3d 491, and questioned application of the rationale underlying the Smith rule to contracts of adhesion. (Aral v. Earthlink, Inc. (2005) 134 Cal.App.4th 544, 558–562 (Aral).) Aral, however, involved California consumers who each incurred only about $50 in damages and who would have been required to litigate their claims in Georgia under the forum selection clause and on an individual basis (due to a class action waiver). The court there recognized that both California Supreme Court and the United States Supreme Court place “a heavy burden on the plaintiff who seeks to prove that a forum selection clause is unreasonable, particularly where the alleged unreasonableness is based on the additional expense and inconvenience of litigating far from home, the burden was not intended to be insurmountable.” (Id. at p. 561.) The Aral court found that, under the facts of that case, trial in the contractual forum would be so “ ‘gravely difficult and inconvenient’ ” that a plaintiff would “ ‘for all practical purposes be deprived of his day in court.’ ” (Ibid., citing The Bremen v. Zapata Off-Shore Co. (1972) 407 U.S. 1, 18.) Therefore, “[t]o expect any or all of them to travel to Georgia in order to obtain redress on a case-by-case basis, whether in a courthouse or in an arbitration hearing room, is unreasonable as a matter of law.” (Aral, at p. 561.) No such facts are presented here.
MacIntosh argues that the trial court made a factual determination, supported by substantial evidence, that MacIntosh would suffer “extraordinary financial burdens” were he required to arbitrate his claims in Texas. We find no evidence in the record (and MacIntosh cites to none) that the court made any factual finding on this issue, expressly or impliedly, and the court’s comments at the hearing were almost entirely focused on the “one-way” carve-out provision we have discussed above. The only evidence MacIntosh submitted on this issue was his declaration that he resided in Menlo Park, and if forced to bring his claims in Texas, he would “have to incur numerous expenses, including thousands of dollars for travel to and from Texas and lodging while in Texas.” MacIntosh made no claim that these costs would present any insurmountable impediment to pursuit of his claims. In its very limited discussion on this question, the court noted that it appeared that it could address any concerns with the arbitration forum by severing that provision if necessary. While we review any factual determinations for substantial evidence, unconscionability is ultimately a question of law for the court. (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 89.)
There is no indication on this record that requiring arbitration of the claims presented in MacIntosh’s complaint before the AAA would fail to provide him with access to an adequate forum for redress or inadequate remedies. We find nothing in the contractual forum selection clause that would place any undue burden on Macintosh, or which would violate California public policy, and therefore no unconscionability.
C. Severance
Since we agree that the unilateral carve-out provision of the EPIA is both procedurally and substantively unconscionable, the question becomes whether the trial court should have severed that provision and enforced the remainder of the agreements. Arbitration agreements that fail to meet conscionability standards, or those that violate public policy, nevertheless may be enforced if the objectionable terms can be severed. (Sonic-Calabasas, supra, 51 Cal.4th at pp. 681–682; Little, supra, 29 Cal.4th at p. 1075; Armendariz, supra, 24 Cal.4th at p. 124.)
See also Civil Code section 1670.5, subdivision (a) which 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.”
“Two reasons for severing or restricting illegal terms rather than voiding the entire contract appear implicit in case law. The first is to prevent parties from gaining underserved benefit or suffering undeserved detriment as a result of voiding the entire agreement.... Second, more generally the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme. [Citations.] The overarching inquiry is whether ‘ “the interests of justice... would be furthered” ’ by severance. [Citation.]” (Armendariz, supra, 24 Cal.4th at pp. 123–124.)
In Armendariz, there was more than one substantively unconscionable provision in the arbitration agreement. “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. In other words, ... the trial court did not abuse its discretion in concluding that the arbitration agreement is permeated by an unlawful purpose. [Citation.]” (Armendariz, supra, 24 Cal.4th at p. 124.) Further, the court could not strike any single provision of the arbitration agreement to remove its unconscionable taint. (Id. at p. 124–125.) “Rather, the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms.” (Id. at p. 125.)
We do not find this to be a case where the employment agreements at issue are “permeated” with unconscionability as a result of multiple objectionable terms. (See Trivedi, supra, 189 Cal.App.4th at p. 398; Murphy, supra, 156 Cal.App.4th at p. 149; Abramson, supra, 115 Cal.App.4th at p. 666.) Our Supreme Court in Armendariz, analogizing to overly broad covenants not to compete, has also suggested that severance of an objectionable clause may be inappropriate “when it appears they were drafted in bad faith, i.e., with a knowledge of their illegality. [Citations.]” (Armendariz, supra, 24 Cal.4th at pp. 124–125, fn. 13.) In that instance, an employer would “not be deterred from routinely inserting such a deliberately illegal clause into the arbitration agreements it mandates for its employees if it knows that the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter.” (Ibid.) MacIntosh points to nothing in the record here, however, that would either directly or inferentially support a finding of bad faith by Powered.
Where only a single unconscionable provision is at issue, and where that offending provision can be severed without reforming the contract or augmenting it with additional terms, the appropriate remedy is to sever the objectionable term, leaving the rest of the arbitration agreement intact. (Little, supra, 29 Cal.4th at p. 1075; Armendariz, supra, 24 Cal.4th at p. 124.) Doing so is also consistent with the “ ‘principal purpose’of the FAA... to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’ [Citations.]” (AT&T Mobility, supra, 131 S.Ct. at p. 1748.)
III. Disposition
The determination of the trial court that the equitable “carve-out” provision of the EPIA is affirmed. The court’s order declining to sever this provision and denying the motion to compel arbitration is reversed. The matter is remanded to the trial court with directions to sever the unconscionable provision and to grant the motion. Powered shall recover its costs on appeal.
We concur: Jones, P.J., Simons, J.
We see nothing in Armendariz expressing “judicial hostility to arbitration agreements” (AT&T Mobility, supra, 131 S.Ct. at p. 1745), or which would stand as an obstacle to accomplishment of the FAA’s objectives. We remain obligated to follow Armendariz. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.)
While the court’s comments on the judiciary of a sister state may have been intemperate and unfortunate, they appear irrelevant to a determination about arbitration before an AAA panel, whether in California or in Texas, and Powered made no effort to seek recusal of the trial judge following those comments. Further, our Supreme Court has since disapproved Harker to the extent that it holds that an appearance of bias alone can amount to a denial of due process requiring reversal. (People v. Freeman (2010) 47 Cal.4th 993, 1006, fn. 4.)