Opinion
G047300
08-21-2013
KRISTIANE MCELROY, Plaintiff and Respondent, v. TENET HEALTH CARE CORPORATION, et al., Defendants and Appellants.
Littler Mendelson, Elizabeth Staggs-Wilson, Keith A. Jacoby, Henry D. Lederman and Anthony G. Ly for Defendants and Appellants. Capstone Law, Miriam Schimmel, Glenn A. Danas, Robert K. Friedl and Katherine Den Bleyker for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Super. Ct. No. 30-2012-00543205)
OPINION
Appeal from an order of the Superior Court of Orange County, Steven L. Perk, Judge. Reversed and remanded.
Littler Mendelson, Elizabeth Staggs-Wilson, Keith A. Jacoby, Henry D. Lederman and Anthony G. Ly for Defendants and Appellants.
Capstone Law, Miriam Schimmel, Glenn A. Danas, Robert K. Friedl and Katherine Den Bleyker for Plaintiff and Respondent.
INTRODUCTION
Tenet Healthcare Corporation, Tenet California, Inc. (collectively, Tenet), and Fountain Valley Regional Hospital and Medical Center appeal from an order denying their petition to compel arbitration of a wage-and-hour lawsuit brought by one of the hospital's nurses, Kristiane McElroy, and framed as a potential class action. McElroy had signed an arbitration agreement seven years before filing her lawsuit and Tenet's petition sought to enforce that agreement. The trial court denied the petition on several grounds, going both to the existence and the enforceability of the agreement.
We reverse. The agreement was enforceable under both federal and California law, and McElroy presented insufficient evidence to support her claim it was unconscionable, so the trial court should have granted the petition. In addition, the court should have entered an order dismissing the class action allegations from the complaint, because, as the court observed, "[c]lass arbitration cannot be 'inferred' from an agreement silent on the issue."
FACTS
McElroy has worked as a nurse at Fountain Valley Hospital since 1995.In February 2012, she became the named plaintiff in a wage-and-hour class action against Tenet and the hospital. Appellants moved to compel arbitration pursuant to an employee handbook acknowledgement form McElroy signed in December 2004. In 2001, Tenet had sought to obtain her signature on an acknowledgement form containing an identical arbitration agreement, but McElroy refused. She continued to work at the hospital notwithstanding her refusal. And in 2004, she signed the employee handbook acknowledgement.
McElroy was covered by collective bargaining agreements between the hospital and the United Nurses Associations of California/Union of Health Care Professionals.
The relationship between Tenet and the hospital is not explained. Presumably one of the Tenet defendants has some kind of employment relationship with hospital personnel; the hospital's employees were subject to the Tenet Open Door Policy and Fair Treatment Process (FTP), which referred to "dispute[s] relating to your employment with the company," identified as "Tenet." The document McElroy signed in 2004 acknowledged receipt of the "Tenet Healthcare Corporation Employee Handbook and Standards of Conduct."
The signed acknowledgement form had several provisions bearing on this appeal. McElroy acknowledged that she had received the Tenet employee handbook and standards of conduct and that she was bound by them, to the extent they did not conflict with her collective bargaining agreement. The acknowledgement also informed McElroy that Tenet could change the policies, benefits, and practices described in the handbook at its discretion, except for the company's at-will employment policy and the arbitration agreement. McElroy also acknowledged and agreed that the handbook did not constitute a contract of employment, and that her employment was at-will.
The last two paragraphs of the form dealt with arbitration. The first paragraph acknowledged the receipt of Tenet's Fair Treatment Process (FTP) brochure. McElroy then agreed to submit all employment-related disputes to binding arbitration and to use the FTP. She also agreed to have the arbitration conducted under the Federal Arbitration Act and the procedural rules of the American Arbitration Association (AAA). The second paragraph limited her arbitration expenses to one day's pay and prohibited any change in the arbitration agreement except by mutual consent in writing. The acknowledgement occupies one page, is dated December 27, 2004, and is signed Kristiane McElroy. The two paragraphs regarding arbitration occur immediately above this signature.
The FTP outlines a five-step process for dispute resolution, culminating in binding arbitration. The other steps are submission to a supervisor, submission to a department head, submission to the administration, and submission to the FTP committee.
The court denied the petition to compel arbitration on multiple grounds. It held that the agreement to arbitrate did not exist because the employer's ability to make unilateral changes rendered the contract illusory, because the AAA's procedural rules were not shown to have been provided or readily available, and because the accompanying handbook specifically disclaimed the creation of a contract. The court also found the agreement procedurally unconscionable because of the lack of McElroy's signature, the renaming of the form between 2001 and 2004, the "take it or leave it" nature of the agreement, and the "burial" of the arbitration agreement in the handbook. The agreement was substantively unconscionable because of the employer's unilateral ability to alter its terms and the lack of any reference in the arbitration provisions to the requirement of the employee to share arbitration fees. The court also held, "Class arbitration cannot be 'inferred' from an agreement silent on the issue. The [collective bargaining agreement] does not affect the enforceability of existing employee agreements to be bound by the FTP."
DISCUSSION
Congress enacted the Federal Arbitration Act (9 U.S.C. § 1 et seq.) to "create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." (Moses H. Cone Memorial Hospital v. Mercury Construction Corporation (1983) 460 U.S. 1, 24.) "[T]his body of . . . law is enforceable in both federal and state courts." (Perry v. Thomas (1987) 482 U.S. 483, 489.) A conflicting state law is pre-empted. (AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 1749-1650; Southland Corp. v. Keating (1984) 465 U.S. 1, 10.) State procedural rules relating to arbitration apply, so long as they do not interfere with the purpose of the federal law, and California courts use California motion procedure to determine whether to compel arbitration. (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 409-410 (Rosenthal).)
On appeal, we review the enforceability of the arbitration agreement de novo, under general principles of California contract law. (Kleveland v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 764); see also Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 475-476 [state contract formation law applies].) Unconscionablity is a question of law unless there are factual conflicts in the evidence. If, however, the extrinsic evidence is entirely written, the reviewing court subjects the contract to independent review. (Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, 1663.)
In Rosenthal, our Supreme Court stated, "[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists . . . . Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence." (Rosenthal, supra, 14 Cal.4th at p. 413.) Once the moving party has established the agreement's existence, the burden shifts to the party opposing arbitration to establish, by a preponderance of the evidence, the factual basis for any defense to enforcement. (Ibid.)
I. Existence of the Arbitration Agreement
The trial court identified three reasons for finding the agreement to arbitrate non-existent. First, the AAA's procedural rules were not shown to have been provided or readily accessible. Second, the handbook disclaimed the formation of a contract. Finally, the agreement was illusory because the employer reserved the right to make unilateral changes in FTP policy.
The last sentence of the first paragraph dealing with arbitration states, "I also agree that such arbitration will be conducted before an experienced arbitrator chosen by me and the Company, and will be conducted under the Federal Arbitration Act and the procedural rules of the American Arbitration Association ('AAA')."
A. Incorporation by reference
Under California law, a contract may include the provisions of a document that is not physically part of the basic contract. "'For the terms of another document to be incorporated into the document executed by the parties the reference must be clear and unequivocal, the reference must be called to the attention of the other party and he must consent thereto, and the terms of the incorporated document must be known or easily available to the contracting parties.'" (Williams Constr. Co. v. Standard-Pacific Corp. (1967) 254 Cal.App.2d 442, 454, quoting Scott's Valley Fruit Exchange v. Growers Refrigeration Co. (1947) 81 Cal.App.2d 437, 447, Scott's Valley Fruit Exchange disapproved on other grounds in Hischemoeller v. National Ice & Cold Storage Co. of Cal. (1956) 46 Cal.2d 318, 328; see also Wolschlager v. Fidelity National Title Ins. Co. (2003) 111 Cal.App.4th 784, 790-791 [arbitration clause in separate title insurance policy incorporated into preliminary report].)
Although appellants disputed the trial court's finding on this issue, McElroy did not argue in this court that not getting a copy of the AAA rules rendered the arbitration agreement non-existent. Accordingly, the issue is submitted on appellants' brief. (See County of Butte v. Bach (1985) 172 Cal.App.3d 848, 867.)
McElroy argued instead that the failure to include a copy of the AAA rules rendered the arbitration agreement procedurally unconscionable, a finding the trial court did not make. The courts that have found incorporation of rules by reference unconscionable have done so because of some defect or unfairness in the rules themselves. (See Ruhe v. Masimo Corp. (C.D.Cal. Sept. 16, 2011, SACV 11-00734-CJC) 2011 U.S. Dist. Lexis 104811, pp. *9-*10; Lucas v. Gund, Inc. (C.D. Cal. 2006) 450 F.Supp.2d 1125, 1131.) McElroy has not made this argument.
We agree with appellants that the reference to the AAA rules meets the requirements under California law for incorporation by reference. The rules are clearly and unequivocally identified in the arbitration provision, and they are readily accessible on the AAA Web site. McElroy cannot claim unfamiliarity with the arbitration process and its implications; she stated in her opposition that she refused to sign the arbitration agreement in 2001 because it would force her to relinquish her rights. Finally, McElroy's consent to the incorporation of the AAA rules is indicated by her signature on the form.
McElroy has not directed us to a published opinion finding an arbitration agreement non-existent because procedural rules were not provided along with the contract, and we have found none. Any such blanket finding would single out arbitration agreements for special treatment and thus would be contrary to both federal and state law. (See Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 235 (Pinnacle).) California law permits incorporation by reference into contracts so long as certain conditions are met, as they were here.
The AAA rules for employment arbitration are 36 pages long. One can imagine the contrary argument if a copy of the rules was provided - the employee was overwhelmed by too much paper.
B. Illusoriness
Another reason that the trial court articulated for finding a contract nonexistent was "FTP language reserved in employer's favor, unilateral right to changes in FTP policy makes it illusory." Contract provisions reserving to one party the power to vary performance do not render the contract illusory, so long as principles such as the covenant of good faith and fair dealing limit the exercise of this power. (See 24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1214 and cases cited therein; see also Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 705-708 and cases cited therein.) Thus, even if the acknowledgment had reserved to Tenet the right to make changes in the arbitration agreement, the agreement would not necessarily have been illusory.
But the acknowledgment and the FTP brochure actually did not reserve this right. The acknowledgement provided, "I also understand that the Company may change, rescind or add to any of the policies, benefits or practices described in the Employee Handbook, except the employment-at-will policy and the Mutual Agreement to Arbitrate referred to below, in its sole and absolute discretion . . . ." (Italics added.) The second of the arbitration paragraphs provided, "I further acknowledge that this mutual agreement to arbitrate may not be modified or rescinded except in writing by both me and the Company." The FTP brochure stated, "The company will not modify or change the agreement between you and the company to use final and binding arbitration to resolve employment-related disputes without notifying you and obtaining your consent to such changes. However, the company may change or modify FTP procedures from time-to-time without advance notice and without consent of employees. Additionally, the parties agree that the FTP procedures may be modified by the company as needed to comport with applicable state or federal law." What Tenet reserved was the unilateral right to change the FTP procedures, but not the FTP policy or the underlying agreement to arbitrate. Any changes made in the procedures would be governed by the implied covenant of good faith and fair dealing. (See Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 15-16.) The agreement to arbitrate was not illusory.
C. Disclaimer
The final obstacle to finding the existence of an agreement to arbitrate was the lack of contract formation. The trial court stated, "Receipt of the Handbook does not create a contract especially when the Handbook disclaims formation of a contract."
This conclusion is erroneous for at least two reasons. First, the employee handbook was not in evidence, so there is no way of knowing what it claimed or disclaimed. Second, if the trial court meant the acknowledgement disclaimed contract formation, the court misread the document. The acknowledgement stated, "I understand, acknowledge and agree that the Employee Handbook is not a contract of employment, that my employment with the Company is not for a specified term and that employment with the Company is at the mutual consent of the employee and the Company. Therefore, I hereby acknowledge that either I or the Company can terminate my employment relationship at will, with or without cause or notice, except to the extent that any applicable collective bargaining agreement provides otherwise." In the next paragraph, McElroy "voluntarily agree[d]" to use the FTP and to submit employment-related disputes to arbitration.
The FTP brochure reinforced this message: "Nothing in the FTP shall be construed to create a contract of employment, express or implied, not does the FTP in any way alter the at-will nature of the employment relationship between you and the company."
What the acknowledgement disclaimed was any basis for asserting the employee was something other than an at-will employee, one who could be terminated without cause. (Cf. Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389-390.) It did not repudiate or cancel out the separate arbitration agreement formed in the last two paragraphs before McElroy's signature. (See Patterson v. Tenet Healthcare (8th Cir. 1997) 113 F.3d 832, 835; see also Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 399, 402-404.)
Under well established principles of contract interpretation, the existence of an agreement to arbitrate was established. As courts have repeatedly held, arbitration agreements must be analyzed as all contracts are. They cannot be subjected to special requirements, such as no incorporation by reference or no unilateral changes.
II. Unconscionability
Once an agreement to arbitrate has been found to exist, the burden shifts to the party opposing arbitration to show why it should not be enforced. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.) In this case, the trial court ruled that the agreement could not be enforced because it was unconscionable.
Unconscionability has both a procedural and a substantive element. Procedural unconscionability focuses on oppression or surprise. Substantive unconscionability looks to whether contract terms are one-sided or overly harsh. (Pinnacle, supra, 55 Cal.4th at p. 246.) Both procedural and substantive unconscionability must be present to preclude enforcement of a contract, although they need not be present in equal proportions. (Armendariz v. Foundation Health Care Psychcare Servicec, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).)
A. Procedural Unconscionablity
The court identified the indicators of procedural unconscionability as follows: "plaintiff's lack of signature, the [form] was renamed in 2004, and [McElroy's] understanding that she had to sign because 'take it or leave it' and no opportunity to negotiate and the arbitration clause was buried in the handbook." The record supports none of these grounds for finding unconscionability.
The acknowledgement bears McElroy's signature, and she did not maintain otherwise in her opposition. It is not clear where, or even if, the arbitration paragraphs appeared in the employee handbook, because the handbook is not in the record. What is clear, however, is that McElroy's signature appears directly below the two paragraphs dealing with arbitration. Most of the text dealing with arbitration in the first of the two paragraphs is in bold type. The arbitration clauses were not "buried." The fact that the 2004 form bears a somewhat different name from the one McElroy refused to sign in 2001 is hardly misleading, and McElroy has not explained in her brief why the difference in title should preclude enforcement.
The copy of the employee handbook acknowledgement in the record has the number 11 at the bottom of the page and "Section V" in the top right-hand corner.
The 2001 form was entitled "Employee Acknowledgement Form." The 2004 form was entitled "Employee Handbook Acknowledgment." Both documents acknowledge receipt of the employee handbook, and both contain an arbitration agreement.
McElroy claims that the difference between the 2001 acknowledgement, which was evidently a stand-alone document, and the 2004 form, which was incorporated into a handbook, means that Tenet was trying to trick its employees into signing the arbitration agreement. Assuming the arbitration agreement was incorporated into the handbook - which McElroy did not introduce into evidence - the agreement itself appeared directly above her signature, and a substantial part of the first paragraph was in bold-faced type. Even if McElroy did not read the entire handbook, she cannot be excused from reading the one page she signed. (See Rosenthal, supra, 14 Cal.4th at p. 423.)
The trial court also expressed concern that this was a contract of adhesion and McElroy had to sign the agreement. A contract of adhesion is a standardized contract imposed by the party with superior bargaining strength and offered to the other party on a "take-it-or-leave-it" basis, with no opportunity for negotiating the terms. (Armendariz, supra, 24 Cal.4th at p. 113.) There is no question in this case that the arbitration agreement was adhesive, giving McElroy no chance to negotiate before she signed.
Whether McElroy had to sign the agreement is, however, a different issue. Unlike the usual adhesion contract, which an employee must sign to get or keep a job, this contract could be refused without penalty. McElroy could elect to "leave it" and still work at the hospital. McElroy had refused to sign the identical arbitration agreement in 2001 without any apparent effect on her employment. The collective bargaining agreements in force between 2007 and 2013 specifically provided that "[n]o retaliation or adverse action may be taken against anyone who exercises the option not to sign the FTP." The only opposing evidence McElroy presented on this issue was talks with unnamed colleagues and her own "observations," which led her to believe she would be terminated if she did not sign the acknowledgement. McElroy did not explain what had happened after 2001 - when she refused to sign an identical arbitration agreement because it would "force [her] to relinquish [her] rights" - that could lead her to believe she would now lose her job if she did not sign. "[W]here a party to an arbitration agreement is given an opportunity to decline that agreement, no finding of unconscionability is possible." (Swarbrick v. Umpqua Bank (E.D.Cal., Aug. 4, 2008, 2:08-CV-00532-MCE) 2008 U.S. Dist. Lexis 73678, at p. *12.)
What her colleagues said and what she observed were not specified.
McElroy argues that the compulsory aspect of the agreement is established by the provision in the FTP brochure stating, "Your decision to accept employment or to continue employment with the company constitutes your agreement to be bound by the FTP." (Italics omitted.) This provision might be relevant if McElroy had refused to sign the acknowledgement and Tenet had tried to enforce the arbitration agreement anyway. But she did sign, so whether her continued employment constituted acceptance of the FTP is immaterial. More to the point, the brochure did not say she would lose her job if she did not sign. On the contrary, the brochure stated that the FTP did not apply to a union member unless the employee agreed to it.
It was McElroy's burden to show procedural unconscionability. She did not present the evidence needed to carry this burden.
B. Substantive Unconscionability
Finally, the court found substantive unconscionability in the ability of the employer to unilaterally change the terms of the agreement and the absence of any reference to fee-sharing in the acknowledgment, although it was mentioned in the policy brochure itself.
McElroy argued on appeal, although she did not do so in the trial court, that the agreement is unconscionable because the FTP's five-step process put obstacles in the way of arbitration. If the goal is to reach arbitration quickly, then the intervening steps could be considered obstacles. If, however, the goal is to resolve disputes, then the process gives the aggrieved employee multiple chances to reach it before wheeling out the cumbersome and expensive arbitration machinery. McElroy, for example, complained about unpaid overtime and unpaid off-the-clock hours. Surely it would be possible to determine whether she was owed additional money, by examining documents such as payroll records, without involving an arbitrator.
We have already dealt with the employer's discretion to change the terms of the agreement and, in any case, the arbitration clause specifically prohibits any change in the arbitration agreement without mutual consent in writing. Tenet did not have the discretion to change the arbitration provisions unilaterally.
The court was also mistaken about the fee-sharing. The agreement states, "[I]f I submit a request for binding arbitration, my maximum out-of-pocket expenses for the arbitrator and the administrative cost of the AAA will be an amount equal to one day's pay (if I am an exempt employee) or eight times my hourly rate of pay (if I am a non-exempt employee), and that the Company will pay all of the remaining fees and administrative costs of the arbitrator and the AAA." The fee-sharing arrangement was spelled out in the acknowledgment, and McElroy presented no evidence that any such requirement was "overly harsh" or "one-sided." The trial court erred when it refused to enforce the agreement because it was substantively unconscionable.
In the FTP brochure itself, the provision is slightly different. The employee's fees are one day's pay, eight hours' pay, or the local civil filing fee, whichever is less.
III. Class Allegations
Although appellants asked the trial court to dismiss McElroy's class claims with prejudice, the court did not explicitly rule on this request. Nevertheless, it agreed with appellants' position that consent to arbitrating class claims cannot be inferred from an agreement that is silent on the subject. This ruling comports with both federal and state law.
In Stolt-Nielsen S.A. v. Animalfeeds International Corp. (2010) 559 U.S. 662 (Stolt-Nielsen), the United States Supreme Court held that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." (Id. at p. _ .) "An implicit agreement to authorize class-action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the parties' agreement to arbitrate. This is so because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator." (Ibid.)
In Kinecta Alternative Financial Solutions, Inc. v. Superior Court (2012) 205 Cal.App.4th 506 (Kinecta), the court followed Stolt-Nielsen in a wage-and-hour case that the plaintiff was attempting to bring as a class action. (Id. at pp. 511-512.) Because the language of the arbitration agreement authorized only individual claims, class-action arbitration between employer and employee could not be compelled. (Id. at pp. 518-519; see also Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1130-1131.) The court therefore dismissed the class action claims. (Kinecta, supra, 205 Cal.App.4th at p. 519.)
Like the agreements in Kinecta and Nelsen, the arbitration agreement in this case unmistakably contemplates a two-party arbitration. The agreement throughout uses "I," "my," and "me" to refer to McElroy as one contracting party and "the Company" as the other. (See Kinecta, supra, 205 Cal.App.4th at p. 517.) Nothing indicates that either party consented to class arbitration. The court should have formally dismissed the class allegations of the complaint.
DISPOSITION
The court's order denying appellants' petition to compel arbitration is reversed, and the court is directed to enter an order granting the petition to compel arbitration of respondent's individual claims and dismissing the class action allegations from the complaint. Appellants are to recover their costs on appeal.
BEDSWORTH, J. WE CONCUR: RYLAARSDAM, ACTING P. J. IKOLA, J.