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Stirlen v. Supercuts, Inc.
51 Cal. App. 4th 1519 (Cal. Ct. App. 1997)
KLINE, P. J.
The San Francisco Superior Court refused to enforce a compulsory
arbitration clause of an employment contract on the grounds it was against public policy
and unconscionable. We find this determination correct and hold that, in the circumstances
of this case, the governing state law pertaining to unconscionable contracts (Civ. Code,
§ 1670.5) is not preempted by the Federal Arbitration Act. (9 U.S.C. § 1-14.)
I.
Defendants Supercuts, Inc., and David E. Lipson, its president and
chief executive officer (hereinafter collectively referred to as Supercuts), appeal from
an order denying their motion to compel arbitration of a dispute relating to the
termination from employment of plaintiff William N. Stirlen.
Supercuts, a Delaware corporation that conducts a national hair care
franchise business, employed Stirlen as its vice-president and chief financial officer
from January 1993 until March 1994, when he was terminated.
Stirlen commenced this wrongful discharge case in December 1994. His
complaint alleged seven causes of action for (1) a judicial declaration that an
arbitration clause in his employment contract was null and void in certain particulars and
unenforceable; (2) wrongful termination in violation of public policy; (3) defamation; (4)
intentional misrepresentation; (5) violation of Labor Code section 970, governing certain
knowingly false representations inducing workers "to change from one place to
another"; (6) breach of contract; and (7) breach of the implied covenant of good
faith and fair dealing.
. . .
. . . Supercuts moved to compel arbitration under the compulsory
arbitration provision of an employment contract between the parties. The court denied the
motion, as we have said, on the grounds the provision, considered in its entirety, was
unconscionable and therefore unenforceable.
After answering the complaint, Supercuts filed this timely appeal. An
order dismissing or denying a motion to compel arbitration is directly appealable. (Code
Civ. Proc., § 1294, subd. (a).)
II.
The complaint alleges that on numerous occasions in late 1993 and early
1994 Stirlen informed Lipson and other corporate officers of various operating problems he
felt contributed to the general decline in Supercuts' retail profits and of
"accounting irregularities" he feared might be in violation of state and federal
statutes and regulations. Stirlen also expressed concern that the decline in profits
"was being hidden in the books and from public shareholders." At a meeting in
November 1993, Stirlen provided senior managers quarterly statements indicating that,
before accounting "adjustments," Supercuts' earnings level moved only laterally
or actually declined during the previous seven quarters. Though Lipson assertedly
expressed anger at the production of these statements, Stirlen reiterated his concerns in
a memo to Lipson in January of 1994. After Stirlen brought these concerns to the company's
auditor, Lipson allegedly reprimanded him, accused him of being a "troublemaker"
and told him that if he did not reverse his position on the issues taken to the auditor he
would no longer be considered a "member of the team."
At the end of February 1994, Lipson called Stirlen to his office and
suspended him from his job. He was terminated the following month. The complaint avers the
termination was unjustified, that Stirlen had never been informed he was not fulfilling
his responsibilities as chief financial officer or otherwise doing a poor job, and had
never been disciplined or advised that his employment was in jeopardy. Thereafter, Lipson
assertedly represented to independent securities analysts that Stirlen was responsible for
erroneous accounting entries or "adjustments" that resulted in a decline in
earnings from 70 cents to 63 cents per share, and that, as a result "Bill Stirlen is
no longer with the company." News articles and investment reports on Supercuts at
about this time attributed the company's declining earnings to "improper bookkeeping
procedures" and said the individuals "deemed responsible for the irregularities
were asked to leave the Company." One news article quoted Lipson to the effect that
Stirlen had lost his job as a result of "sloppy and inappropriate accounting."
On July 21, 1994, Supercuts' general counsel wrote Stirlen's counsel
rejecting the latter's prelitigation settlement demand and stating that the dispute should
be submitted to binding arbitration, as specified in the employment contract. Stirlen
never responded to this and a subsequent request to arbitrate made prior to the filing of
the motion to compel arbitration.
III.
Code of Civil Procedure section 1281.2 provides in material part that
"[o]n petition of a party to an arbitration agreement alleging the existence of a
written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate
such controversy, the court shall order the petitioner and respondent to arbitrate the
controversy if it determines that an agreement to arbitrate the controversy exists . . .
." In a petition to compel arbitration under this statute, "the moving
party, in essence, requests specific performance of a contractual agreement to arbitrate
the controversy. The trial court must determine in advance whether there is a duty
to arbitrate the controversy. This determination 'necessarily requires the court to
examine and, to a limited extent, construe the underlying agreement.'" (Green v. Mt.
Diablo Hospital Dist. (1989) 207 Cal. App. 3d 63, 69.)
The determination of the validity of an arbitration clause, which may
be made only "upon such grounds as exist for the revocation of any contract"
(Code Civ. Proc., § 1281), "is solely a judicial function unless it turns upon the
credibility of extrinsic evidence; accordingly, an appellate court is not bound by a trial
court's construction of a contract based solely upon the terms of the instrument without
the aid of evidence." (Merrick v. Writers Guild of America, West, Inc. (1982) 130
Cal. App. 3d 212, 217.) Thus, in cases such as this, in which extrinsic evidence was not
presented, "[d]eterminations of arbitrability, like the interpretation of any
contractual provision, are subject to de novo review." (Republic of Nicaragua v.
Standard Fruit Co. (9th Cir. 1991) 937 F.2d 469, 474.)
IV.
The employment contract between the parties, formally denominated
"Agreement Regarding Trade Secrets, Inventions, Employment and Competition,"
consists of 23 paragraphs. Throughout, Stirlen is referred to as "Executive,"
"he/she" or "his/her," and Supercuts is referred to as "the
Company." The first six paragraphs briefly describe Stirlen's duties, the fact that
his employment is at will, his compensation and fringe benefits, and other compensation he
may receive as well as the manner in which he will be reimbursed for certain expenses.
Paragraph 7 provides that any inventions, improvements, ideas or
discoveries relating to the company's business that the employee may conceive during the
period of employment, whether patentable or not, must be disclosed and assigned to the
company and "shall be the sole and exclusive property of the Company." Paragraph
8 states that certain confidential and proprietary information to which the employee may
have access shall constitute trade secrets which the employee shall not disclose to third
persons without company authorization. Under paragraph 9 the employee agrees to deliver to
the company "at the termination of his/her employment, or at any other time that the
Company may request," all information and equipment the employee may then have under
his or her control, which is "the sole property of the Company." Under paragraph
10 the employee agrees that during the period of employment with the company and for two
years thereafter he or she will not directly or indirectly engage in any similar business
within the United States and specified Canadian territories, and will not attempt to
induce other employees to leave the company, or franchisee to discontinue its relationship
with the company, or customer or supplier to cease doing business with the company.
Paragraph 11 is entitled "Submission to Jurisdiction;
Arbitration" and comprises what we refer to in this opinion as the "arbitration
clause." This provision consists of four subparagraphs.
Subparagraph (a), which pertains to claims that need not be submitted
to arbitration, provides as follows: "Any action initiated by the Company seeking
specific performance or injunctive or other equitable relief in connection with any breach
or violation of Paragraphs 7, 8, 9, or 10 of this Agreement may be maintained in any
federal or state court having jurisdiction over Marin County, California. The parties
hereby submit themselves to the jurisdiction of any such court for the purpose of
resolving all such actions, waive any objections to the service of any such court, and
agree not to challenge the exclusive jurisdiction of such court." The parties further
agree that in the event Supercuts commences an action against the employee for violation
of the provisions contained in paragraphs 7, 8, 9 or 10, "Executive's employment
hereunder and the Company's payment of Salary, benefits, and/or any unpaid Severance
Compensation (as provided in Paragraph 13 herein) shall cease, without penalty to the
Company, pending the outcome of such action or, if the parties submit any such claim to
arbitration hereunder, pending the outcome of such arbitration."
Subparagraph (b) of paragraph 11 states that, "[e]xcept as
provided in Paragraph 11. a. hereinabove, in the event there is any dispute arising out of
Executive's employment with the Company, the termination of that employment, or arising
out of this Agreement, whether such dispute gives rise or may give rise to a cause of
action in contract or tort or based on any other theory or statute, including but not
limited to the California Fair Employment & Housing Act, Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities
Act, or any other act or statute, Executive and the Company agree that exclusive recourse
shall be to submit any such dispute to final and binding arbitration pursuant to the
provisions of the Federal Arbitration Act (9 U.S.C. § 1 et seq.), if applicable, or the
provisions of Title 9 of Part III of the California Code of Civil Procedure, commencing at
§ 1280, or any successor or replacement statutes, if the Federal Arbitration Act does not
apply, upon a request submitted in writing in accordance with the notice provisions of
this Agreement to the other party to this Agreement within one (1) year of the date the
dispute arose, or, in the case of a dispute arising out of the termination of Executive's
employment, within one (1) year of the date Executive's employment was terminated. The
failure to timely request arbitration hereunder shall constitute a complete waiver of all
rights to raise any claims in any forum, arising out of any dispute described herein. The
one (1) year limitations period within which to request arbitration shall not be subject
to tolling, equitable or otherwise."
Subparagraph (c) of paragraph 11 restricts the remedies available in
arbitration. The parties agree that "in arbitration, the exclusive remedy for alleged
violation of this Agreement or the terms conditions, or covenants of employment, and for
any harm alleged in connection with any dispute subject to arbitration hereunder
(including, without limitation, causes of action arising in tort), shall be a money award
not to exceed the amount of actual damages for breach of contract, less any proper offset
for mitigation of such damages, and the parties shall not be entitled to any other remedy
at law or in equity, including but not limited to other money damages, exemplary damages,
specific performance, and/or injunctive relief."
The final subparagraph of paragraph 11, subparagraph (d), prescribes
the method for choosing an arbitrator and provides that the arbitrators decision
"will be final and binding on the parties," the arbitrator's fees will be shared
by the parties, the arbitration shall be held in Marin County, and "the arbitrator
shall not have the power to alter, amend, or modify any of the provisions of this
agreement."
The trial court's determination that the
arbitration clause offended public policy related to the provision of subparagraph (c) of
the arbitration clause that the "exclusive remedy" for any violation of any
claim required to be submitted to arbitration "shall be a money award not to exceed
the amount of actual damages for breach of contract," specifically excluding, among
other things, exemplary damages. The court found that this restriction violates Civil Code
section 1668, which provides that "[a]ll contracts which have for their object,
directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful
injury to the person or property of another, or violation of law, whether willful or
negligent, are against the policy of the law." We need not separately address the
question whether the restriction on employee remedies is "against the policy of the
law" within the meaning of this statute. As will be seen, the restriction bears as
well on the question of unconscionability and can be most efficaciously addressed in that
context.
V.
The trial court succinctly explained its conclusion that the
arbitration clause was "so one-sided as to be unconscionable" as follows:
"Defendants can use the court system for certain claims, but the plaintiff must use
arbitration for all his, with very limited damages. The plaintiff gives up significant
rights, and defendant is protected from liability for all fraud, willful injury or
violation of law."
The judicially developed criteria for determining whether an
arbitration clause is unconscionable and therefore unenforceable are set forth in Graham
v. Scissor-Tail, Inc. (1981) 28 Cal. 3d 807 (Scissor-Tail), which the trial court
explicitly relied upon. The analysis commences with the determination whether the
agreement to arbitrate is a contract of adhesion. If it is, the court must then determine
whether other factors operate to render it unenforceable. "Generally speaking,"
the court declared, "there are two judicially imposed limitations on the enforcement
of adhesion contracts or provisions thereof. The first is that 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. The second--a principle of equity
applicable to all contracts generally--is that a contract or provision, even if consistent
with the reasonable expectation of the parties, will be denied enforcement if, considered
in its context, it is unduly oppressive or 'unconscionable.'" ( Id., at p. 820.) In
other words, an adhesive contract "would remain fully enforceable unless (1) all or
part of the contract fell outside the reasonable expectations of the weaker party or (2)
it was unduly oppressive or unconscionable under applicable principles of equity." (
Izzi v. Mesquite Country Club (1986) 186 Cal. App. 3d 1309, 1317.)
In 1979, after initiation of the trial proceedings in Scissor-Tail, the
Legislature enacted Civil Code section 1670.5, and thereby adopted the doctrine of
unconscionability enunciated in section 2-302 of the Uniform Commercial Code, except that
section 1670.5 applies to all contracts, not just those for the sale of goods.
Section 1670.5, which is identical to section 2-302 of the U.C.C. and is set forth in its
entirety in the margin below, does not itself provide a
definition of what is or is not "unconscionable," which suggests the concept
cannot be satisfactorily defined in the abstract. The closest the comments to the Uniform
Commercial Code come to a definition is the declaration that the "basic test is
whether, in the light of the general commercial background and the commercial needs of the
particular trade or case, the clauses involved are so one-sided as to be unconscionable
under the circumstances existing at the time of the making of the contract." (U. Com.
Code, § 2-302, com. 1.)
The Uniform Commercial Code doctrine of unconscionability adopted in
Civil Code section 1670.5 mandates an analysis that is not materially different from that
described in Scissor-Tail. The two approaches were harmonized in Perdue v. Crocker
National Bank (1985) 38 Cal. 3d 913, where the court observed that "[b]oth pathways
should lead to the same result." (Id., at p. 925, fn. 9.) Under the Uniform
Commercial Code provision, " '[u]nconscionability has generally been recognized to
include an absence of meaningful choice on the part of one of the parties together with
contract terms which are unreasonably favorable to the other party.' Phrased another way,
unconscionability has both a 'procedural' and a 'substantive' element.
"The procedural element focuses on two factors: 'oppression' and
'surprise.' 'Oppression' arises from an inequality of bargaining power which results
in no real negotiation and 'an absence of meaningful choice.' 'Surprise' involves the
extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix
printed form drafted by the party seeking to enforce the disputed terms." ( A & M
Produce Co. v. FMC Corp., supra, 135 Cal. App. 3d 473, 486.) n6
Substantive unconscionability is less easily explained. "Cases
have talked in terms of 'overly harsh' or 'one-sided' results. One commentator has pointed
out, however, that '. . . unconscionability turns not only on a "one-sided"
result, but also on an absence of "justification" for it', which is only to say
that substantive unconscionability must be evaluated as of the time the contract was made.
The most detailed and specific commentaries observe that a contract is largely an
allocation of risks between the parties, and therefore that a contractual term is
substantively suspect if it reallocates the risks of the bargain in an objectively
unreasonable or unexpected manner. But not all unreasonable risk allocations are
unconscionable; rather enforceability of the clause is tied to the procedural aspects of
unconscionability . . . such that the greater the unfair surprise or inequality of
bargaining power, the less unreasonable the risk reallocation which will be
tolerated." (A & M Produce Co. v. FMC Corp., supra, 135 Cal. App. 3d at p. 487.)
In California Grocers Assn. v. Bank of America, supra, 22 Cal. App. 4th 205, this
court rejected the "reasonableness" standard applied in A & M Produce Co. v.
FMC Corp., supra, 135 Cal. App. 3d at pp. 486-487, as being inherently subjective.
We instead reverted to the traditional standard of unconscionability - - contract terms so
one-sided as to "shock the conscience."
One commentator sums up the matter as follows: " '[p]rocedural
unconscionability' has to do with matters relating to freedom of assent. 'Substantive
unconscionability' involves the imposition of harsh or oppressive terms on one who has
assented freely to them." (Hawkland, Uniform Commercial Code Series (1996) §
2-302:02 (Art. 2), p. 246.) The prevailing view is that these two elements 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. (Id., § 2-302:03 (Art. 2), p. 249, and
cases cited at fn. 4; id., § 2-302:05 (Art. 2), p. 266.) This is consistent with the
concept of unconscionability articulated in Scissor-Tail. (Perdue v. Crocker National
Bank, supra, 38 Cal. 3d at p. 925, fn. 5; A & M Produce, Inc. v. FMC Corp., supra, 135
Cal. App. 3d at p. 487.) [Editorial
note: But see the California Supreme Court's subsequent language, in Donovan v.
RRL Corporation, referring to a sliding scale under which the requirement for
"procedural unconscionability" may be disregarded."].
In the present case, the threshold question is whether the subject
arbitration clause is part of a contract of adhesion, thereby establishing the necessary
element of procedural unconscionability.
A.
The standard definition of a "contract of adhesion" is "
'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.' " (Scissor-Tail, supra, 28 Cal. 3d at p. 817.)
Supercuts maintains that the contract here is not adhesive because it
did not have superior bargaining strength. It emphasizes that Stirlen was not a person
desperately seeking employment but a successful and sophisticated corporate executive
Supercuts sought out and "hired away" from a highly paid position with a major
corporation "by offering him an annual salary of $150,000, and then agreeing to
remunerative 'extras' not included in the standard executive employment agreement,"
such as generous stock options, a bonus plan, a supplemental retirement plan, and a
$10,000 "signing bonus." We are unpersuaded.
For one thing, Stirlen does not even arguably possess the bargaining
strength of the plaintiff in Scissor-Tail, Bill Graham, who was the dominant rock music
impresario of his generation. Noting that virtually all concert artists with whom Graham
wished to do business belonged to the labor union that prepared the contract at issue, and
that such artists were not permitted to sign any form of contract other than the one
prepared by the union, the court concluded that ". . . Graham, whatever his asserted
prominence in the industry, was required by the realities of his business as a concert
promoter to sign [union] form contracts," so that in effect "he was presented
with the nonnegotiable option of accepting such contracts [as proposed] or not at
all." (Scissor-Tail, supra, 28 Cal. 3d at pp. 818-819.)
In the present case Stirlen appears to have had no realistic ability to
modify the terms of the employment contract. Undisputed evidence shows that the terms of
the contract, which were cast in generic and gender-neutral language, were presented to
him after he accepted employment and were described as standard provisions that were not
negotiable. The only negotiating between the parties regarding the conditions of Stirlen's
employment related to the stock options, bonus and retirement plans, and other
"extras," but these matters were the subject of a separate letter agreement
Stirlen executed on January 25, 1993, more than a month before he signed the employment
contract. Moreover, the letter agreement adverted to the "standard employment
contract" Stirlen would be required to sign, noting that the terms of the letter
agreement did not supplant but were "[i]n addition to the standard provisions of the
contract . . . ." Stirlen's assertions that the employment contract was presented to
him on a "take it or leave it basis" and that every other corporate officer was
required to and had signed an identical agreement, were not disputed. We agree with the
trial court's determination that the agreement to arbitrate was part of a contract of
adhesion.
Having determined that the procedural element of unconscionability is
present in this case, we turn to the matter of substantive unconscionability.
B.
Implicitly conceding that the manifest one-sidedness of the arbitration
clause appears objectively unreasonable on its face, Supercuts argues (1) that Stirlen is
"estopped" from claiming it is unconscionable; (2) that the restriction on
remedies, which Supercuts apparently considers the only substantively unconscionable
aspect of the arbitration clause, was "revoked or waived" and therefore does not
apply in this case; and (3) that, properly understood, the remaining provisions of the
arbitration clause are not unconscionable. We reject all of these contentions.
1.
Supercuts claims Stirlen is "estopped" from claiming the
arbitration clause is unconscionable because he "was too bright and too well
experienced in the machinations of corporate management to sign an agreement that was
'unduly oppressive.' " This argument relates not so much to whether the contract is
unduly oppressive as to whether it is adhesive, a matter we need not revisit. The
suggestion that a contract or clause cannot be unconscionable if it is accepted by a
knowledgeable party has been repudiated by our Supreme Court. As explained in
Scissor-Tail, an adhesion contract or provision thereof will be denied enforcement if it
is unduly oppressive "even if consistent with the reasonable expectations of the
parties." (Scissor-Tail, supra, 28 Cal. 3d at p. 820.) Scissor-Tail shows that
our Supreme Court is among the many courts that "have begun to recognize that
experienced but legally unsophisticated businessmen may be unfairly surprised by
unconscionable contract terms." ( A & M Produce Co. v. FMC Corp., supra.)
2.
Supercuts does not contest the finding that the restriction on remedies
is against public policy within the meaning of Civil Code section 1668 nor otherwise
defend the restriction. It argues instead that the restriction does not apply in this
case.
On July 21, 1994, after Supercuts learned Stirlen was considering a
suit for wrongful termination, its general counsel, Lawrence D. Imber, sent Stirlen's
counsel a letter reminding her of the arbitration clause. Imber stated that, in the event
Stirlen intended to "assert a claim based on a statute, constitutional rights,
etc. by which damages other than for contract breaches are permitted; . . . I will be
willing to confer on the arbitrator authority to issue an award consistent with law,
should the arbitrator, of course, find liability on the part of Supercuts in the first
place." Supercuts maintains that "[b]y this offer [it] was essentially waiving
or revoking paragraph 11(c) of the agreement."
Unimpressed with this contention, the trial court viewed the July 21
letter as merely a concession of the invalidity of the restriction on remedies and the
one-sidedness of the entire arbitration clause. We agree the letter does not effectuate a
revocation or waiver of the restriction on remedies. Among other things, Supercuts'
"waiver or revocation" theory cannot be reconciled with the integration clauses
of the employment contract. Paragraph 18 provides that the contract "may not be
modified or amended by oral agreement, or course of conduct, but only by an
agreement in writing signed by the parties." Paragraph 20 similarly provides
that the terms of the contract embody "the complete agreement and understanding
between the parties" and states the agreement of the parties "that no
representations, inducements, promises or agreements, orally or otherwise, have
been made by a party or anyone acting on behalf of a party that are not embodied
herein, and that no other agreement or promise, whether oral or written, express
or implied, shall be valid or binding." In light of these provisions, the
July 21 letter can be seen, at most, as an offer to modify the contract; an offer that was
never accepted. No existing rule of contract law permits a party to resuscitate a legally
defective contract merely by offering to change it. Suffice it for present purposes to
conclude that the restriction on remedies remains a part of the arbitration clause and is
therefore relevant to the question whether that clause is unconscionable within the
meaning of Civil Code section 1670.5.
3.
Finally coming to grips with the issue at the heart of this case,
Supercuts alternatively claims the arbitration clause is not one-sided, and therefore
unconscionable, because the apparent disparities are actually reasonable and fair. Its
chief argument is that violation of the employer rights described in paragraphs 7, 8, 9,
and 10 of the employment contract, pertaining to patent infringement, improper use of
confidential information and competition, pose "an immediate threat to business
operations" and therefore require immediate access to the courts, which alone can
provide meaningful "emergency relief." According to Supercuts, "[s]imple
business realities underscore a need for this type of immediate access to court-ordered
relief which is simply not present in the context of the standard employment
dispute."
We agree a contract can provide a "margin of safety" that
provides the party with superior bargaining strength a type of extra protection for which
it has a legitimate commercial need without being unconscionable. (See Hawkland, Uniform
Commercial Code Series, supra, § 2-302:05 (Art. 2), p. 268.) However, unless the
"business realities" that create the special need for such an advantage are
explained in the contract itself, which is not the case here, it must be factually
established. Thus, subdivision (b) of Civil Code section 1670.5 provides that "[w]hen
it is claimed or appears to the court that the contract or any clause thereof may be
unconscionable the parties shall be afforded a reasonable opportunity to present evidence
as to its commercial setting, purpose, and effect to aid the court in making the
determination." This language reflects "legislative recognition that a claim of
unconscionability often cannot be determined merely by examining the face of the contract,
but will require inquiry into its setting, purpose, and effect." (Perdue v. Crocker
National Bank, supra, 38 Cal. 3d 913, 926.)
Supercuts failed to provide the trial court evidence of the
"business realities" it now relies upon because it was unwilling to concede
during the proceedings below that it had any advantage under the arbitration clause that
needed to be justified. This evidentiary deficiency can be overlooked, however, because,
the "business realities" belatedly claimed to justify the many advantages
Supercuts enjoys under the arbitration clause would not provide such justification even if
they had been factually established.
The forms of emergency judicial relief Supercuts asserts it must have
are available to a party compelled to arbitrate a dispute. Code of Civil Procedure section
1281.8, subdivision (b), provides, as material, that "[a] party to an arbitration
agreement may file in the court in the county in which an arbitration proceeding is
pending, or if an arbitration proceeding has not commenced, in any proper court, an
application for a provisional remedy in connection with an arbitrable controversy, but
only upon the ground that the award to which the applicant may be entitled may be rendered
ineffectual without provisional relief." As we noted in Woolley v. Embassy Suites,
Inc. (1991) 227 Cal. App. 3d 1520, "[s]ection 1281.8 was enacted primarily to allow a
party to an arbitration [or subject to an arbitration agreement] to obtain provisional
judicial remedies without waiving the right to arbitrate, as some early cases had
suggested. The statute covers not merely injunctions, but all provisional remedies,
including attachments, temporary protective orders, writs of possession and appointments
of receivers." ( Id., at p. 1527.) n9 The unilateral
right to litigate rather than arbitrate claims therefore cannot be justified by the need
for provisional remedies. Furthermore, justification would be lacking even if Supercuts
could show that its legitimate dispute resolution needs could not always be met through
arbitration, for that is also true with respect to employee claims.
While it may often be advantageous for employees to submit employment
disputes to arbitration, it may also be disadvantageous. For example, arbitral discovery
is ordinarily much more limited than judicial discovery, which may seriously compromise an
employee's ability to prove discrimination or unfair treatment. (Bales, Compulsory
Arbitration of Employment Claims: A Practical Guide to Designing and Implementing
Enforceable Agreements (1995) 47 Baylor L.Rev. 591, 608-609 [It "would be
impossible" for employees to prove disparate treatment "without the opportunity
to obtain from [employers] statistical information about the employment practice in
question."]; but see Gilmer v. Interstate/Johnson Lane Corp., supra, 500 U.S. at p.
31.) Procedural protections available in arbitration are inferior in other ways to those
employees may obtain in a judicial forum. As the Ninth Circuit noted in Prudential Ins.
Co. of America v. Lai (9th Cir. 1994) 42 F.3d 1299, in California ". . . the privacy
rights of victims of sexual harassment are protected by statutes limiting discovery and
admissibility of plaintiff's sexual history in a judicial proceeding." ( Id., at p.
1305, fn. 4.) No such statutory protection is provided an employee compelled to arbitrate
a claim of sexual harassment against an employer under an agreement of the sort presented
here, in which the parties do not agree that the civil discovery statutes shall apply.
(See Code Civ. Proc., § 1283.05, subd. (a), 1283.1.)
Further, except in extraordinary circumstances, parties who submit a
dispute to private arbitration also give up their right to review of an adverse decision.
Thus, unlike Supercuts, which can obtain judicial review of an adverse judicial
determination of its claims, its employees must accept adverse rulings on their employment
claims even if an error of fact or law appears on the face of the arbitrator's ruling and
causes substantial injustice.
Supercuts relies on Grubb & Ellis Co. v. Bello (1993) 19 Cal. App.
4th 231, 238 for the proposition that "[m]utuality of obligation does not require
that both parties to the agreement be subject to arbitration." That case involved
real estate listing agreements providing for arbitration of any dispute between the
parties. When the broker demanded arbitration on a fee dispute the defendant objected on
the ground that the broker had not initialed each arbitration provision, as required by
Code of Civil Procedure section 1298, subdivision (c), although the defendant had done so.
The defendant argued that the court should "read into the statute the requirement of
mutuality of remedy, namely arbitration, in order for such an arbitration provision to be
valid." (19 Cal. App. 4th at pp. 238-239.) Confining its analysis to the language of
Code of Civil Procedure section 1298, subdivision (c), which pertains only to real estate
contract arbitration, the court concluded ". . . there is no reason to find the
statute requires mutuality of arbitration by necessary implication." (19 Cal. App.
4th at p. 239.) "The section is designed to ensure that a party to a listing
agreement is not subjected to arbitration without notice of the rights being waived and to
assure his or her written assent to the arbitration provision. The written assent of the
other party to the agreement is not 'necessary, essential, natural or proper' to
accomplish these goals." ( Id., at p. 240.)
To the extent Grubb & Ellis suggests mutuality of arbitral
obligation is not required, we question the court's analysis of this issue, which has
never been relied upon by other courts and is hard to reconcile with other pertinent cases
requiring mutuality of the arbitral obligation. (See, e.g., Hull v. Norcom, Inc. (11th
Cir. 1985) 750 F.2d 1547, 1550 ["the consideration exchanged for one party's promise
to arbitrate must be the other party's promise to arbitrate at least some specified class
of claims"]. In any event, Grubb & Ellis is inapposite. First, the analysis
of the case is based upon a statute that has no application here. Second, the arbitration
provisions at issue in Grubb & Ellis were not claimed to be unconscionable and bear
little resemblance to the arbitration clause at issue in this case. Thus, Grubb &
Ellis would not be dispositive even if the court in that case had properly rejected the
requirement of mutuality as an absolute prerequisite to the validity of an arbitration
agreement. The issue here is not simply the unilateral nature of the compulsory duty to
arbitrate, but a variety of attendant discrepancies all favorable to the employer and
prejudicial to employees.
One of the most significant discrepancies, of course, is the unilateral
restriction on employee remedies and the nature of the rights employees are deprived of in
this manner. While Supercuts is deprived of no common law or statutory remedies that may
be available to it under paragraphs 7, 8, 9 and 10 of the employment contract, remedies
available to employees in employment disputes are severely curtailed. Not only are
employees denied punitive damages for tort claims, they are also denied relief for
statutory claims, specifically including those brought under the California Fair
Employment and Housing Act, title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act and the Americans With Disabilities Act. For example, a
cause of action for racial or sexual employment discrimination or harassment under the
FEHA may sustain recovery of punitive damages. Similarly, under Title VII "[a]
complaining party may recover punitive damages . . . if [he or she] demonstrates that the
respondent engaged in a discriminatory practice or discriminatory practices with malice or
with reckless indifference to the federally protected rights of an aggrieved person."
(42 U.S.C. § 1981a(a)(3).) The ADEA provides that an aggrieved person "may bring a
civil action in any Federal district court of competent jurisdiction for such legal or
equitable relief as will effectuate the purposes of the statute." (29 U.S.C. §
633a(c).) Appropriate injunctive relief is also available under the ADA including
"order[s] to alter facilities to make such facilities readily accessible to and
usable by individuals with disabilities." (42 U.S.C. § 12188(a)(2).) Supercuts's
arbitration clause not only deprives employees of the exemplary damages and equitable
relief available under the foregoing federal statutes, but deprives them as well of the
reasonable attorney fees, including litigation expenses, and costs, that prevailing
parties can obtain under those statutes. The only remedy left to employees--actual
damages for breach of contract--may bear no relation whatsoever to the extent of the wrong
and the magnitude of the injuries suffered at the hands of the employer. This would amount
to denial of the underlying cause of action, which would be preserved in name only.
Virtually conceding that such restrictions on remedies are against
public policy, and claiming no commercial need for them whatsoever, Supercuts offers
only the argument, which we have already rejected, that it "revoked or waived"
the restriction in this case.
Apparently anticipating we might decide, as we have, that the
restriction on remedies applies to Stirlen, Supercuts endeavors to justify the restriction
on the theory that the employment disputes to which it applies can be initiated by an
employer as well as an employee, and Supercuts has therefore subjected itself to the same
limitations as apply to employees. This contention is exceedingly disingenuous. The
mandatory arbitration requirement can only realistically be seen as applying primarily if
not exclusively to claims arising out of the termination of employment, which are
virtually certain to be filed against, not by, Supercuts. Supercuts identifies no
provision of the employment contract and no statute likely to give rise to a claim
Supercuts would be compelled to submit to arbitration. The only "employment
disputes" likely to be initiated by Supercuts--such as claims that an employee
violated a non-competition agreement or divulged confidential information--need not be
arbitrated.
Saika v. Gold, supra, 49 Cal. App. 4th 1074, shows that provisions of
arbitration agreements unduly advantageous to one party at the expense of the other will
not be judicially enforced. That case involved an arbitration agreement between a doctor
and a patient with a "trial de novo clause" providing that if the arbitrator's
award was equal to or greater than $25,000, either party may request a trial de novo by
filing a civil action in the superior court. Upon the filing of such an action, the
arbitration award " 'will be null and void and may not be used for any purpose
thereafter.' " ( Id., at p. 1077.) The Court of Appeal emphasized the one-sided
nature of this provision, which it condemned as creating a " ' "heads I win,
tails you lose" situation.' " ( Id., at p. 1079.) "As a practical matter,
the benefit which the trial de novo clause confers on patients is nothing more than a
chimera. The odds that an award will both (a) clear the $ 25,000 threshold but (b) still
be so low that the patient would want to have a trial de novo are so small as to be
negligible. Unless we are to assume that arbitrators in medical malpractice cases
regularly and capriciously make awards substantially below what justice requires--and that
is an assumption we will not indulge--the cases where the trial de novo clause could
possibly benefit the patient are going to be rare indeed." ( Id., at p. 1080, italics
in original.) Because the arbitration agreement provides "virtually no conclusiveness
when the patient wins the arbitration," the court declared, ". . . the practical
effect of the clause is to tilt the playing field in favor of the doctor." ( Id., at
p. 1076, italics in original.) The court reversed the trial court's order denying the
patient's petition to confirm the $325,000 arbitration award on equitable grounds:
"Because it renders arbitration an illusory remedy for one party, the trial de novo
clause here contravenes the strong public policy in favor of arbitration despite the fact
that the patient signed the agreement and may be presumed to have known of the clause.
Equity will not enforce this clause." (Id., at p. 1082.)
Though it does not relate to the absence of finality as to any party,
nor render arbitration a completely illusory remedy, the arbitration agreement before us
lacks even the "modicum of bilaterality" present in Saika. (49 Cal. App. 4th at
p. 1079.) Employer claims may be brought in court or submitted to arbitration while claims
for violation of employee rights must be arbitrated. Even with respect to employer claims
that may be adjudicated, important rights that would otherwise be available to employees
are severely restricted. Not only does the employee waive any meritorious objections that
might be made to the jurisdiction of the federal or state court selected by the employer,
but he or she waives as well any meritorious objections that might be made with respect to
"the service of any such court." The most extreme burden imposed on employees is
submission to the loss of his or her job, salary and all other benefits during the
pendency of what may prove to be lengthy litigation, "without penalty to the
Company" even in the event its claim proves unmeritorious. Supercuts offers no
commercial justification whatsoever for this draconian provision, which appears calculated
to intimidate any employee who might otherwise have the temerity to resist Supercuts'
claims.
Having forfeited significant adjudicatory rights, employees are the
beneficiaries of no compensating concessions in connection with the employment related
claims against Supercuts which they must arbitrate. On the contrary, the concessions here
again favor the employer. Employees agree to a one-year statute of limitation even as to
claims to which a longer period would otherwise apply; andthis period "shall not be
subject to tolling, equitable or otherwise." The failure of an employee to
request arbitration within the prescribed period "shall constitute a complete waiver
of all rights to raise any claims in any forum, arising out of any dispute described
herein." Moreover, as earlier noted, the employee gives up remedies for willful fraud
or other intentional acts of the employer as well as statutory remedies.
In short, the arbitration clause provides the employer more rights and
greater remedies than would otherwise be available and concomitantly deprives employees of
significant rights and remedies they would normally enjoy. Considering the terms of the
arbitration clause in the light of the commercial context in which it operates and the
legitimate needs of the parties at the time it was entered into, we have little
difficulty concluding that its terms are " 'so extreme as to appear unconscionable
according
to the mores and business practices of the time and place.' . . . ." (Williams v.
Walker-Thomas Furniture Co. (D.C. Cir. 1965) 350 F.2d 445, 450).
VI.
Supercuts argues that the Federal Arbitration Act (9 U.S.C. § 1-16;
FAA) precludes a finding the instant arbitration clause is unconscionable and
unenforceable under California law. We are unpersuaded.
[Discussion of this issue omitted.]
The arbitration clause, which provides a comprehensive mechanism for
resolving all disputes likely to arise between the parties, is unconscionably one-sided
and unfair in numerous respects and therefore unenforceable in its entirety. (See Graham
Oil v. ARCO Products Co. (9th Cir. 1994) 43 F.3d 1244, 1248-1249.) We do not mean to
suggest, of course, that the employment contract is otherwise objectionable or
unenforceable, as Stirlen makes no such claim. Where, as here, "a contract has
several distinct objects, of which one at least is lawful, and one at least is unlawful,
in whole or in part, the contract is void as to the latter and valid as to the rest."
(Civ. Code, § 1599; see also § 1670.5, subd. (a).)
The judgment is affirmed. Respondent shall be awarded costs on appeal.
Haerle, J., and Lambden, J., concurred.
Notes and Questions
1. In Part V.B.2. of the opinion, the court refers to Paragraph 20 of the employment agreement. Is that paragraph relevant to communication between the parties that followed execution of the agreement? For what other reasons does the court conclude that the parties did not modify their employment agreement to eliminate the restriction on Stirlen's remedies? You will recall that a failed attempt at modification may nonetheless operate as a waiver. The court never discusses why it concludes that the letter from Supercuts' attorney did not waive the restriction on remedies. Do you think the letter waived the restriction?
2. Make sure that you understand the difference between the restriction imposed by the employment agreement upon Stirlen's forum for dispute resolution and the restriction imposed upon his remedies. Then make sure that you understand how the court uses the restriction upon his remedies to support its conclusion that the restriction on his forum for dispute resolution is unconscionable.