ARMENDARIZ v.
FOUNDATION HEALTH PSYCHCARE SERVICES, INC.,
2000 WL 1201652 (Cal. Sup. Ct. Aug. 24, 2000).
MOSK, J.
In this case, we consider a number of issues related to the validity of a mandatory employment arbitration agreement, i.e., an agreement by an employee to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which an employer imposes on a prospective or current employee as a condition of employment. . . .
Marybeth Armendariz and Dolores Olague-Rodgers (hereafter the employees) filed a complaint for wrongful termination against their former employer, Foundation Health Psychcare Services, Inc. (hereafter the employer). The complaint and certain documents filed in support of the employer’s petition to compel arbitration provide us with the basic factual background of this case. In July and August of 1995, the employer hired the employees in the “Provider Relations Group” and they were later given supervisory positions with annual salaries of $38,000. On June 20, 1996, they were informed that their positions were “being eliminated” and that they were “being terminated.” During their year of employment, they claim that their supervisors and coworkers engaged in sexually based harassment and discrimination. The employees alleged that they were “terminated … because of their perceived and/or actual sexual orientation (heterosexual).”
Both employees had filled out and signed employment application forms, which included an arbitration clause pertaining to any future claim of wrongful termination. Later, they executed a separate employment arbitration agreement, containing the same arbitration clause. The clause states in full: “I agree as a condition of my employment, that in the event my employment is terminated, and I contend that such termination was wrongful or otherwise in violation of the conditions of employment or was in violation of any express or implied condition, term or covenant of employment, whether founded in fact or in law, including but not limited to the covenant of good faith and fair dealing, or otherwise in violation of any of my rights, I and Employer agree to submit any such matter to binding arbitration pursuant to the provisions of title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280 et seq. or any successor or replacement statutes. I and Employer further expressly agree that in any such arbitration, my exclusive remedies for violation of the terms, conditions or covenants of employment shall be limited to a sum equal to the wages I would have earned from the date of any discharge until the date of the arbitration award. I understand that I shall not be entitled to any other remedy, at law or in equity, including but not limited to reinstatement and/or injunctive relief.”
The employees’ complaint against the employer alleges a cause of action for violation of the FEHA and three additional causes of action for wrongful termination based on tort and contract theories of recovery. The complaint sought general damages, punitive damages, injunctive relief, and the recovery of attorney fees and costs of suit.
The employer countered by filing a motion for an order to compel arbitration . . The trial court first found that the arbitration agreement was an “adhesion contract.” It also found that several of the provisions of the contract are “so one-sided as to ‘shock the conscience.’ ” In particular, it singled out the fact that only employees who file claims against an employer are required to arbitrate their claims, but not vice versa. Second, the agreement limits damages to back pay, precluding damages available for statutory antidiscrimination claims and tort damages, such as punitive damages. The trial court also mentioned the supposed lack of discovery under the arbitration agreement. It concluded: “Given the overall unfairness of the provision,” this was not an appropriate case for striking the unlawful provisions of the arbitration agreement; instead it invalidated the entire agreement.
After the employer filed a timely appeal, the Court of Appeal reversed. The court concluded that the contract was indeed one of adhesion and that the damages provision was unconscionable and contrary to public policy. But . . . the Court of Appeal held, contrary to the trial court, that the rest of the arbitration agreement should be enforced. . . . We granted review.
The employees urge us to adopt the conclusion of the United States Court of Appeals for the Ninth Circuit in Duffield v. Robertson Stephens & Co. (9th Cir.1998) 144 F.3d 1182 (Duffield ), which held that the Civil Rights Act of 1991 prohibits the enforcement of mandatory employment agreements to arbitrate claims under Title VII of the Civil Rights Act of 1964, or equivalent state antidiscrimination statutes, such as the FEHA . . . As the employer points out, the Ninth Circuit stands alone in its interpretation of the 1991 Act. . . . Aside from the fact that Duffield is a minority of one, we find its reasoning unpersuasive. . . . We therefore conclude that nothing in the 1991 Act prohibits mandatory employment arbitration agreements that encompass state and federal antidiscrimination claims. . . .
Except for the neutral-arbitrator requirement, which we have held is essential to ensuring the integrity of the arbitration process and is not at issue in this case, the employees claim that the present arbitration agreement fails to measure up . . . . We consider below the validity of those requirements and whether they are met by the employer’s arbitration agreement.
1. Limitation of Remedies
The principle that an arbitration agreement may not limit statutorily imposed remedies such as punitive damages and attorney fees appears to be undisputed. We suggested as much [in Broughton v. Cigna Healthplans, 21 Cal.4th 1066 (1999)] when we held that an agreement to arbitrate a statutory claim implicitly incorporates “the substantive and remedial provisions of the statute” so that parties to the arbitration would be able to vindicate their “statutory cause of action in the arbitral forum As stated, the arbitration agreement in this case provides in part: “I and Employer further expressly agree that in any such arbitration, my exclusive remedies for violation of the terms, conditions or covenants of employment shall be limited to a sum equal to the wages I would have earned from the date of any discharge until the date of the arbitration award. I understand that I shall not be entitled to any other remedy, at law or in equity, including but not limited to reinstatement and/or injunctive relief.” The employees claim that the agreement compels them to arbitrate statutory claims without affording the full range of statutory remedies, including punitive damages and attorneys fees to a prevailing plaintiff, available under the FEHA. . . . We conclude this damages limitation is contrary to public policy and unlawful.
2. Adequate Discovery
The employees argue that employers typically have in their possession many of the documents relevant for bringing an employment discrimination case, as well as having in their employ many of the relevant witnesses. The denial of adequate discovery in arbitration proceedings leads to the de facto frustration of the employee’s statutory rights. They cite a report by the Department of Labor’s Commission on the Future of Worker-Management Relations, chaired by former Secretary of Labor John Dunlop and including employee and employer representatives, which concludes that “if private arbitration is to serve as a legitimate form of private enforcement of public employment law,” it must among other things provide “a fair and simple method by which the employee can secure the necessary information to present his or her claim.”
We agree that adequate discovery is indispensable for the vindication of FEHA claims. The employer does not dispute the point, but contends that the arbitration agreement at issue in this case does provide for adequate discovery by incorporating by reference all the rules set forth in the CAA. Adequate provisions for discovery are set forth in the CAA at Code of Civil Procedure section 1283.05, subdivision (a). [FN10]
The employees point out that the provisions of Code of Civil Procedure section 1283.05 are only “conclusively deemed to be incorporated into” an agreement to arbitrate under section 1283.1 if the dispute arises “out of … any injury to, or death of, a person caused by the wrongful act or neglect of another” (id.), and argues that this language does not apply to FEHA claims. They further argue that because adequate discovery is not guaranteed under the arbitration agreement, FEHA claims should not be deemed arbitrable. . . . Therefore, although the employees are correct that they are entitled to sufficient discovery as a means of vindicating their sexual discrimination claims, we hold that the employer, by agreeing to arbitrate the FEHA claim, has already impliedly consented to such discovery. Therefore, lack of discovery is not grounds for holding a FEHA claim inarbitrable.
3. Written Arbitration Award and Judicial Review
The employees argue that lack of judicial review of arbitration awards makes the vindication of FEHA rights in arbitration illusory. . . . Arbitration, they argue, cannot be an adequate means of resolving a FEHA claim if the arbitrator is essentially free to disregard the law. . . .
We are not faced in this case with a petition to confirm an arbitration award, and therefore have no occasion to articulate precisely what standard of judicial review is “sufficient to ensure that arbitrators comply with the requirements of [a] statute.” All we hold today is that in order for such judicial review to be successfully accomplished, an arbitrator in a FEHA case must issue a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based. While such written findings and conclusions are not required under the CAA (Code Civ. Proc., ยง 1283.4; Baldwin Co. v. Rainey Construction Co. (1991) 229 Cal.App.3d 1053, 1058, fn. 3, 280 Cal.Rptr. 499), nothing in the present arbitration agreement precludes such written findings, and to the extent it applies to FEHA claims the agreement must be interpreted to provide for such findings. In all other respects, the employees’ claim that they are unable to vindicate their FEHA rights because of inadequate judicial review of an arbitration award is premature.
4. Employee Not to Pay Unreasonable Costs and Arbitration Fees
The employees point to the fact that the agreement is governed by Code of Civil Procedure section 1284.2, which provides that “each party to the arbitration shall pay his pro rata share of the expenses and fees of the neutral arbitrator, together with other expenses of the arbitration incurred or imposed by the neutral arbitrator.” They argue that requiring them to share the often substantial costs of arbitrators and arbitration effectively prevents them from vindicating their FEHA rights. . . .
The Cole [Cole v. Burns Int. Security Services, 105. F.3d 1465 (D.C. Cir. 1997)] court held that it was unlawful to require an employee who is the subject of a mandatory employment arbitration agreement to have to pay the costs of arbitration. The issue in that case was an arbitration agreement that was to be governed by the rules of the American Arbitration Association (AAA). Under these rules, the court noted that the employee may well be obliged to pay arbitrators’ fees ranging from $500 to $1,000 per day or more, a $500 filing fee, and administrative fees of $150 per day, in addition to room rental and court reporter fees. “. . . There is no indication in AAA’s rules that an arbitrator’s fees may be reduced or waived in cases of financial hardship. These fees would be prohibitively expensive for an employee like Cole, especially after being fired from his job, and it is unacceptable to require Cole to pay arbitrators’ fees, because such fees are unlike anything that he would have to pay to pursue his statutory claims in court.” . . .
Accordingly, consistent with the majority of jurisdictions to consider this issue, we conclude that when an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court. This rule will ensure that employees bringing FEHA claims will not be deterred by costs greater than the usual costs incurred during litigation, costs that are essentially imposed on an employee by the employer. . . .
We therefore hold that a mandatory employment arbitration agreement that contains within its scope the arbitration of FEHA claims impliedly obliges the employer to pay all types of costs that are unique to arbitration. Accordingly, we interpret the arbitration agreement in the present case as providing, consistent with the above, that the employer must bear the arbitration forum costs. The absence of specific provisions on arbitration costs would therefore not be grounds for denying the enforcement of an arbitration agreement.
D. Unconscionability of the Arbitration Agreement
1. General Principles of Unconscionability
In the previous section of this opinion, we focused on the minimum requirements for the arbitration of unwaivable statutory claims. In this section, we will consider objections to arbitration that apply more generally to any type of arbitration imposed on the employee by the employer as a condition of employment, regardless of the type of claim being arbitrated. These objections fall under the rubric of “unconscionability.” . . . Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. “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.” . . . “Generally speaking, 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 expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or ‘unconscionable.’ “
2. Unconscionability and Mandatory Employment Arbitration
Applying the above principles to this case, we first determine whether the arbitration agreement is adhesive. There is little dispute that it is. It was imposed on employees as a condition of employment and there was no opportunity to negotiate.
Moreover, in 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. While 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. Various studies show that arbitration is advantageous to employers not only because it reduces the costs of litigation, but also because it reduces the size of the award that an employee is likely to get, particularly if the employer is a “repeat player” in the arbitration system. It is perhaps for this reason that it is almost invariably the employer who seeks to compel arbitration.
. . . 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. “Private arbitration may resolve disputes faster and cheaper than judicial proceedings. Private arbitration, however, may also become an instrument of injustice imposed on a ‘take it or leave it’ basis. The courts must distinguish the former from the latter, to ensure that private arbitration systems resolve disputes not only with speed and economy but also with fairness.” With this in mind, we turn to the employees’ specific unconscionability claims.
Aside from FEHA issues discussed in the previous part of this opinion, the employees contend that the agreement is substantively unconscionable because it requires only employees to arbitrate their wrongful termination claims against the employer, but does not require the employer to arbitrate claims it may have against the employees.
We conclude that . . . [other courts] are correct in requiring this “modicum of bilaterality” in an arbitration agreement. Given the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on “business realities.” As has been recognized ” ‘unconscionability turns not only on a “one-sided” result, but also on an absence of “justification” for it.’ ” 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. . . . We emphasize that if an employer does have reasonable justification for the arrangement — i.e., a justification grounded in something other than the employer’s desire to maximize its advantage based on the perceived superiority of the judicial forum — such an agreement would not be unconscionable. Without such justification, we must assume that it is.
Applying these principles to the present case, we note the arbitration agreement was limited in scope to employee claims regarding wrongful termination. Although it did not expressly authorize litigation of the employer’s claims against the employee, . . . such was the clear implication of the agreement. Obviously, the lack of mutuality can be manifested as much by what the agreement does not provide as by what it does . . . an arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences. The arbitration agreement in this case lacks mutuality in this sense because it requires the arbitration of employee–but not employer–claims arising out of a wrongful termination. An employee terminated for stealing trade secrets, for example, must arbitrate his or her wrongful termination claim under the agreement while the employer has no corresponding obligation to arbitrate its trade secrets claim against the employee.
The unconscionable one-sidedness of the arbitration agreement is compounded in this case by the fact that it does not permit the full recovery of damages for employees, while placing no such restriction on the employer. Even if the limitation on FEHA damages is severed as contrary to public policy, the arbitration clause in the present case still does not permit full recovery of ordinary contract damages. The arbitration agreement specifies that damages are to be limited to the amount of back pay lost up until the time of arbitration. This provision excludes damages for prospective future earnings, so-called “front pay,” a common and often substantial component of contractual damages in a wrongful termination case. The employer, on the other hand, is bound by no comparable limitation should it pursue a claim against its employees. . . .
E. Severability of Unconscionable Provisions
The employees contend that the presence of various unconscionable provisions or provisions contrary to public policy leads to the conclusion that the arbitration agreement as a whole cannot be enforced. The employer contends that, insofar as there are unconscionable provisions, they should be severed and the rest of the agreement enforced. . . .
The provisions in the . . . [two cases cited by the employer] are different from the one-sided arbitration provision at issue in this case in at least two important respects. First, the one-sidedness in the above two cases were confined to single provisions regarding the rights of the parties after an arbitration award was made, not a provision affecting the scope of the arbitration. As such, the unconscionability could be cured by severing the unlawful provisions. Second, in both cases, the arguments against severance were made by the party that had imposed the unconscionable provision in order to prevent enforcement of an arbitration award against them, and the failure to sever would have had the effect of accomplishing the precise unlawful purpose of that provision the invalidation of the arbitration award. As discussed, courts will generally sever illegal provisions and enforce a contract when nonenforcement will lead to an undeserved benefit or detriment to one of the parties that would not further the interests of justice. In Benyon and Saika, the interests of justice would obviously not have been furthered by nonenforcement. The same considerations are not found in the present case.
The judgment of the Court of Appeal upholding the employer’s petition to compel arbitration is reversed, and the cause is remanded to the Court of Appeal with directions to affirm the judgment of the trial court.
George, C.J., Kennard, J., Baxter, J., and Werdegar, J., concur.