Serpa v. California Surety Investigations, Inc.

arises concerning your employment which you and the Company cannot resolve informally and internally, you and the Company agree to submit the dispute (including, but not limited to wage and hour claims and, claims of unlawful discrimination based on race, sex, age, national origin, disability or any other basis prohibited by law), exclusively to binding arbitration before a retired judge. This Arbitration Policy specifically excludes only those claims that are required by law to be heard solely by a public agency such as worker’s compensation. ... H] ... [f]

“You and the Company shall each bear your own costs for legal representation at any such arbitration. The Company will be responsible for all costs associated with the arbitration (with the exception of legal representation). . . .

“You and the Company agree that if any court of competent jurisdiction declares that any part of this Arbitration Policy or the Acknowledgment of Receipt of Arbitration Policy and Agreement to Arbitration, which is being provided to you at the same time, is illegal, invalid or unenforceable, such a declaration will not affect the legality, validity or enforceability of the remaining parts of either document, and the illegal, invalid, or unenforceable part will no longer be part of either document.”^[1]

The second paragraph of page 3 of the handbook, under the heading “Right to Revise,” states, “The Company retains the right to revise, modify, or delete any provision or policy in this Handbook, or the implementation of any provision or policy, except for the policy of at-will employment, at any time.”

c. Acknowledgment of receipt of employee handbook

On the first day of her employment, Serpa also received and signed a document entitled “Acknowledgment of Receipt of Employee Handbook” in which she acknowledged reviewing a copy of the handbook and agreed to abide by the terms and conditions of her employment as stated in the handbook. This acknowledgment form also stated, “I understand that any and all policies or practices [in the handbook] can be changed at any time by employer. Employer reserves the right to change my hours, wages and working conditions at any time. ... I also understand that the employer reserves the right to amend, modify, rescind, delete, supplement or add to the provisions of the Handbook, as it deems appropriate from time to time in its sole discretion.”

3. Serpa’s Opposition to the Motion to Compel Arbitration

Serpa opposed the motion to compel arbitration, asserting any agreement to arbitrate was unconscionable. She argued the agreement to arbitrate was part of an adhesion contract, lacked mutuality of obligation and, because any part of the handbook, including the arbitration policy, could be revised at any time by CSI, was illusory. In addition, Serpa argued the arbitration agreement was substantively unconscionable because it required her to submit to internal grievance procedures before pursuing arbitration, thus giving CSI a “free peek” at her case, and deprived her óf her statutory right under FEHA to recover attorney fees if she prevailed on any of her FEHA claims (Gov. Code, § 12965, subd. (b)).

4. The Trial Court’s Ruling Denying the CSI Parties’ Motion

The trial court denied the CSI parties’ motion to compel arbitration, agreeing with Serpa that the agreement was unconscionable. The court found the agreement to arbitrate, considered alone and on its face, lacked mutuality because it required Serpa to arbitrate her employment-related claims against CSI but did not compel CSI to arbitrate its disputes with Serpa. It also concluded that, while the arbitration policy expressed in the handbook and incorporated by reference into the. agreement to arbitrate appeared to make the facially unilateral agreement to arbitrate bilateral, the bilateral nature of the agreement was actually illusory because CSI could change the arbitration policy as stated in the handbook at its sole discretion and without notice. Finding the offending nature of the agreement could not be severed without rewriting the agreement, the court concluded the agreement was unconscionable and unenforceable.^[2]

DISCUSSION

1. Public Policy in Favor of Arbitration and Standard of Review

There is a strong public policy in favor of arbitration. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187 , 1195 [ 8 Cal.Rptr.3d 517 , 82 P.3d 727 ] [recognizing strong federal and state public policies favoring arbitration]; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 , 9 [ 10 Cal.Rptr.2d 183 , 832 P.2d 899 ]; Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951 , 971-972 [ 64 Cal.Rptr.2d 843 , 938 P.2d 903 ].)

Under both the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) and the California Arbitration Act (CAA; Code Civ. Proc., § 1280 et seq.), arbitration

agreements are valid, irrevocable and enforceable except upon grounds that exist for revocation of the contract generally. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 , 97-99 [ 99 Cal.Rptr.2d 745 , 6 P.3d 669 ] (Armendariz); AT&T Mobility LLC v. Concepcion (2011) 563 U.S._,_[ 179 L.Ed.2d 742 , 131 S.Ct. 1740 , 1746] [under 9 U.S.C. § 2 , part of the FAA, arbitration agreement is valid, irrevocable and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract”]; Code Civ. Proc., §§ 1281 [same], 1281.2, subd. (b) [on petition of party to arbitration agreement to arbitrate controversy with another party to agreement, court must compel arbitration unless grounds exist for revocation of agreement].)^[3]

Like any other contract, an agreement to arbitrate is subject to revocation if the agreement is unconscionable. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US) (2012) 55 Cal.4th 223 , 246-247 [ 145 Cal.Rptr.3d 514 , 282 P.3d 1217 ] (Pinnacle); Armendariz, supra, 24 Cal.4th at p. 98; see Civ. Code, § 1670.5, subd. (a) [“[i]f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result”].)

Absent conflicting extrinsic evidence, the validity of an arbitration clause, including whether it is subject to revocation as unconscionable, is a question of law subject to de novo review. (Pinnacle, supra, 55 Cal.4th at p. 236; Roman v. Superior Court (2009) 172 Cal.App.4th 1462 , 1468-1469 [ 92 Cal.Rptr.3d 153 ] (Roman); Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138 , 1144 [ 140 Cal.Rptr.3d 492 ].)

2. Governing Law on Unconscionability

Unconscionability has both procedural and substantive elements. (Armendariz, supra, 24 Cal.4th at p. 99; Roman, supra, 172 Cal.App.4th at

3. The Trial Court Erred in Concluding the Agreement to Arbitrate Was Unconscionable and Unenforceable

a. Procedural unconscionability

It is well settled that adhesion contracts in the employment context, that is, those contracts offered to employees on a take-it-or-leave-it basis, typically contain some aspects of procedural unconscionability. (See Armendariz, supra, 24 Cal.4th at p. 115 [“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 agreement”]; Little, supra, 29 Cal.4th at p. 1071 [same].)

The instant agreement to arbitrate is no different. It provides that, “[b]y accepting or continuing in employment,” Serpa agrees to the terms of the arbitration agreement. The parties presented neither evidence nor argument that Serpa had any opportunity to negotiate the terms of the agreement. Nonetheless, as we have explained, this adhesive aspect of an agreement is not dispositive. (Roman, supra, 172 Cal.App.4th at p. 1471 & fn. 2.) When, as here, there is no other indication of oppression or surprise, “the degree of procedural unconscionability of an adhesion agreement is low, and the agreement will be enforceable unless the degree of substantive unconscionability is high.” (Ajamian v. CantorC02e, L.P. (2012) 203 Cal.App.4th 771 , 796 [ 137 Cal.Rptr.3d 773 ]; accord, Dotson v. Amgen, Inc., supra, 181 Cal.App.4th at pp. 981-982; see generally Roman, at p. 1470, fn. 2 [“[w]hen bargaining power is not grossly unequal and reasonable alternatives exist, oppression typically inherent in adhesion contracts is minimal”].)^[4]

b. Substantive unconscionability

i. The obligation to arbitrate is mutual

Serpa contends the agreement to arbitrate is one sided because it requires her to submit claims against CSI to arbitration but does not require CSI to arbitrate its claims against her: “I understand and agree that if my employment is terminated or my employment status is otherwise changed or if any other dispute arises concerning my employment . . . , I will submit any such dispute . . . exclusively to binding arbitration . . . .”

Were that the Ml extent of the agreement, we would likely agree it lacked mutuality because it requires Serpa to submit to arbitration “any such dispute[s]” involving her employment without imposing a similar obligation on CSI. (See Armendariz, supra, 24 Cal.4th at p. 117 [arbitration agreement that imposes obligation only on employee to arbitrate employee’s claims lacks mutuality and is unconscionable]; Zullo v. Superior Court (2011) 197 Cal.App.4th 477 , 486 [ 127 Cal.Rptr.3d 461 ].) In this way, this document, at least on its face, is far different from that in Roman, supra, 172 Cal.App.4th 1462 in which we held the words “I agree” did not vitiate an otherwise bilateral obligation to arbitrate “ ‘all disputes and claims that might arise out of my employment.’ ” (Id. at pp. 1466-1467, 1471; see, e.g., Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267 , 1273 [ 16 Cal.Rptr.3d 296 ] [where arbitration obligation was triggered solely by employee’s objection to company’s personnel decision, agreement lacked mutuality]; O’Hare v. Municipal Resource Consultants (2003) 107 Cal.App.4th 267 , 271 [ 132 Cal.Rptr.2d 116 ] [arbitration provision unilateral and unconscionable because language providing “ 'Any claim that you may have arising out of or relating to this Agreement. . . shall be settled by binding arbitration . . . ’ ” imposed obligation to arbitrate only on employee, not employer].)^[5]

However, as the trial court recognized, the agreement’s incorporation of the arbitration policy in the employee handbook (see generally Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co. (1992) 6 Cal.App.4th 1266 , 1271 [ 8 Cal.Rptr.2d 587 ] [“[a]n agreement need not expressly provide for arbitration, but may do so in a secondary document which is incoiporated by reference”]; Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632 , 641 [ 223 Cal.Rptr. 838 ] [same]) salvages the agreement by establishing an unmistakable mutual obligation on the part of CSI and Serpa to arbitrate “any dispute” arising out of her employment. (See Roman, supra, 172 Cal.App.4th at pp. 1467, 1471 [agreement providing “all disputes and claims arising out of’ employment was bilateral because it covered both employer’s and employee’s claims]; McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76 , 100 [ 134 Cal.Rptr.2d 446 ] [agreement to arbitrate “ ‘[a]ll disputes arising out of your employment’ ” created mutual obligation to arbitrate].)

ii. The obligation to arbitrate is not illusory

Serpa agrees the arbitration policy in the handbook establishes a bilateral obligation to arbitrate but insists that mutual obligation is illusory

to modify the terms of the personnel handbook [on written] notice indisputably carries with it the duty to exercise that right fairly and in good faith. [Citation.] So construed, the modification provision does not render the contract illusory.” (Id. at p. 1214.)

Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal.App.4th 1425 [ 140 Cal.Rptr.3d 38 ] (Peleg) is not to the contrary. In Peleg the employee of a department store asserted the arbitration agreement he signed was illusory because the store retained the unilateral right to amend, modify or revoke the agreement on 30 days’ advance written notice, with the change to apply to any unfiled claim. (Id. at p. 1437.) Citing 24 Hour Fitness, the Peleg court observed had the agreement to arbitrate simply authorized the department store to make unilateral modifications, it would not be illusory under California law because the implied covenant of good faith and fair dealing would preclude any change that undermined the employee’s rights. (Peleg, at pp. 1465-1466.) What made the agreement problematic, in the court’s view, was that it expressly applied to unfiled claims, including those that had accrued, thus potentially permitting the employer to modify the agreement retroactively to frustrate the employee’s rights in arbitration. Because the agreement specifically allowed retroactive modifications, the implied covenant could not be used to vary those express contract terms and limit the employee to prospective amendments only. (Id. at p. 1464 [“while the covenant may imply limitations making the use of that right fair and in good faith, it may not give rise to duties or obligations that conflict with the agreement’s express terms”]; see Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342 , 373 [ 6 Cal.Rptr.2d 467 , 826 P.2d 710 ] [“the implied covenant of good faith is read into contracts ‘in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract’s purpose’ ”].) Without the benefit of the implied covenant to rein in and restrict the employer’s otherwise unilateral right to modify the agreement to include unfiled claims, the court held the agreement to arbitrate was illusory and invalid under California law. (Peleg, at pp. 1464-1465.)^[6]

The peculiar issue of retroactivity that concerned the court in Peleg is not present in this case. Thus, we need not consider whether we agree with that court’s implicit conclusion that modifications to arbitration procedures affecting accrued claims would not be subject to the implied covenant of good faith. (See Peleg, supra, 204 Cal.App.4th at pp. 1433, 1465.) Simply stated, under the analyses of both 24 Hour Fitness and Peleg, the implied covenant of good faith and fair dealing is properly applied in this case and saves this

arbitration contract from being illusory. (See 24 Hour Fitness, supra, 66 Cal.App.4th at p. 1214; see generally Civ. Code, § 1643 [if possible without violating the parties’ unambiguous intent, a contract is interpreted so as to make it “lawful, operative, definite, reasonable, and capable of being carried into effect”]; Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665 , 682 [ 108 Cal.Rptr.3d 171 , 229 P.3d 83 ] [whenever possible court interprets contract in manner that is consistent with parties’ intent and renders contract enforceable rather than void].)

Serpa alternatively argues, and the trial court apparently agreed, 24 Hour Fitness is distinguishable because the arbitration provision in that case permitted the employer to modify the handbook’s policies only after giving the employee written notice, while in the instant case the agreement can be modified by CSI to the employee’s detriment without any notice. This characterization of the agreement in 24 Hour Fitness is questionable. No advance notice was required; only written notice after the fact. (See 24 Hour Fitness, supra, 66 Cal.App.4th at p. 1213 [Nautilus “reserves the right to change any provision in this Handbook at any time for any reason without advance notice” provided changes are made in a writing provided to employee].) In any event, when, as here, the agreement is silent as to notice, implied in the unilateral right to modify is the accompanying obligation to do so upon reasonable and fair notice. (See, e.g., Asmus v. Pacific Bell, supra, 23 Cal.4th at p. 16; see generally Guz v. Bechtel National, Inc., supra, 24 Cal.4th at p. 334.) In sum, this is an even stronger case than 24 Hour Fitness to conclude the implied covenant of good faith and fair dealing limits the employer’s authority to unilaterally modify the arbitration agreement and saves that agreement from being illusory and thus unconscionable.^[7]

discrimination. For that reason, the provision limiting the recovery of attorney fees is unenforceable. (Armendariz, supra, 24 Cal.4th at p. 124.) That determination, however, does not vitiate the underlying agreement to arbitrate. When, as here, the arbitration agreement is not otherwise permeated by unconscionability, the offending provision, which is plainly collateral to the main purpose of the contract, is properly severed and the remainder of the contract enforced. (See Roman, supra, 172 Cal.App.4th at p. 1462; Armendariz, at p. 122 [although Civ. Code, § 1670.5 gives trial court some discretion whether to sever the unconscionable provision or refuse to enforce entire agreement, it also appears “to contemplate the latter course only when an agreement is ‘permeated’ by unconscionability”]; Dotson v. Amgen, Inc., supra, 181 Cal.App.4th at pp. 985-986 [same].)^[8]

iv. Language in the agreement contemplating internal efforts to resolve the dispute before it is submitted to arbitration is not substantively unconscionable

Relying on language in Nyulassy v. Lockheed Martin Corp., supra, 120 Cal.App.4th 1267 , Serpa contends the agreement to arbitrate “requires” her to submit her dispute informally to the company before seeking arbitration and thus unfairly gives the CSI parties a “free peek” at her case. (Id. at pp. 1282-1283 [given unilateral nature of agreement requiring only employee to arbitrate his claims, the additional requirement that employee submit claim to supervisors before seeking to arbitrate claims, while seemingly laudable effort at informal resolution, was actually just an effort to obtain a “free peek” at employee’s case].) The agreement states that if the dispute “cannot be resolved through informal internal efforts, I will submit” the claim to binding arbitration. “Informal internal efforts” are not defined in the agreement or the handbook, and there is no reasonable basis to infer the agreement requires anything other than some informal notice of a grievance before proceeding to arbitration. This case is thus far different from the provisions in Nyulassy, which the court found unacceptable primarily because it was yet another employer-based mechanism in an agreement permeated by unilateral provisions favoring the employer. (Id. at p. 1283.) Moreover, to the extent the cited language is anything other than precatory, a requirement that internal grievance procedures be exhausted before proceeding to arbitration is both reasonable and laudable in an agreement containing a mutual obligation to arbitrate. It plainly does not “shock the conscience” so as to vitiate the arbitration agreement.