STIRLEN v. SUPERCUTS, INC. Docket No. A070573.
51 Cal.App.4th 1519 (1997)
WILLIAM N. STIRLEN, Plaintiff and Respondent, v. SUPERCUTS, INC., et al., Defendants and Appellants.
Court of Appeals of California, First District, Division Two.
January 9, 1997.
Daniel J. Herling for Defendants and Appellants.
Kathleen M. Lucas and David S. Schwartz for Plaintiff and Respondent.
The San Francisco Superior Court refused to enforce a compulsory arbitration clause of an employment contract on the grounds it
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 demurred to all causes of action except the first, pertaining to the validity of the arbitration clause, and the fifth, alleging violation of Labor Code section 970. On May 10, 1995, the superior court sustained the demurrer without leave to amend with respect to the sixth and seventh causes of action for breach of contract and the implied covenant. The court overruled the demurrer with respect to the causes of action for wrongful termination, defamation, and intentional misrepresentation.
On April 21, 1995, while the demurrer was pending, 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).)
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.
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
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 [181 Cal.Rptr. 530].)
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 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
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
In 1979, after initiation of the trial proceedings in Scissor-Tail, the Legislature enacted Civil Code section 1670.5, and thereby adopted the doctrine
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 [216 Cal.Rptr. 345, 702 P.2d 503], where the court observed that "[b]oth pathways should lead to the same result." (Id., at p. 925, fn. 9.)
Substantive unconscionability is less easily explained. "Cases have talked in terms of `overly harsh' or `one-sided' results. [Citations.] 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.' [citation], which is only to say that substantive unconscionability must be evaluated as of the time the contract was made. [Citation.] 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. [Citations.] 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. [Citation.]" (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. (California Grocers Assn. v. Bank of America, supra, 22 Cal. App.4th at p. 214.) We instead reverted to the traditional standard of unconscionability — contract terms so one-sided as to "shock the conscience." (Ibid.; accord, American Software Inc. v. Ali (1996) 46 Cal.App.4th 1386 [54 Cal.Rptr.2d 477].)
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
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, quoting Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694 [10 Cal.Rptr. 781], opn. by Tobriner, J.)
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.)
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.
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
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
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.
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."
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
Further, except in extraordinary circumstances, parties who submit a dispute to private arbitration also give up their right to review of an adverse decision. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 32 [10 Cal.Rptr.2d 183, 832 P.2d 899]; Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th 362, 375; Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269 [52 Cal.Rptr.2d 115, 914 P.2d 193].) 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. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 28; see also Comment, Contracting Employment Disputes Out of the Jury System: An Analysis of the Implementation of Binding Arbitration in the Non-Union Workplace and Proposals to Reduce the Harsh Effects of a Non-Appealable Award (1995) 22 Pepperdine L.Rev. 1485; Commonwealth Coatings Corp. v. Continental Casualty Co. (1968) 393 U.S. 145, 148-149 [21 L.Ed.2d 301, 304-305, 89 S.Ct. 337] [observing that arbitration may require greater oversight than judicial proceedings].)
Supercuts relies on Grubb & Ellis Co. v. Bello (1993) 19 Cal.App.4th 231, 238 [23 Cal.Rptr.2d 281] 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
To the extent Grubb & Ellis suggests mutuality of arbitral obligation is not required,
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
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
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.
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; and this period "shall not be subject to tolling, equitable or otherwise."
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 [121 App.D.C. 315, 18 A.L.R.3d 1297].)
Section 2 of the FAA states that a "written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or submission ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2, italics added.)
As it is undisputed Stirlen's employment related to interstate commerce, the sole federal question is whether the entire arbitration clause may be invalidated under the state doctrine of unconscionability without offense to the FAA. The answer requires a brief discourse on the purpose of that federal statute.
State laws held preempted by the FAA have been those which in some measure reflect the traditional antiarbitration bias. (See, e.g., Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. ___ [134 L.Ed.2d 902, 116 S.Ct. 1652]; Allied-Bruce Terminix Cos. v. Dobson, supra, 513 U.S. 265.) By and large, the laws of this state do not fit this description.
Though application of particular California statutes has been found to conflict with the proarbitration policy of the FAA and to be preempted (see,
Arbitration is not only legislatively endorsed but "judicially favored" in this state (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 707 [131 Cal.Rptr. 882, 552 P.2d 1178]), where it is seen "as an economical, efficient alternative to traditional litigation in law courts. [Citations.] And given its favored status, [California] courts `indulge' every `intendment' to implement and give effect to arbitration proceedings. [Citations.]" (Saika v. Gold, supra, 49 Cal.App.4th 1074, 1076.)
It is an interesting question whether, as applied to an agreement to arbitrate, Civil Code section 1668's proscription of contracts designed "to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law" may be inconsistent with the underlying policy of the FAA,
In any case, as we have said, it is unnecessary for us to decide whether the FAA precludes the use of Civil Code section 1668 to invalidate an arbitration agreement as against public policy. Even if we were persuaded the FAA permits parties to an arbitration agreement to do that which section 1668 prohibits (and we are not) the restriction in this case would remain pertinent to the question of unconscionability, because it is so one-sided. The restriction on employee remedies (and concomitant enlargement of employer remedies) is simply one of the many bases of the finding below of unconscionability.
The FAA was clearly not designed to save an arbitration agreement as egregiously one-sided as the one before us, which would not survive scrutiny under legal or equitable principles applicable in almost every American jurisdiction. It must be kept in mind that the Uniform Commercial Code doctrine of unconscionability codified by Civil Code section 1670.5 is not unique to California but "has long been adopted by the majority of states." (IMO Development Corp. v. Dow Corning Corp., supra, 135 Cal.App.3d 451, 459.) Indeed, the doctrine had deep roots in Anglo-American jurisprudence long before it was made a part of the Uniform Commercial Code (See, e.g., Hume v. United States (1889) 132 U.S. 406, 411 [33 L.Ed. 393, 395-396, 10 S.Ct. 134], quoting Earl of Chesterfield v. Janssen, 2 Ves. Sen. 125, 155, 28 Eng. Rep. 82, 100 (1750 Ch.); Rest. 2d Contracts § 208, com. b, pp. 107-108.; 1 Farnsworth on Contracts, supra, § 4.27 at pp. 490-495.) State court application of the doctrine to invalidate arbitration agreements therefore would not "encourage and reward forum shopping," which would be of legitimate federal concern. (Southland Corp. v. Keating, supra, 465 U.S. 1, 15 [79 L.Ed.2d 1, 15].)
There is no shortage of pertinent cases holding that the FAA is not offended by the refusal to enforce an arbitration agreement under state
In Chase v. Blue Cross of California (1996) 42 Cal.App.4th 1142 [50 Cal.Rptr.2d 178], the insurer argued that state law calling for the forfeiture of the right to arbitration if the insurer breaches the covenant of good faith and fair dealing is preempted by the FAA. The Court of Appeal disagreed, pointing out that the covenant of good faith and fair dealing is implied "in every contract in California" and "can result in the revocation of any contract" (id., at p. 1159), not just arbitration contracts. Thus, because it is "based upon a general contract principle," the court declared that denial of a motion to compel arbitration on that ground does not conflict with the FAA. If the FAA permits an arbitration agreement to be invalidated under our covenant of good faith and fair dealing, no reason appears why the federal statute should not permit such an agreement to be invalidated under our doctrine of unconscionability.
Hull v. Norcom, Inc., supra, 750 F.2d 1547, which was relied upon in Chase, supra, has particular relevance to the instant case, because it indicates that an arbitration clause in an employment contract similar in some respects to that before us may be found unenforceable as too one-sided under state contract law requiring mutuality of obligation. The arbitration clause of the contract at issue in Hull compelled both parties to submit disputes arising out of the agreement to binding arbitration. However, another provision of the contract rendered this mutual obligation illusory, because it granted the employer the unilateral right to a judicial forum if the employee breached confidentiality and noncompetition provisions in the employment contract,
Cases holding that federal law bars application of the doctrine of unconscionability or other state contract laws to invalidate an arbitration agreement are all different from this case in one or more significant particulars.
Dryer v. Los Angeles Rams, supra, 40 Cal.3d 406 involved an employment contract with a standard provision calling for binding arbitration under the terms of the applicable collective bargaining agreement between the players' union and management of the National Football League. A clause permitting the league commissioner to remove from the grievance and arbitration process any dispute involving the "integrity" of or "public confidence in" professional football was found unconscionable by the trial court. The Supreme Court reversed on two grounds. First, the court explained that the collective bargaining agreement was subject to section 301(a) of the Labor Management Relations Act (LMRA) (29 U.S.C. § 185(a)), which "appears to limit a court's inquiry to a few basic questions concerning arbitrability of the dispute and defenses, if any, based on allegations of a lack of fair representation." (40 Cal.3d at p. 412.) The court found that the principles of unconscionability set forth in Scissor-Tail, supra, was incompatible with "national labor policy" when "applied in the context of a motion to compel arbitration under a provision of a collective bargaining agreement subject to section 301(a) [of the LMRA]." (Ibid.) There is no similar incompatibility in this case, as the trial court's finding of unconscionability offends neither the LMRA nor any other substantive federal law. The second basis of the reversal in Dyer was that, entirely aside from federal labor law, the provision of the agreement at issue was not unconscionable to begin with. The Supreme Court found that the trial court improperly "invalidated an entire arbitration procedure because of a purely speculative possibility that the commissioner might have the power, at some point, to withdraw the dispute from the normal arbitration process." (Id., at p. 417.) The finding of unconscionability in the present case is not similarly speculative.
Thomas v. Perry (1988) 200 Cal.App.3d 510 [246 Cal.Rptr. 156] was decided on remand after reversal by the United States Supreme Court in
The many state and federal cases pertaining to arbitration under rules of the New York Stock Exchange (NYSE) or the National Association of Securities Dealers (NASD) are distinguishable for a similar reason. Cohen v. Wedbush, Noble, Cook, Inc. (9th Cir.1988) 841 F.2d 282, is typical of such cases. There the Ninth Circuit considered the enforceability of an agreement to arbitrate claims arising out of a stock margin purchase agreement. The plaintiffs objected to the trial court's order compelling arbitration on the ground, inter alia, "that the arbitration clause is unenforceable as an unconscionable provision of a contract of adhesion." (Id., at p. 285.) This claim was based on two California cases arising out of challenges to the methods used by stockbrokers to calculate interest owed them by their clients. (Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1986) 183 Cal.App.3d 1097 [228 Cal.Rptr. 345] and Lewis v. Prudential-Bache Securities, Inc. (1986) 179 Cal.App.3d 935 [225 Cal.Rptr. 69].) The California courts held in these cases that arbitration before the NYSE or NASD does not "`meet the level of integrity requisite to withstand a challenge of unconscionability,' 179 Cal. App.3d at 944-45 ..., because the challenged practices were virtually universal among securities brokerage firms, and thus any arbitration panel selected by the securities industry itself would be `presumptive[ly] bias[ed].' Id. at 944." (Cohen v. Wedbush, Noble, Cooke, Inc., supra, at p. 285.) The Ninth Circuit disagreed "with the conclusion of the California courts that the doctrine of unconscionability is applicable under these circumstances." (Id., at p. 286, italics added.) The most pertinent "circumstance" was that "the Securities and Exchange Commission has virtually plenary authority over the arbitration procedures adopted by the national securities exchanges and securities associations.... Because Congress has committed to the SEC the task of ensuring that the federal rights established by the Securities Acts are not compromised by inadequate arbitration procedures, we are bound by the Commission's determination that the procedures at issue here are satisfactory. [Citation.] Any contrary holding would frustrate this carefully crafted federal regulatory scheme." (Ibid.) Thus the gravamen of Cohen, which relates more to the Securities Acts than the FAA, is that "agreements
Because the unconscionability of arbitration agreements involving the securities industry has been so heavily litigated in federal courts and raises issues under the securities acts and other substantive federal laws, California courts are now unwilling to impose different criteria of unconscionability in such cases. (See, e.g., Tonetti v. Shirley (1985) 173 Cal.App.3d 1144, 1150-1151 [219 Cal.Rptr. 616]; Lewis v. Prudential-Bache Securities, Inc., supra, 179 Cal.App.3d 935, 941-943; cf. Hope v. Superior Court (1981) 122 Cal.App.3d 147 [175 Cal.Rptr. 851].) This has been particularly true with respect to the question of adhesiveness and the bias of the arbitrator or arbitral body. (See, e.g., Downs v. Prudential-Bache Securities, Inc. (1988) 202 Cal.App.3d 616, 621-622 [248 Cal.Rptr. 734].)
The present case is not analogous to those involving the securities industry. Neither the SEC nor any other federal body regulates the sort of arbitration procedure that is before us in this case or has approved a similar arrangement. On the contrary, the Commission on the Future of Worker-Management Relations, which was appointed by the United States Secretary of Labor to make recommendations regarding certain employment related issues, urges a variety of procedural protections for employees largely missing from Supercuts's standard employment contract,
The FAA does not reflect "a congressional intent to occupy the entire field of arbitration" but preempts state regulation in this area only "to the extent that it `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" (Volt Info. Sciences v. Leland Stanford Jr. U., supra, 489 U.S. 468, 477 [103 L.Ed.2d 488, 498], quoting Hines v. Davidowitz (1941) 312 U.S. 52, 67 [85 L.Ed. 581, 586-587, 61 S.Ct. 399].) Judicial refusal to enforce an arbitration clause clearly unconscionable under a general contract law principle not at all hostile to arbitration presents no obstacle to the objective of the FAA or any other congressional purpose.
For the foregoing reasons, we conclude that the equitable doctrine of unconscionability set forth in Civil Code section 1670.5, which was properly applied in this case, provides "such grounds as exist at law or in equity for the revocation of any contract," within the meaning of section 2 of the FAA, and there is therefore no federal preemption.
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.
On February 10, 1997, the opinion was modified to read as printed above. Appellants' petition for review by the Supreme Court was denied April 16, 1997.
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