Opinion
NOT TO BE PUBLISHED
APPEAL and cross-appeal from an order of the Superior Court of San Diego County, Super. Ct. No. 862057, Ronald S. Prager, Judge.
HALLER, J.
Mary Pronovost filed a wrongful termination action against her former employer, Aurora Loan Services, Inc. (Aurora) and several related individuals and entities. Aurora responded by moving to compel arbitration based on an arbitration provision in Pronovost's employment application that she filled out after verbally accepting Aurora's job offer. The trial court denied Aurora's motion to compel arbitration, finding the arbitration provision was procedurally and substantively unconscionable under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). We affirm.
Based on our affirmance, we do not reach Pronovost's cross-appeal challenging Aurora's standing to bring a motion to compel arbitration in its capacity as a limited liability company. For purposes of this opinion, our reference to "Aurora" includes the entity in any of its business forms.
FACTUAL AND PROCEDURAL BACKGROUND
Pronovost brought a wrongful termination action against Aurora. In response, Aurora moved to compel arbitration based on an arbitration provision on the back of an employment application signed by Pronovost.
Pronovost opposed the motion, arguing that she was not bound by the arbitration provision because it was procedurally and substantively unconscionable under Armendariz, supra, 24 Cal.4th 83. She claimed the arbitration provision was not mutual and she was not given an opportunity to negotiate the terms of the arbitration agreement.
In support of these contentions, Pronovost directed the court to the placement of the arbitration provision in the employment application. The front of the application form asks for the employee's identifying information, prior employment experience, and other routine background information. The back of the application form contains two parts. The top half contains 10 single-spaced paragraphs asking various standard employment application questions, such as whether the employee has ever been convicted of a criminal offense or involved in a lawsuit. The bottom half is entitled "Representation by Applicant," and contains eight single-spaced paragraphs in small print (approximately 9-point type). Most of the paragraphs relate to the application process. However, the last paragraph pertains to arbitration and states:
"I hereby agree that any controversy arising out of or in connection with my compensation, employment or termination of employment with Aurora Loan Services Inc. or any of its affiliated companies, shall be submitted to arbitration before the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc. or the American Stock Exchange Inc. and be resolved in accordance with the rules, then in effect, of such entities. In the event I fail to abide by these terms, this section shall in no way limit or impair the Firm's other legal rights, including the right to enforce said provisions in a court of competent jurisdiction. This provision applies (but is not limited) to any claims or actions under Title VII, the ADA, the ADEA or any other federal, state or local discrimination laws."
Pronovost filled out the entire application and signed the application form on the bottom of the back page (below the arbitration provision). There was no signature line for the employer, and Aurora did not sign the form.
Pronovost also submitted her declaration to explain the context in which she signed the employment application. She stated that in October 2002, a recruiting firm contacted her regarding a senior vice president position in Aurora's subprime loan sales division. After interviewing Pronovost, Aurora's executive vice president, Jeff Schaefer, telephoned Pronovost and offered her the job. Pronovost accepted the offer. Schaefer then told Pronovost "that a package would be sent . . . containing (1) an offer letter, spelling out the terms of [her] contract with Aurora . . ., and (2) a standard employment application that had to be filled out for human resources purposes." Schaefer told Pronovost "to fill out the employment application and sign both documents and return them to Aurora, immediately, as they wanted [her] to start as soon as possible." Pronovost said "I was not given the option of not completing any part of the employment application, there was no discussion or negotiation as to any of the pre-printed terms and conditions on the back of the employment application. At Mr. Schaefer's request, I signed and returned the papers to Aurora as soon as I received them."
In reply, Aurora asserted that the arbitration provision was not substantively unconscionable because both parties were equally bound to arbitrate disputes. Aurora additionally denied that the provision was procedurally unconscionable, emphasizing that Pronovost was a sophisticated job applicant, who had ample time to object to the terms in the employment application. Aurora presented Schaefer's supporting declaration, which stated in relevant part: "In December 2002, I was contacted by a professional recruiter . . . regarding [Pronovost] . . . for the position of Sr. Vice-President of a start-up territory in Aurora's Subprime Sales Division. . . . I negotiated the terms of Ms. Pronovost's contract with . . . the recruiter. [¶] . . . On or about December 19, 2002, . . . Human Resources sent on my behalf an offer letter to Ms. Pronovost indicating the terms of her employment. . . . [¶] . . . Ms. Pronovost was also sent an employment application which included an arbitration agreement . . . . At no time after the offer letter was sent to Ms. Pronovost and before she commenced her employment with Aurora on January 3, 2003, did Ms. Pronovost ever mention any concerns to me about the terms of the Arbitration Agreement."
The December 19 letter referred to in Schaefer's declaration begins: "It is my pleasure to offer you the position of Senior Vice President, Sub Prime Sales West, at [Aurora] . . . ." The letter then identifies the "major components of the compensation package and benefits for this position," which include base salary, bonuses, benefits, vacation, start date, and Pronovost's agreement to security checks and representation that she is not bound by an inconsistent agreement. The arbitration provision was not mentioned in this letter. On December 21, Pronovost signed both the offer letter and application form, and mailed them to Aurora.
After considering the declarations, documentary evidence, and the parties' arguments, the trial court denied Aurora's motion to compel, finding the arbitration provision was both procedurally and substantively unconscionable.
With respect to procedural unconscionability, the court stated: "Examining the negotiations between the parties[,] [the court] finds that there was no negotiation on the arbitration provision. Plaintiff was offered and accepted the position pursuant to a telephone conversation where she was informed she would receive documents to fill out and return prior to employment. Plaintiff states that she was told to complete the documents and return [them] immediately in order to start her employment. Plaintiff was sent an employment application/agreement with the arbitration provision along with other documents. Plaintiff filled out the requested information on the application and signed at the bottom. The arbitration provision is in small print in a line of paragraphs at the end of the application. It is essentially hidden in a standard form. Though Defendants assert that Plaintiff made no attempt to discuss the arbitration provision, this does not resolve the issue. Clearly the employer is in a superior position and the employee is the weaker party. Therefore, Plaintiff has demonstrated procedural unconscionability."
With respect to substantive unconscionability, the court stated that the "any controversy" language in the first sentence of the arbitration provision appeared to require both parties to arbitrate their disputes, but the second sentence in the arbitration provision was unfairly one-sided. The court explained: "[U]se of the terms 'other legal rights' implies that there are other legal rights of the employer that are not contemplated in the agreement. These terms imply that the employer has legal rights not available to Plaintiff. In addition, the terms make the agreement clearly one-sided in that it provides legal remedies if Plaintiff fails to submit to arbitration, but there is no mutual enforcement provision should the employer refuse to submit to arbitration." The court further rejected Aurora's argument that severance was an appropriate remedy for the unconscionable arbitration terms.
DISCUSSION
I. Summary of Governing Legal Principles
"California law favors the enforcement of arbitration agreements and any 'doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration. [Citations].' [Citations]." (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 711 (Fitz).) "Nevertheless, pursuant to 'general contract principles,' California courts may invalidate arbitration agreements when they contain provisions that are 'unconscionable . . . .' " (Ibid.; see Civ. Code, § 1670.5.)
The unconscionability doctrine contains two components: procedural and substantive. (Armendariz, supra, 24 Cal.4th at p. 114.) Procedural unconscionability focuses on " ' "oppression" ' or ' "surprise" ' due to unequal bargaining power." (Ibid.) Substantive unconscionability concerns " ' "overly harsh" ' or ' "one-sided results." ' " (Ibid.) A court must find both procedural and substantive elements to support a finding that an arbitration agreement is unconscionable. (Ibid.; Fitz, supra, 118 Cal.App.4th at p. 714.) "But they need not be present in the same degree. 'Essentially a sliding scale is invoked . . . .' [T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." (Ibid.)
The party opposing an arbitration petition has the burden of proving the arbitration provision is unconscionable. (Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1249.) The question of unconscionability presents a mixed question of law and fact. If there is disputed extrinsic evidence (e.g., regarding the circumstances of the contract formation), an appellate court must apply a substantial evidence standard to review the trial court's resolution of those issues. (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 89.) However, if there is no extrinsic evidence or the extrinsic evidence is undisputed, the issue is one of law and the court conducts a de novo review. (Higgins, supra, at p. 1250; Flores v. Transamerica Home First, Inc. (2001) 93 Cal.App.4th 846, 851.)
II. Procedural Unconscionability
" 'Procedural unconscionability' concerns the manner in which the contract was negotiated and the circumstances of the parties at that time." (Kinney v. United Health Care Services, Inc. (1999) 70 Cal.App.4th 1322, 1329; see Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 (Little).) "The oppression component arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party." (Kinney, supra, 70 Cal.App.4th at p. 1329.) The component of surprise arises when the challenged terms are "hidden in a prolix printed form drafted by the party seeking to enforce them." (Ibid.) "The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, ' "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." ' " (Little, supra, 29 Cal.4th at p. 1071; Fitz, supra, 118 Cal.App.4th at p. 713.)
Applying these principles, California courts have frequently held arbitration provisions in employment agreements to be procedurally unconscionable because of the employer's superior bargaining position over an employee. (See, e.g., Little, supra, 29 Cal.4th at p. 1071; Armendariz, supra, 24 Cal.4th at p. 115; Fitz, supra, 118 Cal.App.4th at pp. 721-723; Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 663; McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 91 (McManus).) As our high court has recognized, this is particularly true in the case of a preemployment arbitration contract because the economic pressure on a job applicant makes it unlikely the employee can " 'refuse a job because of an arbitration requirement.' " (Little, supra, 29 Cal.4th at p. 1071, quoting Armendariz, supra, 24 Cal.4th at p. 115.)
Under these authorities, the arbitration provision in this case was procedurally unconscionable. Although Pronovost (through the recruiter) had the opportunity to negotiate the terms of her compensation package and other conditions of her employment, Aurora never mentioned the requirement that Pronovost agree to arbitrate her employment-related claims during these discussions. Instead, Aurora waited until Pronovost had orally accepted the employment offer to send her a standard-looking "employment application," which Aurora vice president Schaefer represented to be a routine document for human resources purposes. Schaefer told Pronovost to return the application "immediately" so she could start her new job. Pronovost had no option but to promptly sign the application if she wanted the job. Aurora also sent Pronovost the December 19 letter summarizing the agreed-upon employment terms, but did not include any reference to an arbitration requirement as one of the these terms. Further, as found by the trial court, the arbitration provision was essentially hidden in the application document. It was not highlighted or specially identified as an arbitration provision, and it was in approximately 9-point type, which makes it very difficult to read without magnification.
Under the circumstances, the arbitration provision was procedurally unconscionable. It was provided on a "take it or leave it" basis, and Pronovost did not have any meaningful opportunity to negotiate the existence or terms of the provision. (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100; McManus, supra, 109 Cal.App.4th at p. 91; see Little, supra, 29 Cal.4th at p. 1071.)
In challenging this conclusion, Aurora focuses on the evidence showing that Pronovost was an experienced salesperson and supervisor. However, as numerous courts have held, the fact the plaintiff is a sophisticated businessperson does not negate a finding that an arbitration agreement was procedurally unconscionable. (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 812 [unconscionability claim upheld, notwithstanding plaintiff's status as "an experienced promoter and producer of musical concerts"]; Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533 [contract determined to be adhesive, despite plaintiff being "a successful and sophisticated corporate executive"]);see also Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1285 [arbitration agreement procedurally unconscionable despite that plaintiff was represented by counsel in the negotiation and execution of the employment agreement].) The fact that Pronovost negotiated, or could have negotiated, other aspects of her employment does not necessarily show she had the power to affect the arbitration requirement. (Nyulassy, supra, 120 Cal.App.4th at p. 1285; Abramson v. Juniper Networks, Inc., supra, 115 Cal.App.4th at pp. 662-663.)
Aurora also contends Pronovost did not meet her burden to show procedural unconscionability because Pronovost did not state in her declaration that she was unaware of the provision or that she had no time to negotiate its provisions. However, the evidence established that Pronovost was required to immediately return the employment application sent by Aurora if she wanted to be hired by the company. The trial court inferred from this evidence that Pronovost had no real ability or opportunity to negotiate the terms. Substantial evidence supports this finding. Further, even if Pronovost knew about the contract provision, it is well settled that "[w]hen a contract is oppressive, awareness of its terms does not preclude a finding of procedural unconscionability." (Abramson v. Juniper Networks, Inc., supra, 115 Cal.App.4th at p. 663, accord Kinney v. United Health Care Services, Inc., supra, 70 Cal.App.4th at p. 1330.)
Aurora's reliance on Oblix, Inc. v. Winiecki (7th Cir. 2004) 374 F.3d 488 is misplaced. In Oblix, the Seventh Circuit held the district court erred when it ordered discovery on the issue of whether an employment arbitration agreement was unconscionable under California law. (Id. at pp. 490-492.) In so doing, the federal court appeared to question whether Armendariz's application of the unconscionability defense to arbitration agreements is consistent with the Federal Arbitration Act. (Id. at p. 492.) However, the Armendariz court specifically determined that its unconscionability analysis was consistent with federal law because the defense applies generally to all contract provisions under California law (and not just to arbitration agreements). (Armendariz, supra, 24 Cal.4th at p. 114.) As an intermediate appellate court, we are bound to follow the California Supreme Court. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.)
III. Substantive Unconscionability
A procedurally unconscionable arbitration provision is enforceable unless the objecting party also proves it was substantively unconscionable. (Armendariz, supra, 24 Cal.4th at p. 114.) "Substantively unconscionable terms . . . take various forms, but may generally be described as unfairly one-sided." (Little, supra, 29 Cal.4th at p. 1071.) In evaluating this issue, " 'the paramount consideration is mutuality.' " (Nyulassy v. Lockheed Martin Corp., supra, 120 Cal.App.4th at p. 1287.) An arbitration agreement 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." (Armendariz, supra, 24 Cal.4th at p. 120.) "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." (Id. at p. 118.)
In this case, the arbitration provision lacked sufficient mutuality to satisfy a basic fairness test. The provision begins: "I [Pronovost] hereby agree that any controversy . . . shall be submitted to arbitration." (Italics added.) There is no other language in the arbitration provision, or anywhere else in the employment application, that Aurora also agreed to submit its claims to arbitration. Further, Aurora did not sign the application form, nor was the application incorporated into an employment agreement or employment manual or policy. Generally, only a party that signs a contract is bound by the provisions in the agreement. (See Higgins v. Superior Court, supra, 140 Cal.App.4th 1238. There was no other evidence that Aurora intended to be bound by the arbitration provision for its own affirmative claims.
Aurora argues that we should imply that it was equally bound by the arbitration provision, citing several federal cases applying contract law from other jurisdictions in which the courts enforced arbitration provisions in documents signed only by the employee. (See Valdes v. Swift Transportation Co. (S.D. N.Y. 2003) 292 F.Supp.2d 524, 531; O'Neil v. Hilton Head Hosp. (4th Cir. 1997) 115 F.3d 272, 274; Martin v. Vance ( N.C. Ct.App. 1999) 514 S.E.2d 306.) However, the primary legal issue in those cases was whether a contract had been formed at all, i.e., whether there was consideration for the employee's agreement to be bound by the arbitration provision. In this case, Pronovost did not dispute the existence of a contract. Instead, she raised only the issue whether the contract was unconscionable under California law.
Moreover, even assuming we can imply that Aurora agreed to be bound by the arbitration provision for its own claims, the second sentence of the arbitration provision provides Aurora a potential contractual basis to avoid arbitration of these claims. The second sentence states: "In the event I fail to abide by these terms, this section shall in no way limit or impair the Firm's other legal rights, including the right to enforce said provisions in a court of competent jurisdiction." This sentence expressly provides rights to Aurora that it does not provide to Pronovost, i.e., only the Firm (Aurora) retains its "other legal rights," including to enforce provisions in court.
Aurora contends this language merely restates its existing right to bring a motion to compel arbitration if Pronovost fails to abide by the arbitration requirement. However, if the provision was to be interpreted in this manner, why would the arbitration agreement merely state that the "Firm" would have this right and not extend this right to Pronovost? The most reasonable answer is either that the "Firm" (Aurora) did not believe it was bound by the arbitration provision (so that it could never violate the "these terms") or that it had certain rights to bring its claims in court that Pronovost would not have. Under either interpretation, the party's arbitration obligations set forth in the provision would not be mutual.
Moreover, applying a plain meaning interpretation to the second sentence, the sentence is not a mere restatement of the parties' existing arbitration rights. Under the sentence, Aurora's right to "enforce said provisions" are triggered by Pronovost's failure to abide by "these terms." To which "terms" and "provisions" does this sentence refer? Because there are no "terms" (plural) pertaining to the arbitration requirement, it is unlikely Aurora was intending to refer solely to the promise to arbitrate. An interpretation that this second sentence applies only when Pronovost fails to arbitrate its claims (and thus is merely a restatement of existing law) is inconsistent with the general rule that contracts "are to be construed to avoid rendering terms surplusage." (Farmers Ins. Exchange v. Knopp (1996) 50 Cal.App.4th 1415, 1421.) A more reasonable interpretation is that the phrases "these terms" and "said provisions" refer to the terms and provisions set forth in the entire employment application—and not merely to the first sentence of the arbitration provision. Read in this manner, Aurora was essentially maintaining its right to bring any and all of its own claims against Pronovost in a "court of competent jurisdiction" if Pronovost breached any provision of the employment application.
In construing the arbitration provision in this manner, we emphasize that it is not our task in this appeal to conclusively determine the precise meaning of the provision. The critical point is that the arbitration clause is subject to various reasonable meanings and the defendant, as the party with superior bargaining power, may enforce a provision only if it is reasonably mutual. If the mutuality of an arbitration provision cannot be established unless a court must make numerous leaps of logic through implications and assumptions, we cannot conclude it is a fair and mutual provision.
Additionally, our conclusion is unaffected by the fact that Aurora now agrees that the arbitration provision binds it to arbitration for all of its affirmative claims. As the Armendariz court stated, "whether an employer is willing, now that the employment relationship has ended, to allow the arbitration provision to be mutually applicable, or to encompass the full range of remedies, does not change the fact that the arbitration agreement as written is unconscionable and contrary to public policy. Such a willingness '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.' " (Armendariz, supra, 24 Cal.4th at p. 125.)
Because the manner in which the arbitration provision was essentially hidden in a routine employment application after the substantive terms of the contract had been negotiated, there was substantial procedural unconscionability in this case. Thus, under the California Supreme Court's sliding scale approach, Pronovost was required only to make a minimal showing of the agreement's substantive unconscionability. (Armendariz, supra, 24 Cal.4th at p. 114.) Pronovost has made this showing. The arbitration provision drafted by Aurora was phrased in such a way that it appears on its face to be one-sided. Nowhere does the contract require Aurora to arbitrate its claims. Aurora did not sign the agreement, and there is no language that Aurora, in addition to Pronovost, "agree[d]" to submit all of its claims to arbitration. The arbitration provision expressly carved out "other legal rights" that only Aurora may enforce "in a court of competent jurisdiction." Aurora drafted the language and could have easily avoided these pitfalls.
IV. Severance
Aurora alternatively contends the trial court erred in refusing to sever the unconscionable portion of the arbitration provision.
The trial court's ruling regarding the severability of a contractual provision is subject to the abuse of discretion standard of review. (See Armendariz, supra, 24 Cal.4th at pp. 124-125; see also Civ. Code, §§ 1599, 1670.5.) "The overarching inquiry is whether ' "the interests of justice . . . would be furthered" ' by severance." (Armendariz, supra, at p. 124.) "[C]ourts 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." (Id. at p. 127.)
In this case, the trial court did not abuse its discretion in refusing to sever the arbitration provision. The entire provision reflected a lack of mutuality. To make the contract mutual, we would have to reform the provision by adding language making clear that Aurora is equally bound to arbitrate its claims. This we have no power to do. (See Armendariz, supra, 24 Cal.4th at pp. 124-125 [a court must void the entire agreement if it can only be cured through reformation and augmentation].)
DISPOSITION
Order affirmed. Aurora to bear Pronovost's costs on appeal.
WE CONCUR: NARES, Acting P. J., McDONALD, J.