GONZALEZ v. HUGHES AIRCRAFT EMPLOYEES FEDERAL CREDIT UNION

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Court of Appeal, Second District, Division 6, California.

Diana GONZALEZ, Plaintiff and Respondent, v. HUGHES AIRCRAFT EMPLOYEES FEDERAL CREDIT UNION et al., Defendants and Appellants.

No. CIV B119278.

Decided: February 23, 1999

Anderson, McPharlin & Conners, Paul F. Schimley, Los Angeles, Brian S. Mizell and Michael J. Kowalski, Riverside, for Defendants and Appellants. Anthony Igwemezie, Beverly Hills, and Michael C. Martinez for Plaintiff and Respondent.

A large company has a form agreement requiring its employees to submit employee disputes to binding arbitration within 20 days after a decision by the company's internal grievance procedure.   The employee is permitted only limited discovery.   The company, however, has no such limitations and may seek judicial relief from claims it has against its employees.

Here we conclude such an agreement to arbitrate is unenforceable.

Hughes Electronics Corporation, Hughes Aircraft Employees Federal Credit Union (Hughes), Robert Krupica (Krupica), Yulandria Pearson and Gena Vincent appeal from the order of the trial court denying their petition to compel arbitration of the complaint of respondent Diana Gonzalez (Gonzalez) for wrongful discharge due to sexual harassment and national origin.   We affirm the order which denies the petition to compel arbitration.

FACTS

Hughes hired Gonzalez as a customer service representative in April 1994.   About two months later, Hughes required her to sign its standardized, form agreement requiring her to submit to arbitration of employment disputes.   After obtaining a right to sue notice from the Department of Fair Employment and Housing, Gonzalez filed her first amended complaint in 1997 without submitting to the formal internal grievance process promulgated by Hughes (the employee problem resolution procedure, hereafter EPRP).   Gonzalez alleges that appellants constructively discharged her by harassing her and discriminating against her because of her gender and national origin.

The arbitration procedure states, in pertinent part, “Effective January 1, 1993 all new hires of [Hughes] will be required to execute a Mutual Agreement to Arbitrate Claims as a condition of employment.”   The arbitration agreement states, in pertinent part, “Claims and disputes by employees hired after January 1, 1993 [as here] shall be governed by this Agreement whether or not an EPRP complaint was initiated.”   It also states, “ [A]ny and all employee disputes not resolved internally through the EPRP shall be submitted to final and binding arbitration.”

“The parties agree that this Agreement does not cover claims for Workers' Compensation and Unemployment Compensation benefits or disputes covered by a collective bargaining agreement.   Also not covered are claims by the Company for injunctive and/or equitable relief for unfair labor practices ․ or unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as to which I understand and agree that the Company may seek and obtain relief from a court or agency of competent jurisdiction.”

The arbitration procedure requires, in pertinent part, “Employees must give written notice to [Hughes] of any claim to be arbitrated.   An Employee must give notice of any claim within twenty (20) working days of the decision date by the EPRP Consensus Review Board (CRB), and within any applicable federal or state statute of limitations.   Late claims shall be deemed void, waived and not arbitrable․ An Employee's filing of an administrative agency charge of discrimination shall not affect this Arbitration Procedure, or the running of the limitation periods specified herein.”

Appellants moved to compel arbitration of the dispute.   Gonzalez objected to the motion on the grounds that the arbitration agreement is unconscionable and unenforceable.   The trial court found that the arbitration agreement is unreasonable, inequitable, unconscionable and unenforceable.   It denied appellants' petition to compel arbitration.   This appeal ensued.   (Code Civ. Proc., §§ 1294, 1294.2.) 1

DISCUSSION

It is the province of the trial court to determine whether a valid and enforceable arbitration agreement exists between the parties.  (§§ 1281, 1281.2, subd. (b);  Green v. Mt. Diablo Hospital Dist. (1989) 207 Cal.App.3d 63, 69-70, 254 Cal.Rptr. 689.)   The trial court must deny a petition to compel arbitration if the agreement is revocable due to oppressive or unconscionable provisions.  (§§ 1281, 1281.2, subd. (b);  Civ.Code, § 1670.5;  see Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 824-826, 171 Cal.Rptr. 604, 623 P.2d 165.)

The court considers general contract principles to determine whether the agreement is unconscionable and unenforceable.  (Baker v. Aubry (1989) 216 Cal.App.3d 1259, 1263, 265 Cal.Rptr. 381.)   Under the Federal Arbitration Act (FAA), courts may find such agreements unenforceable “upon such grounds as exist at law or equity for revocation of any contract.”  (9 U.S.C. § 2.)   However, the Ninth Circuit Federal Court of Appeals recently held that “the FAA does not apply to labor or employment contracts.”  (Craft v. Campbell Soup Company (9th Cir.1998) 161 F.3d 1199, 1206 [dismissing company appeal of denial of its motion for summary judgment for lack of jurisdiction as to employee claim of racial discrimination and harassment].)   We construe the terms of the arbitration agreement under state law, and “[t]he trial court's underlying factual findings will be set aside only if clearly erroneous.”  (Arista Films, Inc. v. Gilford Securities, Inc. (1996) 43 Cal.App.4th 495, 501-502, 51 Cal.Rptr.2d 35.)

An arbitration agreement is unenforceable if it is procedurally and substantively unconscionable.   Procedural unconscionability concerns inability to negotiate the terms of the contract.  (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1531-1532, 60 Cal.Rptr.2d 138.)   This occurs when one side has no real chance to negotiate the terms of the contract.   Substantive unconscionability concerns whether the contract imposes unduly harsh or oppressive one-sided terms.  (Ibid.)  Surprise may be an element of unconscionability.   Surprise occurs when terms are hidden within prolix text drafted by the party seeking to enforce it.  (Id., at p. 1532, 60 Cal.Rptr.2d 138.)   Where the contract is oppressive and it either involves surprise or is unjustifiably one-sided, courts refuse to enforce it.  (Id., at pp. 1532-1533, 60 Cal.Rptr.2d 138.)

In Stirlen, Supercuts fired its chief financial officer, Stirlen, because it believed that his accounting analysis led to lower stock earnings.   Supercuts sought to arbitrate the wrongful termination dispute pursuant to its binding arbitration agreement with Stirlen.

The court deemed the Stirlen arbitration agreement to be procedurally unconscionable and unenforceable even though Stirlen was a successful, sophisticated corporate executive whom Supercuts had sought out and hired away from another highly paid position at a major corporation by offering generous bonuses.  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1533-1534, 60 Cal.Rptr.2d 138.)   The court pointed out, “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.”   (Id., at p. 1533, 60 Cal.Rptr.2d 138.)   Even Graham had to sign nonnegotiable union form contracts to bill artists.  (Ibid.)

Here Hughes hired Gonzalez as a customer service representative in April 1994.   It is beyond purview that Gonzalez did not possess the bargaining power of Stirlen, much less Graham.   As in Stirlen, Hughes required Gonzalez and all employees to sign its mutual, standardized, gender-neutral form agreement mandating final and binding arbitration in accordance with company procedures.   Hughes required Gonzalez to sign the form two months after it hired her.   Gonzalez had no realistic opportunity, much less ability, to bargain about the terms of the “agreement.”

Substantively, the Stirlen contract was also unconscionable.   It provided a one-year limitations period to request arbitration, not subject to tolling.   (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1542, 60 Cal.Rptr.2d 138.)   The agreement stated, inter alia, that “failure to timely request arbitration hereunder shall constitute a complete waiver of all rights to raise any claims in any forum, arising out of any dispute described herein.”  (Id., at p. 1529, 60 Cal.Rptr.2d 138.)

Substantive unconscionability pervades the instant agreement.   Unlike the Stirlen agreement, Hughes gave employees only 20 working days to give written notice of any claim for arbitration after decisions of the EPRP review board and any claim must fall within any applicable federal or state statute of limitations.   Like the limitations clause in the Stirlen agreement, “Late claims shall be deemed void, waived and not arbitrable” under Hughes' arbitration procedure.   These are unreasonable and unconscionable provisions.   Hughes could consider employee claims to be void even if they fell within statutory limitations periods.

That Gonzalez bypassed the EPRP does not preclude her from seeking judicial relief.   The agreement conjunctively requires written notice within 20 days of EPRP review board decision and within applicable statutory limitations periods.   Because the agreement is denominated to be mutual and mandatory, Hughes admits that it would maintain the affirmative defense that the 20-day limitations period for written notice to arbitrate applies here.

In Stirlen, only Supercuts could seek judicial relief;  employees were relegated to arbitration.  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1541-1542, 60 Cal.Rptr.2d 138.)   It is true that emergency statutory judicial relief is available to any party compelled to arbitrate a dispute.  (Id., at pp. 1536-1537, 60 Cal.Rptr.2d 138;  § 1281.8, subd. (b).)  But Supercuts did not show that business realities dictated that it be accorded the unilateral unfettered right to judicial relief under its agreement without resort to emergency statutory procedures.   Indeed, the unilateral contractual right to seek judicial relief would not be justifiable even if Supercuts could have shown that its legitimate dispute resolution needs could not always be met in arbitration.  (Stirlen, supra, at p. 1537, 60 Cal.Rptr.2d 138.)   Because Stirlen had to arbitrate his claims but Supercuts could use the judicial system, the arbitration agreement was “ ‘so one-sided as to be unconscionable․’ ”  (Id., at p. 1530, 60 Cal.Rptr.2d 138.)   So it is here.

As in Stirlen, the agreement here permits only Hughes to “seek and obtain relief from a court” as to virtually all important employment matters, but it precludes employees from doing so.   Hughes could use the judicial system when it desired, and avoid it when it was advantageous.   Employees must defend any claims Hughes submitted to a court, but be relegated to the limited rights and relief available in arbitration when making their own claims.   As in Stirlen, “[t]he mandatory arbitration requirement can only realistically be seen as applying primarily if not exclusively to claims arising out of the termination of employment, which are virtually certain to be filed against, not by,” Hughes.  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1540-1541, 60 Cal.Rptr.2d 138.)

In one respect the instant arbitration agreement is not as oppressive as the Stirlen agreement.   It does not limit the employee's remedy to damages as does the Stirlen agreement.   But in another respect, it is more oppressive in that it severely curtails the employee's discovery rights, which are already limited in arbitration.  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1537-1538, 60 Cal.Rptr.2d 138.)   As Stirlen points out, the limited discovery available in arbitration may compromise an employee's ability to prove discrimination.  (Ibid.)

There would be virtually no claims Hughes might have against an employee to which the limited discovery provisions apply.   The instant agreement limits the discovery rights of the parties in arbitration to the deposition “of one individual and any expert witness designated by the other Party.”   In practical terms, this means an employee may obtain additional discovery only where the arbitrator orders “upon a showing of substantial need.”

It is disingenuous of Hughes to argue that the instant arbitration agreement actually permits the employee greater discovery rights than those provided by the Code of Civil Procedure.   Subdivision (a) of section 1283.05 allows one to exercise all discovery rights permitted in civil judicial proceedings without a showing of need, except leave must be granted by the arbitrator to take depositions pursuant to subdivision (e).   In a judicial proceeding under section 94, Gonzalez would be permitted to take one deposition of every adverse party without showing need.

A contract is adhesive if it 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.’ ”  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1533, 60 Cal.Rptr.2d 138, citing cases.)   Unconscionability includes oppression from unequal bargaining power and terms that are unreasonably favorable to one side.  (See Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925, fn. 9, 216 Cal.Rptr. 345, 702 P.2d 503.)   Such an adhesion contract will be denied enforcement if it is unduly oppressive “ ‘even if consistent with the reasonable expectations of the parties.’ ”  (Stirlen, supra, at pp. 1534-1535, 60 Cal.Rptr.2d 138, citing Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 820, 171 Cal.Rptr. 604, 623 P.2d 165.)

Because the arbitration clause in Stirlen “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,” the court had “little difficulty concluding that its terms are ‘so extreme as to appear unconscionable․’ ”  (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1542, 60 Cal.Rptr.2d 138.)   The Stirlen agreement was adhesive, procedurally and substantively unconscionable and revocable.   Gonzalez faces a similarly unconscionable arbitration agreement.

Spinello v. Amblin Entertainment (1994) 29 Cal.App.4th 1390, 34 Cal.Rptr.2d 695 is distinguishable from the instant case.   Spinello, a veteran screenwriter with many industry contacts, desired to have his script reviewed by Amblin.   Amblin responded that it would review the script only if Spinello signed a standard script submission agreement containing an arbitration clause.   Spinello agreed to this, after consulting his agent.

Spinello submitted his script to Amblin for limited production purposes.   Amblin did not employ Spinello and rejected the script.   Spinello proceeded to “pitch” his property to about 70 other producers.   Spinello then sued Amblin, among others, for appropriating his ideas and using them in a new movie.

The circumstances relating to the contract in Spinello were not unconscionable.   Spinello had an agent and access to about 70 other producers, some of whom did not require execution of a submission agreement.  (Spinello v. Amblin Entertainment, supra, 29 Cal.App.4th at pp. 1397-1398, 34 Cal.Rptr.2d 695.)   Spinello had the opportunity to negotiate “and simply failed to do so.”  (Id., at p. 1397, 34 Cal.Rptr.2d 695.)   He was not beholden to a single employer;  no long-term obligation was at stake.

Hughes asserts that because there is a severability clause here, we should excise only the unenforceable provisions.   Because procedural and substantive unconscionability pervade the arbitration contract, it is void and unenforceable.  (§ 1281.2, subd. (b);  also see Jacobson v. Simmons Real Estate (1994) 23 Cal.App.4th 1285, 1294, 28 Cal.Rptr.2d 699, disapproved on other grounds in Trope v. Katz (1995) 11 Cal.4th 274, 292, 45 Cal.Rptr.2d 241, 902 P.2d 259 [courts do not rewrite contracts for parties to make them reasonable].)

We uphold the order of the trial court which denies Hughes' petition to compel arbitration.   Costs are awarded to respondent.

I respectfully dissent.   Arbitration is highly favored as an economical, efficient alternative to traditional litigation.  (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899;  Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal.Rptr. 581, 673 P.2d 251;  Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 707, 131 Cal.Rptr. 882, 552 P.2d 1178.)   Because of its favored status, our “courts will ‘ “indulge every intendment to give effect to such proceedings.” ’  [Citation.]”  (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 9, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

The trial court and the majority denigrate the spirit of these rules and undermine the strong public policy which favors arbitration.   The majority hold that the arbitration agreement is inherently unfair because employee was offered a standardized contract on a take it or leave it basis.   Employee concedes that she entered into a binding arbitration agreement but argues that the agreement shortens the statute of limitations, limits discovery, and preserves the employer's right to seek injunctive relief for unfair labor practices and unfair competition.   Employer has articulated theories that rebut each of employee's contentions.   These issues may be revisited by the arbitrator and any unfairness can be remedied.   The arbitration agreement, a copy of which is attached a Exhibit A, is not unconscionable, or unfair.   Most employer-employee arbitration agreements have similar provisions and are designed to provide a speedy and inexpensive means of dispute resolution.   That does not make the instant agreement unconscionable or unenforceable.   This is especially true where the agreement specifies arbitration by AAA or JAMS.

Citing Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138 (Stirlen ), the majority speculate that some of the arbitration provisions could result in a procedural hardship.   The analogy to Stirlen is tenuous.   There the employment contract contained an arbitration clause that relegated all employee claims to arbitration yet allowed the employer to enforce its claims in court.   It unilaterally restricted discovery and denied significant statutory and common law remedies.  (Id., at pp. 1537-1539, 60 Cal.Rptr.2d 138.)   The arbitration clause provided that the employee could not recover exemplary damages, seek equitable relief under federal law, or be awarded attorney fees, litigation expenses, or costs as the prevailing party.  (Id., at p. 1540, 60 Cal.Rptr.2d 138.)   The Court of Appeal concluded that the arbitration clause was draconian and its terms “ ‘ “so extreme as to appear unconscionable according to the mores and business practices of the time and place.”․’   [Citation.]”  (Id., at p. 1542, 60 Cal.Rptr.2d 138.)

Stirlen is limited to those rare cases where the arbitration agreement is egregious and harsh enough to “shock the conscience.”  (Id., at p. 1532, 60 Cal.Rptr.2d 138;  Armendariz v. Foundation Health Psychcare Services, Inc. (1998) 68 Cal.App.4th 374, 392, 80 Cal.Rptr.2d 255.)  “Here, in contrast, the arbitration clause applies equally to employer and employee;  allows both parties substantially the same array of discovery procedures available in civil actions;  and does not create an imbalance in remedies potentially available to either side.”  (24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1213, 78 Cal.Rptr.2d 533.)

Employee complains that the arbitration agreement was prepared by Hughes and offered to her on a take it or leave it basis.   That, standing alone, does not render it unconscionable.  (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 985, 64 Cal.Rptr.2d 843, 938 P.2d 903;  Turner v. Superior Court (1998) 67 Cal.App.4th 1432, 1438, 80 Cal.Rptr.2d 84.)   Employment contracts with arbitration provisions are typically prepared by the employer and require the parties to share the arbitration costs.  (Ibid.;  Armendariz v. Foundation Health Psychcare Services, Inc., supra, 68 Cal.App.4th 374, 393, 80 Cal.Rptr.2d 255.)

The assertion that the arbitration agreement is unconscionable because employee will not be afforded a jury trial or judicial review of the decision is equally without merit.  “The ‘very essence’ of arbitration is finality.   [Citations.]  By choosing arbitration, parties avoid the palaver of procedural challenges that lend, at least for a time, uncertainty to any judgment rendered in the courts․  ‘ “Conclusiveness is expected;  the essence of the arbitration process is that an arbitral award shall put the dispute to rest.” ’  [Citation.]  Or, to put it another way, a nonfinal arbitration is, in the last analysis, an oxymoron.  [Citation.]”  (Saika v. Gold (1996) 49 Cal.App.4th 1074, 1076, 56 Cal.Rptr.2d 922.)

Assuming there is an unlawful provision of the arbitration agreement the trial court can strike the offending sections of the contract and order the case to arbitration.  (Id., at pp. 1082, 56 Cal.Rptr.2d 922 [clause granting doctor unilateral right to trial de novo stricken].)   Because the trial court did not adhere to the teachings of Moncharsh v. Heily & Blase, supra, 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899, and did not exercise its discretion to strike the offending clauses in the agreement, the judgment should be reversed with the direction to either honor it en toto or excise the harsh portions of the agreement that, in theory, may deny employee a fair arbitration.

Two further observations should be made.   First, the courts should be loathe to, in essence, erase any party's signature to a contract.   Such erasure defeats the entire purpose of the law of contracts, i.e., to protect the reasonable expectations of the parties.  (Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 475, 47 Cal.Rptr.2d 12.)   Until today, the instant employee and the thousands of others who work for Hughes Aircraft reasonably believed that disputes would be decided by AAA or JAMS' arbitration.   Those signatures have also been erased and the price of dispute resolution has just gone up.

Second, where the matter is to be arbitrated by an “in-house” arbitrator, the possible procedural and substantive unfairness may be present.   The same cannot be said for JAMS or AAA arbitration.   If, in fact, this employee was discriminated against on the basis of sex or national origin, the presumption must be that a fair and impartial arbitrator will so find and that an appropriate remedy will be forthcoming.

I would reverse the order denying arbitration.

FOOTNOTES

1.   All statutory references are to the Code of Civil Procedure unless otherwise stated.

GILBERT, Acting P.J.

COFFEE, J., concurs.