Marybeth ARMENDARIZ et al., Plaintiffs and Respondents, v. FOUNDATION HEALTH PSYCHCARE SERVICES, INC., Defendant and Appellant.
Foundation Health Psychcare Services, Inc. (hereafter employer) appeals from an order denying its motion to compel arbitration of the claims asserted by two former female employees, Marybeth Armendariz and Dolores Olague-Rodgers (hereafter plaintiffs) in a complaint for wrongful termination. We sever the remedies' restriction contained in the agreement and reverse.
PROCEDURAL AND FACTUAL BACKGROUND
On April 17, 1997, plaintiffs filed a complaint against employer for wrongful termination of employment, alleging a cause of action for violation of the California Fair Employment and Housing Act (Gov.Code, § 12900 et seq.) and three additional causes of action based on tort and contract theories of recovery. The complaint sought general damages, punitive damages, injunctive relief, and the recovery of attorney's fees and costs of suit. Employer countered by filing a motion for an order to compel arbitration pursuant to Code of Civil Procedure, section 1281.2. The parties submitted declarations in support of, and in opposition to the motion prior to a hearing on September 2, 1997. Relying on Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138, the trial court denied the motion on the ground that the arbitration provision in question was an unconscionable contract of adhesion.1 Employer filed a timely notice of appeal.
The record reveals that in July and August 1995 the employer hired plaintiffs in the “Provider Relations Group” and they were later given supervisory positions with annual salaries of $38,000. On June 20, 1996, they were informed that their positions were “being eliminated” and that they were “being terminated.” During their year of employment, they claim that their supervisors and coworkers engaged in sexually based harassment and discrimination. Plaintiffs alleged that they were “terminated ․ because of their perceived and/or actual sexual orientation (heterosexual).”
Both plaintiffs filled out and signed employment application forms, which included an arbitration clause pertaining to any future claim of wrongful termination. Later, they executed a separate employment arbitration agreement, containing the same arbitration clause.
The clause provided: I agree as a condition of my employment, that in the event my employment is “terminated, and I contend that such termination was wrongful or otherwise in violation of the conditions of employment or was in violation of any express or implied condition, term or covenant of employment, whether founded in fact or in law, including but not limited to the covenant of good faith and fair dealing, or otherwise in violation of any of my rights, I and Employer agree to submit any such matter to binding arbitration pursuant to the provisions of title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280 et seq. or any successor or replacement statutes. I and Employer further expressly agree that in any such arbitration, my exclusive remedies for violation of the terms, conditions or covenants of employment shall be limited to a sum equal to the wages I would have earned from the date of any discharge until the date of the arbitration award. I understand that I shall not be entitled to any other remedy, at law or in equity, including but not limited to reinstatement and/or injunctive relief.”
I. The Policy Favoring Arbitration
The enforceability of pre-employment arbitration agreements is currently the subject of much debate not only in the business and legal communities, but also before various legislative bodies. As an intermediate appellate court, our analysis of the issues raised in this appeal and our conclusion are constrained by statutory provisions and a consistent line of binding case precedent.
The United States Supreme Court has held that “ ‘as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.’ Moses H. Cone Memorial Hospital [v. Mercury Construction Corp.], 460 U.S.  at 24-25 [103 S.Ct. 927, 74 L.Ed.2d 765 (1983)].” (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444.) Our high court also recognizes this policy in favor of arbitration. “Title 9 of the Code of Civil Procedure, as enacted and periodically amended by the Legislature, represents a comprehensive statutory scheme regulating private arbitration in this state. (§ 1280 et seq.) Through this detailed statutory scheme, the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.’ [Citations.] Consequently, courts will ‘ “indulge every intendment to give effect to such proceedings.” ’ [Citations.]” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899.)
Plaintiffs recognize that the overwhelming weight of both state and federal cases requires the arbitration of claims such as theirs, but “contend that this policy is misguided.” Our role is not to establish policy in this area of the law. That is a task left to our legislative bodies and higher courts. Guided by the strong public policy favoring arbitration, we examine the enforceability of the arbitration agreement in light of federal and state law.
II. Arbitrability of Statutory Claims
The issues raised by this appeal arise from developments in the law of arbitration following the United States Supreme Court decisions in Southland Corp. v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 and Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (Gilmer ). We will briefly review these developments to better identify the issues in the case.
For decades after its enactment in 1925, the Federal Arbitration Act (FAA) was regarded as a procedural statute applying in federal courts. (9 U.S.C.A. § 1 et seq.) A shift in interpretation of the FAA was signaled by Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765. While ruling on the stay of a diversity proceeding to compel arbitration, the United States Supreme Court construed the FAA as creating “a body of federal substantive law of arbitrability,” applicable to proceedings in state court. (Id. at p. 24, 103 S.Ct. 927.) The issue was squarely raised the next year in Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, which adopted the Moses H. Cone analysis, holding that the FAA invalidated a California statute barring arbitration of certain statutory claims.2
The legislative purpose of the FAA “was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts.” (Gilmer, supra, 500 U.S. at p. 24, 111 S.Ct. 1647; Dean Witter Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 219, 105 S.Ct. 1238, 84 L.Ed.2d 158.) To this end, the FAA affirms the general enforceability of arbitration agreements, subject only to traditional equitable and legal defenses applying to “any contract.” In pertinent part, section 2 of the FAA provides: “A written provision in ․ a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, ․ shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 3 (9 U.S.C.A. § 2.)
The FAA thus serves “ ‘to foreclose state legislative attempts to undercut the enforceability of arbitration agreements.’ [Citation.]” (Perry v. Thomas (1987) 482 U.S. 483, 489, 107 S.Ct. 2520, 96 L.Ed.2d 426.) In Southland and Perry, the court invalidated state statutes that required the judicial resolution of certain claims without regard to the existence of a private agreement to arbitrate. (Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1; Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426.) In Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902, the court struck down a Montana statute that required an enforceable arbitration clause to be accompanied by a statutory notice.
“The effect of [section 2 of the FAA] is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.” (Moses H. Cone Hospital v. Mercury Constr. Corp., supra, 460 U.S. at p. 24.) In this respect, the FAA “is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction․ Nevertheless, although enforcement of the Act is left in large part to the state courts, it nevertheless represents federal policy to be vindicated by the federal courts where otherwise appropriate.” (Id. at p. 25, fn. 32, 103 S.Ct. 927.)
The FAA, however, does not “reflect a congressional intent to occupy the entire field of arbitration.” (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488.) In Volt, the Supreme Court upheld a provision of the California Arbitration Act (Code Civ. Proc., § 1280 et seq.) relating to the stay of arbitration, even though it had no counterpart in the FAA. “Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA․” (Volt Info. Sciences v. Leland Stanford Jr. U., supra, at p. 479, 109 S.Ct. 1248.)
Furthermore, under the last clause of section 2, “[s]tates may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ [Citation.]” (Allied-Bruce Terminix Cos. v. Dobson, supra, 513 U.S. at p. 281, 115 S.Ct. 834.) “Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [section] 2.” (Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. at p. 687, 116 S.Ct. 1652.)
In Perry v. Thomas, supra, 482 U.S. at p. 492, fn. 9, 107 S.Ct. 2520, the United States Supreme Court explained, “An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, [citation], ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ [Citation.] Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of [section] 2. [Citations.] A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold today the state legislature cannot.” 4
In Gilmer, supra, 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26, the Supreme Court held that, under the FAA, an employee can enter into a binding arbitration agreement with an employer embracing claims under the Age Discrimination in Employment Act of 1967 (ADEA). (29 U.S.C.A. § 621 et seq.) The court had previously held in Alexander v. Gardner-Denver Co. (1974) 415 U.S. 36, 94 S.Ct. 1011, 39 L.Ed.2d 147 that a union employee who pursued a grievance under the nondiscrimination clause of a collective bargaining agreement was not precluded from later bringing an action under title VII of the Civil Rights Act of 1964. The Gilmer court confined Gardner-Denver to the collective bargaining context, opening the door to the enforcement of agreements for the mandatory arbitration of employee statutory claims. (Gilmer, supra, 500 U.S. at pp. 34-35, 111 S.Ct. 1647.)
The plaintiff in Gilmer was a financial executive who was required to register with the New York Stock Exchange as a condition of his employment. His registration application included a broadly worded agreement to arbitrate disputes arising from termination of his employment pursuant to the rules of the Exchange. After being discharged at age 62, he brought an action against his employer under the ADEA. Enforcing the arbitration agreement with respect to the ADEA claim, the court stated, “ ‘By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.’ [Citation.]” (Gilmer, supra, 500 U.S. at p. 26, 111 S.Ct. 1647.) And, again, to similar effect: “ ‘[S]o long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.’ [Citation.]” (Id. at p. 28, 111 S.Ct. 1647.)
The court rejected four challenges to “the adequacy of arbitration procedures” governing the plaintiff's claim, finding that the New York Stock Exchange rules provided adequately for (1) the impartiality of the arbitrators, (2) fair opportunities for discovery, (3) written opinions allowing appellate review, and (4) empowering the arbitrator to provide suitable relief for statutory violations. (Gilmer, supra, 500 U.S. at pp. 30-32, 111 S.Ct. 1647.) In effect, the court held that the particular arbitration procedures at issue gave the plaintiff an effective means of vindicating his rights under the ADEA in the arbitral forum.
Since Gilmer, supra, 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26, lower courts have almost uniformly upheld pre-employment arbitration agreements which require arbitration of a broad range of employee claims based upon various statutory rights. In Williams v. Cigna Financial Advisors, Inc. (5th Cir.1995) 56 F.3d 656, the court found that arbitration could be compelled to resolve claims based upon the Older Workers Benefit Protection Act, which amended certain sections of the ADEA. (29 U.S.C.A. §§ 621, 623, 626, 630.) Numerous cases have enforced arbitration agreements where the employee claims involved title VII claims. (Bender v. A.G. Edwards & Sons, Inc. (11th Cir.1992) 971 F.2d 698; Mago v. Shearson Lehman Hutton Inc. (9th Cir.1992) 956 F.2d 932; Willis v. Dean Witter Reynolds, Inc. (6th Cir.1991) 948 F.2d 305.) Gilmer, supra, 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 has also been applied to other federal civil rights statutes 5 as well as to parallel state civil rights legislation.6
Subsequent to the completion of briefing in this case, but prior to oral argument, the Ninth Circuit Court of Appeals concluded that the Civil Rights Act of 1991 (Pub.L. 102-166, see notes to 42 U.S.C.A. § 1981) manifests a legislative intent to preclude compulsory arbitration of title VII claims. In a footnote, the court observed that since: “ ‘[p]arallel state anti-discrimination laws are explicitly made part of Title VII's enforcement scheme,’ FEHA claims are arbitrable to the same extent as Title VII claims. [Citations.]” (Duffield v. Robertson Stephens & Co. (9th Cir.1998) 144 F.3d 1182, 1187, fn. 3.) Duffield represents a minority view of the arbitrability of statutory claims, and its reasoning was recently criticized in Seus v. John Nuveen & Co., Inc. (3d Cir.1998) 146 F.3d 175. It also appears to be at odds with an earlier Ninth Circuit case involving arbitration of a title VII claim. In Nghiem v. NEC Electronic, Inc. (9th Cir.1994) 25 F.3d 1437, the plaintiff initiated arbitration which included a title VII claim and lost. He then argued that his employment discrimination complaint was not subject to arbitration. He argued that Gilmer did not apply since the 1991 amendments to title VII provide for a jury trial. The court in Nghiem concluded, however, “․ that establishing a right to jury trial for Title VII claims does not evince a congressional intent to preclude arbitration; it merely defines those procedures which are available to plaintiffs who pursue the federal option, as opposed to arbitration. [¶] Title VII claims are clearly subject to arbitration and Nghiem's argument, therefore, fails.” (Nghiem, supra, at p. 1441.)
Duffield is also contrary to state cases finding that claims under the California Fair Employment and Housing Act (FEHA) are arbitrable. In Spellman v. Securities, Annuities & Ins. Services, Inc. (1992) 8 Cal.App.4th 452, 462, 10 Cal.Rptr.2d 427, the court held that the Gilmer analysis, as construed in Alford v. Dean Witter Reynolds, Inc. (5th Cir.1991) 939 F.2d 229, also applied to parallel provisions of the FEHA. “Reliance on a state statutory antidiscrimination scheme, as here, rather than on a federal title VII claim, does not alter the analysis of enforceability of arbitration agreements under the FAA. [Citations.] [¶] Gilmer and Alford stand for the proposition that important social policies and public rights embodied in statutes prohibiting discrimination in employment can be appropriately resolved by arbitration. The Supreme Court has determined that the arbitration forum provides sufficient procedural safeguards and mechanisms for discovery ‘to make the process suitable for discrimination claims' under such statutes. [Citation.]” (Spellman, supra, at p. 462, 10 Cal.Rptr.2d 427; cf. Brookwood v. Bank of America, supra, 45 Cal.App.4th at pp. 1672-1673, 53 Cal.Rptr.2d 515; 24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1210, fn. 9, 78 Cal.Rptr.2d 533.)
The conclusions reached by the court in Duffield are only persuasive and are not binding on us, but we are of course bound by the decisions of the United States Supreme Court on federal questions. (People v. Bradley (1969) 1 Cal.3d 80, 86, 81 Cal.Rptr. 457, 460 P.2d 129.) We also note that “Where the federal circuits are in conflict, the authority of the Ninth Circuit ․ is entitled to no greater weight than decisions from other circuits.” (Elliot v. Albright (1989) 209 Cal.App.3d 1028, 1034; , 257 Cal.Rptr. 762 9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, § 942, p. 984.)
Based upon the near uniform line of post-Gilmer decisions ordering arbitration of statutory claims, we conclude that the claims set forth in plaintiffs' complaint are arbitrable. We now turn to the terms of the agreement and examine them in the context of familiar rules of contract law and the restrictions imposed by the FAA to determine if the agreement is enforceable.
III. Enforceability of the Contract
A. Adhesion Contract
The concept of contract of adhesion has developed in recent decades “as a basis for modifying or nullifying harsh terms which defeat the reasonable expectations of the parties.” (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 23, p. 53.) Though originating in insurance cases, the concept has gained general application in contract law. (San Francisco Newspaper Printing Co. v. Superior Court (1985) 170 Cal.App.3d 438, 216 Cal.Rptr. 462 [agency contract]; Chretian v. Donald L. Bren Co. (1984) 151 Cal.App.3d 385, 388, 198 Cal.Rptr. 523 [employment contract]; Wilson v. San Francisco Fed. Sav. & Loan Assn. (1976) 62 Cal.App.3d 1, 132 Cal.Rptr. 903 [banking contract].) Neal v. State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694, 10 Cal.Rptr. 781, provides the classic definition of a contract of adhesion: “The term signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.”
We have no hesitation concluding, as a matter of law, that the arbitration clause here was a contract of adhesion and that the plaintiffs were the weaker parties to the contract. The arbitration clause, as it appeared in the employment application and the “Employee Arbitration Agreement,” was “a standardized contract,” drafted by the employer, that relegated to the prospective employee “only the opportunity to adhere to the contract or reject it.” (Neal v. State Farm Ins. Cos., supra, 188 Cal.App.2d at p. 694, 10 Cal.Rptr. 781.) The clause in fact expressly required the prospective employee to agree “as a condition of my employment.” While the employee could reject the job rather than sign the arbitration agreement, the employer still possessed the “superior bargaining strength” requisite to bring the clause within the concept of a contract of adhesion. (Neal v. State Farm Ins. Cos., supra, at p. 694, 10 Cal.Rptr. 781; see Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1533-1534, 60 Cal.Rptr.2d 138.)
The courts, however, frequently caution that the classification of a contract as a contract of adhesion is “the beginning and not the end of the analysis insofar as enforceability of its terms is concerned.” (Wheeler v. St. Joseph Hospital (1976) 63 Cal.App.3d 345, 357, 133 Cal.Rptr. 775.) “[A] contract of adhesion is enforceable unless it is unconscionable or does not fall within the reasonable expectations of the weaker or ‘adhering’ party.” (San Francisco Newspaper Printing Co. v. Superior Court, supra, 170 Cal.App.3d at p. 442, 216 Cal.Rptr. 462; see also Keating v. Superior Court (1982) 31 Cal.3d 584, 594, 183 Cal.Rptr. 360, 645 P.2d 1192.)
In Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 171 Cal.Rptr. 604, 623 P.2d 165, the plaintiff, a promoter of musical concerts, was compelled to secure the services of musicians under standard contracts, containing an arbitration clause that gave the musicians' union the right to appoint the arbitrator. The decision begins with a summary of generally applicable principles of contract law: “Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or ‘adhering’ party will not be enforced against him. [Citations] The second-a principle of equity applicable to all contracts generally-is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or ‘unconscionable.’ ” (Id. at p. 820, 171 Cal.Rptr. 604, 623 P.2d 165, fn. omitted.)
B. Reasonable Expectation of the Parties
In Beynon v. Garden Grove Medical Group (1980) 100 Cal.App.3d 698, 161 Cal.Rptr. 146, the membership agreement of a health care plan contained an arbitration clause requiring malpractice claims to be arbitrated before a panel of attorneys but gave the plan the right to resubmit any arbitration award in the member's favor to a second panel of doctors pursuant to a provision designated “paragraph B.” The plaintiff won an arbitration award from the first panel, only to have the plan demand a second arbitration of her claim. Refusing to enforce paragraph B, the court found that the membership agreement was a contract of adhesion and that the provision “defeat[ed] the reasonable expectations of one enrolling in the plan․” (Id. at p. 706, 161 Cal.Rptr. 146.) “Where a contract is adhesive, courts will not enforce a provision which limits the liabilities and duties of the stronger party unless such provisions are clear and conspicuous and will not operate to defeat the reasonable expectations of the weaker party.” (Id. at p. 705, 161 Cal.Rptr. 146.)
In Patterson v. ITT Consumer Financial Corp. (1993) 14 Cal.App.4th 1659, 1662, 18 Cal.Rptr.2d 563, an arbitration provision in a loan agreement, executed by plaintiffs in San Francisco, California, required disputes to be resolved by “arbitration by the National Arbitration Forum, Minneapolis, Minnesota․” The rules of the National Arbitration Forum, which the plaintiffs received only after the lender initiated a claim against them, provided for arbitration solely on the basis of submitted documents unless a party made a prompt demand for a hearing accompanied by prepayment of substantial arbitration fees. Analyzing the provision under the principles both of contracts of adhesion and unconscionability, the court found it to be unenforceable under either analysis: “whether we analyze this arbitration clause as beyond the reasonable expectation of the borrower ․ or as substantively and procedurally unconscionable ․, the result is the same.” (Id. at pp. 1666-1667, 18 Cal.Rptr.2d 563.)
Our review of the arbitration provision convinces us that the limitation of the employee's remedies in the arbitration clause was beyond the plaintiffs' reasonable expectations. We note, first, the drastic nature of the limitation. The clause provides that the employee's “exclusive” remedy “shall be limited to a sum equal to the wages [the employee] would have earned from the date of any discharge until the date of the arbitration award.” Contract damages for wrongful termination of employment normally may include not only back pay but also the loss of fringe benefits, reliance damages, and the present value of lost future earnings. (1 Wrongful Employment Termination Practice (Cont.Ed.Bar 2d ed. 1998) §§ 832-837, pp. 377-382.) Tort damages may include back pay and lost future earnings, damages for emotional distress and punitive damages. (Id. at §§ 5.61-5.63, pp. 243-244.) In a civil action under the FEHA, a plaintiff may recover the full range of tort damages and may seek injunctive relief. (Id. at § 2.109, pp. 72-73; Commodore Home Systems, Inc. v. Superior Court (1982) 32 Cal.3d 211, 221, 185 Cal.Rptr. 270, 649 P.2d 912.) In addition, the court has discretion to award the prevailing party reasonable attorney fees and costs. (Gov.Code, § 12965, subd. (b).)
The employer argues that the limitation on damages applies only to contract damages, but we do not think it can be reasonably interpreted in this manner. The term “such arbitration” has as an antecedent any contention that the employee's termination was “in violation of the conditions of employment,” presumably including conditions implied in law, or “in violation of any of [her] rights․” The last sentence states broadly that the employee “shall not be entitled to any other remedy.”
We note, secondly, that nothing in the arbitration clauses or their manner of presentation served to alert the employee that the clauses sought to drastically limit her remedies in a wrongful termination action. The language restricting remedies for wrongful termination appeared in the middle of a clause purporting on its face to offer an alternative remedy for resolution of disputes. In declarations submitted in opposition to the motion to compel arbitration, the plaintiffs each state that “no discussion or other explanatory information was provided concerning the ‘Employment Arbitration Agreement’ either at the time of hire or at any other time.” This lack of notice with respect to the impact of the clause is “an extremely significant [factor] to be weighed in assessing the reasonable expectations of the ‘adhering’ party.” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 820, fn. 18, 171 Cal.Rptr. 604, 623 P.2d 165.)
In sum, the limitation of remedies in the arbitration clause comes squarely within the rule established by the line of decisions denying enforcement of provisions in contracts of adhesion that are beyond the reasonable expectations of the weaker party. The employer argues, however, that the court should sever the damages limitation from the arbitration agreement and enforce the remainder of the agreement. We will address the issue of severance after considering other challenges to the arbitration agreement.
The doctrine of unconscionability, long recognized as a common-law defense to the enforcement of a contract, received explicit statutory recognition in 1979 through the enactment of Civil Code section 1670.5, a provision drawn verbatim from section 2-302 of the Uniform Commercial Code. (Carboni v. Arrospide (1991) 2 Cal.App.4th 76, 81, 2 Cal.Rptr.2d 845; A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 484, 186 Cal.Rptr. 114.) The intent of the Uniform Commercial Code provision, reflected also in the legislative history of Civil Code section 1670.5, is to avoid covert judicial manipulation of legal doctrine to avoid unfair results by allowing the courts to openly police contracts for an unconscionable degree of unfairness. (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1531, fn. 3, 60 Cal.Rptr.2d 138; IMO Development Corp. v. Dow Corning Corp. (1982) 135 Cal.App.3d 451, 459-460, 185 Cal.Rptr. 341.)
Following the leading decision in A & M Produce Co. v. FMC Corp., supra, 135 Cal.App.3d 473, 186 Cal.Rptr. 114, California courts analyze unconscionability as having two separate elements-procedural and substantive. Both elements must be present to allow a court to refuse to enforce a contract provision on grounds of unconscionability. (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1532-1533, 60 Cal.Rptr.2d 138.) “Some courts have indicated that a sliding scale applies-for example, a contract with extraordinarily oppressive substantive terms will require less in the way of procedural unconscionability.” (American Software, Inc. v. Ali (1996) 46 Cal.App.4th 1386, 1391, 54 Cal.Rptr.2d 477.)
“ ‘ “[P]rocedural unconscionability” has to do with matters relating to freedom of assent ․’ ” (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1532, 60 Cal.Rptr.2d 138, citation omitted); it concerns “the manner in which the contract was negotiated and the circumstances of the parties․ [¶] Indicia of procedural unconscionability include ‘oppression, arising from inequality of bargaining power and the absence of real negotiation or a meaningful choice’ and ‘surprise, resulting from hiding the disputed term in a prolix document.’ [Citation.]” (American Software, Inc. v. Ali, supra, 46 Cal.App.4th at pp. 1390-1391, 54 Cal.Rptr.2d 477.) Procedural unconscionability is a narrower concept than that of contracts of adhesion, though the two concepts share a “significant overlap.” (Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758, 769, 259 Cal.Rptr. 789.) Common form contracts, which qualify as contracts of adhesion, may not involve the elements of oppression and surprise required to bring them within the ambit of procedural unconscionability. (California Grocers Assn. v. Bank of America (1994) 22 Cal.App.4th 205, 214, 27 Cal.Rptr.2d 396.)
“ ‘Substantive unconscionability’ involves the imposition of harsh or oppressive terms on one who has assented freely to them” (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1532, 60 Cal.Rptr.2d 138, citation omitted); it focuses on the actual terms of the agreement. “Substantive unconscionability is indicated by contract terms so one-sided as to ‘shock the conscience.’ [Citation.]” (American Software, Inc. v. Ali, supra, 46 Cal.App.4th at p. 1391, 54 Cal.Rptr.2d 477.) By way of clarification, it has been said that the terms of an unconscionable contract must be “ ‘ “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” ’ [Citation.]” (California Grocers Assn. v. Bank of America, supra, 22 Cal.App.4th at p. 214, 27 Cal.Rptr.2d 396.)
In Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138, the court concluded that a somewhat complex clause in the employment contract of a corporate executive was so one-sided as to be unconscionable. Among other things, the clause (1) allowed the employer to bring actions against the employee in state or federal court for a range of matters, but provided that arbitration was the employee's exclusive remedy against the employer for any claims arising out of his termination of employment, including claims based on contract, tort or anti-discrimination statutes. (2) The clause required the employee to submit claims to arbitration within one year of his termination of employment. And (3) the clause limited the employee's remedy for any claim, whether based on contract, tort, or statute, to “a money award not to exceed the amount of actual damages for breach of contract” and expressly precluded the employee from securing equitable relief, punitive damages, or attorney fees and costs of litigation to which he might be entitled by state or federal statute. (Id. at p. 1529, 60 Cal.Rptr.2d 138.)
Although the agreement before us does not contain the extensive one-sided provisions discussed in Stirlen, it contains an even more restrictive limitation on an employee's remedies; as we previously noted the employee is denied the full extent of contract damages and may recover no more than back pay for the period from the date of termination to the date of the award. We find this provision to be unconscionable.
Plaintiffs also argue that the agreement should not be enforced since it lacks “mutuality.” We do not agree. Here the arbitration agreement specifically obligates both parties to submit any dispute concerning the employee's termination to arbitration. This is not a case where only one party is relegated to an arbitral forum and the other party retains the right to choose a judicial forum for resolution of the matters covered by the agreement. The fact that the agreement does not embrace all conceivable matters which could arise from the employee-employer relationship is not of consequence. The agreement is clear that the dispute which arose between the parties obligates both to arbitrate the issues covered by the agreement. Neither party is given any advantage, and a neutral forum is provided. We also observe that the wording of the agreement most likely resulted from the employees' positions within the organization and may reflect the fact that the parties did not foresee the possibility of any dispute arising from employment that was not initiated by the employee. Plaintiffs were lower-level supervisory employees, without the sort of access to proprietary information or control over corporate finances that might lead to an employer suit against them. In any event except in exceptional cases presenting issues of failure of consideration or unconscionability (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at pp. 1536-1542, 60 Cal.Rptr.2d 138), the parties to an arbitration agreement are free to adopt asymmetric remedies, giving one party rights that are not given to the other. (E.g., Doctor's Associates, Inc. v. Distajo (2d Cir.1995) 66 F.3d 438, 451; Randolph v. Green Tree Financial Corp. (M.D.Ala.1997) 991 F.Supp. 1410, 1421-1422.)
For the first time on appeal, plaintiffs argue that the arbitration clause is unenforceable because they are required to pay the costs of arbitration pursuant to Code of Civil Procedure section 1284.2. We can conceive of situations where it would be unreasonable and unjust to require a party in plaintiffs' position to pay unreasonable arbitration fees that would in effect prevent access to a neutral forum. On the record before us, however, we cannot make such a determination since there is nothing before us to support the plaintiffs' claim that the costs of arbitration would be unconscionable, oppressive or even unfair. In order to adequately consider such an argument, the costs to the plaintiffs of litigating in a judicial forum would need to be considered. Resolution of a dispute in a judicial forum is not without significant costs which may ultimately be borne by plaintiffs if they are unsuccessful in establishing their claims.
The trial court mentioned in its decision denying arbitration, the failure of the arbitration clause “to allow discovery” as an additional factor contributing to the “overall unfairness” of the provision. In Gilmer, supra, 500 U.S. at p. 31, 111 S.Ct. 1647, the court did consider the availability and extent of discovery as a factor in determining if the arbitration provision was enforceable. The availability of discovery, however, is not a factor that we need to consider in this case. Appellant's argument and concession at oral argument that the agreement's general reference to the California Arbitration Act constitutes an express contractual provision incorporating discovery rights under Code of Civil Procedure section 1283.05 is a concession that it will agree to discovery sufficient to allow respondents to fairly present their claims.
IV. California Contract Law and Compatibility with the FAA
We reach the question of whether California cases denying enforcement of an adhesory arbitration agreement, the provisions of which do not fall within the reasonable expectations of the weaker party or are unconscionable, are compatible with federal preemption under the FAA.
Unfortunately, no fewer than four California decisions dealing with arbitration in the securities industry contain confusing dicta to the effect that “California adhesion contract principles are inapplicable to the enforcement of an arbitration clause in a contract governed by the [FAA].” (Tonetti v. Shirley (1985) 173 Cal.App.3d 1144, 1148, 219 Cal.Rptr. 616; Downs v. Prudential-Bache Securities, Inc. (1988) 202 Cal.App.3d 616, 621, 248 Cal.Rptr. 734; Lewis v. Prudential-Bache Securities, Inc. (1986) 179 Cal.App.3d 935, 941, 225 Cal.Rptr. 69; Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 637, 223 Cal.Rptr. 838.) Our analysis shows that this language is overbroad.
The law relating to the enforcement of adhesion contracts applies to “any contract” within the meaning of the final clause of section 2 of the FAA. Applying the distinction in Perry v. Thomas, supra, 482 U.S. at p. 492, fn. 9, 107 S.Ct. 2520, it is clear that the legal principles governing enforcement of contracts of adhesion “arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” (Ibid.) The principles do not require a state court to construe an arbitration agreement “in a manner different from that in which it otherwise construes nonarbitration agreements under state law.” (Ibid.) “[A]pplicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [section] 2.” (Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. at p. 687, 116 S.Ct. 1652; see Stirlen v. Supercuts Inc., supra, 51 Cal.App.4th at p. 1552, 60 Cal.Rptr.2d 138.)
The employer argues that, instead of denying enforcement of the arbitration agreement, the trial court should have severed from the agreement the language limiting the plaintiffs' remedies. We agree.
As we noted above, both our high court and the United States Supreme Court recognize a strong public policy in favor of arbitration. In Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 826-828, 171 Cal.Rptr. 604, 623 P.2d 165, our Supreme Court held unconscionable, and unenforceable, an arbitration provision designating a non-neutral arbitrator. It severed this unconscionable provision but approved the arbitration upon selection of a neutral arbitrator. The court in Saika v. Gold (1996) 49 Cal.App.4th 1074, 1082, 56 Cal.Rptr.2d 922, enforced the arbitration agreement after striking the trial de novo clause, and in Beynon v. Garden Grove Medical Group, supra, 100 Cal.App.3d at p. 709, 161 Cal.Rptr. 146, the court simply disregarded “paragraph B,” which called for rearbitration of the claim. In view of the strong public policy in favor of arbitration, the solution here is also to sever the remedies' restriction which we have found to be unconscionable and not within the reasonable expectations of the plaintiffs.
The order denying arbitration is reversed and the court is ordered to enter an order severing the remedies' restriction contained in the arbitration agreement and enforcing the balance of the agreement.
Each party shall bear its own costs.
1. The minute ruling dated September 2, 1997, explains the basis for denial of the motion as follows: “Defendant's motion to compel arbitration and to stay litigation pending completion of arbitration is denied. The court finds that the arbitration provision is unconscionable. First, defendant's own evidence shows that the provision is an adhesion contract since there was no opportunity to negotiate. [Citation.] Second, the provision is ‘so one-sided as to “shock the conscience.” ’ The provision only requires terminated employees to arbitrate their disputes; the employer is not required to arbitrate any disputes. The provision unreasonably limits damages, potentially to claims other than contract claims (i.e., wrongful discharge in violation of public policy-prohibition against discrimination and harassment reasonabl [y] could be construed as a condition or term of employment implied in law). Given the overall unfairness of the provision (i.e., including failure to allow discovery [see Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1537-1538, 60 Cal.Rptr.2d 138] ), this is not an appropriate case for striking the portion of the provision limiting damages. (Contrast with Saika v. Gold (1996) 49 Cal.App.4th 1074, 56 Cal.Rptr.2d 922.)”
2. The application of the FAA is subject to two statutory restrictions that have no application to the present case. First, the statute applies only to “a contract evidencing a transaction involving commerce.” (9 U.S.C.A. § 2.) This language, however, has been construed as extending the Act's reach “to the limits of Congress' Commerce Clause power” and apply here to the plaintiffs' employment contracts. (Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 270, 115 S.Ct. 834, 130 L.Ed.2d 753.) The parties in fact have not raised any commerce-clause issue, implicitly conceding that the plaintiffs were employed in a business affecting interstate commerce.Secondly, a potentially significant exclusion in section 1 of the FAA, applying “ ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,’ [citation]” has been construed by federal courts as referring only to workers actually engaged in transportation. (Cole v. Burns Intern. Security Services (D.C.Cir.1997) 105 F.3d 1465, 1470-1472.) Although the United States Supreme Court has not ruled authoritatively on this issue, we will assume for the purpose of our analysis that the exclusion has this narrow application, rendering it inapplicable to the present case.
3. Code of Civil Procedure section 1281, which tracks some of the language of section 2, establishes the same rule as a matter of state law: “A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.”
4. We quote footnote 9 at length because it elucidates a distinction critical to the present case and has been quoted in Doctor's Associates, Inc. v. Casarotto, supra, 517 U.S. at p. 685, 116 S.Ct. 1652, as well as several California decisions. (See Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 634, 68 Cal.Rptr.2d 167; Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1545, 60 Cal.Rptr.2d 138; Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1675, 53 Cal.Rptr.2d 515; Heily v. Superior Court (1988) 202 Cal.App.3d 255, 259, 248 Cal.Rptr. 673; and Thomas v. Perry (1988) 200 Cal.App.3d 510, 514, 246 Cal.Rptr. 156.)
5. E.g., Saari v. Smith Barney, Harris Upham & Co., Inc. (9th Cir.1992) 968 F.2d 877 [Employee Polygraph Protection Act]. (29 U.S.C.A. §§ 2001-2009.)
6. E.g., Patterson v. Tenet Healthcare, Inc. (8th Cir.1997) 113 F.3d 832, 838 [title VII and Missouri Human Rights Act] (Mo.Rev.Stat. § 213.010 et seq.); Great Western Mortg. Corp. v. Peacock (3d Cir.1997) 110 F.3d 222, 230-232 [New Jersey Law against Discrimination] (N.J.S.A. § 10:5-1 et seq.); Sacks v. Richardson Greenshield Securities, Inc. (E.D.Cal.1991) 781 F.Supp. 1475, 1480.
STRANKMAN, P.J., and STEIN, J., concur.