Armendariz v. Foundation Health Psychcare Services, Inc

In Armendariz v. Foundation Health Psychcare Services, Inc. 24 Cal.4th 83,(2000) the Court ruled that an employee may be compelled to arbitrate his or her FEHA claims provided the parties' arbitration agreement satisfies five requirements: the agreement must: (1) afford more than minimal discovery; (2) require a written decision permitting limited judicial review; (3) provide the types of relief which would be available in civil court; (4) not impose costs on the plaintiff which are unique to arbitration; (5) provides for a neutral arbitrator. (Armendariz, supra, 24 Cal.4th at pp. 102-103) In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the court upheld the trial court's refusal to enforce the arbitration agreement because it possessed a damages limitation contrary to public policy and was unconscionably unilateral as to the claims subject to arbitration (i.e., only employee claims were subject to arbitration). (24 Cal.4th at pp. 91, 104, 121.) As to the issue of discovery, the court stated that "when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim. As discussed above, it is undisputed that some discovery is often necessary for vindicating a FEHA claim. Accordingly, whether or not the employees in this case are entitled to the full range of discovery provided in Code of Civil Procedure section 1283.05, they are at least entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review pursuant to Code of Civil Procedure section 1286.2." (24 Cal.4th at p. 106.) The Supreme Court clarified that not all lack of mutuality in an adhesive arbitration agreement is invalid. Rather, quoting from Stirlen, supra, 51 Cal. App. 4th at page 1536, the court explained that "a contract can provide a 'margin of safety' that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable." Thus, if the stronger party has a justification "grounded in something other than the stronger party's desire to maximize its advantage based on the perceived superiority of the judicial forum," then the arbitration agreement would not be unconscionable. ( Armendariz, supra, at p. 120.) Conversely, a one-sided arbitration agreement that imposes arbitration on the weaker party while providing a choice of forums for the stronger party is unfair and unconscionable "without at least some reasonable justification for such one-sidedness based on 'business realities.' " ( Id. at p. 117.) However, unless the "business realities" that create the special need for such an advantage are explained in the contract itself, they must be factually established. (Ibid.) The Court held that mandatory employment arbitration agreements are enforceable if the arbitration permits the employees to vindicate their statutory rights; that is, "the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration." ( Id. at p. 91.) The Supreme Court held: "The Federal Arbitration Act (FAA) citation incorporates a strong federal policy of enforcing arbitration agreements. . . ." "California law, like federal law, favors enforcement of valid arbitration agreements. ( Id. at p. 97.) The state's highest court further commented: "We recognize, of course, that a limitation on discovery is one important component of the 'simplicity, informality, and expedition of arbitration.'" ( Id. at p. 106, fn. 11.) Under federal law, "when a contract mandates arbitration, courts generally will enforce the arbitration clause absent a waiver. A party asserting a waiver of arbitration has a heavy burden of proof." ( Peterson v. Shearson/American Exp., Inc. (10th Cir. 1988) 849 F.2d 464, 465-466.) Under California law, "determination by a trial court that 'the right to compel arbitration has been waived by the petitioner' is one of three statutory grounds for withholding an order to arbitrate an otherwise arbitrable controversy." ( Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 781, 191 Cal. Rptr. 8, 661 P.2d 1088.) The Court considered "a number of issues related to the validity of a mandatory employment arbitration agreement, i.e., an agreement by an employee to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which an employer imposes on a prospective or current employee as a condition of employment." (Armendariz, supra, 24 Cal. 4th at p. 90.) The court concluded that FEHA claims "are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights." (Ibid.) For such vindication to occur, "the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration." ( Id., at pp. 90-91.) In addition to those "minimum requirements for the arbitration of unwaivable statutory claims," the court considered objections that apply more generally to any type of arbitration imposed on an employee by an employer as a condition of employment, regardless of the type of claim being arbitrated. "These objections fall under the rubric of 'unconscionability.' " ( Id., at p. 113.) Finding several portions of agreement before it to be unconscionable, the Supreme Court concluded that, rather than the provisions it considered unconscionable being severable, the entire arbitration agreement was unenforceable. ( Id., at p. 91.) In Armendariz, the Supreme Court first agreed that employment discrimination claims could be made subject to arbitration if the arbitration permits an employee to vindicate his or her statutory rights. ( Armendariz, supra, 24 Cal. 4th at p. 90.) Indeed, for purposes of the California Arbitration Act, Code of Civil Procedure section 1280, subdivision (a) defines the term "agreement" as including "agreements between employers and employees or between their respective representatives." But at the same time, the Supreme Court seems to have modified its previous view as to the strength of the public policy in support of arbitration. "Although we have spoken of a 'strong public policy of this state in favor of resolving disputes by arbitration' citation, Code of Civil Procedure section 1281 makes clear that an arbitration agreement is to be rescinded on the same ground as other contracts or contract terms. In this respect, arbitration agreements are neither favored nor disfavored, but simply placed on an equal footing with other contracts." ( Armendariz, supra, 24 Cal. 4th at pp. 126-127.) In Armendariz, the Supreme Court agreed that adequate discovery was indispensable for the vindication of FEHA claims. But rather than invalidate the agreement before it solely on that basis, the Supreme Court inferred that "when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim." (Armendariz, supra, 24 Cal. 4th at pp. 105-106.) "Accordingly, whether or not the employees in this case are entitled to the full range of discovery provided in Code of Civil Procedure section 1283.05, they are at least entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review pursuant to Code of Civil Procedure section 1286.2." ( Id., at p. 106, fn. omitted.) The Supreme Court therefore held "that the employer, by agreeing to arbitrate the FEHA claim, has already impliedly consented to such discovery. Therefore, lack of discovery is not grounds for holding a FEHA claim inarbitrable." (Ibid.) The court had declined to find that the trial court had abused its discretion in refusing to enforce the entire agreement (i.e., the trial court had refused to save the agreement by a severance of the unconscionable provisions). Two factors prompted this result. "First, the arbitration agreement contains more than one unlawful provision; . . . Such multiple defects indicate a systematic effort to impose arbitration on an employee" in a manner that was tilted in the employer's favor. ( Armendariz, supra, 24 Cal. 4th at p. 124.) "Second, in the case of the agreement's lack of mutuality, such permeation is indicated by the fact that there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. Rather, the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms. Civil Code section 1670.5 does not authorize such reformation by augmentation, nor does the arbitration statute. Code of Civil Procedure section 1281.2 authorizes the court to refuse arbitration if grounds for revocation exist, not to reform the agreement to make it lawful. Nor do courts have any such power under their inherent limited authority to reform contracts. Because a court is unable to cure this unconscionability through severance or restriction and is not permitted to cure it through reformation and augmentation, it must void the entire agreement. Moreover, whether an employer is willing once 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 provided otherwise and was thus 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.'" ( Id. at pp. 124-125, italics added.) The court concluded that FEHA claims 'are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights.' (Ibid., italics in original.) For such vindication to occur, 'the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration.' (Id., at pp. 90-91.) In addition to those 'minimum requirements for the arbitration of unwaivable statutory claims,' the court considered objections that apply more generally to any type of arbitration imposed on an employee by an employer as a condition of employment, regardless of the type of claim being arbitrated. 'These objections fall under the rubric of "unconscionability."' (Id., at p. 113.) Finding several portions of the agreement before it to be unconscionable, the Supreme Court concluded that, rather than the provisions it considered unconscionable being severable, the entire arbitration agreement was unenforceable (Id., at p. 91.)" (Shubin v. William Lyon Homes, Inc. (2000) 84 Cal. App. 4th 1041, 1050-1051.) The Court found two factors weighed against severance of the unlawful provisions. First, the arbitration provision contained "more than one unlawful provision," suggesting a "systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage." (Id. at pp. 124-125.) Second, the agreement's lack of mutuality permeated the entire agreement, requiring not just severance of the provision, but a reformation and augmentation of the agreement. (Ibid.) The Court held that an arbitration agreement between an employer and employee must have a modicum of bilaterality to be conscionable. "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. Without reasonable justification for this lack of mutuality, arbitration appears less as a forum for neutral dispute resolution and more as a means of maximizing employer advantage. Arbitration was not intended for this purpose." (Armendariz, supra, 24 Cal.4th at p. 118.) The California Supreme Court explained, pursuant to Civil Code section 1670.5, subdivision (a), that "'if the court as a matter of law finds a contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.'" In the case before it, the court said that two factors weighed against the severance of the unconscionable provisions. First, the arbitration agreement contained more than one unlawful provision, indicating "a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the defendant's advantage." (Armendariz, at p. 124.) Second, "in the case of the agreement's lack of mutuality, such permeation is indicated by the fact that there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. Rather, the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms. Civil Code section 1670.5 does not authorize such reformation by augmentation, nor does the arbitration statute. Code of Civil Procedure section 1281.2 authorizes the court to refuse arbitration if grounds for revocation exist, not to reform the agreement to make it lawful. Nor do courts have any such power under their inherent limited authority to reform contracts. Because a court is unable to cure this unconscionability through severance or restriction and is not permitted to cure it through reformation and augmentation, it must void the entire agreement." (Id. at pp. 124-125.) The California Supreme Court explained: "'Unconscionability has both a "procedural" and a "substantive" element,' the former focusing on '"oppression"' or '"surprise"' due to unequal bargaining power, the latter on '"overly harsh"' or '"one-sided"' results. 'The prevailing view is that procedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.' But they need not be present in the same degree. 'Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.' In other words, the 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." (Id. at p. 114.) The Court summarized the judicially created doctrine of unconscionability as follows: "Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. 'The term contract of adhesion 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.' If the contract is adhesive, the court must then determine whether 'other factors are present which, under established legal rules--legislative or judicial--operate to render it unenforceable.' '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. 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."' Subsequent cases have referred to both the 'reasonable expectations' and the 'oppressive' limitations as being aspects of unconscionability." ( Armendariz, supra, 24 Cal.4th at p. 113.)