Nyulassy v. Lockheed Martin Corp.

Opinion

Our Supreme Court has upheld employment agreements that require the employee to arbitrate disputes, so long as the arbitration clause does not impair the employee’s statutory rights and is not unconscionable. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 [99 Cal.Rptr.2d 745, 6 P.3d 669] (Armendariz).) We are called upon here to examine whether a mandatory employment arbitration agreement—executed by the employee in connection with the settlement of a previous dispute with the employer’s predecessor after advice from the employee’s attorney—is unconscionable or otherwise unenforceable.

Plaintiff Fred Nyulassy sued his employer, defendant Lockheed Martin Corporation, alleging that defendant demoted him in retaliation for his protected workplace activity (i.e., complaints about treatment of employees and resistance to employer-sanctioned illegal activity). Plaintiff asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, wrongful demotion in violation of public policy, and violation of section 6310 of the Labor Code. Defendant moved to compel arbitration and stay all proceedings (motion), based upon a mandatory arbitration clause in plaintiff’s employment agreement. The trial court denied the motion, and defendant appeals that decision.

Defendant claims that the court erred in holding that the subject arbitration agreement was unconscionable, and that the court improperly extended the holding in Armendariz to a postdispute arbitration agreement as defendant claims is presented here. For the reasons stated below, we conclude that the trial court correctly decided that the arbitration agreement was unconscionable. Accordingly, we affirm the order denying the motion to compel arbitration.

*1272 FACTS

I. Prior Dispute

Plaintiff was employed for approximately 20 years by Western Development Labs and/or Loral Aerospace Corporation, company/companies subsequently acquired by defendant (collectively, defendant’s predecessor). 1 In December 1994, defendant’s predecessor terminated plaintiff.

As a result of his termination, plaintiff brought an action in Santa Clara Superior Court, case No. CV 747363 (prior case), asserting, inter alia, a claim for age discrimination. Plaintiff was represented in that prior case by Randall Widmann, his attorney in the present action. The parties to the prior case settled their dispute in November 1997 and signed the agreements that are central to the issue of the arbitrability of the present dispute. The terms of the settlement included a payment to plaintiff 2 and an agreement that defendant would hire plaintiff as an employee.

II. Settlement Agreement

In or about November 1997, the parties to the prior case—plaintiff and defendant’s predecessor—entered into a written agreement (settlement agreement) entitled, “Confidential Settlement Agreement And Release Of Claims.” (Capitalization omitted.) The settlement agreement was signed by plaintiff; it was also signed by Attorney Widmann, as plaintiff’s counsel, below the block lettering, “APPROVED AS TO FORM.”

Paragraph 18 of the settlement agreement provided in part: “The parties stipulate that any action involving the validity, interpretation or enforcement of the Agreement, or for any claim for breach of this Agreement shall be subject to the arbitration provision in Exhibit C.” The document referenced as “Exhibit C” was the employment agreement (discussed post), entered into by the parties at the time of the settlement. The settlement agreement contained a confidentiality provision, which referenced further the remedy of arbitration under the employment agreement. The settlement agreement also *1273 contained a general provision that the parties in the prior case had been represented by counsel; it included a statement that the parties had carefully read and reviewed the terms of the agreement with their respective counsel and were “freely and voluntarily entering into it.”

III. Employment Agreement

At or about the time the settlement agreement was signed, plaintiff and defendant signed an employment agreement. 3 That agreement was a standard form document; it was modified or supplemented, however, in several respects by the settlement agreement. One notable change made plaintiff’s employment relationship terminable only for good cause for a period of three years after the date of his employment, notwithstanding the “at-will” provision in the form employment agreement. The settlement agreement also contained supplemental terms of plaintiff’s employment, including starting salary, the identity of plaintiff’s supervisor, and other specifics.

The employment agreement provided that all disputes or controversies that plaintiff had concerning his employment would be subject to binding arbitration conducted under the employment dispute resolution rules of the American Arbitration Association. Under this arbitration agreement, plaintiff waived all rights to pursue any claims against defendant through judicial proceedings. Plaintiff—as a precondition to arbitration—was also required to attempt to resolve any employment disputes by engaging in discussions with various levels of management. The employment agreement provided further that plaintiff waived his arbitration remedy if he did not exercise it (a) within 180 days of his employment termination (if a termination claim), or, alternatively, (b) within 180 days after such other dispute or controversy arose. 4

*1274 IV. Declarations Submitted in Connection with Motion

Plaintiff submitted two declarations in opposition to defendant’s motion to compel arbitration: Widmann’s and plaintiff’s own declaration. Plaintiff declared that, as part of settling the prior case, he was required to sign the employment agreement and a proprietary information agreement, and that “[t]here was no negotiation over any of the terms of these agreements, as Lockheed will not negotiate the terms of its proprietary information agreement and employment agreement.” 5 He stated further that he had been out of work after being terminated by defendant’s predecessor, and that, “if [he] wanted to settle [his] case[, he] would have to do what all-new [Vc] employees do and that is sign the employment agreement and proprietary information agreements concerning which no negotiations were tolerated by LOCKHEED.”

Widmann declared that he had represented plaintiff in both the prior case and in the instant action. He summarized the allegations in the prior case and described it as “hard fought” litigation that lasted nearly three years. During settlement negotiations shortly before trial scheduled in September 1997, defendant “abruptly” made an employment offer to plaintiff. Widmann declared that, under the terms of the settlement reached in the prior case, in order to be hired, plaintiff “was required to submit a resume, complete an employment application, sign a proprietary agreement and the standard employment agreement which LOCKHEED was using at that time. These *1275 documents were not negotiated by the parties and, indeed, were nonnegotiable.” Widmann twice repeated in his declaration that the terms of the employment agreement were nonnegotiable. He declared that, if plaintiff “wanted to settle his case at all on any terms he had to sign the standard employment agreement.... Thus, if Mr. Nyulassy wanted to obtain the other benefits of the settlement aside from obtaining employment from LOCKHEED he had to sign the standard agreements which were non-negotiable.” 6 (Underscoring in original.)

Defendant’s evidence in support of the motion consisted of a declaration from its counsel (in the present case), 7 principally reciting the language contained in the settlement documents from the prior case. Exhibits to that declaration included copies of the settlement agreement (redacted), the employment agreement, and correspondence between counsel involving defendant’s request that plaintiff arbitrate his dispute pursuant to the arbitration clause in the employment agreement. Defendant submitted no declarations in reply to the Nyulassy and Widmann declarations.

PROCEDURAL HISTORY

Plaintiff filed his complaint on May 15, 2003. The complaint alleged four causes of action arising out of plaintiff’s employment relationship with defendant, namely, (1) wrongful demotion in violation of public policy (claimed under, inter alia, Lab. Code, § 6310), (2) violation of statute (Lab. Code, § 6310), (3) breach of employment contract, 8 and (4) breach of implied good faith covenant.

The complaint alleged that, as of March 2001, plaintiff managed defendant’s QA department in Santa Clara County, and at that time, he was given additional responsibility for the management of the QA department in the “RSAIIA project,” located in Santa Maria. Plaintiff alleged that he made complaints to management both about his employer’s abusive treatment of his subordinates in Santa Maria, and regarding its insistence that defendant deliver a product to the United States government that the company knew *1276 was defective. The complaint alleged further that, sometime 9 after receiving extremely favorable reviews in January 2002 and June 2002, plaintiff was “abruptly” given an “[u]nsatisfactory” interim performance review, removed from his management position, and was told that he should retire. He claimed that defendant took this adverse employment action as a result of his protected activities of complaining “about the treatment of. . . employees and his complaining about and resisting [defendant’s] efforts to sell defective products to the government.”

Defendant filed its motion on August 1, 2003, requesting that the court issue an order compelling arbitration and staying the action until the matter was resolved through binding arbitration. It asserted that the written employment contract and settlement agreement between the parties expressly mandated that the controversy alleged in the complaint be resolved through binding arbitration.

In his opposition to the motion, plaintiff contended, inter alia, that the mandatory employment arbitration agreement was unenforceable because (1) it was unconscionable, and (2) it was against public policy in that it failed to meet the minimum requirements enunciated in Armendariz, supra, 24 Cal.4th 83. After a hearing on September 11, 2003, the court ordered supplemental briefing, which the parties filed thereafter. A second hearing on the motion took place on October 21, 2003.

In its order entered on October 24, 2003, the court denied the motion. The court stated: “After consideration of the papers on file and the arguments of counsel, the motion is DENIED. The agreement is unenforceable because it is unconscionable. The unconscionability cannot be cured through severance or restriction. [Armendariz]”

Defendant filed timely its notice of appeal on November 6, 2003. The order denying defendant’s motion to compel arbitration is directly appealable. (See Code Civ. Proc., § 1294 [“aggrieved party may appeal from: [|] (a) An order dismissing or denying a petition to compel arbitration”]; see also Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 349 [79 Cal.Rptr.2d 308, 965 P.2d 1178].)

*1277 DISCUSSION

I. Standard of Review

The determination of arbitrability is a legal question subject to de novo review. (Arista Films, Inc. v. Gilford Securities, Inc. (1996) 43 Cal.App.4th 495, 501 [51 Cal.Rptr.2d 35].) We will uphold the trial court’s resolution of disputed facts if supported by substantial evidence. (Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653 [35 Cal.Rptr.2d 800].) Where, however, there is no disputed extrinsic evidence considered by the trial court, we will review its arbitrability decision de novo. (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 650 [9 Cal.Rptr.3d 422] (Abramson).)

In this instance, the only extrinsic evidence concerning the subject arbitration agreement was that presented by plaintiff, namely, the Nyulassy and Widmann declarations to the effect that the employment agreement (including its mandatory arbitration clause) was nonnegotiable. Defendant offered no conflicting evidence that was extrinsic to the settlement agreement and employment agreement themselves. Accordingly, we review de novo the trial court’s denial of the motion.

II. Issues on Appeal

Defendant contends that the trial court erred in concluding that the arbitration clause in the employment agreement was unconscionable. It asserts that the court’s ruling disregarded the public policy favoring arbitration. Defendant claims that the court ignored the critical distinction between the “postdispute” circumstances surrounding the execution of the employment agreement here, and the typical “predispute” situation proscribed by Armendariz in which a mandatory arbitration agreement is imposed upon the employee by the employer. Defendant argues further that, because plaintiff executed the employment agreement as part of an overall settlement of a prior dispute with defendant and defendant’s predecessor, plaintiff’s claims that the arbitration clause is unconscionable and against public policy necessarily fail.

Our analysis of defendant’s contentions requires a brief overview of general law concerning arbitration agreements, unconscionable contracts, and the Supreme Court’s holdings in Armendariz, supra, 24 Cal.4th 83, and in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064 [130 Cal.Rptr.2d 892, 63 P.3d 979] (Little).

*1278 III. Applicable Law

A. Arbitration agreements

Code of Civil Procedure section 1281 provides: “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.” The California statute corresponds with federal law (i.e., the Federal Arbitration Act), which states that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.)

California courts have uniformly acknowledged that “[t]here is a strong public policy in favor of arbitration agreements.” (Blake v. Ecker (2001) 93 Cal.App.4th 728, 741 [113 Cal.Rptr.2d 422]; see also Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-972 [64 Cal.Rptr.2d 843, 938 P.2d 903]; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 [10 Cal.Rptr.2d 183, 832 P.2d 899].) In light of this policy favoring arbitration, “doubts concerning the scope of arbitrable issues are to be resolved in favor of arbitration. [Citations.]” (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323 [197 Cal.Rptr. 581, 673 P.2d 251].)

“Despite the strong policy favoring arbitration, there are circumstances in which California courts may invalidate or limit agreements to arbitrate. Employing ‘general contract law principles,’ courts will refuse to enforce arbitration provisions that are ‘unconscionable or contrary to public policy.’ [Citation.]” (Abramson, supra, 115 Cal.App.4th at p. 651, quoting Armendariz, supra, 24 Cal.4th at p. 99.)

B. Public policy considerations: Armendariz & Little

Four years ago, in Armendariz, the Supreme Court considered a challenge to a mandatory arbitration clause contained in the employment agreements of two employees. {Armendariz, supra, 24 Cal.4th 83.) The employees claimed that, as a matter of law, they could not be compelled to arbitrate their statutory discrimination claims under the Fair Employment and Housing Act, Government Code section 12900 et seq. (FEHA). (Armendariz, supra, 24 Cal.4th at p. 90.) The court rejected the blanket view that such mandatory employment arbitration agreements are per se invalid with respect to the assertion of FEHA claims. (Id. at p. 96.) Instead, it “conclude[d] that such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights.” (Id. at p. 90.)

Such vindication of statutory rights meant that the arbitration agreement perforce needed to “meet certain minimum requirements.” (Armendariz, *1279 supra, 24 Cal.4th at p. 91.) Adopting the standards described by the District of Columbia Circuit in Cole v. Bums Intern. Security Services (D.C. Cir. 1997) 105 F.3d 1465 [323 U.S.App.D.C. 133] (Cole), the court in Armendariz held that “[s]uch an arbitration agreement is lawful if it ‘(1) provides for neutral arbitrators, (2) provides for more than minimal discovery, (3) requires a written award, (4) provides for all of the types of relief that would otherwise be available in court, and (5) does not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.’ ” (Armendariz, supra, 24 Cal.4th at p. 102, quoting Cole, supra, 105 F.3d at p. 1482.)

Last year, the Supreme Court extended its holding in Armendariz to certain employee claims other than FEHA discrimination claims. (Little, supra, 29 Cal.4th 1064.) The employee in Little asserted that he was wrongfully demoted and then terminated in retaliation for his reporting of warranty fraud. (Id. at p. 1069.) He therefore alleged, inter alia, a Tameny claim 10 for wrongful termination in violation of public policy. (Ibid.) Plaintiff urged that, as was the case with FEHA claims, a mandatory arbitration agreement relating to an employee claim for wrongful termination in violation of public policy was subject to the same “minimum requirements” enunciated in Armendariz. (Id. at p. 1076.)

The Supreme Court agreed. It held that “a legitimate Tameny claim is designed to protect a public interest and therefore ‘ “cannot be contravened by private agreement.” ’ (Armendariz, supra, 24 Cal.4th at p. 100.) In other words, an employment agreement that required employees to waive claims that they were terminated in violation of public policy would itself be contrary to public policy. Accordingly, because an employer cannot ask the employee to waive Tameny claims, it also cannot impose on the arbitration of these claims such burdens or procedural shortcomings as to preclude their vindication. Thus, the Armendariz requirements are as appropriate to the arbitration of Tameny claims as to unwaivable statutory claims.” (Little, supra, 29 Cal.4th at p. 1077.) The court reasoned that “[t]he Armendariz requirements are therefore applications of general state law contract principles regarding the unwaivability of public rights to the unique context of arbitration .... And . . . there is no reason under Armendariz’s logic to distinguish between unwaivable statutory rights and unwaivable rights derived from common law.” (Id. at p. 1079.)

As noted, Plaintiff argues that the mandatory employment arbitration agreement is both unconscionable and fails to meet the five Cole requirements as enunciated in Armendariz. As we discuss post, we agree that the *1280 arbitration agreement is unconscionable; thus, the trial court’s decision to deny the motion to compel arbitration on that basis was proper. Therefore, we need not address whether the trial court could have also denied enforcement of the arbitration agreement because it violates public policy, in that it fails to meet the five minimum requirements for lawful arbitration agreements enunciated in Armendariz, supra, 24 Cal.4th 83. (See Hiser v. Bell Helicopter Textron, Inc. (2003) 111 Cal.App.4th 640, 655 [4 Cal.Rptr.3d 249] [appellate courts generally “decline to decide questions not necessary to the decision”].)

C. Unconscionable contracts

An arbitration agreement—in order to be enforceable, and irrespective of whether public or only private rights are implicated—must also satisfy traditional contract standards of conscionability. As we have recently held: “In addition to satisfying the Armendariz requirements, an agreement to arbitrate public rights necessarily must be conscionable as well. That conclusion inevitably follows from the great deference accorded unwaivable public rights by both the Legislature and the California Supreme Court. (See, e.g., Armendariz, supra, 24 Cal.4th at pp. 101-102; Little, supra, 29 Cal.4th at p. 1079.) If agreements to arbitrate claims arising from ordinary private rights must meet conscionability standards, then certainly those that affect revered public values warrant the same consideration.” (Abramson, supra, 115 Cal.App.4th at p. 655.)

“Unconscionability is a judicially created doctrine, which the Legislature codified in 1979. (Civ. Code, § 1670.5, subd. (a). [Citations.]) Whether an agreement is unconscionable depends on circumstances at the time it was made. (Civ. Code, § 1670.5, subd. (a).)” (Abramson, supra, 115 Cal.App.4th at p. 655.)

In Little, the Supreme Court succinctly described the applicable law: “To briefly recapitulate the principles of unconscionability, the doctrine 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.’ (Armendariz, supra, 24 Cal.4th at p. 114.) The procedural element of an unconscionable contract generally takes the form of a contract of adhesion,[ 11 ] ‘ “which, imposed and *1281 drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” ’ [Citation.]” (Little, supra, 29 Cal.4th at p. 1071, quoting Armendariz, supra, 24 Cal.4th at p. 113.)

“ ‘Substantive unconscionability’ focuses on the terms of the agreement and whether those terms are ‘so one-sided as to “shock the conscience.” ’ [Citations.]” (Kinney v. United Healthcare Services, Inc. (1999) 70 Cal.App.4th 1322, 1330 [83 Cal.Rptr.2d 348].) A contractual provision that is substantively unconscionable “may take various forms, but may generally be described as unfairly one-sided.” (Little, supra, 29 Cal.4th at p. 1071.) “[T]he paramount consideration in assessing [substantive] conscionability is mutuality.” (Abramson, supra, 115 Cal.App.4th at p. 657.)

We have recently identified on a nonexclusive basis certain types of provisions in mandatory employment arbitration contracts that have been held substantively unconscionable. (See Abramson, supra, 115 Cal.App.4th at pp. 656-657.) Those cases include: (1) where the agreement unfairly favored the employer by allowing for appeal of arbitration awards in excess of $50,000 (Little, supra, 29 Cal.4th at pp. 1072-1074); (2) where the employer imposed forum costs on the employee (McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 93 [134 Cal.Rptr.2d 446]); (3) where the employee’s damage remedy was limited, the employee was required to pay all costs, and the required hearing location was Oakland (Pinedo v. Premium Tobacco Stores, Inc. (2000) 85 Cal.App.4th 774, 781 [102 Cal.Rptr.2d 435]); and (4) where the contract provided that, pending the arbitration hearing, the employee lost his job, salary, and benefits. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1542 [60 Cal.Rptr.2d 138].)

“ ‘Procedural unconscionability’ concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citation.] It focuses on factors of oppression and surprise. [Citation.] 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. [Citations.]” (Kinney v. United Healthcare Services, Inc., 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. [Citation.]’ (Kinney v. United Healthcare Services, Inc., supra, 70 Cal.App.4th at p. 1329.) Where an adhesive contract is oppressive, surprise need not be shown.” (Abramson, supra, 115 Cal.App.4th at p. 656.)

*1282 In evaluating a claim of unconscionability, courts are mindful of the interplay between “procedural” and “substantive” unconscionability: “ ‘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. ’ (Stirlen v. Supercuts, Inc., supra, 51 Cal.App.4th at p. 1533 . . . .) 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.’ [Citations.] 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.” (Armendariz, supra, 24 Cal.4th at p. 114.)

IV. The Arbitration Agreement Is Unconscionable

We apply the above stated principles to our de novo review of the arbitration clause at issue in the employment agreement between plaintiff and defendant. We start with what is, in this instance, the easier issue: the question of substantive unconscionability.

A. Substantive unconscionability

The employment agreement requires plaintiff only to arbitrate any and all of his employment claims. The arbitration clause plainly contains only a unilateral agreement to arbitrate; any claims that defendant may have that arise out of plaintiff’s employment are not subject to the arbitration clause. Defendant’s argument to the contrary notwithstanding, the parties’ agreement to arbitrate disputes concerning “the validity, interpretation, or enforcement” of the settlement agreement does not infuse an element of bilaterality into the employment agreement. It is true that the settlement agreement contains a bilateral agreement to arbitrate settlement-related disputes', that agreement, however, does not extend to all disputes arising after plaintiff and defendant’s predecessor settled the prior case and plaintiff commenced employment with defendant. A dispute arising out of plaintiff’s employment, occurring many years after the settlement—such as the present dispute—would not invoke the arbitration provision of the settlement agreement.

The employment agreement—in addition to compelling plaintiff to arbitrate all of his disputes with defendant—requires him to submit to discussions with his supervisors in advance of, and as a condition precedent to, having his dispute resolved through binding arbitration. While on its face, this provision may present a laudable mechanism for resolving employment disputes informally, it connotes a less benign goal. Given the unilateral nature of the *1283 arbitration agreement, requiring plaintiff to submit to an employer-controlled dispute resolution mechanism (i.e., one without a neutral mediator) suggests that defendant would receive a “free peek” at plaintiff’s case, thereby obtaining an advantage if and when plaintiff were to later demand arbitration.

Moreover, the unilateral arbitration clause places time limitations upon plaintiff’s assertion of any claims against defendant. In limiting the time to assert a claim to a maximum of 180 days of the date of his employment termination or “such other dispute or controversy first arose,” plaintiff’s time for bringing a claim is shortened, in some instances, by a period of more than three and one-half years. 12 Of course, the employment agreement limits none of the employer’s rights against the employee (including the statutory time for bringing suit against him).