Page 1
S.C. Invalidates Fees for Employer Compelling Arbitration
Disapproves Court of Appeal Decision in Unrelated Case Finding Such a Contractual Provision Is Enforceable
By Kimber Cooley, Staff Writer
The California Supreme Court held yesterday that a provision in an agreement providing for the payment of attorney fees to an employer that successfully moves to compel arbitration of a dispute—regardless of whether the underlying action is frivolous—is unconscionable as it violates provisions of a statute that bars employment discrimination and harassment.
That provision was one of the bases for finding the agreement to be unenforceable. The high court also held that no bright line rule requires a court to decline to enforce a contract that has more than one unconscionable term—or mandates severance if the agreement has only one such provision—as the appropriate inquiry is qualitative in nature and begins with considering whether the central purpose of the contract is tainted with illegality.
The dispute arose in a lawsuit in which Angelica Ramirez sued her former employer, Charter Communications, Inc., for alleged discrimination, harassment, and retaliation under the Fair Employment and Housing Act (“FEHA”), codified at Government Code §12900 et seq. Charter cited an arbitration agreement signed by Ramirez as part of her onboarding with the company and moved to compel arbitration.
Los Angeles Superior Court Judge David Cowan denied the motion to compel. In the opinion by then-Justice Thomas L. Willhite Jr. (now retired from the court and serving as an arbitrator for an alternative dispute outfit), Div. Four of this district’s Court of Appeal affirmed, saying “given that we have found the agreement permeated by significant unconscionable terms, a denial of severance is entirely reasonable.”
Justice Carol Corrigan wrote the opinion for a unanimous court which agrees with the Court of Appeal that several provisions in the arbitration agreement are unconscionable but reverses and remands for a severance analysis consistent with the opinion. Corrigan wrote:
“As clarified here, the decision whether to sever unconscionable provisions and enforce the balance is a qualitative one, based on the totality of the circumstances. The court cannot refuse to enforce an agreement simply by finding that two or more collateral provisions are unconscionable as written and eschewing any further inquiry.”
Unconscionable Provisions
Corrigan pointed out that Charter does not dispute that the contract is procedurally unconscionable as an adhesion contract required as a condition of employment but argues that there is no substantive unconscionability in its terms. Section K of the agreement provides:
“If any judicial action or proceeding is commenced in order to compel arbitration, and if arbitration is in fact compelled or the party resisting submits to arbitration following the commencement of the action or proceeding, the party that resisted arbitration will be required to pay to the other party all costs, fees and expenses that they incur in compelling arbitration, including, without limitation, reasonable attorneys’ fees.”
The jurist explained that several well-established rules govern the imposition of fees and costs incurred under FEHA. Sec. 12965 provides that “a prevailing defendant shall not be awarded fees and costs unless the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.”
She added that the 2000 California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc. “articulated a second rule governing FEHA fees and costs.” Justice Stanley Mosk (now deceased) wrote:
“[W]hen an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.”
Applying the rules to the present case, Corrigan opined:
“Read together, the statutes and Armendariz make clear that an arbitration agreement imposed as a condition of employment cannot require an employee to pay attorney fees to the employer in the arbitration of a statutory claim, unless the arbitrator finds that the action was frivolous, unreasonable, or groundless when brought, or that the employee continued to litigate after it clearly became so. The Court of Appeal correctly concluded that Section K could violate the dictates of FEHA and Armendariz.”
Patterson Case Disapproved
Charter pointed to the 2021 decision in Patterson v. Superior Court of Los Angeles in which Div. Seven of this district’s Court of Appeal considered the same Charter arbitration provision. Following a petition for writ of mandate challenging a fee award to Charter for costs incurred in compelling arbitration, the court did not review the order granting the motion to compel, but only considered the propriety of the award.
In an opinion by then-Presiding Justice Dennis Perluss (now retired), the court held that the provision allowed the prevailing party to recover attorney fees under Section K “to the extent not otherwise prohibited or limited by FEHA” and read into the agreement the requirement that the action be frivolous for the award to be proper.
Corrigan acknowledged that courts should construe ambiguous agreements in favor of an interpretation that renders the provision valid, but said that case law does not suggest that “a court can construe an unambiguous contractual clause to mean something it does not say, in violation of the parties’ clear and agreed-upon language.”
She declared that the Patterson opinion “is disapproved to the extent it is inconsistent with the views expressed herein.”
Other Problematic Provisions
The justice remarked that “[t]he Court of Appeal concluded that four aspects of the Agreement were substantively unconscionable: (1) the lack of mutuality in the covered and excluded claims provisions; (2) the shortened limitations periods for filing; (3) the limited number of permitted depositions; and (4) the potential for an unlawful award of attorney fees.” She agreed with the Court of Appeal except as to the depositions clause.
A provision in the agreement provides that each party is “permitted to take up to four (4) depositions” and that any “disagreements regarding the exchange of information or depositions will be resolved by the arbitrator.” Ramirez argues that the provision is substantively unconscionable because it allows for only four depositions and she would need at least seven to substantiate her claims.
Unpersuaded, Corrigan said:
“Where a contract is susceptible to two interpretations, one which renders it valid and the other which renders it void, a court should select the interpretation that makes the contract valid….Even if we were to assume for the sake of argument that the Agreement…[is] susceptible to either interpretation, we would conclude the arbitrator has authority to order additional discovery if the arbitrator determines that action is necessary to allow fair arbitration of the claim. Such an interpretation of the provisions eliminates any unconscionability.”
Severance Availability
Corrigan noted that Civil Code §1670.5 provides that if a contractual clause is found to be unconscionable, a court may “(1) refuse to enforce the contract; (2) sever any unconscionable clause; or (3) limit the application of any clause to avoid unconscionable results.”
The justice noted a split in authority in the appellate courts with some “treat[ing] the severance question as more of a quantitative inquiry than a qualitative one.”
She declared:
“Here, we clarify that no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term. Likewise, a court is not required to sever or restrict an unconscionable term if an agreement has only a single such term. Instead, the appropriate inquiry is qualitative….”
Central Purpose
Corrigan set forth factors governing the analysis, saying that the court should first ask whether the central purpose of the agreement is tainted with illegality, and said:
“If so, the contract cannot be cured, and the court should refuse to enforce it. If that is not the case, the court should go on to ask first, whether the contract’s unconscionability can be cured purely through severance or restriction of its terms, or whether reformation by augmentation is necessary…. If the unconscionability cannot be cured by extirpating or limiting the offending provisions, but instead requires augmentation to cure the unconscionability then the court should refuse to enforce the contract.”
She added that “[e]ven if a contract can be cured, the court should also ask whether the unconscionability should be cured through severance or restriction because the interests of justice would be furthered by such actions” and “the greater the number of unconscionable provisions a contract contains the less likely it is that severance will be the appropriate remedy.”
She opined that “if the contract contains a severance clause, the court should take it into account as an expression of the parties’ intent” but “we note that the parties to an agreement cannot divest a trial court of its discretion under Civil Code section 1670.5 by including such a severance clause.”
The case is Ramirez v. Charter Communications, Inc., 2024 S.O.S. 2372.
Copyright 2024, Metropolitan News Company