Farrar v. Direct Commerce, Inc.
9 Cal. App. 5th 1257
| Cal. Ct. App. | 2017Background
- Farrar, a senior executive with substantial negotiation experience, accepted a six-page offer letter from Direct Commerce that set salary, commissions, stock options, and contained an arbitration clause (paragraph 13) and referenced a separate Assignment of Inventions & Confidentiality Agreement.
- The arbitration paragraph required binding arbitration for employment-related disputes but expressly excluded: (a) workers’ compensation claims and (b) “any claim based on or related to the … Assignment of Inventions & Confidentiality Agreement.”
- Farrar signed the final offer letter after negotiating economic terms; she did not receive the separate confidentiality agreement until her start date and did not allege she asked for and was denied a copy before signing.
- Four years later Farrar sued for breach of contract, wrongful termination, conversion, breach of the covenant of good faith and fair dealing, and unpaid wages; Direct Commerce petitioned to compel arbitration.
- The trial court denied the petition, finding the arbitration clause procedurally and substantively unconscionable. The Court of Appeal reviewed de novo and considered severability and cost-allocation under Armendariz.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Procedural unconscionability of arbitration clause | Farrar: adhesive clause; surprised by provider change, missing rules, and confidentiality agreement delivered after signing | Direct Commerce: clause was conspicuous, negotiated for economic terms, Farrar knew clause and had opportunity to request docs | No significant procedural unconscionability — some adhesion but not sharp practice; clause was clear and Farrar had opportunity to review/raise issues |
| Substantive unconscionability — confidentiality carve-out | Farrar: carve-out makes arbitration one-sided because employer’s likely claims (trade secrets/confidentiality) are exempt while employee claims must be arbitrated | Direct Commerce: carve-out justified by legitimate commercial need to protect trade secrets and need for provisional relief | Carve-out is substantively unconscionable because it wholly exempts confidentiality claims (not limited to provisional remedies) and thus is one-sided |
| Severability of offending carve-out | Farrar: whole clause should be invalidated | Direct Commerce: sever the carve-out and enforce arbitration | Court: sever the confidentiality exception under Cal. Civ. Code § 1670.5; remaining arbitration provision is bilateral and enforceable |
| Allocation of arbitration forum costs (Armendariz issue) | Farrar (raised on appeal): arbitration may impose unique forum costs on employee, rendering agreement unenforceable | Direct Commerce: no specific cost term in agreement; forum rules may assign costs | Court implies Armendariz rule: employer must bear arbitration forum costs; arbitration compelled with implied employer-bearing-costs term |
Key Cases Cited
- Armendariz v. Foundation Health Psychare Servs., 24 Cal.4th 83 (2000) (mandatory employment arbitration covering unwaivable statutory rights requires certain protections, including employer bearing arbitration forum costs where necessary)
- Baltazar v. Forever 21, Inc., 62 Cal.4th 1237 (2016) (adhesive employment arbitration clause not per se unconscionable; failure to attach arbitration rules does not automatically increase procedural unconscionability)
- Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899 (2015) (unconscionability analysis focuses on overall fairness and reasonable expectations; adhesive character establishes some procedural unconscionability)
- Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519 (1997) (arbitration carve-outs for employer’s intellectual-property/confidentiality claims can render an agreement one-sided and substantively unconscionable)
- Sonic-Calabasas A, Inc. v. Moreno, 57 Cal.4th 1109 (2013) (substantive unconscionability requires terms unreasonably favorable to drafting party; analysis depends on commercial context)