ANGELICA RAMIREZ,
S273802
IN THE SUPREME COURT OF CALIFORNIA
July 15, 2024
Second Appellate District, Division Four B309408 Los Angeles County Superior Court 20STCV25987
Justice Corrigan authored the opinion of the Court, in which Chief Justice Guerrero and Justices Liu, Kruger, Groban, Jenkins, and Evans concurred.
RAMIREZ v. CHARTER COMMUNICATIONS, INC.
S273802
Opinion of the Court by Corrigan, J.
Defendant was sued by a former employee and unsuccessfully moved to compel arbitration. The trial court and the Court of Appeal concluded the arbitration agreement contained unconscionable provisions and declined to enforce it. We too conclude that certain provisions are substantively unconscionable. The next question revolves around remedy. Should the courts have refused to enforce the agreement, or could they have severed the unconscionable provisions and enforced the rest? We conclude the matter must be remanded for further consideration of this question in light of the conclusions and the analysis set out here. We also conclude the Court of Appeal‘s decision did not violate the Federal Arbitration Act (
I. BACKGROUND
A. Proceedings Below and Grant of Review
Defendant Charter Communications, Inc. (Charter) has nearly 100,000 employees and provides telecommunications services throughout the United
Charter job applicants had to agree to use Solutiоn Channel. If a job offer was made, prospective employees used a computerized onboarding process. They were required to read several company documents and policies and to agree by use of an electronic signature. Those documents included a Mutual Arbitration Agreement (Agreement) and the Solution Channel Guidelines (Guidelines).
Charter hired plaintiff Angelica Ramirez in July 2019. Using the onboarding process, Ramirez accepted the proposed Agreement, including adherence to the Guidelines. In May 2020, Ramirez was fired. She sued Charter in July 2020, alleging claims for discrimination, harassment, and retaliation under the Fair Employment and Housing Act (
Relying on the Agreement, Charter moved to compel arbitration and to recover the attorney fees incurred in seeking that ruling. In opposition, Ramirez argued the Agreement was procedurally unconscionable as a contract of adhesion, and that several provisions were substantively unconscionable as well. The challenged provisions included those: describing which claims were subject to and excluded from arbitration; imposing a shortened filing period for certain claims; limiting the discovery available in arbitration; and allowing Charter to recover attorney fees in a manner contrary to FEHA. Charter urged the Agreement was not unconscionable. Alternatively, it argued that, if certain provisions were so held, they should be severed and the balance of the Agreement enforced.
The trial court found that the Agreement was one оf adhesion because it was required as a condition of employment. It concluded the Agreement was substantively unconscionable because it shortened the time for filing a claim; violated FEHA by failing to limit Charter‘s recovery of attorney fees to cases involving frivolous or bad faith claims; and impermissibly allowed an interim fee award to a party which successfully compelled arbitration. The court rejected arguments that the discovery limitations and the exclusion of some claims were unconscionable. Finding the Agreement was “permeated with unconscionability,” the court refused to enforce it and denied the motion to compel arbitration. Charter appealed.
We granted review to resolve that conflict and to determine whether the Court of Appeal erred in concluding the Agreement was unconscionable because it lacked mutuality in terms of the claims subject to and excluded from arbitration; shortened the period for filing claims; and truncated discovery. We also agreed to resolve whether the Court of Appeal‘s refusal to sever the unconscionable provisions and enforce the Agreement violated the FAA.
B. Relevant Provisions of the Agreement and the Guidelines
In Section A of the Agreement, Ramirez and Charter “mutually agree” that “any dispute arising out of or relating to [Ramirez‘s] pre-employment application and/or employment with Charter or the termination of that relationship, except as specifically excluded below, must be resolved through binding arbitration by a private and neutral arbitrator, to be jointly chosen by [Ramirez] and Charter.” Sections B and C modify Section A and specify certain claims as subject to (Section B) or excluded from (Section C) arbitration. Among other claims, those for wrongful termination, discrimination, harassment, and retaliation are made subject to arbitration.
Section E limits the time for filing an arbitration claim. Section I provides that the “arbitrator will decide all discovery disputes related to the arbitration” and that all arbitration proceedings are conducted pursuant to the Guidelines.
Section K governs the allocation of arbitral costs, fees, and expenses. It requires that Charter pay “AAA administrative fees” and “the arbitrator‘s fees and expenses.” “All other costs, fees and expenses associated with the arbitration, including without limitation each party‘s attorneys’ fees, will be borne by the party” incurring them. Section K goes on to provide that “the failure or refusal of either party to submit to arbitration as required by this Agreement will constitute a material breach of this Agreement. If any judicial action or proceeding is commenced in order to compel arbitration, and if arbitration is in fact compelled or the party resisting arbitration submits to arbitration following the commencement of the action or proceeding, thе 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.”
II. DISCUSSION
Federal and California law treat valid arbitration agreements like any other contract and favor their enforcement. (
The “general principles of unconscionability are well established. A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party.” (Kho, supra, 8 Cal.5th at p. 125; see also Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243 (Baltazar).) Unconscionability has both a procedural and a substantive element. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 246 (Pinnacle).) The party resisting enforcement of an arbitration agreement has the burden to establish unconscionability. (Id. at p. 236.)
Procedural unconscionability “addresses the circumstanсes of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.” (Pinnacle, supra, 55 Cal.4th at p. 246.) This element is generally established by showing the agreement is a contract of adhesion, i.e., 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.” (Yeng Sue Chow v. Levi Strauss & Co. (1975) 49 Cal.App.3d 315, 325 (Yeng Sue Chow).) Adhesion contracts are subject to scrutiny because they are “not the result of freedom or equality of bargaining.” (Ibid.) However, they remain valid and
Substantive unconscionability looks beyond the circumstances of contract formation and considers “the fairness of an agreement‘s actual terms” (Pinnacle, supra, 55 Cal.4th at p. 246), focusing on whether the contract will create unfair or one-sided results (Armendariz, supra, 24 Cal.4th at p. 114). Substantively unconscionable contractual clauses “reallocate risks in an objectively unreasonable or unexpected manner.” (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 703 (Serpa); see also Lange v. Monster Energy Co. (2020) 46 Cal.App.5th 436, 447 (Lange).) Both procedural and substantive elements must be present to conclude a term is unconscionable, but these required elements need not be present to the same degree. (Baltazar, supra, 62 Cal.4th at p. 1243.) Courts apply a sliding scale analysis under which “the more substantively oppressive [a] 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.) “[W]hether a contract is fair or works unconscionable hardship is determined with reference to the time when the contract was made and cannot be resolved by hindsight by considering circumstances of which the contracting parties were unaware.” (Yeng Sue Chow, supra, 49 Cal.App.3d at p. 325.)
Appellate review of an order regarding an arbitration agreement‘s validity is de novo if the evidence is not in conflict and the ruling is based entirely on an interpretation of law. (Pinnacle, supra, 55 Cal.4th at p. 236Magno v. The College Network, Inc. (2016) 1 Cal.App.5th 277, 283 (Magno).) The facts here are undisputed; our review is de novo.
A. Procedural Unconscionability
The trial court and the Court of Appeal ruled that the Agreement was procedurally unconscionable because it was an adhesion contract required as a condition of employment. Charter does not challenge that conclusion. Instead, it urges the degree of unconscionability is low because the Agreement‘s adhesive nature is the only basis for that finding. (See Dotson v. Amgen, Inc. (2010) 181 Cal.App.4th 975, 981 (Dotson).) We have previously explained that there are “‘degrees of procedural unconscionability. At one end of the spectrum are contracts that have been
B. Substantive Unconscionability
A court should consider substantive unconscionability only after procedural unconscionability has been established. A “conclusion that a contract contains no element of procedural unconscionability is tantamount to saying that, no matter how one-sided the contract terms, a court will not disturb the contract because of its confidence that the contract was negotiated or chosen freely, that the party subject to a seemingly one-sided term is presumed to have obtained some advantage from conceding the term or that, if one party negotiated poorly, it is not the court‘s place to rectify these kinds of errors or asymmetries.” (Gentry v. Superior Court (2007) 42 Cal.4th 443, 470.)
As we observed in Baltazar, supra, 62 Cal.4th 1237, the unconscionability doctrine “ensures that contracts . . . do not impose terms that have been variously described as “‘overly harsh‘” [citation], “‘unduly oppressive‘” [citation], “‘so one-sided as to “shock the conscience“‘” [citation], or “unfairly one-sided” [citation]. All of these formulations point to the central idea that the unconscionability doctrine is concerned not with “a simple old-fashioned bad bargain” [citation], but with terms that are “unreasonably favorable to the more powerful party” [citation].‘” (Baltazar, at p. 1244, quoting Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145 (Sonic).) “‘Commerce depends on the enforceability, in most instances, of a duly executed written сontract. A party cannot avoid a contractual obligation merely by complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided contract
The 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. We discuss these in turn.
1. Covered and Excluded Claims
Ramirez asserted the Agreement was unconscionable because it compelled arbitration of claims more likely to be brought by an employee and excluded claims more likely to be brought by Charter. The trial court rejected the argument, but the Court of Appeal did not. It held the lack of mutuality in the Agreement‘s covered and excluded claims clauses was substantively unconscionable. We agree.
An arbitration agreement need not “mandate the arbitration of all claims between” the parties. (Armendariz, supra, 24 Cal.4th at p. 120.) However, if an agreement singles out certain claims for arbitration, there must be “mutuality.” (Ibid.) The agreement cannot require “one contracting party, but not the other, to arbitrate all claims arising out of the same transaсtion or occurrence or series of transactions or occurrences.” (Ibid.; see also Pinnacle, supra, 55 Cal.4th at pp. 248–249.) Instead, a “modicum of bilaterality” is required. (Armendariz, at p. 117.) Armendariz explained: “Given the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on ‘business realities’ . . . 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.” (Id. at pp. 117–118.) “Although parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope, . . . the doctrine of unconscionability limits the extent to which a stronger party may,
As Armendariz made clear, unconscionability turns on both a one-sided result and the absence of justification for it. (Armendariz, supra, 24 Cal.4th at pp. 117–118.) We held “that an employer may not impose a system of arbitration on an employee that seeks to maximize the advantages and minimize the disadvantages of arbitration for itself at the employee‘s expense,” but we also “emphasize[d] that if an employer doеs have reasonable justification for the arrangement — i.e., a justification grounded in something other than the employer‘s desire to maximize its advantage based on the perceived superiority of the judicial forum — such an agreement would not be unconscionable.” (Id. at p. 120.) In the absence of justification, we assume the agreement is unconscionable. (Ibid.)
Section B of the Agreement identifies covered claims as those that “will be submitted to arbitration.” The term “covered claims” is generally defined as “all disputes, claims, and controversies that could be asserted in court or before an administrative agency or for which you or Charter have an alleged cause of action related to pre-employment, employment, employment termination or post-employment-related claims, whether the claims are denominated as tort, contract, common law, or statutory claims.” Covered claims include those for: (1) unlawful termination; (2) unlawful failure to hire or promote; (3) unlawful discrimination, harassment, or retaliation; (4) wage and hour disputes; (5) violations of the Family Medical Leave Act, the Americans with Disabilities Act, or other similar state laws; (6) violations of whistleblower laws or the Sarbanes-Oxley Act; (7) violations of the Occupational Health and Safety Act or other similar laws; (8) improper background checks; (9) collection of overpaid wages and commissions; (10) recovery of reimbursed tuition, relocation expense, or unauthorized company credit card charges; and (11) damage to or loss of Charter property.2 The Guidelines
identify the first eight categories of claims as “employee claims” and the last three as “Charter claims.”
not result in termination; (8) older than the applicable statute of limitations; (9) for injunctive and equitable relief “related to unfair competition and the taking, use or unauthorized disclosure of trade secrets or confidential information“; (10) for theft, embezzlement, or any criminal conduct; (11) covered by any collective bargaining or severance agreement or a written employment contract; (12) that were previously adjudicated; (13) for the assertion of any party‘s intellectual property rights; and (14) that are “expressly non-arbitrable by statute, including
The Court of Appeal held the Agreement “is unfairly one-sided because it compels arbitration of the claims more likely to be brought by an employee, the weaker party, but exempts from arbitration the types of claims that are more likely to be brought by an employer, the stronger party.” For support,
likely to bring against its employees.” (Mercuro, at p. 176; accord Fitz, at pp. 724–726.)
Here, the Court of Appeal‘s finding that mutuality was lacking is well supported. As Charter‘s own Guidelines make clear, a wide range of statutory and policy-based claims that would typically be initiated by an employee are directed into arbitration. On the other hand, only a small subset of claims that would typically be initiated by Charter are similarly directed. Meanwhile, the Agreement specifically excludes claims related to intellectual property rights and severance or noncompete agreements, claims for equitable relief related to unfair competition or the disclosure of trade secrets or confidential information, and claims for theft or embezzlement. Though the Guidelines classify the first two as “Charter” and “employee” claims, both are more likely to be employer-initiated. (See, e.g., Davis v. Kozak (2020) 53 Cal.App.5th 897, 916 (Davis); Fitz, supra, 118 Cal.App.4th at p. 725; Mercuro, supra, 96 Cal.App.4th at p. 176.) Further, several of the exclusions for “employee claims” appear to be illusory. Workers’ compensation and unemployment insurance claims are excluded from arbitration by law. (
This lack of mutuality is indicative of substantive unconscionability. Charter resists this conclusion, arguing the Agreement is “fundamentally mutual” because it requires arbitration of claims Charter is likely to initiate and “exempts numerous types of claims that could be brought by an employee.” Relying on the Guidelines, Charter urges the exclusions for claims related to intellectual property and separation agreements are mutual “because either Charter or a Charter employee could bring such claims.” That argument fails. While Ramirez could bring those types of claims, that remote possibility does not change the conclusion that the Agreement, as a whole, tends to exempt claims likely to be made by Charter while directing Ramirez‘s likely claims into arbitration. As noted above, Armendariz requires arbitration agreements to have a modicum of bilaterality. (Armendariz, supra, 24 Cal.4th at p. 117.) But “nothing in Armendariz supports the conclusion that the presence of a modicum of bilaterality renders an agreement per se
Charter also argues there is nothing unfair about the exclusion of claims for injunctive or equitable relief based on unfair cоmpetition and the taking, use, or unauthorized disclosure of trade secrets or confidential information. Charter urges this exclusion is no broader than the protection provided by Code of Civil Procedure section 1281.8, subdivision (b), which allows a “party to an arbitration agreement [to] file [in court] an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.” In Baltazar, supra, 62 Cal.4th 1237, we held that an arbitration agreement that “does no more than recite the procedural protections already secured” was not substantively unconscionable. (Baltazar, at pp. 1247–1248.) We held this was so “regardless of whether [the defendant was], practically speaking, more likely to seek provisional remedies than its employees,” because “simply reciting the parties’ rights under section 1281.8 does not place [the plaintiff] at an unfair disadvantage.” (Baltazar, at p. 1248.)
Contrary to Charter‘s assertion, the exclusion‘s language exceeds the protections offered by the Code of Civil Procedure provision. Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227 is instructive. There, an arbitration agreement required an employee to arbitrate all disputes she had with her employer but allowed the employer to obtain an injunction to restrain the employee from breaching the agreement‘s nondisclosure and exclusive use provisions. (Carbajal, at p. 249Carbajal, at p. 250.) Carbajal rejected that argument. It reasoned that the statute “only authorizes a party to an arbitration agreement to seek a preliminary injunction or other provisional remеdy ‘upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.‘” (Ibid.) By contrast, “the injunctive relief carve-out broadly authorizes [the employer] to seek any type of injunctive relief in court.” (Ibid.) As in Carbajal, the Agreement here excludes any request for injunctive relief, including one for a permanent injunction, related to unfair competition or unauthorized use of trade secrets or confidential information. This type of claim is more likely to be initiated by Charter, and the protection provided by the exclusion goes beyond that provided by the Code of Civil Procedure provision.
“When an appellant fails to raise an issue in the opening brief, raising it for the first time in a reply brief or at oral argument, we generally decline to аddress the issue or address it in a summary manner.” (People v. Grimes (2018) 60 Cal.4th 729, 757.) “Obvious reasons of fairness militate against consideration of an issue raised” so late. (Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 295, fn. 11.) Bearing those considerations in mind, we decline to address the sufficiency of Charter‘s proffered justification. In the absence of a cognizable justification, properly asserted, we “must assume” the Agreement‘s lack of mutuality is unconscionable. (Armendariz, supra, 24 Cal.4th at p. 120.)
2. Filing Time Limits
The Agreement places time limits on the filing of covered claims. It requires the “aggrieved party” to “give written notice of the claim, in the manner required by this Agreement, within the time limit established by the applicable statute of limitations for each legal claim being asserted.” It further provides that, “[t]o be timely, any claim that must be filed with an administrative agency or body as a precondition or prerequisite to filing the claim in court, must be filed with Solution Channel within the time period by which the charge, complaint or other similar document would have had to be filed with the agency or other administrative body.”
The Court of Appeal held this provision unconscionable, explaining that “the outside limit to file a FEHA lawsuit” when the Agreement was executed “could have been as long as three years.”4 (Italics added.) Under the
The Court of Appeal was correct. It is settled that parties may agree, in an arbitration agreement or otherwise, to shorten
the limitations period applicable to a claim. (See Fageol Truck & Coach Co. v. Pacific Indemnity Co. (1941) 18 Cal.2d 748, 753; Ellis v. U.S. Security Associates (2014) 224 Cal.App.4th 1213, 1222 (Ellis).) However, the shortened limitations period must be reasonable. (Ellis, at p. 1222; see also Baxter, supra, 16 Cal.App.5th at p. 731.) Ellis held that an agreement imposing a six-month limitation on the filing of any employee claim, including a FEHA claim, violated public policy. (Ellis, at p. 1225.) The court reasoned an employee would “necessarily” have at least two years to file a FEHA lawsuit. (Ellis, at p. 1225.) Thus, the Legislature had determined that two years was “‘sufficient . . . for the effective pursuit of the judicial remedy.’ ” (Ibid., citation omitted.) By comparison, the contractual six-month limitations period did not give Ellis sufficient time to vindicate her statutory rights. (Ibid.) Further, the “shortened limitation period would thwart [an] aspect of the FEHA that is critical in some cases: the administrative enforcement by the DFEH itself.” (Id., at p. 1226.) The court noted the filing of an administrative claim was ” ‘often the only remedy for employees with modest salaries and small claims; they need [DFEH] because they are not likely to find a private lawyer to represent them.’ ” (Ibid., citation omitted.) The six-month limitations period would “effectively eliminate[] any meaningful participation by [DFEH].” (Ibid.) These factors rendered the contractual limitations period unreasonable. (Ibid.)Baxter, supra, 16 Cal.App.5th 713 reached a similar conclusion. There, an employment arbitration agreement provided that, if a claim “requires the filing of a charge with an administrative agency before a court action may be instituted,” the deadline for an arbitration claim was “the administrative agency filing deadline.” (Id. at p. 730.) Thus, as in this case, a FEHA claim had to be submitted to arbitration within one year. (Baxter, at p. 730.) Baxter held this shortened limitations period was unconscionable. (Id. at p. 732.)
The relevant circumstances here are identical to those in Baxter. The Agreement requires FEHA claims to be submitted to arbitration. The filing limitation provision requires that any such claim be filed with Solution Channel within the one-year period to submit an administrative claim to DFEH. This limitation truncates the period the Legislature has determined employees need to effectively vindicate their rights. As a result, it potentially deprives Charter employees of meaningful DFEH participation. It is “problematic to require [an] employee to arbitrate statutory FEHA claims before an administrative investigation can be conducted.” (Baxter, supra, 16 Cal.App.5th at p. 734.) The “involvement of the DFEH serves an important function [and] ‘may be helpful . . . because it requires a prompt, detailed response from the employer, giving the employee a free, quick look at the defenses the employer is likely to raise.’ ” (Ibid., quoting Ellis, supra, 224 Cal.App.4th at p. 1226.) The filing limitation substantially shortens the time for fully pursuing a FEHA claim and may preclude a DFEH investigation, rendering it substantively unconscionable.
Charter lodges two arguments against this conclusion. First, it argues the limitation provision is ambiguous and should be construed in a way that renders it valid rather than unenforceable. According to Charter, the first sentence of the clause indicates that the “normal statute of limitations” applies to any claim submitted to arbitration, whereas the second sentence provides a shorter limitations period for сertain claims that must be filed with an administrative agency before being filed in court. Given this “ambiguity,” Charter argues the provision “should be interpreted in a way to make the Agreement operative.” Charter relies on the rule that ambiguous terms in a contract should be construed in favor of enforceability and validity where it can be done without violating the parties’ intent. (See, e.g.,
We reject this strained interpretation. The principle Charter cites applies when a contract contains a genuine ambiguity. (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1473 (Roman).) It does not apply when ambiguity is absent. “[W]hen the language of a contract is plain and unambiguous it is not within the province of a court to rewrite or
Second, Charter argues the filing limitation had no impact on Ramirez in the context of this case because she sought an immediate right-to-sue letter and relinquished her right to а DFEH investigation. Stated differently, Charter argues that even if the clause might create unconscionable results in some instances, it did not do so for Ramirez. But whether a contract “works unconscionable hardship is determined with reference to the time when the contract was made” and cannot be resolved in hindsight, “considering circumstances of which the contracting parties were unaware.” (Yeng Sue Chow, supra, 49 Cal.App.3d at p. 325.) Charter‘s reliance on post-formation circumstances violates this principle. Moreover, FEHA protections “are for the benefit of the entire public, not just [this] plaintiff[].” (Wherry v. Award, Inc. (2011) 192 Cal.App.4th 1242, 1249 (Wherry); see also Ellis, supra, 224 Cal.App.4th at p. 1220.) FEHA‘s protections, including its limitations periods, cannot be abrogated by private agreement. As
3. Limits on Discovery
Under the Agreement, an “arbitrator will decide all discovery disputes related to the arbitration.” The Guidelines provide greater detail in three paragraphs under the heading “Exchanging Information and Preparing for Hearing.” The parties are allowed 90 days “to exchange information and take depositions.” During that time, each party is “permitted to take up to four (4) depositions and allowed up to 20 total interrogatories (including subparts) and up to 15 total requests for documents to the other party.” Any “disagreements regarding the exchange of information or depositions will be resolved by the
Armendariz, supra, 24 Cal.4th 83 provided a standard that many cases have used to evaluate the validity of discovery limits. A brief review will provide context. The Armendariz plaintiffs sued their employer for FEHA violations, and the employer moved to compel arbitration. (Armendariz, at p. 92.) In opposition, the plaintiffs first argued that a mandatory agreement to arbitrate claims arising under a state antidiscrimination statute, like FEHA, is prohibited. We rejected that broad argument, but held that arbitration of a claim based on nonwaivable statutory civil workplace rights could only be compelled if the agreement satisfied five minimum requirements. Such an 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 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.’ ”7 (Armendariz, at p. 102, quoting Cole v. Burns Intern. Security Services (D.C. Cir. 1997) 105 F.3d 1465, 1482.)
As to discovery, we stated that parties to an arbitration clause can agree “to something less than the full panoply of discovery provided” in the
Armendariz stands for the principle that an arbitration agreement required as a condition of employment must generally permit employees sufficient discovery to adequately arbitrate any statutory claims. The scope of what discovery is sufficient is determined by the arbitrator. Here, Ramirez argued the discovery provision was substantively unconscionable because it allowed for only four depositions while she would need at least seven to substantiate her claims.10 The trial court rejected her argument, but the Court of Appeal did not. It reasoned that while Ramirez had estimated, without dispute from Charter, that she needed to take at least seven depositions, the discovery provision limited her to four and the arbitrator had no authority to expand that number. As a result, it concluded the authorized discovery was inadequate to permit a fair pursuit of her claims.
One difficulty with that analysis is that the Court of Appeal looked to specific circumstances that only arose after the contract was executed. As noted, an unconscionability assessment focuses on circumstances known at the time the agreement was made. (Yeng Sue Chow, supra, 49 Cal.App.3d at p. 325.) The Court of Appeal acknowledged this general principle, but reasoned that other courts had “consistently assessed unconscionability for limitations on discovery as applied to a particular plaintiff.” The Court of Appeal is correct that several appellate decisions have assessed the unconscionability of discovery provisions in the manner described. (See Baxter, supra, 16 Cal.App.5th at pp. 727-730; see also De Leon v. Pinnacle Property Management Services LLC (2021) 72 Cal.App.5th 476, 489; Davis, supra, 53 Cal.App.5th 897, 912; Torrecillas, supra, 52 Cal.App.5th at p. 497; Sanchez v. Carmax Auto Superstores California, LLC (2014) 224 Cal.App.4th 398, 405-406; Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 513-514 (Ontiveros).) This approach to addressing unconscionability challenges to discovery clauses in arbitration agreements seems to be taking
The assessment of whether a discovery clause is unconscionable should focus on general factors that can be examined without relying on subsequent developments. Those factors include the types of claims covered by the agreement, the amount of discovery allowed, the degree to which that amount may differ from the amount available in conventional litigation, any asymmetries between the parties with regard to discovery, and the arbitrator‘s authority to order additional discovery. As Kho, supra, 8 Cal.5th 111 explained, “a substantive unconscionability analysis is sensitive to ‘the context of the rights and remedies that otherwise would have been available to the parties.’ [Citation.] We must examine both the features of the dispute resolution adopted as well as the features eliminated.” (Id. at p. 130.) Allowing the arbitrator to deviate from agreed-upon default discovery limits ensures that neither party will be unfairly hampered in pursuing a statutory claim based on circumstances that arise post-formation. We note that giving the arbitrator authority to expand discovery basеd on Armendariz‘s requirement is one way the adequacy concern can be addressed. We do not foreclose other formulations that ensure adequate discovery to vindicate a specific claim.
The second difficulty with the Court of Appeal‘s analysis is that it misinterpreted the scope the arbitrator‘s authority. As mentioned, the Agreement states the “arbitrator will decide all discovery disputes related to the arbitration” and the Guidelines provide that “[a]ny disagreements regarding the exchange of information or depositions will be resolved by the arbitrator to allow a full and equal opportunity to all parties to present evidence that the arbitrator deems material and relevant to the resolution of the dispute.” The Court of Appeal held that language empowered the arbitrator to resolve disagreements as to “things like the identity of persons sought to be deposed, objections made during depositions, and the dates, location, and duration of depositions,” but not to order additional depositions.
There is no compelling reason to construe the applicable provisions in such a limited way. While the language could have been more precise, it seems clear the Agreement and the Guidelines give the arbitrator the authority to resolve “all discovery disputes” in a manner that allows “a full and equal opportunity” to discover and present relevant and material evidence. Understood in this way, if the arbitrator determined additional depositions were necessary to satisfy the Armendariz requirement, the Guidelines would permit the arbitrator to order expanded discovery. Normally, we assume the arbitrator will act reasonably and in conformity with the law. (Dotson, supra, 181 Cal.App.4th at p. 981.)
4. Award of Interim Attorney Fees
Under Section K of the Agreement, the parties agreed “that the failure or refusal of either party to submit to arbitration as required by this Agreement will constitute a material breach of this Agreement. 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 рroceeding, 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 trial court found this clause was “unusual, lack[ed] mutuality, and produce[d] overly harsh results.” The Court of Appeal agreed, holding the clause is unenforceable because it violates FEHA‘s asymmetric rule regarding awards of costs and fees. We agree with the courts below that the clause has the potential to result in an unlawful award of attorney fees and is substantively unconscionable.
“Several well-established rules govern [the] imposition of fees and costs incurred in actions under” FEHA. (Patterson, supra, 70 Cal.App.5th at p. 477.) FEHA grants a trial court discretion to award “reasonable attorney‘s fees and costs” to “the prevailing party.” (
Armendariz, supra, 24 Cal.4th 83 articulated a second rule governing FEHA fees and costs. “[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.” (Armendariz, at pp. 110-111.) We reasoned that this rule would “ensure that employees bringing FEHA claims will not be deterred by costs greater than the usual costs incurred during litigation.” (Id. at p. 111.)
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. The provision unambiguously requires an award of attorney fees, even if the moving party is a defendant in a FEHA action and the arbitrator has made no finding of frivolity, groundlessness, or continued litigation. Permitting payment of attorney fees in these circumstances would be inconsistent with Armendariz‘s directive that a mandatory arbitration agreement cannot require employees to bear any expense that they would not be required to bear if they were able to bring the action in court. The provision thus creates a potential obligation to pay costs only in an arbitral setting. The provision would also undermine the public policy embodied in FEHA‘s asymmetric rule. As a result, the clause is unconscionable.
Moreover, an unconscionability evaluation “often requires inquiry into the ‘commеrcial setting, purpose, and effect’ of the contract or contract provision.” (Sanchez, supra, 61 Cal.4th at p. 911.) Here, the potential effects of Section K support a finding of unconscionability because the clause does not take into account a situation in which some arguments made by the resisting party are successful. It is possible that a court could find parts of the Agreement unconscionable, sever those parts from the Agreement, and enforce the remainder by compelling arbitration. In such a case, Charter could
Charter resists this conclusion, relying on Patterson, supra, 70 Cal.App.5th 473, which interpreted the same agreement involved here. Patterson sued Charter, alleging FEHA violations, and Charter moved to compel arbitration. Patterson opposed, arguing the Agreement was unconscionable and unenforceable. Unlike this case, the trial court granted the motion to compel.11 (Patterson, at pp. 478-479.) The trial court then granted Charter‘s attorney fee request, reasoning that FEHA‘s asymmetric rule did not apply. (Id. at p. 480.) Patterson sought relief via a second petition for writ of mandate, arguing the fee award violated FEHA‘s asymmetric attorney fee rule. (Id. at p. 480.)
The Court of Appeal began by clarifying the issue to be resolved. The court noted it was not reviewing the order compelling the parties to arbitrate. (Patterson, supra, 70 Cal.App.5th at p. 486, fn. 5.) Rather, it assumed the Agreement was enforceable and addressed the validity of the fee award. (Id. at pp. 484-486.) As to that question, the court held that, where “there is no other contract issue . . . to be resolved [and] [t]he only contract dispute [is] the enforceability of the arbitration agreement,” the prevailing party “is entitled to its fees under [Section K] to the extent not otherwise prohibited or limited by FEHA.” (Id. at p. 486, italics added.)
Patterson went on to consider how FEHA‘s asymmetric rule applied. Several appellate decisions have held that arbitration agreements covering FEHA claims were unconscionable because they authorized the recovery of attorney fees by the prevailing party or required each party to bear its own fees and costs, rather than adopting FEHA‘s asymmetric rule. (See Patterson, supra, 70 Cal.App.5th at p. 488, citing Trivedi v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 395, disapproved on another ground in Baltazar v. Forever 21, Inc., supra, 62 Cal.4th at p. 1246; accord Wherry, supra, 192 Cal.App.4th at p. 1249; Serpa, supra, 215 Cal.App.4th at pp. 709-710.) Analogizing to those cases, Patterson reasoned that “[p]ermitting Charter to recover its attorney fees for a successful motion to compel arbitration in a pending FEHA lawsuit[,] without a showing the plaintiff‘s [opposition] was objectively groundless,” would deny the “plaintiff the rights guaranteed by [FEHA] with a corresponding chill on access to the courts for any employee or former employee who has an arguably meritorious argument that the [Agreement] is unenforceable. Even with a strong claim of unconscionability, [the] employee might not pursue it and risk a substantial awаrd of attorney fees before arbitration begins.” (Patterson, at p. 489.) Citing the “strong public policy favoring arbitration” and “the requirement we interpret the provisions in a contract in a manner that render[s] them legal rather than void when possible,” the Court of Appeal construed Section K “to impliedly incorporate [FEHA‘s] asymmetric rule for awarding attorney fees and costs.” (Patterson, at p. 490.) The court cited Armendariz, supra, 24 Cal.4th 83, Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665 (Pearson Dental), and Roman, supra, 172 Cal.App.4th 1462 for support. Construed in that manner, Patterson stated the provision would “preclude an award of attorney fees and costs to Charter following a successful motion to compel arbitration absent a showing that [the employee‘s] opposition to the motion was frivolous, unreasonable or groundless.” (Patterson, at p. 490.) The matter was then remanded to the trial court with directions to vacate its fee award and “conduct a hearing to make the required findings” if Charter continued to pursue its request. (Ibid.)
Charter urges us to construe Section K of the Agreement as Patterson did.12 Even if we conclude the clause may conflict with FEHA‘s asymmetric rule in some instances, Charter urges us to interpret the provision to “render it lawful by reading it to only allow attorneys’ fees where the plaintiff‘s opposition to the motion to compel arbitration was frivolous or groundless.” Charter cites
Charter‘s reliance on Patterson is misplaced for several reasons. First, Patterson did not expressly hold that Section K complies with FEHA. The court noted it had summarily denied the plaintiff‘s writ petition challenging the order compelling arbitration, and that the order would “be reviewable on appeal from a final judgment.” (Patterson, supra, 70 Cal.App.5th at p. 486, fn. 5.) The summary denial of a petition for writ of mandate generally is not
On the contrary, Patterson‘s reasoning suggests the рrovision is not enforceable in all its potential applications. To bring Section K into compliance with FEHA, Patterson construed the clause as if it incorporated an exception modeled on FEHA‘s asymmetric cost and fee rule. Under Patterson‘s construction, the provision would allow Charter to recover attorney fees it incurred in compelling arbitration of a FEHA claim, but only if the employee‘s opposition to Charter‘s motion to compel was found frivolous, unreasonable, or groundless. Patterson did not conclude Section K is enforceable as written. At most, it stands for the proposition that an attorney fee award to Charter could be lawful if additional findings, not required by the Agreement, were made.
Second, the authorities Patterson relied on in interpreting Section K do not support its construction. Patterson cited
Section K, however, is not ambiguous. It clearly requires payment of attorney fees to a party who successfully compels arbitration. The payment obligation is unqualified.
Patterson also cited Armendariz, supra, 24 Cal.4th 83, Pearson Dental, supra, 48 Cal.4th 665, and Roman, supra, 172 Cal.App.4th 1462 to support its construction. According to Patterson, Pearson Dental and Roman stand for the proposition that courts must interpret contract provisions in a manner that “render[s] them legal rather than void when possible.” (Patterson, supra, 70 Cal.App.5th at p. 490.) This characterization sweeps too broadly. Indeed, Roman and Pearson Dental are consistent with our interpretation of Section K. If a contractual provision is ambiguous, and one interpretation would render it valid while another would render it void, a court should select the interpretation that renders it valid. (Roman, at p. 1473; Pearson Dental, at p. 682;
Patterson also suggested its contractual interpretation was consistent with our approach in Armendariz. (Patterson, supra, 70 Cal.App.5th at p. 490Armendariz is overbroad. As mentioned, Armendariz held “that a mandatory employment arbitration agreement that contains within its scope the arbitration of FEHA claims impliedly obliges the employer to pay all types of costs that are unique to arbitration.” (Armendariz, supra, 24 Cal.4th at p. 113.) The Armendariz agreement contained no provision governing arbitration costs. (Ibid.) In light of the agreement‘s silence on the subject, Armendariz inferred that the parties had agreed to allocate costs, expenses, and fees in a manner consistent with applicable legal standards. Armendariz did not rewrite the contract to avoid the unconscionability embedded in its unambiguous terms. It inferred the agreement complied with applicable legal standards precisely because the parties had not unambiguously agreed otherwise.
Finally, Patterson suggested its interpretation was supported by the “strong public policy favoring arbitration.” (Patterson, supra, 70 Cal.App.5th at p. 490Morgan v. Sundance, Inc. (2022) 596 U.S. 411, 418 [142 S.Ct 1708, 1713].) Section K is unconscionable because it unambiguously violates FEHA. The policy favoring arbitration cannot save it.13 Patterson v.
Superior Court, supra, 70 Cal.App.5th 473 is disapproved to the extent it is inconsistent with the views expressed herein.
Here, the trial court found three aspects of the Agreement unconscionablе: the time limits imposed on the filing of certain claims; the allowance for an award of attorney fees to Charter without a finding the plaintiff‘s claim was frivolous or groundless; and the allowance for an award of attorney fees for a successful motion to compel arbitration. Noting that there was “more than one unlawful provision” and “that there [was] no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement,” the court determined that severance was improper and refused to enforce the Agreement. The Court of Appeal affirmed that decision. It reasoned that severance “may be properly denied when the agreement contains more than one unconscionable provision” and the unconscionable taint cannot be removed from the agreement by striking or restricting a single provision. The court concluded that it had identified “multiple defects” that “worked to Ramirez‘s distinct disadvantage,” making a denial of severance “entirely reasonable.”
Armendariz, supra, 24 Cal.4th 83 explained how a court should determine whether and how to exercise its discretion under
In particular, we noted
We concluded that the “basic principles of severability that emerge” from the statutes and case law regarding illegal contracts appear fully applicable to the doctrine of unconscionability.” (Armendariz, supra, 24 Cal.4th at p. 124.) We explained: “Courts are to look to the various purposes of the contract. If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate.” (Ibid.)
In Armendariz, “two factors weigh[ed] against severance” for the agreement at issue. First, the agreement contained “more than one unlawful provision; it has both an unlawful damages provision and an unconscionably unilateral arbitration clause. Such multiple defects indicate 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.” (Armendariz, supra, 24 Cal.4th at p. 124.) “[G]iven the multiple unlawful provisions, the trial court did not abuse its discretion in concluding that the arbitration agreement is permeated by an unlawful purpose.” (Ibid.)
Second, regarding the “agreement‘s lack of mutuality,” we reasoned that “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.” (Armendariz, supra, 24 Cal.4th at pp. 124-125.) Instead, “the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms.” (Id. at p. 125.) We observed that neither
Charter argues the trial court and the Court of Appeal erroneously assumed that a bright line rule prohibits severance where an agreement has more than one unconscionable provision. Neither court stated its reliance on such an assumption expressly, though both did highlight the number of unconscionable provisions as a key factor in their decisions to refuse to enforce the
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 and accounts for each factor Armendariz identified. At the outset, a court should ask whether “the central purpose of the contract is tainted with illegality.” (Armendariz, supra, 24 Cal.4th at p. 124.) 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. (See Armendariz, supra, 24 Cal.4th at pp. 124-125.) If no “reformation is required,” the offending provision can be severed or limited, and “the rest of the arbitration agreement left intact,” then severance or restriction is the preferred course for provisions that are collateral to the agreement‘s main purpose. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1075; see also Armendariz, at p. 124; Farrar, supra, 9 Cal.App.5th at p. 1275.) 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. (Mercuro, supra, 96 Cal.App.4th at p. 185; see id. at pp 185-186.) Courts cannot “rewrite agreements and impose terms to which neither party has agreed.” (Sonic, supra, 57 Cal.4th at p. 1143.)
Even 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. (Armendariz, supra, 24 Cal.4th at p. 124.) This part of the inquiry focuses on whether mere severance of the unconscionable terms would function to condone an illegal scheme and whether the defects in the agreement indicate that the stronger party engaged in a systematic effort to impose arbitration on the weaker party not simply as an alternative to litigation, but to secure a forum that works to
In conducting this analysis, the court may also consider the deterrent effect of each option. As Mills v. Facility Solutions Group, Inc. (2022) 84 Cal.App.5th 1035 explained, severing multiple unconscionable provisions from an agreement and enforcing the remainder could “create an incentive for an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, the court would simply modify the agreement to include the bilateral terms the employer should have included in the first place.” (Id. at p. 1045.) Although there are no bright line numerical rules regarding severance, it is fair to say that the greater the number of unconscionable provisions a contract contains the less likely it is that severance will be the appropriate remedy. Finally, if the contract contains a severance clause, the court should take it into account as an expression of the parties’ intent that an agreement curable by removing defective terms should otherwise be enforced. (See Baeza v. Superior Court (2011) 201 Cal.App.4th 1214, 1229-1230; Alvarez v. Altamed Health Services Corp. (2021) 60 Cal.App.5th 572, 596;
Accordingly, courts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract‘s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice. (See Armendariz, supra, 24 Cal.4th at pp. 124-125; accord Marathon Entertainment, Inc. v. Blasi (2008) 42 Cal.4th 974, 991; Adair v. Stockton Unified School Dist. (2008) 162 Cal.App.4th 1436, 1450.) Here, the Court of Appeal concluded that four aspects of the Agreement are unconscionable. We concur as to three of the four but conclude the discovery rules imposed by the Agreement and the Guidelines are not unconscionable. That difference alone might not merit reversal of the Court of Appeal‘s judgment. However, for the reasons set out below, we conclude that reversal and remand for further proceedings is warranted.
First, it is not clear that the Court of Appeal would have affirmed the ruling had it reached the conclusion we draw regarding the Agreement‘s discovery
On remand, the Court of Appeal may consider the severance question anew, in light of its answers to those questions, and in a manner consistent with this opinion.
D. FAA Preemption
The Agreement expressly provides that it “will be governed” by the FAA. The “overarching purpose” of the FAA “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 344.) Charter argues it would contravene the FAA to apply the general law of unconscionability and to refuse to sever the Agreement‘s unconscionable provisions and enforce the rest.
Patterson rejected a similar argumеnt, stating that “Charter‘s abbreviated and overly broad discussion of FAA preemption . . . omit[ted] several fundamental principles of FAA jurisprudence.” (Patterson, supra, 70 Cal.App.5th at p. 491.) As Patterson explained, although the FAA “requires courts to place arbitration agreements on an equal footing with other contracts and to enforce them according to their terms,” it also permits courts to declare arbitration agreements unenforceable upon the same grounds as any other contract, including unconscionability. (Patterson, at p. 491, citing McGill v. Citibank, N.A. (2017) 2 Cal.5th 945, 961-962.) Thus, it does not contravene the FAA to find that certain provisions of the Agreement are unconscionable. The FAA seeks to treat interpretation and enforcement of arbitration agreements equally with other contracts. Such treatment continues to recognize the severance of unconscionable claims as an option for the court‘s consideration. As McGill observed, it was not Congress‘s intent to make arbitration agreements more enforceable than other contracts. (McGill, at p. 962.)
III. DISPOSITION
The Court of Appeal‘s judgment is reversed. The matter is remanded for further proceedings consistent with our decision.
CORRIGAN, J.
We Concur:
GUERRERO, C. J.
LIU, J.
KRUGER, J.
GROBAN, J.
JENKINS, J.
EVANS, J.