Armendariz v. Foundation Health Psychcare

Decision Date24 August 2000
Docket NumberNo. S075942.,S075942.
Citation99 Cal.Rptr.2d 745,24 Cal.4th 83,6 P.3d 669
CourtCalifornia Supreme Court
PartiesMarybeth ARMENDARIZ et al., Plaintiffs and Respondents, v. FOUNDATION HEALTH PSYCHCARE SERVICES, INC., Defendant and Appellant.

Pillsbury Madison & Sutro, William Gaus, Craig E. Stewart, Alice Kwong Ma Hayashi and Emily E. Flynn, San Francisco, for Defendant and Appellant.

Paul, Hastings, Janofsky & Walker, Paul W. Cane, Jr., Leslie L. Abbott, Los Angeles, and Kristen L. McMichael for California Employment Law Council as Amicus Curiae on behalf of Defendant and Appellant.

Jones, Day, Reavis & Pogue, William J. Emanuel, Harry I. Johnson III, Holger C. Besch, Los Angeles; Law Offices of Steven Drapkin and Steven Drapkin, Los Angeles, for Employers Group as Amicus Curiae on behalf of Defendant and Appellant.

Miller, Clark, Calvert & Raimondi, Berkeley, Glenn M. Clark, Orange, Allan C. Miller, Berkeley; Altshuler, Berzon, Nussbaum, Berzon & Rubin, Michael Rubin and Indira Talwani, San Francisco, for Plaintiffs and Respondents.

McGuinn, Hillsman & Palefsky, Cliff Palefsky and Keith Ehrman, San Francisco, for California Employment Lawyers Association as Amicus Curiae on behalf of Plaintiffs and Respondents.

Bill Lockyer, Attorney General, Richard M. Frank, Chief Assistant Attorney General, Louis Verdugo, Jr., Assistant Attorney General, and Kathleen W. Mikkelson, Deputy Attorney General, for the State of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

The Sturdevant Law Firm and James C. Sturdevant, San Francisco, for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

MOSK, J.

In this case, we consider a number of issues related to the validity of a mandatory employment arbitration agreement, i.e., an agreement by an employee to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which an employer imposes on a prospective or current employee as a condition of employment. The employees in this case claim that employees may not be compelled to arbitrate antidiscrimination claims brought under the California Fair Employment and Housing Act (FEHA) (Gov.Code, § 12900 et seq.) We conclude that such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights. As explained, in order for such vindication to occur, the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration.

The employees further claim that several provisions of the arbitration agreement are unconscionable, both because they fail to meet these minimum requirements and because the arbitration agreement is not bilateral. We conclude that the agreement possesses a damages limitation that is contrary to public policy, and that it is unconscionably unilateral. Finally, the employees contend that the presence of these unconscionable provisions renders the entire arbitration agreement unenforceable. The employer argues that even if some of the provisions are unconscionable or contrary to public policy, the proper remedy is to strike or restrict those clauses pursuant to Civil Code section 1670.5, and to enforce the rest of the arbitration agreement. The trial court chose the employees' preferred solution of refusing to enforce the arbitration agreement, but the Court of Appeal sided with the employer and enforced the agreement minus the one provision it found unconscionable. We conclude, for reasons explained below, that the arbitration agreement is unenforceable and that therefore the Court of Appeal's judgment must be reversed.

I. STATEMENT OF FACTS AND PROCEDURAL ISSUES

Marybeth Armendariz and Dolores Olague-Rodgers (hereafter the employees) filed a complaint for wrongful termination against their former employer, Foundation Health Psychcare Services, Inc. (hereafter the employer). The complaint and certain documents filed in support of the employer's petition to compel arbitration provide us with the basic factual background of this case. In July and August of 1995, the employer hired the employees in the "Provider Relations Group" and they were later given supervisory positions with annual salaries of $38,000. On June 20, 1996, they were informed that their positions were "being eliminated" and that they were "being terminated." During their year of employment, they claim that their supervisors and coworkers engaged in sexually based harassment and discrimination. The employees alleged that they were "terminated ... because of their perceived and/or actual sexual orientation (heterosexual)."

Both employees had filled out and signed employment application forms, which included an arbitration clause pertaining to any future claim of wrongful termination. Later, they executed a separate employment arbitration agreement, containing the same arbitration clause. The clause states in full: "I agree as a condition of my employment, that in the event my employment is terminated, and I contend that such termination was wrongful or otherwise in violation of the conditions of employment or was in violation of any express or implied condition, term or covenant of employment, whether founded in fact or in law, including but not limited to the covenant of good faith and fair dealing, or otherwise in violation of any of my rights, I and Employer agree to submit any such matter to binding arbitration pursuant to the provisions of title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280 et seq. or any successor or replacement statutes. I and Employer further expressly agree that in any such arbitration, my exclusive remedies for violation of the terms, conditions or covenants of employment shall be limited to a sum equal to the wages I would have earned from the date of any discharge until the date of the arbitration award. I understand that I shall not be entitled to any other remedy, at law or in equity, including but not limited to reinstatement and/or injunctive relief."

The employees' complaint against the employer alleges a cause of action for violation of the FEHA1 and three additional causes of action for wrongful termination based on tort and contract theories of recovery. The complaint sought general damages, punitive damages, injunctive relief, and the recovery of attorney fees and costs of suit.

The employer countered by filing a motion for an order to compel arbitration pursuant to Code of Civil Procedure section 1281.2. The parties submitted declarations in support of, and in opposition to, the motion. Relying on Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138, the trial court denied the motion on the ground that the arbitration provision in question was an unconscionable contract. The trial court first found that the arbitration agreement was an "adhesion contract." It also found that several of the provisions of the contract are "so one-sided as to `shock the conscience.' " In particular, it singled out the fact that only employees who file claims against an employer are required to arbitrate their claims, but not vice versa. Second, the agreement limits damages to backpay, precluding damages available for statutory antidiscrimination claims and tort damages, such as punitive damages. The trial court also mentioned the supposed lack of discovery under the arbitration agreement. It concluded: "Given the overall unfairness of the provision," this was not an appropriate case for striking the unlawful provisions of the arbitration agreement; instead it invalidated the entire agreement.

After the employer filed a timely appeal, the Court of Appeal reversed. The court concluded that the contract was indeed one of adhesion and that the damages provision was unconscionable and contrary to public policy. But for reasons elaborated below, the Court of Appeal held, contrary to the trial court, that the rest of the arbitration agreement should be enforced. It also determined that because the agreement incorporated the California Arbitration Act (CAA), adequate discovery, pursuant to Code of Civil Procedure section 1283.05, was available.

We granted review.

II. DISCUSSION
A. Arbitrability of FEHA Claims

The employees urge us to adopt the conclusion of the United States Court of Appeals for the Ninth Circuit in Duffield v. Robertson Stephens & Co. (9th Cir.1998) 144 F.3d 1182 (Duffield), which held that the Civil Rights Act of 1991 (Pub.L. No. 102-166 (Nov. 21, 1991) 105 Stat. 1071, hereafter sometimes the 1991 Act) prohibits the enforcement of mandatory employment agreements to arbitrate claims under title VII of the Civil Rights Act of 1964 (title VII), or equivalent state antidiscrimination statutes, such as the FEHA. Duffield involved a securities broker who sought to litigate Title VII and FEHA claims against her employer after alleged sexual discrimination and harassment, and who was subject to a mandatory arbitration agreement. The starting point for the Duffield court is the fact that the 1991 Act "was primarily designed to `overrule' hostile Supreme Court decisions in order to make discrimination claims easier both to bring and to prove in federal courts...." (Duffield, supra, 144 F.3d at p. 1189.) It is against this background that the court examined section 118 of the 1991 Act, which provides: "Where appropriate and to the extent authorized by law, the use of alternative means of dispute resolution, including ... arbitration, is encouraged to resolve disputes arising under the Acts or provisions of Federal law amended by this title." (Pub.L.No. 102-166, § 118, reprinted in notes foil. 42 U.S.C. § 1981.) The Duffield court found the language "[w]here appropriate and to the extent authorized by law" to be indicative of a congressional...

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