Ferguson v. Countrywide Credit Industries, Inc., 01-55985.

Citation298 F.3d 778
Decision Date23 July 2002
Docket NumberNo. 01-55985.,01-55985.
PartiesMisty FERGUSON, Plaintiff-Appellee, v. COUNTRYWIDE CREDIT INDUSTRIES, INC., Countrywide Home Loans, Inc., Defendants-Appellants, and Leo DeLeon; Does 1-10, inclusive, Defendants.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Karen A. Rooney, Steptoe & Johnson, Los Angeles, CA, attorney for the defendants-appellants.

Janet Koehn, Ventura, California, attorney for the plaintiff-appellee.

Cliff M. Palefsky, McGuinn, Hillsman & Palefsky, San Francisco, CA, attorney for amicus curiae, National Employment Lawyers Assn.

Appeal from the United States District Court for the Central District of California A. Howard Matz, District Judge, Presiding. D.C. No. CV-00-13096 AHM.

Before PREGERSON and TROTT, Circuit Judges, and FITZGERALD,* District Judge.

OPINION

PREGERSON, Circuit Judge.

Misty Ferguson ("Ferguson") filed a complaint against Countrywide Credit Industries, Inc. ("Countrywide") and her supervisor, Leo DeLeon ("DeLeon"), alleging causes of action under federal and state law for sexual harassment, retaliation, and hostile work environment. Countrywide filed a petition for an order compelling arbitration of Ferguson's claims. The district court denied Countrywide's petition on the grounds that Countrywide's arbitration agreement is unenforceable based on the doctrine of unconscionability and that Ferguson cannot be compelled to arbitrate her Title VII employment discrimination claims. Countrywide appeals this decision. We have jurisdiction under 9 U.S.C. § 16(a)(1)(B). We review de novo a district court's denial of a motion to compel arbitration, United Food & Commercial Workers Union, Local 770 v. Geldin Meat Co., 13 F.3d 1365, 1368 (9th Cir.1994), and affirm on the ground that the arbitration agreement is unconscionable.

I. FACTUAL and PROCEDURAL HISTORY

Ferguson filed a complaint against Countrywide and DeLeon, alleging causes of action for sexual harassment, retaliation, and hostile work environment under Title VII of the Civil Rights Act of 1964 and 1991, 42 U.S.C. §§ 2000e-2(a), 2000e 3 & 1981a(c), and the California Fair Employment and Housing Act, Cal. Gov't Code §§ 12900 et seq. ("FEHA").

Countrywide filed a petition to compel arbitration of Ferguson's claims. When Ferguson was hired she was required to sign Countrywide's Conditions of Employment, which states in relevant part: "I understand that in order to work at Countrywide I must execute an arbitration agreement." Countrywide's arbitration agreement ("the arbitration agreement") contains the following relevant clauses:

Paragraph 1. Agreement to Arbitrate; Designated Claims:

"Except as otherwise provided in this Agreement, the Company and Employee hereby consent to the resolution by arbitration of all claims or controversies for which a federal or state court ... would be authorized to grant relief...."

The arbitration agreement then outlines which claims are covered by the agreement1 and which claims are not covered.2

Paragraph 3. Waiver of Right to Jury:

"By entering into this Agreement, the Company and Employee each knowingly and voluntarily waive any and all rights they have under law to a trial before a jury."

Paragraph 8. Fees and Costs: "The party requesting the arbitration shall pay to NAF [National Arbitration Forum] its filing fee up to a maximum of $125.00 when the Claim is filed. The Company shall pay for the remainder of the NAF filing fee. The Company shall pay for the first hearing day. All other arbitration costs shall be shared equally by the Company and the Employee.... However, the arbitrator, may in his or her discretion, permit the prevailing party to recover fees and costs only to the extent permitted by applicable law."

Paragraph 9. Discovery: "[E]ach side shall be limited to three depositions and an aggregate of 30 discovery requests of any kind.... A deposition of a corporate representative shall be limited to no more than four designated subjects.... Each side may depose the other side's experts, ... and these depositions will not be charged to the parties' aggregate limit on discovery requests or the three deposition limit."

Paragraph 11. Exclusive Remedy: "For Claims covered by this Agreement, arbitration is the parties' exclusive remedy."

In her answer to Countrywide's petition to compel arbitration, Ferguson denied that she signed the arbitration agreement and requested a jury trial on that issue, pursuant to section 4 of the Federal Arbitration Act ("FAA").3 Countrywide filed reply documents in support of the petition, and submitted evidence that Ferguson entered the agreement.

The district court, Judge A. Howard Matz presiding, denied Countrywide's petition to compel arbitration. Although the court found that Ferguson raised a genuine dispute regarding the making of the arbitration agreement, it ruled that, assuming the agreement does exist: (1) the arbitration agreement is unenforceable because it is unconscionable under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 99 Cal. Rptr.2d 745, 6 P.3d 669 (Cal.2000); and (2) under the Ninth Circuit's holding in Duffield v. Robertson Stephens & Co., 144 F.3d 1182, 1190 (9th Cir.1998), Ferguson cannot be compelled to arbitrate her Title VII claims.

Countrywide appeals the denial of its petition to compel arbitration.4

II. UNCONSCIONABILITY
A. The district court correctly concluded that Countrywide's arbitration agreement was unenforceable because it is unconscionable under California law.

The FAA compels judicial enforcement of a wide range of written arbitration agreements. Section 2 of the FAA provides, in relevant part, that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In determining the validity of an agreement to arbitrate, federal courts "should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). "Thus, generally applicable defenses, such as ... unconscionability, may be applied to invalidate arbitration agreements without contravening § 2 [of the FAA]." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).

California courts may invalidate an arbitration clause under the doctrine of unconscionability. This doctrine, codified by the California Legislature in California Civil Code § 1670.5(a), provides:

if the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

This statute, however, does not define unconscionability. Instead, we look to the California Supreme Court's decision in Armendariz, 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, which provides the definitive pronouncement of California law on unconscionability to be applied to mandatory arbitration agreements, such as the one at issue in this case. In order to render a contract unenforceable under the doctrine of unconscionability, there must be both a procedural and substantive element of unconscionability. See Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. These two elements, however, need not both be present in the same degree. See A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 186 Cal.Rptr. 114, 121 (Ct. App.1982). Thus, for example, "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." Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690.

1. Procedural Unconscionability

Procedural unconscionability "concerns the manner in which the contract was negotiated and the circumstances of the parties at that time." Kinney v. United Healthcare Servs., Inc., 70 Cal.App.4th 1322, 83 Cal.Rptr.2d 348, 352-53 (Ct.App.1999). A determination of whether a contract is procedurally unconscionable focuses on two factors: oppression and surprise. "`Oppression' arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice. `Surprise' involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 60 Cal.Rptr.2d 138, 145 (Ct.App.1997).

In Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.), cert. denied, ___ U.S. ___, 122 S.Ct. 2329, 153 L.Ed.2d 160 (2002), we held that the arbitration agreement at issue satisfied the elements of procedural unconscionability under California law.5 We found the agreement to be procedurally unconscionable because:

Circuit City, which possesses considerably more bargaining power than nearly all of its employees or applicants, drafted the contract and uses it as its standard arbitration agreement for all of its new employees. The agreement is a prerequisite to employment, and job applicants are not permitted to modify the agreement's terms — they must take the contract or leave it.

Circuit City, 279 F.3d at 893 (citing Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690). See also Stirlen, 60 Cal.Rptr.2d at 146 (finding procedural unconscionability where an arbitration clause is part of a contract of adhesion in which the employee is presented with an employment contract on a "take it or leave it" basis). In the present case, as in Circuit City, the arbitration agreement was imposed as a condition of employment and was non-negotiable.

Countrywide contends that there was no element of "surprise" or "oppr...

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