Stirlen v. Supercuts, Inc.

Decision Date09 January 1997
Docket NumberNo. A070573,A070573
Citation51 Cal.App.4th 1519,60 Cal.Rptr.2d 138
CourtCalifornia Court of Appeals Court of Appeals
Parties, 12 IER Cases 1127, 12 IER Cases 684, 97 Cal. Daily Op. Serv. 270, 97 Daily Journal D.A.R. 405 William N. STIRLEN, Plaintiff and Respondent, v. SUPERCUTS, INC., et al., Defendants and Appellants.

Daniel J. Herling, San Francisco, for defendants and appellants.

The Lucas Law Firm, Kathleen Lucas and David S. Schwartz, San Francisco, for plaintiff and respondent.

KLINE, Presiding Justice.

The San Francisco Superior Court refused to enforce a compulsory arbitration clause of an employment contract on the grounds it was against public policy and unconscionable. We find this determination correct and hold that, in the circumstances of this case, the governing state law pertaining to unconscionable contracts (Civ.Code, § 1670.5) is not preempted by the Federal Arbitration Act. (9 U.S.C. §§ 1-14.)


Defendants Supercuts, Inc., and David E. Lipson, its president and chief executive officer (hereinafter collectively referred to as "Supercuts"), appeal from an order denying their motion to compel arbitration of a dispute relating to the termination from employment of plaintiff William N. Stirlen.

Supercuts, a Delaware corporation that conducts a national hair care franchise business, employed Stirlen as its vice president and chief financial officer from January 1993 until March 1994, when he was terminated.

Stirlen commenced this wrongful discharge case in December 1994. His complaint alleged seven causes of action for (1) a judicial declaration that an arbitration clause in his employment contract was null and void in certain particulars and unenforceable; (2) wrongful termination in violation of public policy; (3) defamation; (4) intentional misrepresentation; (5) violation of Labor Code section 970, governing certain knowingly false representations inducing workers "to change from one place to another;" (6) breach of contract; and (7) breach of the implied covenant of good faith and fair dealing.

Supercuts demurred to all causes of action except the first, pertaining to the validity of the arbitration clause, and the fifth, alleging violation of Labor Code section 970. On May 10, 1995 the superior court sustained the demurrer without leave to amend with respect to the sixth and seventh causes of action for breach of contract and the implied covenant. The court overruled the demurrer with respect to the causes of action for wrongful termination, defamation, and intentional misrepresentation.

On April 21, 1995, while the demurrer was pending, Supercuts moved to compel arbitration under the compulsory arbitration provision of an employment contract between the parties. The court denied the motion, as we have said, on the grounds the provision, considered in its entirety, was unconscionable and therefore unenforceable.

After answering the complaint, Supercuts filed this timely appeal. An order dismissing or denying a motion to compel arbitration is directly appealable. (Code Civ.Proc., § 1294, subd. (a).)


The complaint alleges that on numerous occasions in late 1993 and early 1994 Stirlen informed Lipson and other corporate officers of various operating problems he felt contributed to the general decline in Supercuts' retail profits and of "accounting irregularities" he feared might be in violation of state and federal statutes and regulations. Stirlen also expressed concern that the decline in profits "was being hidden in the books and from public shareholders." At a meeting in November 1993, Stirlen provided senior managers quarterly statements indicating that, before accounting "adjustments," Supercuts' earnings level moved only laterally or actually declined during the previous seven quarters. Though Lipson assertedly expressed anger at the production of these statements, Stirlen reiterated his concerns in a memo to Lipson in January of 1994. After Stirlen brought these concerns to the company's auditor, Lipson allegedly reprimanded him, accused him of being a "troublemaker" and told him that if he did not reverse his position on the issues taken to the auditor he would no longer be considered a "member of the team."

At the end of February 1994, Lipson called Stirlen to his office and suspended him from his job. He was terminated the following month. The complaint avers the termination was unjustified, that Stirlen had never been informed he was not fulfilling his responsibilities as chief financial officer or otherwise doing a poor job, and had never been disciplined or advised that his employment was in jeopardy. Thereafter, Lipson assertedly represented to independent securities analysts that Stirlen was responsible for erroneous accounting entries or "adjustments" that resulted in a decline in earnings from 70 cents to 63 cents per share, and that, as a result "Bill Stirlen is no longer with the company." News articles and investment reports on Supercuts at about this time attributed the company's declining earnings to "improper bookkeeping procedures" and said the individuals "deemed responsible for the irregularities were asked to leave the Company." One news article quoted Lipson to the effect that Stirlen had lost his job as a result of "sloppy and inappropriate accounting."

On July 21, 1994, Supercuts' general counsel wrote Stirlen's counsel rejecting the latter's pre-litigation settlement demand and stating that the dispute should be submitted to binding arbitration, as specified in the employment contract. Stirlen never responded to this and a subsequent request to arbitrate made prior to the filing of the motion to compel arbitration.


Code of Civil Procedure section 1281.2 provides in material part that "[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists...." In a petition to compel arbitration under this statute, "the moving party, in essence, requests specific performance of a contractual agreement to arbitrate the controversy. [Citation.] The trial court must determine in advance whether there is a duty to arbitrate the controversy. [Citation.] This determination 'necessarily requires the court to examine and, to a limited extent, construe the underlying agreement.' [Citation.]" (Green v. Mt. Diablo Hospital Dist. (1989) 207 Cal.App.3d 63, 69, 254 Cal.Rptr. 689.)

The determination of the validity of an arbitration clause, which may be made only "upon such grounds as exist for the revocation of any contract" (Code of Civ.Proc., § 1281), "is solely a judicial function unless it turns upon the credibility of extrinsic evidence; accordingly, an appellate court is not bound by a trial court's construction of a contract based solely upon the terms of the instrument without the aid of evidence." (Merrick v. Writers Guild of America, West, Inc. (1982) 130 Cal.App.3d 212, 217, 181 Cal.Rptr. 530.) 1 Thus, in cases such as this, in which extrinsic evidence was not presented, "[d]eterminations of arbitrability, like the interpretation of any contractual provision, are subject to de novo review." (Republic of Nicaragua v. Standard Fruit Company (9th Cir.1991) 937 F.2d 469, 474.) 2


The employment contract between the parties, formally denominated "Agreement Regarding Trade Secrets, Inventions, Employment and Competition," consists of 23 paragraphs. Throughout, Stirlen is referred to as "Executive," "he/she" or "his/her," and Supercuts is referred to as "the Company." The first six paragraphs briefly describe Stirlen's duties, the fact that his employment is at-will, his compensation and fringe benefits, and other compensation he may receive as well as the manner in which he will be reimbursed for certain expenses.

[51 Cal.App.4th 1528] Paragraph 7 provides that any inventions, improvements, ideas or discoveries relating to the company's business that the employee may conceive during the period of employment, whether patentable or not, must be disclosed and assigned to the company and "shall be the sole and exclusive property of the Company." Paragraph 8 states that certain confidential and proprietary information to which the employee may have access shall constitute trade secrets which the employee shall not disclose to third persons without company authorization. Under Paragraph 9 the employee agrees to deliver to the company "at the termination of his/her employment, or at any other time that the Company may request," all information and equipment the employee may then have under his or her control, which is "the sole property of the Company." Under Paragraph 10 the employee agrees that during the period of employment with the company and for two years thereafter he or she will not directly or indirectly engage in any similar business within the United States and specified Canadian territories, and will not attempt to induce other employees to leave the company, or franchisee to discontinue its relationship with the company, or customer or supplier to cease doing business with the company.

Paragraph 11 is entitled "Submission to Jurisdiction; Arbitration" and comprises what we refer to in this opinion as the "arbitration clause." This provision consists of four subparagraphs.

Subparagraph (a), which pertains to claims that need not be submitted to arbitration, provides as follows: "Any action initiated by the Company seeking specific performance or injunctive or other equitable relief in connection with any breach or violation of Paragraphs 7, 8, 9, or 10 of this Agreement may be maintained in any federal or state court having jurisdiction over Marin County, California. The parties hereby submit...

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