WALTER MACIEJEWSKI, Plaintiff and Respondent,


ALPHA SYSTEMS LAB, INC. et al., Defendants and Appellants.

No. G021588

In the Court of Appeal of the State of California

Fourth Appellate District

Division Three

(Super. Ct. No. 774707)

Appeal from a judgment of the Superior Court of Orange County, Jane D. Myers, Temporary Judge. Affirmed.


 Watkins, Blakely & Torgerson and Noel K. Torgerson for Defendants and Appellants.

 Sara C. Elich for Plaintiff and Respondent.

Filed August 5, 1999

 In this action for wrongful termination based on age and race discrimination, the trial court denied the defendants' motion to compel arbitration, finding the arbitration provision in the employment contract to be unconscionable. We affirm.

 Walter Maciejewski was employed by Alpha Systems as director of computer software development under a written employment agreement. Maciejewski, a 52-year-old Caucasian male, was terminated after sixteen months, allegedly so Alpha Systems could hire employees who were younger and Asian. After filing a complaint with the California Department of Fair Employment and Housing and exhausting his administrative remedies, he filed this action against Alpha Systems and its owners, Mitchell and Rosalinda Phan. The complaint alleges breach of the written employment agreement, breach of the implied covenant of good faith and fair dealing, violations of the Fair Employment and Housing Act based on age and race discrimination (Gov. Code, § 12940 et seq., [FEHA]), and wrongful termination in violation of public policy. Maciejewski seeks compensatory damages in the form of lost wages, employee benefits, and emotional distress; punitive damages; and costs and attorney fees as the prevailing party under the contract and as a statutory claimant (Gov. Code, § 12965, subd. (b)).

 Alpha Systems petitioned to compel arbitration of all causes of action, relying on an express clause in the employment agreement which provided that "[a]ny controversy or claim arising out of or relating to this Agreement, or breach of this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association . . . ." The clause required three arbitrators, one to be selected by each party, and the third to be chosen by the other two. "Each party shall pay the fees of the arbitrator selected by that party, the fees of the party' s own attorneys, the expenses of the party' s own witnesses, and any other expenses connected with presenting that party' s case. All other costs of arbitration . . . shall be borne equally by the parties."

 The employment agreement also provides, apart from the arbitration clause, that the employer has the right "to obtain injunctive relief against the breach of this contract by Employee or the performance of services elsewhere by Employee, or both." The agreement contains a clause awarding attorney fees and costs to the prevailing party "[i]n the event that any legal, declaratory, self help, or equitable action is commenced between the Parties hereto . . . concerning any provision of this Agreement or the rights and duties of any person in relation thereto . . . ."

 Maciejewski opposed the petition on the grounds that the arbitration provision would deprive him of discovery, require him to forego statutory remedies, and, because it was so cost prohibitive, effectively deprive him of a forum to pursue his claims. Maciejewski further claimed the arbitration clause was inconsistent with the other provisions of the employment agreement and was so vague that he could not have exercised a knowing waiver of his rights. He attached a declaration stating he had never been provided with a copy of the governing arbitration rules; accordingly, when he signed the agreement he did not know he would be giving up discovery, that it would cost him between $2000 and $7000 merely to file his claim, or that he was waiving his right to a jury trial.

 The trial court agreed with Maciejewski, finding the arbitration clause was "vague and ambiguous and/or procedurally unconscionable" when read with other provisions in the agreement, and that it was "substantively unconscionable" due to the lack of discovery and the burdensome cost. Alpha Systems appeals.

 Although arbitration is highly favored (Saika v. Gold (1996) 49 Cal.App.4th 1074, 1076), an agreement to arbitrate can be invalidated "upon such grounds as exist for the revocation of any contract." (Code Civ. Proc., § 1281.) The determination of the validity of an arbitration clause "is solely a judicial function . . . ." (Stirlen v. Supercuts (1997) 51 Cal.App.4th 1519, 1527.)

 Unconscionability is an established defense to the enforcement of a contract, and has been applied to invalidate arbitration agreements. (Ibid.) Unconscionability is generally defined as the absence of meaningful choice for one party plus contract terms that are unreasonably one-sided. (Ilkchooyi v. Best, (1995) 37 Cal.App.4th 395, 409.) The concept includes both procedural and substantive elements: The procedural element "concerns the manner in which the contract was negotiated and the circumstances of the parties at that time." (Kinney v. United Healthcare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.) It involves oppression "arising from an inequality of bargaining power which results in an absence of meaningful choice" or surprise due to the hidden nature of the offensive terms. (Ibid.) The procedural aspect of unconscionability often arises in connection with an adhesion contract (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 984), but an adhesion contract is not a prerequisite to a finding of unconscionability (see, e.g., Graham v. Scissor-Tail (1981) 28 Cal.3d 807, 828; A&M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 485-488; but see, Pitchley v. Nortech Waste (July 9, 1999) C029714).[FOOTNOTE 1]

 The substantive element of unconscionability focuses on the terms of the agreement and whether they are unjustifiably one-sided and unreasonably harsh. (Stirlen v. Supercuts, supra, 51 Cal.App.4th at p. 1532.) The two elements work together in a sliding scale relationship. "[T]he greater the degree of substantive unconscionability, the less[er] the degree of procedural unconscionability that is required to annul the contract or clause." (Ilkchooyi v. Best, supra, 37 Cal.App.4th at p. 410.)

 Mandatory arbitration clauses contained in employment agreements have recently come under particular scrutiny for unfairness, especially in the context of federal and state laws prohibiting employment discrimination.[FOOTNOTE 2] In Stirlen v. Supercuts, supra, 51 Cal.App.4th 1519, the arbitration provisions in an employment contract allowed the employer to retain access to the court system for certain claims, but the employee was required to arbitrate all claims, with limited damages. Under the agreement, the employee was denied punitive damages for tort claims as well as the remedies for statutory discrimination claims, such as FEHA [Fair Employment and Housing Act (Gov. Code, § 12940 et seq.)], Title VII [Title VII of the Civil Rights Act of 1964 (42 U.S.C. § 2000e et seq.)], ADEA [Age Discrimination in Employment Act (29 U.S.C. § 621 et seq.)], and ADA [Americans with Disabilities Act (42 U.S.C. § 12101 et seq.)]. This restriction on remedies included forgoing the recovery of attorney fees and litigation expenses as the prevailing party. The court found, "The arbitration clause, which provides a comprehensive mechanism for resolving all disputes likely to arise between the parties, is unconscionably one-sided and unfair in numerous respects and therefore unenforceable in its entirety." (Id. at p. 1552.)

 In Kinney v. United Healthcare Services, Inc., supra, 70 Cal.App.4th 1322, the court refused to enforce an arbitration agreement on the grounds of unconscionability where the employee had no opportunity to negotiate or review the terms of the arbitration provisions; the employee was required to arbitrate all claims while the employer was not; discovery was limited, as were damages for employment discrimination claims; and the employee was precluded from showing the employment relationship was other than at-will.

 The problem of the inherent unfairness in mandatory pre-dispute arbitration agreements in employment contracts has also been addressed by administrative agencies and arbitration professionals. Two of the largest alternative dispute resolution firms, JAMS/Endispute and the American Arbitration Association (AAA), have adopted rules designed to assure minimum due process standards in the arbitration of employment disputes. These minimum due process standards include a neutral arbitrator, the right to counsel, minimum levels of discovery, and no limitation on the employee' s rights and remedies under federal or state statutes. (TRG, Alternative Dispute Resolution, § § 5:155.12-5:155.14, pp. 5-61-5-62.)

 The Equal Employment Opportunity Commission has repeatedly taken the position that a pre-dispute waiver of the right to a trial on a discrimination claim under Title VII should not be enforced because "requiring an individual to waive his or her right to trial before a discrimination claim even arises would ' subvert the purposes' of Title VII -- to eliminate discrimination in the workplace." (Delikat, "The Siege Continues: Mandatory Arbitration of Employment Claims" (PLI 1998) pp. 42-45.) Likewise, the NLRB has taken the position that mandatory arbitration provisions in employment contracts should not be enforced. (Id. at p. 45.) And the Commission on the Future of Worker-Management Relations, which was appointed by the Secretary of Labor to make recommendations regarding certain employment related issues, takes the position that "mandatory agreements to arbitrate are ineffective and should not be imposed unilaterally by employers as a condition of employment." (Stirlen v. Supercuts, supra, 51 Cal.App.4th at p. 1550.) That commission recommended: "[I]f private arbitration is to serve as a legitimate form of private enforcement of public employment law, these systems must provide: [¶ ] a neutral arbitrator who knows the laws in question and understands the concerns of the parties; [¶ ] a fair and simple method by which the employee can secure the necessary information to present his or her claim; [¶ ] a fair method of cost-sharing between the employer and employee to insure affordable access to the system for all employees; [¶ ] the right to independent representation if the employee wants it; [¶ ] a range of remedies equal to those available through litigation; [¶ ] a written opinion by the arbitrator explaining the rationale for the result; [¶ ] and sufficient judicial review to ensure that the result is consistent with the governing laws." (Commission on the Future of Worker-Management Relations, Report and Recommendations (Dec. 1994) at p. 31, quoted in Stirlen v. Supercuts, supra, 51 Cal.App.4th at p. 1550, fn.18.)

 The arbitration provisions in the case before us suffer from several of the disabilities pointed out above. Because the agreement provides for arbitration under the AAA Commercial Arbitration Rules, rather than those designed for employment disputes, discovery is limited, "which may seriously compromise an employee' s ability to prove discrimination or unfair treatment." (Stirlen v. Supercuts, supra, 51 Cal.App.4th at p. 1537.) And the right to recover attorney fees and costs, available under the FEHA, is forfeited by the requirement that each party pay his own. This forfeiture of the right to attorney fees and costs contributes to the most egregious defect in the arbitration provision before us: the exorbitant and unjustified expense that Maciejewski must shoulder to pursue his claims against his employer.

 In Cole v. Burns International Security Services (D.C. Cir. 1997) 105 F.3d 1465, the court held an employer could not require an employee to submit his statutory claims to arbitration and then require him to pay all or part of the arbitrators' fees. Acknowledging the United States Supreme Court' s decision in Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20, which held that statutory claims are subject to binding arbitration as a general rule, the Cole court pointed out that the expense of arbitration to the employee "was not an issue in Gilmer (and other like cases), because, under NYSE Rules and NASD Rules, it is standard practice in the securities industry for employers to pay all of the arbitrators' fees. [Citation.] Employees may be required to pay a filing fee, expenses, or an administrative fee, but these expenses are routinely waived in the event of financial hardship." (Cole v. Burns International Security Services, supra, 105 F.3d at pp. 1483-1484.)

 The arbitration provision before the Cole court incorporated the AAA rules for the resolution of employment disputes, which did not mention the allocation of arbitrator' s fees. Observing that the average arbitrator' s fee is $700 per day, the court characterized these fees as "prohibitively expensive" for an employee who has lost his job, rendering him unable to pursue his statutory claims. "Under Gilmer, arbitration is supposed to be a reasonable substitute for a judicial forum. Therefore, it would undermine Congress' s intent to prevent employees who are seeking to vindicate statutory rights from gaining access to a judicial forum and then require them to pay for the services of an arbitrator when they would never be required to pay for a judge in court." (Id. at p. 1484.)

 Cole' s reasoning has been followed in several recent cases. In Shankle v. B-G Maintenance Management etc. (10th Cir. 1999) 163 F.3d 1230, the court refused to enforce a mandatory arbitration agreement imposed as a condition of employment solely because the agreement required the employee to pay a portion of the arbitrator' s fees. "The Agreement thus placed Mr. Shankle between the proverbial rock and a hard place -- it prohibited use of the judicial forum, where a litigant is not required to pay for a judge' s services, and the prohibitive cost substantially limited use of the arbitral forum." (Id. at p. 1235; see also Paladino v. Avnet Computer Technologies, Inc. (11th Cir. 1998) 134 F.3d 1054, 1062, Cox and Tjoflat, JJ., specially concurring [Employee' s liability for "at least half the hefty cost of an arbitration" was a "legitimate basis for a conclusion that the clause does not comport with statutory policy." ].)

 Cole was recently cited with approval by the California Supreme Court in California Teachers Association v. State of California (1999) 20 Cal.4th 327, which invalidated a provision in the Education Code imposing half of the costs of an administrative law judge on teachers who unsuccessfully challenged a threatened suspension or dismissal. The court concluded these costs "necessarily and impermissibly deter[] teachers from exercising their due process right to a hearing" (id. at p. 357), bolstering its reasoning with a reference to Cole: "The invalidity of a provision requiring dismissed pubic teachers to pay for the public cost of the administrative law judge is apparent when we consider decisions holding that even private employees who have agreed to private arbitration of statutory wrongful termination claims cannot be compelled to pay half the cost of the arbitrator" (id. at pp. 354-355).

 The reasoning of the foregoing authorities compels the conclusion that the arbitration provision before us is unconscionable. Maciejewski must submit to arbitration before not one, but three arbitrators. Thus, Maciejewski' s obligation for fees is even greater than the burden found unacceptable in Cole and its progeny. This provision, plus the limitation on discovery and the forfeiture of the statutory right to attorney fees and costs, renders the arbitration provision substantively unconscionable.

 The degree of substantive unconscionability present in this arbitration clause makes the requirement of a procedural element minimal. (See Ilkchooyi v. Best, supra, 37 Cal.App.4th at p. 410.)[FOOTNOTE 3] But more than minimal procedural elements of unconscionability are present. As the trial court found, the conflict between the arbitration clause and other provisions of the agreement (i.e., access to the judicial process and the prevailing party' s right to attorney fees) renders the agreement vague and precludes Maciejewski' s knowing waiver of substantial rights. (Prudential Ins. Co. v. Lai (9th Cir. 1994) 42 F.3d 1299.) Without a knowing waiver, Maciejewski could not reasonably expect that, by accepting employment with Alpha Systems, he had given up his right to a public forum in exchange for a remedy he could not afford.

 We perceive a significant trend in the law, both in this jurisdiction and elsewhere, toward a heightened awareness of the potential for unfairness in pre-dispute arbitration clauses. We applaud this trend. In the final analysis, no dispute resolution method, whether in court or out, will be accepted by litigants unless it is (and is perceived to be) fair, prompt and economical.

 The order denying enforcement of the arbitration clause is affirmed. Appellant is entitled to costs of appeal



::::::::::::::::::::::::::::: FOOTNOTE(S):::::::::::::::::::::::::::::

FN1. The doctrine of unconscionability in this state has two sources, case law and statute, neither of which requires an adhesion contract. The judicially created doctrine of unconscionability is typified by the analysis in Graham v. Scissor-Tail, supra, 28 Cal.3d 807, which found unconscionable an arbitration provision designating the union of one of the parties as the arbitrator. Although the contract in question was one of adhesion, the court emphasized: "Such a provision, being inimical to the concept of arbitration as we understand it, would be denied enforcement in any circumstances; clearly it cannot stand in a case which, like that before us, requires the careful and searching scrutiny appropriate to a contract with manifestly adhesive characteristics." (Id. at p. 828.)

 The doctrine of unconscionability is codified in Civil Code section 1670.5, which had its genesis in the Uniform Commercial Code, section 2-302. The Legislative Committee Comment to Civil Code section 1670.5 explains, "Section 1670.5 is intended to make it possible for the courts to police explicitly against the contracts or clauses which they find to be unconscionable. . . . The basis test is whether, in the light of the general background and the needs of the particular case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. . . . The principle is one of the prevention of oppression and unfair surprise . . . and not of disturbance of allocation of risks because of superior bargaining power." The two slightly different analyses were reconciled in Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, where the Supreme Court explained, "Graham v. Scissor-Tail, Inc. comports somewhat more closely to the California precedent; A&M Produce conforms more closely to the Uniform Commercial Code and the cases decided under that code. Both pathways should lead to the same result." (Id. at p. 925, fn. 9.)

FN2. The Ninth Circuit has held that employers may not require employees to waive their right to bring Title VII actions in court and agree to arbitration as a condition of employment. (Duffield v. Robertson (9th Cir. 1998) 144 F.3d 1182.) We do not reach this issue because our decision is on a different ground.

FN3. A New York court recently struggled with that state' s requirement that both procedural and substantive prongs must be present to find a contract unconscionable. The consumer arbitration agreement in question was reasonably short and the consumer was given 30 days to reconsider; the court thus concluded it was not procedurally unconscionable. The agreement was so substantively unconscionable, however that the court held under some circumstances "the substantive element alone may be sufficient to render the terms of the provision at issue unenforceable." (Brower v. Gateway 2000 Inc. (App.Div. 1998) 676 N.Y.S.2d 569, 574.)

FN*.Retired Associate Justice, Court of Appeal, Fourth Appellate District, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.