Filed 10/26/20 Carver v. JFK Memorial Hospital CA4/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION TWO

CRYSTAL CARVER,

Plaintiff and Respondent,

v.

JFK MEMORIAL HOSPITAL, Inc., et al.,

Defendants and Appellants.

E071782

(Super.Ct.No. PSC1803426)

OPINION

APPEAL from the Superior Court of Riverside County. David M. Chapman, Judge. Affirmed.

Hill, Farrer & Burrill, Michael S. Turner, Warren J. Higgins and Jenner C. Tseng, for Defendant and Appellant.

Valiant Law, Raymond Babaian and Carrie Shumake, for Plaintiff and Respondent.

I.

INTRODUCTION

Plaintiff and respondent, Crystal Carver, entered into an arbitration agreement with her former employer, defendant and appellant, JFK Memorial Hospital, Inc. (JFK). After she brought this suit, JFK filed a petition to compel arbitration of her claims. The trial court denied the petition on the ground that the arbitration agreement’s prearbitration dispute resolution process is unconscionable. We affirm.

II.

FACTUAL AND PROCEDURAL BACKGROUND

Carver worked as a registered nurse at JFK from February 2015 until her termination in January 2018. Carver attended a “new-hire orientation” when she began her job at JFK. At the end of the last day of the orientation, Carver was told it was “mandatory” for her to complete employee onboarding through the “Red-Carpet system,” which is an online program that JFK uses for employees to “receive information and review documents related to their employees.” Carver was told she had to complete the onboarding by using JFK’s computers on its premises, and she was “never given the option” to complete the process at home.

Carver also was told that she had to sign the “Handbook and Fair Treatment Process Acknowledgement” (Acknowledgement) as a condition of her employment. Carver electronically signed the Acknowledgement in February 2015. The Acknowledgement provides in relevant part: “Except to the extent that any applicable [collective bargaining agreement (CBA)] provides otherwise, I hereby voluntarily agree to use the Company’s Fair Treatment Process [(FTP)] and to submit to final and binding arbitration any and all claims and disputes that are related in any way to my employment or the termination of my employment” with JFK. While employed by JFK, however, Carver was a member of a union and covered by a CBA, which provided that “[n]o retaliation or adverse action may be taken against anyone who exercises the option not to sign the FTP.”

The Acknowledgment also explains that “I also understand the Company may change, rescind or add to any of the policies, benefits or practices described in the Employee Handbook, except the employment-at-will policy and the Mutual Agreement to Arbitrate . . . in its sole and absolute discretion, with or without prior notice.” The Acknowledgement also states that the parties’ “mutual agreement to arbitrate may not be modified or rescinded except in writing by both me and the Company.”

The FTP is several pages long and outlines JFK’s employee dispute resolution process, which culminates in binding arbitration. The FTP’s first substantive line states that it “applies to all employees, regardless of length of service or status, and covers all disputes relating to or arising out of an employee’s employment with the Company or the termination of employment. The only disputes or claims not covered by the FTP are those listed in the ‘Exclusions and Restrictions’ section below.” That section, in turn, outlines several claims that are not covered by the FTP, and concludes by stating that, “[i]n addition, the FTP does not apply to employees covered by a collective bargaining agreement, unless otherwise agreed to by such employees.” The FTP also provides that “[a]n employee’s decision to accept employment or to continue employment constitutes his or her agreement to be bound by the FTP.”

The FTP outlines a five-step process “that an employee generally must follow to obtain a resolution of a problem, concern or dispute.” The first step explains that, “[i]f an informal discussion with the [s]upervisor did not resolve an employee’s problem, concern or dispute, the employee should promptly contact the Human Resources Department to obtain an FTP Dispute Resolution Form. The employee should complete the form and submit it to his or her supervisor to initiate the FTP.” The supervisor will then respond to the employee. “If the employee is not satisfied with the supervisor’s response to the problem or dispute, then the employee may take the problem or dispute to the Department Head usually within seven working days of receipt of the response.” If dissatisfied with the Department Head’s response, the third step of the FTP directs the employee to take his or her dispute “to a member of the Facility’s Administration office for reconsideration.” If step three “does not resolve the employee’s problem or dispute, the employee may request that the problem or dispute be submitted to the FTP.” “If the employee does not accept the decision of the FTP Committee in Step 4, then the employee has the right to submit the problem or dispute to final and binding arbitration” as the fifth and final step of the FTP Committee. The FTP then outlines the terms of the parties’ arbitration agreement.

The FTP concludes by explaining that JFK “will not modify or change the agreement between [JFK] and its employees to use final and binding arbitration to resolve employment-related disputes, without notifying and obtaining the consent of employees to such changes. However, [JFK] may change or modify the FTP procedures from time-to-time without advance notice and without the consent of employees.”

After her termination, Carver filed this case, alleging various employment-related claims that the parties agree are covered by the FTP. JFK therefore filed a motion to compel arbitration, which Carver opposed on the ground that the FTP was unconscionable. Specifically, Carver argued the FTP’s four-step prearbitration process is unconscionable because it is mandatory for JFK’s employees, but not for JFK. Carver also argued the FTP was unconscionable because it allows JFK to unilaterally “change or modify the FTP procedures from time-to-time.” JFK argued that those provisions were not unconscionable and, even if they were, the trial court should sever them and enforce the parties’ agreement to arbitrate.

The trial court rejected JFK’s arguments and denied its petition to compel arbitration. The trial court found that the FTP was procedurally unconscionable “because of the inequality of the parties’ bargaining power and an absence of real negotiation or a meaningful choice on the part of Carver whether to agree to the agreement.” The trial court found that the FTP’s four-step prearbitration procedure was substantively unconscionable because it would afford JFK a “‘free peek’” at Carver’s case before she requested arbitration, which would give JFK “‘an advantage if and when [she] were to later demand arbitration.’” The trial court further found it was “not possible” to sever the FTP’s “prearbitration requirements” and, even if it were, it would not be appropriate because the FTP’s prearbitration process was intended “to inhibit Carver’s access to a fair resolution of the dispute by requiring her to disclose to JFK the evidence and arguments she would present before arbitration.”

JFK timely appealed.

III.

DISCUSSION

JFK argues the trial court erred in denying its petition to compel arbitration because (1) the FTP’s prearbitration process is not unconscionable and (2) even if it were, the trial court should have severed the prearbitration provisions, upheld the parties’ arbitration agreement, and ordered them to arbitration. We disagree.

At the outset, we note the parties extensively briefed whether the Federal Arbitration Act (FAA) applies to the FTP. We need not resolve this issue because “‘even when the [FAA] applies, interpretation of the arbitration agreement is governed by state law principles.’” (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177.) To the extent the parties dispute whether the FAA applies because it is more favorable to arbitration than California law, we disagree. (See Farrar v. Direct Commerce, Inc. (2017) 9 Cal.App.5th 1257, 1266 [“‘“In keeping with California’s strong public policy in favor of arbitration, any doubts regarding the validity of an arbitration agreement are resolved in favor of arbitration.”’”].) Regardless, our analysis below is the same whether the FAA applies.

A. Unconscionability
B.
1. Applicable Law and Standard of Review
2.
Under Civil Code section 1670.5 and Code of Civil Procedure section 1281, if the court as a matter of law finds an arbitration contract or any clause of the contract to have been unconscionable when made, the court may refuse to enforce the contract. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).) The doctrine of unconscionability has both a procedural and a substantive element. (Ibid.) The procedural unconscionability element focuses on oppression, lack of freedom of assent, and surprise due to unequal bargaining power and the weaker party’s lack of notice of hidden or oppressive terms. “Procedural unconscionability may be proven by showing oppression, which is present when a party has no meaningful opportunity to negotiate terms or the contract is presented on a take-it-or-leave-it basis.” (Wherry v. Award (2011) 192 Cal.App.4th 1242, 1246.)

Substantive unconscionability is present when an agreement has overly harsh or one-sided terms. (Armendariz, supra, 24 Cal.4th at p. 114.) Both procedural and substantive unconscionability must be present in order “‘for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’” (Ibid.) But procedural and substantive unconscionability need not be present in the same degree. (Ibid.) “‘Essentially a sliding scale is invoked . . . . In other words, 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, and vice versa.’” (Ibid.)

“In general, ‘[t]here is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the court’s order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court’s denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.]’” (Laswell v. AG Seal Beach, LLC (2010) 189 Cal.App.4th 1399, 1406.)

3. Procedural unconscionability
4.
Carver argues the FTP is procedurally unconscionable, in part because she was required to agree to it as a condition of her employment. The evidence on this issue is disputed. On the one hand, the FTP states that “the FTP does not apply to” JFK’s unionized employees covered by a CBA, such as Carver. Carver’s CBA also stated that she need not agree to the FTP. This suggests that the FTP “was free from procedural unconscionability.” (Securitas Security Services USA, Inc. v. Superior Court (2015) 234 Cal.App.4th 1109, 1123.)

On the other hand, this provision was relatively buried in the FTP’s lengthy terms at the end of a paragraph listing certain claims that are not covered by the FTP, not employees that are not covered by the FTP. Further, the first substantive paragraph of the FTP states not only that “the FTP applies to all employees,” but also that “an employee’s decision to accept employment or to continue employment constitutes his or her agreement to be bound by the FTP,” without any mention of JFK employees covered by a CBA. On their face, these provisions appear to conflict with the FTP’s inconspicuous exemption for union employees and could confuse a layperson, which supports the trial court’s finding that the FTP is procedurally unconscionable. (See Penilla v. Westmont Corp. (2016) 3 Cal.App.5th 205, 216 [“confusing and sometimes contradictory” arbitration agreement held procedurally unconscionable].)

Moreover, Carver swore under oath in her declaration in support of her opposition to JFK’s motion to compel arbitration that she was told she had to agree to the FTP as presented to her as a condition of her employment during her onboarding process and that she was required to do so without a meaningful opportunity to review the FTP. This suggests an element of “surprise” or “oppression,” which indicates the FTP is procedurally unconscionable, particularly given that Carver’s CBA provided that she was not required to agree to the FTP. (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 87.) The fact that there is no evidence that suggests Carver could have negotiated the FTP’s terms also suggests that it was presented as an adhesive contract, which further supports a finding of procedural unconscionability. (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1319 [“‘The oppression component arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party.’”].)

We conclude that Carver’s declaration, coupled with the FTP’s language that suggested she had to agree to the FTP as a condition of her employment with JFK and that her continued employment with JFK constitutes acceptance of its terms, provides substantial evidence to support the trial court’s finding that the FTP was procedurally unconscionable. (See Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704 (Serpa); Baxter v. Genworth North America Corp. (2017) 16 Cal.App.5th 713, 737 [“As a contract of adhesion that Baxter was forced to accept as a condition of her continued employment, Resolve is procedurally unconscionable.”]; McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 101 [“[T]he arbitration clauses are procedurally unconscionable because they must be executed as a condition of employment.”].) The trial court therefore did not err in finding the FTP was procedurally unconscionable.

5. Substantive unconscionability
6.
Carver argued in the trial court, and again argues on appeal, that the FTP is substantively unconscionable for two reasons. First, she argued the FTP’s prearbitration procedures are unconscionable because they apply only to employees, but not to JFK. Second, she argued the FTP lacks mutuality because it gives JFK the unilateral right to “change or modify the FTP procedures.”

As to Carver’s first argument, we agree that the FTP’s prearbitration procedure applies exclusively to employees. JFK argues that the procedure applies equally to employees and JFK alike, but the plain, unambiguous text of the FTP shows that the procedure applies only to JFK employees. The FTP explains that the four-step prearbitration procedure is a process that “an employee generally must follow” to resolve his or her dispute with JFK. Although the FTP’s four prearbitration steps discuss only what an employee “should” or “may” do to resolve his or her complaint with JFK, it does not indicate what JFK “should” or “may” do to resolve its employee-related issues. The FTP’s five-step process repeatedly references “you” (i.e., the employee) without any reference to what JFK must do to resolve a problem with an employee. Nothing in the FTP indicates what, if any, prearbitration steps JFK must take before initiating arbitration against its employees.

JFK argues the FTP’s four-step prearbitration procedure is voluntary because it is written in permissive terms. JFK notes that the FTP states employees are only “encouraged” to use the FTP process and that an employee “may” or “should” do something at each step. But the FTP states that “an employee generally must follow” the FTP’s five-step procedure without any explanation of when, if at all, an employee may forego the process. Although the FTP process may not always be mandatory, by its own terms, it is mandatory in most cases. As the FTP explains, it provides for “a multiple-step process that ultimately provides for final and binding arbitration of . . . disputes if they are not resolved in any of the previous steps in the process.” This language therefore strongly suggests that arbitration is permissible only after the employee has exhausted the FTP’s prearbitration process.

We conclude the FTP’s one-sided prearbitration process is substantively unconscionable. “In assessing substantive unconscionability, the paramount consideration is mutuality.” (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 664.) Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267 (Nyulassy), which the trial court exclusively relied on, is instructive. There, the court found the employer-defendant’s arbitration agreement had three substantively unconscionable provisions: (1) it required only employees to arbitrate their employment claims; (2) it required only employees to engage in a prearbitration, “employer-controlled dispute resolution” process; and (3) it shortened the statutes of limitations for employees’ claims. (Id. at pp. 1282-1283.) The Nyulassy court reasoned that the prearbitration provision was substantively unconscionable because “[w]hile on its face, this provision may present a laudable mechanism for resolving employment disputes informally, it connotes a less benign goal. Given the unilateral nature of the arbitration agreement, requiring plaintiff to submit to an employer-controlled dispute resolution mechanism (i.e., one without a neutral mediator) suggests that defendant would receive a ‘free peek’ at plaintiff’s case, thereby obtaining an advantage if and when plaintiff were to later demand arbitration.” (Id. at pp. 1282-1283.)

JFK relies on Serpa, supra, 215 Cal.App.4th 695, to support its argument that the FTP’s prearbitration process is not substantively unconscionable. The prearbitration procedure at issue in Serpa required employees to do nothing more than to provide “some informal notice of a grievance before proceeding to arbitration.” (Id. at p. 518.) The procedure was therefore “far different from the provisions in Nyulassy” and in the FTP. (Ibid.)

JFK also cites Nguyen v. Applied Medical Resources Corp. (2016) 4 Cal.App.5th 232, but that case is distinguishable. Unlike the FTP, the prearbitration “dispute resolution procedure” in Nguyen was bilateral, meaning that both the employer and its employees were required to use it before demanding arbitration. (Id. at p. 254.)

Sanchez v. CarMax Auto Superstores California, LLC (2014) 224 Cal.App.4th 398, 406, another case JFK relies on, is likewise distinguishable. The provisions at issue in that case required employees, upon initiating arbitration, to complete a form outlining the nature of their claims and “listing the names of witnesses and the name of the employee’s attorney, if any.”

The only authority on point cited by JFK is the federal district court decision in Quevedo v. Macy’s, Inc. (C.D. Cal. 2011) 798 F.Supp.2d 1122 (Quevedo). In Quevedo, the employer’s arbitration agreement required employees, but not the employer, “to pursue three preliminary steps before submitting a claim to arbitration.” (Id. at p. 1139.) The agreement also allowed the employer to unilaterally cancel or modify the parties’ agreement to arbitrate. (Ibid.) The district court assumed that the prearbitration provision was substantively unconscionable, but concluded it was not sufficiently unconscionable so as to render the arbitration agreement unenforceable. (Ibid.) The court reasoned that “Nyulassy emphasized the unilateral nature of the arbitration agreement in finding that agreement unenforceable,” but the Quevedo parties’ arbitration agreement was bilateral. (Id. at p. 1140.) The Quevedo court therefore found “the preliminary-steps requirement,” alone or in conjunction with the employer’s unilateral right to modify or cancel the arbitration agreement, did not render the parties’ arbitration agreement so substantively unconscionable that it was unenforceable, “particularly in light of” its low level of procedural unconscionability. (Ibid.)

We do not find Quevedo persuasive. For one thing, it is a federal trial court decision. More importantly, Quevedo conflicts with the subsequently issued decision in Carmona v. Lincoln Millenium Car Wash, Inc. (2014) 226 Cal.App.4th 74. The Carmona court relied on Nyulassy in finding that a similar “unilateral ‘free peek’ provision” in the parties’ arbitration agreement was substantively unconscionable. The Carmona court reasoned that the provision was unfairly unilateral in favor of the employer because it subjected employees to mandatory prearbitration disclosures while “[t]he employer ha[d] no corresponding obligation under the agreement to discuss its disputes with employees before taking action in court or through arbitration.” (Id. at p. 89.)

The Ninth Circuit held a similar prearbitration provision was substantively unconscionable in Pokorny v. Quixtar, Inc. (9th Cir. 2010) 601 F.3d 987, a case applying California law that the Quevedo court did not discuss. In Pokorny, the employer’s arbitration agreement required its employees to submit their disputes to a non-binding, “employer-controlled” dispute resolution process before demanding arbitration. (Pokorny v. Quixtar, Inc., supra, at p. 999.) The Ninth Circuit reasoned the arbitration agreement unfairly gave the employer the unilateral right to a “free peek” at the employee’s case. (Ibid.) Because only employees were required to submit their grievances to a prearbitration dispute process while the employer remained free to immediately demand arbitration, the procedure “clearly” gave the employer “an unfair advantage.” (Ibid.) The Pokorny court therefore held that the procedure was substantively unconscionable. (Ibid.)

In Carlson v. Home Team Pest Defense, Inc. (2015) 239 Cal.App.4th 619, 635 (Carlson), the employer’s arbitration agreement required employees, but not the employer, “to submit to an unspecified form of alternative dispute resolution before demanding arbitration.” (Ibid.) Relying on Nyulassy, the Carlson court held this provision was substantively unconscionable. (Ibid.)

Following Nyulassy, Carmona, Pokorny, and Carlson, we likewise conclude FTP’s unilateral prearbitration provisions are unconscionable. We can conceive of no reason why JFK requires its employees, but not itself, to engage in the “employer-controlled” prearbitration process other than to get a “free peek” at employees’ claims in order to procure an upper hand in arbitration. JFK has offered no reason why only its employees must go through the FTP’s four-step prearbitration procedure while it may take its claims straight to arbitration. Instead, JFK unconvincingly argues the FTP’s prearbitration provisions apply equally to JFK and its employees. As explained above, however, the unambiguous language of the FTP shows that only JFK employees must engage in the FTP’s prearbitration procedure. Because the FTP’s prearbitration process is unilateral and favors JFK, we conclude the trial court did not err in finding that it is substantively unconscionable.

As to Carver’s second argument, it is unclear whether she believes the FTP allows JFK to unilaterally modify all of the FTP, including the parties’ arbitration agreement, or whether she contends JFK can only unilaterally modify the FTP’s four-step prearbitration process. To the extent Carver argues JFK may unilaterally modify the parties’ arbitration agreement, we disagree. As the Acknowledgment states, JFK agreed that it “will not modify or change the agreement between [JFK] and its employees to use final and binding arbitration to resolve employment-related disputes, without notifying and obtaining the consent of employees to such changes.” The Acknowledgement further states that JFK “may change, rescind or add to any of the policies, benefits or practices described in the Employee Handbook, except . . . the Mutual Agreement to Arbitrate,” and that the parties’ “mutual agreement to arbitrate may not be modified or rescinded except in writing by both me and [JFK].” These provisions make clear that JFK did not reserve the right to unilaterally modify the parties’ arbitration agreement, but reserved only the right to unilaterally “change or modify the FTP procedures from time-to-time.” When viewed in the context of the FTP and the Acknowledgement, “FTP procedures” is best understood as referring to the FTP’s four-step prearbitration procedure, not the parties’ agreement to arbitrate.

The trial court did not address Carver’s argument that the FTP is unconscionable because it grants JFK the unilateral right to modify its prearbitration procedure. The trial court either implicitly rejected the argument or found it unnecessary to address given its conclusion that the FTP’s prearbitration procedure alone rendered the arbitration agreement unconscionable. We address Carver’s argument given that she raises it again on appeal and it is relevant to our discussion below about the trial court’s decision not to sever the FTP’s terms it found substantively unconscionable.

As noted, “[i]n assessing substantive unconscionability, the paramount consideration is mutuality.” (Abramson v. Juniper Networks, Inc., supra, 115 Cal.App.4th at p. 664.) That said, “[n]ot all one-sided contract provisions are unconscionable.” (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 911.) Several courts have held that an arbitration agreement that gives an employer the unilateral right to modify its terms is not substantively unconscionable. For instance, in Peng v. First Republic Bank (2013) 219 Cal.App.4th 1462, the employer retained “the unilateral authority to modify or terminate [the parties’ arbitration agreement] without notice.” The Peng court concluded this provision was not substantively unconscionable. (Id. at p. 1467.) The court reached that conclusion by relying on Serpa, which held that a similar unilateral provision was not unconscionable because “‘the implied covenant of good faith and fair dealing limits the employer’s authority to unilaterally modify the arbitration agreement and saves that agreement from being illusory and thus unconscionable.’” (Peng v. First Republic Bank, supra, at p. 1474, quoting Serpa, supra, 215 Cal.App.4th at p. 708, fn. omitted; see Ashbey v. Archstone Property Management, Inc. (9th Cir. 2015) 612 Fed.Appx. 430, 432 [relying on Serpa and Peng in holding that “unilateral modification provisions . . . are not substantively unconscionable”].) We follow Peng and Serpa and hold that the FTP’s provision granting JFK the unilateral right “to change or modify the FTP procedures” is not substantively unconscionable. The trial court therefore did not err by declining to address Carver’s contention that the provision is substantively unconscionable.

C. Severability
D.
JFK contends that, even if the trial court correctly determined that the FTP is unconscionable, it erred by declining to sever its unconscionable terms. We disagree.

Civil Code section 1670.5, subdivision (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 it 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.” Accordingly, “[u]nder this section the court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.” (Cal. Civ. Code, § 1670.5, Legis. Comm. Comments, n. 2.)

Two policies support severing a contract’s illegal provision rather than voiding the entire contract: “The first is to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement—particularly when there has been full or partial performance of the contract. [Citations.] Second, more generally, the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme.” (Armendariz, supra, 24 Cal.4th at pp. 123-124.)

To determine whether to sever unconscionable provisions in an arbitration agreement, “[c]ourts 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.” (Armendariz, supra, 24 Cal.4th at p. 124.) “An arbitration agreement is also deemed ‘permeated’ by unconscionability if ‘there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement.’” (Magno v. The College Network, Inc. (2016) 1 Cal.App.5th 277, 292, italics added.)

Thus, “[i]n determining whether to sever or restrict illegal terms rather than voiding the entire contract, ‘[t]he overarching inquiry is whether “‘the interests of justice . . . would be furthered’” by severance.’ [Citation.] Significantly, the strong legislative and judicial preference is to sever the offending term and enforce the balance of the agreement: Although ‘the statute appears to give a trial court some discretion as to whether to sever or restrict the unconscionable provision or whether to refuse to enforce the entire agreement[,] . . . it also appears to contemplate the latter course only when an agreement is “permeated” by unconscionability.’ [Citation.]” (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1477-1478, italics added.) To determine whether an arbitration agreement is “permeated” with unconscionability, courts look to (1) whether there are multiple unconscionable provisions; (2) whether “the central purpose” of the contract is illegal; and (3) whether the contract can be “saved” by severing the unconscionable terms, or whether the contract would have to be “reformed.” (Poublon v. C.H. Robinson Co. (9th Cir. 2017) 846 F.3d 1251, 1273.) Thus, “[a]n arbitration agreement is also deemed ‘permeated’ by unconscionability if ‘there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement.’” (Magno v. The College Network, Inc., supra, 1 Cal.App.5th at p. 292.) If an arbitration agreement is permeated by unconscionability, then the trial court may decline to enforce it. (Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138, 149 [“The court has discretion . . . to refuse to enforce an entire agreement if the agreement is “permeated” by unconscionability.”], abrogated on other grounds as recognized in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 366.)

In Armendariz, for instance, the court concluded severance was not appropriate for two reasons. First, the arbitration agreement contained two unlawful provisions: one which made the agreement wholly unilateral in that only employees were required to arbitrate their claims, and another that limited the amount of damages employees could recover. (Armendariz, supra, 24 Cal.4th at p. 124.) Second, the agreement’s unconscionable terms could not simply be severed. Instead, the provision limiting the agreement to the employee’s claims only would have had to have been reworded to include the employer’s claims. (Ibid.) In other words, the trial court would have had to “reform the contract, not through severance or restriction, but by augmenting it with additional terms” because there was “no single provision” the court could “strike or restrict in order to remove the unconscionable taint from the agreement.” (Id. at pp. 124-125.) The Armendariz court therefore concluded that it had to “void the entire agreement” because “severance or restriction” alone would not cure its unconscionability. (Ibid.)

Under Armendariz, the trial court here did not abuse its discretion in declining to sever the FTP’s extensive prearbitration provisions. (See Armendariz, supra, 24 Cal.4th at p. 124 [trial court did not abuse its discretion in refusing to sever two unconscionable provisions].) Cases where the trial court abused its discretion by refusing to sever an unconscionable term involved a single, brief provision. For instance, in Farrar v. Direct Commerce, supra, 9 Cal.App.5th at page 1262, the parties’ arbitration agreement contained only one unconscionable provision, which exempted “any claim based on or related to the Confidentiality and Inventions Agreement between [the employee] and [the employer].” Because this provision was “readily severable” in that the trial court could have simply struck that one line while enforcing the remainder of the parties’ arbitration agreement, the Farrar court held the trial court abused its discretion by declining to do so. (Ibid.)

Our Supreme Court found that an unconscionable provision in an employer’s arbitration agreement should have been severed in Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064. The provision in that case allowed the parties to appeal any arbitration award exceeding $50,000 to a second arbitrator. (Id. at p. 1071.) Although the provision was mutual on its face, the Little court held it was unfairly one-sided in the employer’s favor because the $50,000 threshold “makes sense only from a defendant’s standpoint” in that it was “geared toward giving” the employer “a substantial opportunity to overturn a sizable arbitration award.” (Id. at pp. 1073-1074.) The Little court held, however, that the provision should have been severed because it was the only unconscionable provision, “[a]nd no contract reformation [was] required,” because it could be severed with “the rest of the arbitration agreement left intact.” (Id. at p. 1075.)

The McManus court reached the same conclusion with regard to an unconscionable fee-sharing provision. There, the employer-defendant’s arbitration agreement unlawfully required employees to pay a $500 deposit plus $1,200 per arbitration hearing. (McManus v. CIBC World Markets Corp., supra, 109 Cal.App.4th at p. 93.) The McManus court held that the fee-sharing provision—the arbitration agreement’s one unconscionable term—should have been severed because the remainder of the agreement was “otherwise enforceable” without adding to or revising its terms. (Id. at p. 102.)

Similarly, in Dotson v. Amgen, Inc. (2010) 181 Cal.App.4th 975, 985, the appellate court found the trial court abused its discretion by refusing to sever a provision in an arbitration agreement limiting discovery. The court reasoned that “[w]here, as here, only one provision of an agreement is found to be unconscionable and that provision can easily be severed without affecting the remainder of the agreement, the proper course is to do so.” (Id. at p. 985, italics added.)

Relying on Collins v. Taco Bell Corp. (C.D. Cal. 2013) 2013 WL 3984252, JFK argues the trial court could have simply severed the FTP’s prearbitration provisions and ordered the parties to arbitration. Collins does not support JFK’s position. In Collins, the parties’ arbitration agreement provided that only the plaintiff had to complete an “internal review process,” but did not explain what that process would entail. (Id. at p. *1.) The district court therefore severed the single sentence in the arbitration agreement about the “internal review process” and ordered the parties to arbitration. (Id. at p. *8.)

By contrast, here, there is no “single provision” that the trial court could have severed here. The FTP’s prearbitration terms are contained in numerous paragraphs spanning multiple pages in the FTP, the employee handbook, and the Acknowledgment. Because “[a]n employment arbitration agreement can be considered permeated by unconscionability if it ‘contains more than one unlawful provision,’” the trial court did not abuse its discretion in declining to sever the numerous prearbitration provisions in the FTP. (Trivedi v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 398; accord, Ontiveros v. DHL Express USA, Inc. (2008) 164 Cal.App.4th 494, 515 [“Given these multiple unlawful provisions, the trial court did not abuse its discretion in determining that the agreement is “permeated with unconscionability and will not be enforced. [Citations.],” footnote omitted], abrogated on other grounds as recognized in Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1563, fn. 9.)

Our dissenting colleague questions whether Nyulassy and Carmona apply here because, unlike the parties’ arbitration agreement, the arbitration agreements in those cases had other substantively unconscionable terms in addition to unconscionable unilateral prearbitration requirements. But neither Nyulassy or Carmona suggested that the prearbitration requirements at issue were not independently unconscionable. The court in Nyulassy held that, “taken together,” the three challenged provisions of the employer’s arbitration agreement, including the unilateral “free peek” provision, “render[ed] [the arbitration agreement] substantively unconscionable.” (Nyulassy, supra, 120 Cal.App.4th at p. 1283.) The court later explained that the “[t]he mandatory arbitration clause in the employment agreement here is substantively unconscionable because it lacks any degree of mutuality, imposes upon plaintiff a prearbitration resolution procedure controlled by defendant, and severely limits the time within which plaintiff may demand arbitration to vindicate his rights.” (Id. at pp. 1287-1288, italics added.) The Carmona court explicitly held that the “unilateral ‘free peek’ provision contributes” to the arbitration agreement’s substantive unconscionability, meaning that the provision itself was unconscionable. (Carmona, supra, 226 Cal.App.4th at p. 89.)

Moreover, the Pokorny court followed Nylassy and Carmona in holding that a unilateral prearbitration provision similar to the FTP’s was “substantively unconscionable under California law.” (Pokorny, supra, 601 F.3d at p. 998.) The court in Carlson, following Nyulassy, also held the unilateral prearbitration dispute resolution terms “aggravate[d] the substantive unconscionability of the” parties’ arbitration agreement. (Carlson, supra, 239 Cal.App.4th at p. 635.)

Nyulassy, Carmona, Pokorny, and Carlson thus show that the FTP’s prearbitration provisions are substantively unconscionable on their own, even without other unconscionable terms.

As we noted above, a trial court may find an arbitration agreement permeated with unconscionability if it contains more than one unlawful provision. (See 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.”].) For that reason, several courts have held that a trial does not abuse its discretion by declining to sever multiple unconscionable provisions from an arbitration agreement and refusing to enforce the agreement. (E.g., Dougherty v. Roseville Heritage Partners (2020) 47 Cal.App.5th 93, 107; Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 803; Magno v. The Coll. Network, Inc., supra, 1 Cal. App. 5th at p. 292.)

True, the majority of these cases involved unconscionable provisions that related to the arbitration itself, not prearbitration provisions alone. But in their severability analysis, the courts in Nyulassy, Carmona, Pokorny, and Carlson did not consider the prearbitration provisions to be distinct from the arbitration provisions. (See Nyulassy, 120 Cal.App.4th at p. 1288; Carmona, supra, 226 Cal.App.4th at p. 90; Pokorny, 601 F.3d at p. 1005; Carlson, supra, 239 Cal.App.4th at p. 640.) Rather, the courts considered them in finding that the arbitration agreements contained multiple unconscionable provisions, which rendered the agreements “permeated with unconscionability” and therefore unenforceable. (See Nyulassy, 120 Cal.App.4th at p. 1288; Carmona, supra, 226 Cal.App.4th at p. 90; Pokorny, 601 F.3d at p. 1005; Carlson, supra, 239 Cal.App.4th at p. 640.) So, under Nyulassy, Carmona, Pokorny, and Carlson, trial courts may consider prearbitration provisions when determining whether arbitration agreement is “permeated” with unconscionability. It follows that if there are multiple unconscionable prearbitration provisions, the arbitration agreement is “permeated” with unconscionability, and the trial court does not abuse its discretion by refusing to sever the prearbitration provisions. (See Carlson, supra, 239 Cal.App.4th at p. 640 [finding multiple prearbitration terms were unconscionable in concluding “substantive unconscionability permeated the entire [arbitration agreement]”]; Magno v. The College Network, Inc., supra, 1 Cal.App.5th at p. 292 [“An arbitration agreement is also deemed ‘permeated’ by unconscionability if ‘there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement.’”].) As our dissenting colleague notes, “[s]everance should be denied if an agreement is ‘permeated’ with unconscionability.”

But our dissenting colleague concludes that the trial court abused its discretion in declining to sever the FTP’s unconscionable prearbitration provisions because they are “collateral” to the parties’ arbitration agreement and neither party seeks to enforce them. We disagree with both points.

“Severance is permissible only if the unconscionable portion is collateral to the main purpose of the contract.” (O’Hare v. Municipal Resources Consultants (2003) 107 Cal.App.4th 267, 281, italics added.) Examples of collateral provisions include cost-splitting requirements (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 92; Roman v. Superior Court, supra, 172 Cal.App.4th at p. 1478; Conyer v. Hula Media Services, LLC (2020) 53 Cal.App.5th 1189, 1199) and attorney’s fees provisions (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 709; Serafin v. Balco Properties Ltd., LLC (2015) 235 Cal.App.4th 165, 184). In these cases, the offending provisions were “collateral to the main purpose of the contract” because they were unrelated to the main purpose of the arbitration agreements, which was to resolve disputes. (See e.g., Gutierrez v. Autowest, Inc., supra, 114 Cal.App.4th at p. 92 [“Here, the main purpose of the arbitration agreement was not to regulate costs, but to provide a mechanism to resolve disputes.”].)

Here, however, the prearbitration procedures are not collateral to the purpose of the FTP, which is to resolve the parties’ employment disputes. As the FTP states in its introduction, its purpose is to provide “a comprehensive mechanism for resolving employment-related disputes between [JFK] and its employees,” which ends with binding arbitration.{AA 134} The prearbitration procedures are explicitly designed for the purpose of resolving employees’ disputes, so they are not “collateral to the main purpose of the contract.” (Armendariz, supra, 24 Cal.4th at p. 124.) Rather, the FTP’s prearbitration provisions go to the heart of the arbitration agreement’s main purpose of resolving disputes between JFK and its employees. The trial court therefore reasonably declined to sever them. (See O’Hare v. Municipal Resources Consultants, supra 107 Cal.App.4th at p. 281 [“Severance is permissible only if the unconscionable portion is collateral to the main purpose of the contract,” italics added]; .)

Finally, the dissent argues the trial court abused its discretion in declining to sever the prearbitration provisions because “no party has complied with the prearbitration provisions, and no party seeks to enforce them,” so no one will “get a ‘free peek’ in this dispute.”

But it does not matter that the parties did not comply with the prearbitration procedures and do not seek to enforce them now. Our Supreme Court rejected a similar argument in Armendariz, reasoning that “whether an employer is willing, now that the employment relationship has ended, to allow the [unconscionable unilateral] arbitration provision to be mutually applicable, or to encompass the full range of remedies, does not change the fact that the arbitration agreement as written is unconscionable and contrary to public policy.” (Armendariz, supra, 24 Cal.4th at p. 125, italics added.) This is because “[s]uch a willingness ‘can be seen, at most, as an offer to modify the contract; an offer that was never accepted. No existing rule of contract law permits a party to resuscitate a legally defective contract merely by offering to change it.’ [Citation.]” (Ibid.) As a result, JFK’s “willingness to have the court sever the invalid clauses is insufficient to save the agreement.” (Ramos v. Superior Court (2018) 28 Cal.App.5th 1042, 1069.)

It is likewise immaterial JFK has not gotten and will not get a “free peek” at Carver’s claims. Our focus is on the parties’ arbitration agreement as written, not whether the parties complied with its terms. (See Armendariz, supra, 24 Cal.4th at p. 125.)

Moreover, in Nyulassy, Carmona, Pokorny, and Carlson, the employees sued in court without participating in the prearbitration procedures that their arbitration agreements mandated. (Nyulassy, supra, 120 Cal.App.4th at p. 1272; Carmona, supra, 226 Cal.App.4th at pp. 78-79; Pokorny, supra, 601 F.3d at p. 991; Carlson, supra, 239 Cal.App.4th at p. 624.) In Nyulassy, Carmona, and Carlson, the employers asked the courts to order the parties directly to arbitration. (Nyulassy, supra, 120 Cal.App.4th at p. 1272; Carmona, supra, 226 Cal.App.4th at pp. 78-79; Carlson, supra, 239 Cal.App.4th at p. 624.) The employer in Pokorny requested that the employee be ordered to participate in the prearbitration process outlined in their arbitration agreement or arbitration. (Pokorny, supra, 601 F.3d at p. 993.) In all three cases, the courts held that the trial court appropriately declined to sever the prearbitration provisions even though the trial court could have done so without affecting the remainder of the parties’ arbitration agreement. (Nyulassy, supra, 120 Cal.App.4th at pp. 1287-1288; Carmona, supra, 226 Cal.App.4th at p. 90; Pokorny, supra, 601 F.3d at p. 1005.) So too here.

In sum, we conclude the trial court did not err in finding the FTP unenforceable as unconscionable and did not abuse its discretion in declining to sever the FTP’s unconscionable terms.

IV.

DISPOSITION

The trial court’s order denying JFK’s petition to compel arbitration is affirmed. Carver is awarded her costs on appeal.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

CODRINGTON

J.

I concur:

RAMIREZ

P. J.

[Carver v. JFK Memorial Hospital, Inc. et al., E071782]

MENETREZ, J., Dissenting.

The only allegedly unconscionable provisions of the parties’ agreement concern the prearbitration dispute resolution process. There is no rational basis to decline to sever those provisions, at least in the context of this case. Because the trial court therefore abused its discretion by declining to sever them and compel arbitration, I respectfully dissent.

The trial court ruled, and the majority opinion agrees, that the prearbitration dispute resolution process is substantively unconscionable under Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267 (Nyulassy) and Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74 (Carmona) because it gives the employer a “‘free peek’” at the employee’s case. (Nyulassy, supra, at p. 1283; Carmona, supra, at p. 89.) It is not clear to me that the Nyulassy/Carmona “free peek” theory of unconscionability is sound, but even assuming that it is, its application in this case is questionable. In determining that a unilateral prearbitration dispute resolution process was unconscionable because it gave the employer a “free peek” at the employee’s case, both Nyulassy and Carmona expressly relied on the fact that the arbitration agreement itself was not bilateral. (Nyulassy, at pp. 1282-1283 [“Given the unilateral nature of the arbitration agreement, requiring plaintiff to submit to an employer-controlled dispute resolution mechanism (i.e., one without a neutral mediator) suggests that defendant would receive a ‘free peek’ at plaintiff’s case, thereby obtaining an advantage if and when plaintiff were to later demand arbitration”]; Carmona, at p. 89.) The arbitration agreement in this case is bilateral, so it is not clear that Nyulassy and Carmona apply.

In addition, procedural and substantive unconscionability are assessed on a sliding scale, meaning that “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, and vice versa.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).) Here, the claims of both procedural and substantive unconscionability are weak, so it is far from clear that the parties’ agreement is unenforceable in any respect. (Dotson v. Amgen, Inc. (2010) 181 Cal.App.4th 975, 982 [if “the degree of procedural unconscionability is minimal, the agreement is unenforceable only if the degree of substantive unconscionability is high”].)

But even assuming that the agreement’s prearbitration dispute resolution process is unconscionable (both procedurally and substantively), there is no rational basis to decline to sever it. Severance should be denied if an agreement is “permeated” with unconscionability, but otherwise severance is appropriate for any unconscionable provisions that are “collateral” rather than “central” to the purpose of the contract. (Armendariz, supra, 24 Cal.4th at pp. 123-124.) Here, the arbitration agreement itself is not permeated with unconscionability. In fact, it is not unconscionable at all, because the only claim of unconscionability relates to the prearbitration dispute resolution process. And the prearbitration dispute resolution provisions are collateral to the arbitration agreement—plaintiff’s claims can be arbitrated exactly as agreed if all of the offending provisions are severed. Moreover, no party has complied with the prearbitration provisions, and no party seeks to enforce them. Consequently, no one has gotten or will get a “free peek” in this dispute, so the alleged illegality of the prearbitration provisions could not have any impact on arbitration of plaintiff’s claims.

The majority opinion’s contrary analysis is unsound. The opinion asserts that any arbitration agreement with more than one unconscionable provision may be found to be permeated with unconscionability. (Maj. opn., ante, at p. 25 [“a trial court may find an arbitration agreement permeated with unconscionability if it contains more than one unlawful provision”].) That is incorrect. As the Supreme Court explained in Armendariz, a court “‘may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single clause or group of clauses which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.’” (Armendariz, supra, 24 Cal.4th at p. 122, italics added.) That is, a contract might have multiple unconscionable provisions and yet not be permeated with unconscionability, and the court can sever or limit the offending provisions.

The majority opinion also asserts that under Armendariz, “it does not matter that the parties did not comply with the prearbitration procedures and do not seek to enforce them now.” (Maj. opn., ante, at p. 28.) Again, that is incorrect. In Armendariz, the Supreme Court determined that severance was impossible because the lack of mutuality in the arbitration agreement could not be cured by striking or deleting certain terms—rather, to cure the defects in the agreement the court would have to “reform the contract . . . by augmenting it with additional terms,” which the court does not have the power to do. (Armendariz, supra, 24 Cal.4th at p. 125.) The court then noted that the employer’s willingness, after termination of the employment relationship, to agree to mutual arbitration was of no consequence; it did not change the fact that the existing arbitration agreement was unilateral, unconscionable, and hence unenforceable. (Ibid.) That is, the employer was trying to enforce an unconscionable arbitration agreement, so the employer’s willingness, after the fact, to enter into a new arbitration agreement that was not unconscionable made no difference. That has nothing to do with my analysis—I do not claim that any of the parties are willing to enter into a new agreement that is free from the putative defects of the existing agreement. Rather, my argument is that no party has complied with or benefited from or seeks to enforce the allegedly unconscionable prearbitration provisions, so there is no reason why they cannot be severed. Again, were those provisions to be severed, the parties could arbitrate plaintiff’s claims exactly as agreed.

For all of the foregoing reasons, I would reverse and direct the trial court to sever the prearbitration dispute resolution provisions and grant the motion to compel arbitration. I therefore respectfully dissent.

MENETREZ

J.