CALIFORNIA CLASS ACTION LAW

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Editorial note:  The author of California Class Action Law appeared for respondent Ajamian in the opinion summarized below, Ajamian v. CantorCO2e, L.P., et al.  

In an opinion certified for publication, the First District Court of Appeal held that a broadly worded arbitration agreement that stated that “[a]ny disputes, differences or controversies arising under” a contract shall be settled by a panel of arbitrators was insufficient to establish “clear and unmistakable” evidence of an intent to delegate issues of enforceability or arbitrability to the arbitration panel.  Ajamian v. CantorCO2e, L.P., et al., No. A131025 (1st Dist., Div. 5 Feb. 6, 2012) (available at http://www.courtinfo.ca.gov/opinions/documents/A131025.PDF).

Although the arbitration provision was broadly worded and indicated that arbitration might be conducted under the rules of an arbitration service that gives arbitrators the power to decide the validity of arbitration agreements, it did not provide clear and unmistakable evidence that the parties intended to delegate authority to the arbitrator, rather than to the court, to decide the threshold issue of whether the arbitration provision itself was unconscionable.

Id.

Background

Plaintiff Ajamian filed a complaint against Defendants CantorCO2e and Margolis, asserting claims under the California’s Fair Employment and Housing Act, the California Labor Code, and other theories.  Id.  Defendants filed a petition to compel arbitration pursuant to the terms of a written employment agreement or, alternatively, an employee handbook.  Id.

The arbitration provision of the employment agreement read:

Any disputes, differences or controversies arising under this Agreement shall be settled and finally determined by arbitration.” (Italics added.) Further, the provision states: “It is expressly agreed that arbitration as provided herein shall be the exclusive means for determination of all matters arising in connection with this Agreement and neither party hereto shall institute any action or proceeding in any court of law or equity other than to request enforcement of the arbitrators’ award hereunder. The foregoing sentence shall be a bona fide defense to any action or proceeding instituted contrary to this Agreement.

Id.

Defendants contended that the threshold question of the enforceability of the arbitration provision should be decided by the arbitrator, Ajamian could not establish procedural unconscionability, and any provisions that were substantively unconscionable could simply be severed. Id.  Ajamian opposed the petition, contending that the court rather than the arbitrator was required to determine the issue and the arbitration provisions were unconscionable. Id. In addition, she argued that, even if there were a clear and unmistakable delegation of authority to the arbitrator to decide the enforceability of the arbitration provision, such a delegation is itself unconscionable and unenforceable. Id.

The Trial Court Order

The trial court judge Hon. Peter Busch of the San Francisco Superior Court agreed with Ajamian and denied the petition to compel arbitration. Id. By written order, the court ruled: (1) Ajamian is not bound by the arbitration provision in the handbook; (2) the court, rather than the arbitration panel, determines whether the arbitration provision of the Employment Agreement is enforceable; (3) the arbitration clause in the Employment Agreement is unconscionable; (4) the damages limitation in the arbitration provision of the Employment Agreement is unlawful and “the attorneys’ fee clause which the arbitration provision in the Employment Agreement would enforce is unconscionable;” and (5) the court would not sever the offending portions of the arbitration provision in order to save it. Id.

Discussion

Defendants contended that the employment agreement clearly and unmistakably sets forth an intent to delegate arbitrability issues to the arbitration panel.  Id.  Defendants “pointing primarily to the breadth of the arbitration provision and its proviso that arbitration may be conducted according to the rules of the AAA (under which an arbitrator has the power to determine the validity of an arbitration agreement).”  Id. Ajamian disagreed, and pointed to other language in the Employment Agreement that “suggests the arbitrator was not given exclusive authority to determine the enforceability of the arbitration provision.”

The Court of Appeal concluded that “Ajamian — and the trial court — have it right.”

We therefore hold that the clear and unmistakable evidence test is not met by language requiring arbitration of “[a]ny disputes, differences or controversies arising under” a contract. Even though, in this case, the agreement also contains language referring to “all matters” and purporting to preclude the parties from initiating a court proceeding, it remains uncertain whether this language merely buttresses the requirement that every substantive claim must be arbitrated. Thus, while there might be something short of an express delegation that constitutes clear and unmistakable evidence of the parties’ intent to arbitrate the unconscionability of an arbitration provision, this is not it.

Id.

Delegation Under AAA Rules

Defendants also contended that there was clear and unmistakable evidence of the parties’ intent to arbitrate the enforceability of the arbitration provision because the employment agreement specified that the arbitration could proceed according to the rules of the AAA, and those rules state that the arbitrator has the power to determine issues of his or her own jurisdiction.  Id.

The Employment Agreement stated that arbitration would be held “according to the rules of the National Association of Securities Dealers, Inc. (or, at [CantorCO2e’s] sole discretion, the American Arbitration Association or any other alternative dispute resolution organization) now in force and hereafter adopted and the laws of the state of New York then in effect.” There is no evidence that Ajamian was given the AAA rules by the time she signed the Employment Agreement. After Ajamian sued, CantorCO2e exercised its unilateral discretion and demanded that Ajamian submit her claims to the AAA. As it turns out, the AAA rules provide: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” (AAA Employment Arbitration Rules and Mediation Procedures (eff. Nov. 1, 2009) rule 6.a.)

Id.

In the end, the Court did not need to decide whether an “unqualified incantation of AAA rules establishes a clear and unmistakable delegation” since the Court concluded that the reference to AAA rules in the agreement was insufficient for another reason: the “Employment Agreement did not mandate that AAA rules would necessarily apply”.  Id.

Instead, the arbitration clause stated that the arbitration would be held according to NASD rules, AAA rules, or the rules of “any other alternative dispute resolution organization” selected by CantorCO2e in its sole discretion. As the trial court stated to appellants’ counsel: “But your argument depends on it being the AAA rules, and there’s . . . no way the plaintiff can know . . . as of the time that she signs this employment agreement that those are the rules that are going to apply.”

Id.

The Court concluded that the agreements language failed to clearly and unmistakably evince the parties’ mutual intent to have the arbitrators decide even the issue of enforceability.   Id. “The mere possibility that employer CantorCO2e might in the future require application of AAA rules does not show that employee Ajamian clearly and unmistakably assented to arbitrate the unconscionability of the arbitration agreement.”  Id.

Other Language in the Employment Agreement Raised Uncertainty

The Court further concluded that “[e]ven if the broad language of the arbitration provision and the reference to AAA rules evinced an intent to delegate the unconscionability issue to the arbitrators, in this case other provisions of the Employment Agreement create an ambiguity that renders the totality of the evidence on the issue neither clear nor unmistakable.”  Id.

Citing other California Court of Appeal decisions, the Court noted that as a “general matter, where one contractual provision indicates that the enforceability of an arbitration provision is to be decided by the arbitrator, but another provision indicates that the court might also find provisions in the contract unenforceable, there is no clear and unmistakable delegation of authority to the arbitrator.”  Id. (citing Parada v. Superior Court, 176 Cal.App.4th 1554, 1565-66 (2009) (fact that the contract’s severability clause authorized the “trier of fact of competent jurisdiction” — instead of “arbitration panel” or “panel of three (3) arbitrators” — to sever unenforceable contractual provisions suggests that the court could find the arbitration provision unenforceable); Hartley v. Superior Court, 196 Cal.App.4th 1249, 1257-58 (2011); Baker v. Osborne Development Corp., 159 Cal.App.4th 884, 888-94 (2008).

The agreement provided that a “court of competent jurisdiction” may determine that a covenant in the Employment Agreement is impermissibly “broad in scope, duration or geographical area” or in the nature of a penalty, in which case the court should limit the scope, duration or geographical area of such covenant or reduce the liquidated damages to the extent necessary to render the covenant reasonable and enforceable.  Id.  The Court concluded that this language shows that a court would in some circumstances have authority to rule on the breadth of the parties’ covenants.  Id.

Moreover, the Court found that the “fact that the Employment Agreement recognizes the court’s authority to adjudicate the proper scope of some covenants in the Employment Agreement is inconsistent with the assumption . . . that all issues in connection with the agreement must be determined by the arbitrator.”  Id.  Noting that other alternative inferences might be drawn from the agreement’s language, the court concluded that “[i]n the final analysis, the language creates an ambiguity that precludes a finding of clear and unmistakable evidence.” Id.

Arbitration Under the Handbook

As an alternative to enforcing the arbitration provision in the Employment Agreement, Defendants sought to enforce the arbitration provision in the Handbook.  Id.  The Court rejected this argument.  Id.

The employment agreement was “terminated as of March 1, 2010” and pursuant to a section of the agreement, at that point “the terms of Employee’s employment, including, but not limited to Employee’s compensation, shall be governed by Company’s policies then in effect. . . .”  Id. By continuing in CantorCO2e’s employ, Defendants argued, she agreed to abide by the arbitration policy and, more specifically, the arbitration agreement contained in the Handbook.  Id.

The Court disagreed:

Although section 4 of the Employment Agreement dictates that Ajamian’s employment would be “governed” by CantorCO2e’s “policies then in effect,” it does not specifically state she would be bound by any arbitration agreement or even mention arbitration at all. Nor was there evidence that she was provided, upon termination of the Employment Agreement, a copy of those “policies then in effect.” Moreover, while Ajamian did have the Handbook containing the company’s policy of arbitrating disputes, she never signed or agreed to the actual arbitration agreement in the Handbook, and she was never even asked to do so after the Employment Agreement was terminated. Under the circumstances, section 4 cannot be construed to validly obligate Ajamian to arbitrate her claims.

Id.

The Court further noted the oddity of the result sought by appellants:

Although not a basis for our ruling, we also note a certain oddity to the result appellants urge. Appellants do not contend Ajamian was bound by the arbitration provision in the Handbook until after the termination of the Employment Agreement on March 10, 2010. Because the arbitration provision in the Employment Agreement was unconscionable, Ajamian was not bound by any valid arbitration provision from the commencement of her employment in September 2006 through March 10, 2010; if the arbitration clause in the Handbook did apply, it applied only from March 10, 2010, until the termination of her employment on April 16, 2010. It would be a strange result indeed if, under the facts of this case, an arbitration clause covering approximately the last five weeks of Ajamian’s employment compelled arbitration of claims that had accrued within the 30 months prior. In our view, such a holding would permit the tail to wag the dog, an untenable proposition no matter how favored a breed arbitration might be.

The Court concluded that Defendants failed to establish error, and affirmed the trial court’s order.

Judges and Attorneys

Associate Justice Henry E. Needham, Jr. wrote the opinion for the Court.  Acting Presiding Justice Mark B. Simons and Associate Justice Terence L. Bruiniers concurred.

Trial court judge: Hon. Peter Busch of the San Francisco Superior Court.

Brian L. Johnsrud and Patrick M. Sherman of Curley, Hessinger & Johnsrud for Defendants and Appellants.

Charles H. Jung and Andrew R. Kislik of Nassiri & Jung LLP for Plaintiffs and Respondents.

William C. McNeill, Michael Gaitley, Claudia Center, Rachael Langston of The Legal Aid Society – Employment Law Center, Counsel for Amicus Curiae in Support of Plaintiff Lena Ajamian.

By CHARLES JUNG