Murray v. United Services Automobile Assn.

Filed 9/15/08 Murray v. United Services Automobile Assn. CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

United Services Automobile Association (USAA) appeals from an order denying its motions to compel arbitration of employment-related claims asserted by its former employees, Thomas J. Murray and Vincent B. McLorg. USAA contends the trial court erred in concluding that the arbitration agreement at issue is unconscionably one-sided and thus unenforceable under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz).

We conclude the agreement impermissibly restricts the right to recover certain costs that might otherwise be awarded in a court action. Aside from these cost recovery provisions, there are no substantively unconscionable provisions in the agreement. In light of our conclusion, we reverse the order denying the motions to compel arbitration and remand the matter to the trial court to exercise its discretion whether to sever the unconscionable provisions and compel arbitration.

Factual and Procedural Background

USAA is a financial services and insurance company based in San Antonio, Texas. USAA employed Vincent McLorg as a managing trial attorney in its San Francisco staff counsel office from October 1999 until April 2006. Thomas Murray was hired to work as a trial attorney in USAAs San Francisco staff counsel office in December 1994. Murray reported to McLorg from 1999 until April 2006. USAA terminated McLorgs and Murrays employment on April 6, 2006.

On November 30, 2006, McLorg and Murray (collectively, plaintiffs) each filed suit against USAA in the San Francisco Superior Court challenging their discharges as unlawful. McLorg alleged that he had suffered discrimination and was wrongfully terminated as a result of his gender, age, and disability. He also claimed he had been terminated as a result of political activity protected by Labor Code sections 1101 and 1102. Murray likewise alleged a cause of action under Labor Code section 1101 and 1102 asserting he had been wrongfully terminated for political activity, and he alleged causes of action for discrimination and wrongful termination based on his gender.

USAA filed motions to compel arbitration and to dismiss the complaint in each of the cases. USAA offered evidence that it had implemented a company-wide dispute resolution program known as Dialogue on August 2, 2004. Dialogue is intended as the sole means of resolving most employment-related disputes between USAA and its employees.[1] Dialogue contains the following binding arbitration provision: All Disputes not otherwise settled by the Parties shall be finally and conclusively resolved through arbitration under this Program Description and the Rules, instead of through trial before a court. Under Dialogues express terms, [p]roceedings under the Program, including arbitration, shall be the exclusive, final, and binding method by which Disputes are resolved.

Two months before implementing Dialogue, USAA had sent plaintiffs and other employees an e-mail message introducing and discussing the program, and including links to the documents comprising the program. In addition, on June 2, 2004, USAA sent plaintiffs by certified mail a detailed announcement concerning Dialogue that included copies of the program documents. USAA also directed employees to complete an online course entitled Understanding Dialogue. The e-mail announcement, materials sent by certified mail, and online course each contained the advisement that by continuing to work for USAA after August 2, 2004, the employee agreed to resolve work-related disputes using the Dialogue program and to waive the right to a jury trial or to sue USAA in court. USAAs records showed that Murray and McLorg each opened the e-mail announcing the Dialogue program, received the materials sent by certified mail, and completed the online course entitled Understanding Dialogue.

In McLorgs opposition to the motion to compel arbitration, he argued that his consent to arbitrate disputes with USAA had not been freely given due to economic duress, menace, and/or undue influence. McLorg stated he was 58 years old, disabled, suffering from lingering war wounds, in need of medical care and insurance, and had no reasonable alternative but to remain employed to protect his family and his health. Both McLorg and Murray argued they had not signed the arbitration agreement and their silence or inaction could not be construed as consent to participate in the Dialogue program. They also contended the Dialogue program was unenforceable because it was unconscionable and did not satisfy the minimum requirements set forth in our Supreme Courts decision in Armendariz.

The trial court denied the motions to compel arbitration. In its written order denying the motions, the court rejected plaintiffs contention that the lack of an employee-signed consent to be bound by Dialogue rendered the agreement invalid. With respect to McLorgs claim of economic duress, menace, and/or undue influence, the court noted that McLorg had presented facts to support his claim but that the issue was more appropriately considered in connection with the essential fairness of Dialogue, including how it was implemented. The court concluded that the Dialogue program was procedurally unconscionable because it was offered on a  take it or quit  basis, without any opportunity for the employee to negotiate the terms of the contract. The court held that provisions giving USAA the unilateral right to amend or terminate the Dialogue program were consistent with the courts determination of procedural unconscionability.

The trial court also concluded that the Dialogue program is substantively unconscionable because it gives the arbitrator unfettered discretion to limit discovery, and it allows the arbitrator to award attorney fees to a prevailing employer under a less stringent standard than is applied under California law. The court further concluded that provisions requiring the parties to bear their own discovery costs and expert fees were substantively unconscionable because they prevented the arbitrator from awarding such costs to a prevailing party. In considering whether to sever the objectionable provisions in order to give effect to the arbitration agreement, the court reasoned that severance was unjustified because there were too many such provisions and augmentation as well as severance would be required in order to eliminate all of the substantive uncertainty embraced in the current terms.

USAA timely appealed the order denying the motions to dismiss in appeal numbers A117596 and A117598. On the courts own motion, we consolidated the two appeals.

Discussion

I. General Principles Applicable to Arbitration Agreements

California law, like federal law, favors enforcement of valid arbitration agreements. [Citation.] (Armendariz, supra, 24 Cal.4th at p. 97.) Indeed, California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration. [Citations.] (CoastPlazaDoctorsHospital v. Blue Cross of California(2000) 83 Cal.App.4th 677, 686.) [U]nder both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. [Citations.] In other words, under California law, as under federal law, an arbitration agreement may only be invalidated for the same reasons as other contracts. (Armendariz, supra, 24 Cal.4th at p. 98, fn. omitted.) Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements . . . . (Doctors Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.)

On appeal from the denial of a motion to compel arbitration, we review the arbitration agreement de novo to determine whether it is legally enforceable, applying general principles of California contract law. [Citations.] (Kleveland v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 764.)

II. Lack of Consent

Initially, we consider plaintiffs claims that the Dialogue program is invalid due to lack of consent. Both plaintiffs urge that no valid arbitration agreement exists unless the employee consents by signing the agreement. McLorg separately contends that his consent to the Dialogue program was not freely given due to economic duress and/or undue influence. We conclude that both claims lack merit.

A. Implied Consent by Continuing Employment

Plaintiffs argue that their agreement to be bound by the Dialogue program cannot be implied from their continued employment, citing the principle that silence or inaction may not be taken as consent to an offer to form an agreement. (See Leslie v. Brown Brothers Incorporated (1929) 208 Cal. 606, 621.) Plaintiffs assert that no contract was formed because they did not sign the arbitration agreement.

In Craig v. Brown & Root, Inc. (2000) 84 Cal.App.4th 416, the Court of Appeal considered an argument similar to the one advanced by plaintiffs here. There, a plaintiff who sued her employer for wrongful termination claimed the evidence was insufficient to support the existence of an agreement to arbitrate. The employer had notified its employees of a new dispute resolution program by sending a memorandum that informed recipients they would be bound by the program. (Id. at p. 419.) The plaintiff argued there was no evidence she expressly agreed to arbitrate her claims, received the materials constituting the program, or had actual acknowledge of the program. (Id. at p. 420.) The Court of Appeal rejected the plaintiffs contentions, pointing out that a partys agreement to arbitrate may be express or implied-in-fact, where . . . the employees continued employment constitutes her acceptance of an agreement proposed by her employer [Citations]. (Ibid.) Further, the court held that the employers evidence showing that copies of the memorandum and program materials were sent to plaintiff created a presumption they were received by plaintiff, thus shifting the burden of producing evidence to the plaintiff to prove otherwise. (Id. at p. 421.)

Here, not only did USAA offer evidence that the program materials were sent to plaintiffs, but they also demonstrated actual receipt of the materials by relying on electronic e-mail read receipts, mail return receipts, and evidence that plaintiffs completed an online course explaining Dialogue. McLorg did not dispute receiving the Dialogue materials prior to the programs adoption, although Murray claimed to have no recollection of having received or read the announcements sent by e-mail and certified mail.[2] Murrays claimed lack of recollection does not overcome the presumption he received the Dialogue program materials, particularly in light of evidence confirming receipt of the materials through three different sources. Under the reasoning of Craig v. Brown & Root, Inc., supra, plaintiffs acceptance of the Dialogue program was implied in fact by their continued employment. (84 Cal.App.4th at pp. 420-421.)

Plaintiffs ask us to reject the holding of Craig v. Brown & Root, Inc., arguing that the courts reasoning is not supported by the cases on which it relied, Asmus v. Pacific Bell (2000) 23 Cal.4th 1 and DiGiacinto v. Ameriko-Omserv Corp. (1997) 59 Cal.App.4th 629. Plaintiffs contend that in both cases the employers offered new consideration in exchange for modifications in the employment relationship, suggesting that additional consideration is a prerequisite to enforcement of a unilateral change in the employment relationship. To the extent additional consideration may have been offered in Asmus v. Pacific Bell or DiGiacinto v. Ameriko-Omserv Corp., the cases did not turn on that fact. Indeed, the California Supreme Court expressly rejected the notion that separate consideration must be offered in addition to an offer of continued employment in order to support modification or termination of an employment relationship. (Asmus v. Pacific Bell, supra, 23 Cal.4th at pp. 14-15.) The offer of continued employment constitutes sufficient consideration for a change in the terms of employment. (Ibid.)

Plaintiffs rely on Badie v. Bank of America (1998) 67 Cal.App.4th 779, and Romo v. Y-3 Holdings, Inc. (2001) 87 Cal.App.4th 1153, as support for the proposition that an agreement to arbitrate must be signed to be enforceable. The cases do not stand for that proposition. In Badie v. Bank of America, supra, the court considered whether credit card holders had knowingly consented to an arbitration agreement that was announced in a bill stuffer insert included with their monthly account statements. (67 Cal.App.4th at p. 783.) The bank that issued the credit cards relied upon a contractual term that allowed it to unilaterally change the terms of the account agreements upon notice to account holders. (Id. at p. 799.) The court concluded that the customers consent to allow the bank to change account terms did not constitute consent to the addition of an alternative dispute process, which was a term different in kind from the terms and conditions contained in the original customer account agreement. (Id. at p. 803.) Moreover, the court found that the wording of the bill stuffer failed to contain direct, clear, and unambiguous language required to alert a consumer to the important rights waived by agreeing to resolve disputes through arbitration or other forms of alternative dispute resolution. (Id. at pp. 805-806.) What was lacking in Badie v. Bank of America was meaningful notice that cardholders would be bound by the terms of a pre-dispute arbitration agreement. Here, by contrast, plaintiffs received multiple forms of notice that plainly informed employees of the consequences of the Dialogue program.

In Romo v. Y-3 Holdings, Inc., supra, the court refused to enforce an agreement to arbitrate contained within a lengthy employee manual. (See 87 Cal.App.4th at pp. 1155-1156.) The employee signed an acknowledgment of receipt for the manual but did not sign or date the arbitration agreement itself, even though the agreement contained a separate line for the employees signature. (Ibid.) The court held the arbitration agreement was a stand-alone agreement separate and severable from the rest of the employee manual. (Id. at p. 1160.) Because the arbitration agreement expressly contemplated that the employee would sign the agreement, the absence of the employees signature evidenced lack of consent. (See Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th 1164, 1172-1173 [consent cannot be implied when agreement expressly contemplated it would be signed].) Here, by contrast, USAA did not require the employee to sign the arbitration agreement as evidence of the employees consent. Instead, the Dialogue program materials made clear that the employees consent would be implied from continued employment. Further, unlike in Romo v. Y-3 Holdings, Inc., the arbitration agreement here was not buried in a lengthy employee manual addressed to other issues.

Plaintiffs contend that a partys consent must be express and not implied when the party waives statutory or constitutional rights. As support for this proposition, they rely on Wright v. Universal Maritime Services Corp. (1998) 525 U.S. 70, but that case merely held that a general arbitration clause in a unions collective bargaining agreement did not contain a clear and unmistakable waiver of a covered employees rights to a judicial forum for federal claims of employment discrimination. (Id. at p. 82.) It does not address whether the individual employees consent to enter into a pre-dispute arbitration agreement must be express or may be implied by conduct.

Plaintiffs have failed to point to any case establishing that an arbitration agreement must be signed in order to be valid, except when the parties expressly contemplate that a signature is required to indicate consent. To the extent federal courts have addressed the issue, they have concluded that an agreement to arbitrate may be implied by conduct. (See, e.g., Caley v. Gulfstream Aerospace Corp. (11th Cir. 2005) 428 F.3d 1359, 1369 [arbitration agreement must be in writing but need not be signed].) In Caley v. Gulfstream Aerospace Corp., the court observed that the overwhelming weight of authority supports the view that no signature is required to meet the [Federal Arbitration Acts] written requirement, and after the court cited numerous decisions from various jurisdictions, noted that it has found no decision to the contrary. (Ibid.)

We conclude that plaintiffs consent to be bound by Dialogue was implied by their decision to continue their employment with USAA. It was not necessary to sign the agreement.

B. Economic Duress and Undue Influence

A partys consent to a contract must be freely given. (Civ. Code,  1565.) Apparent consent is not free when obtained through duress, menace, fraud, undue influence, or mistake. (Civ. Code,  1567.) McLorg argues that his consent to arbitrate pursuant to the Dialogue program was not freely given but was instead obtained through economic duress and/or undue influence. We disagree.

Duress generally exists whenever one is induced by the unlawful act of another to make a contract or perform some act under circumstances that deprive him of the exercise of free will. [Citation.] (Tarpy v. County of San Diego(2003) 110 Cal.App.4th 267, 276.) Economic duress does not necessarily involve an unlawful act, but may arise from the doing of a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrators pressure. [Citations.] (Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal.App.3d 1154, 1158, italics added.) Examples of such wrongful acts include [t]he assertion of a claim known to be false or a bad faith threat to breach a contract or to withhold a payment . . . . (Id. at p. 1159.)

McLorgs economic duress claim fails because he has not demonstrated that USAA committed any wrongful act. USAA simply offered to arbitrate employment-related disputes, albeit in a take it or leave it fashion that gave the employee the option of accepting the offer or quitting. It may be true, as discussed below, that the resulting agreement is procedurally unconscionable, but that does not render USAAs conduct wrongful. McLorg claims he was 58 years old at the time Dialogue was introduced, was the primary wage earner in a family of four, was the only member of the family with medical insurance through an employer, needed the job to make ends meet, and needed the USAA health plan for ongoing health problems. While he may well have had no alternative but to accept USAAs continued offer of employment, the circumstances that compelled the decision did not result from any wrongful conduct by USAA.

McLorgs reliance on the doctrine of undue influence is equally unavailing. Undue influence consists 1. In the use, by one in whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him; [] 2. In taking an unfair advantage of anothers weakness of mind; or, [] 3. In taking a grossly oppressive and unfair advantage of anothers necessities or distress. (Civ. Code,  1575.)

 Undue influence involves a type of mismatch which our statute calls unfair advantage. [Citation.] Whether a person of subnormal capacities has been subjected to ordinary force or a person of normal capacities subjected to extraordinary force, the match is equally out of balance. If will has been overcome against judgment, consent may be rescinded. [] . . . [] However, overpersuasion is generally accompanied by certain characteristics which tend to create a pattern. The pattern usually involves several of the following elements: (1) discussion of the transaction at an unusual or inappropriate time, (2) consummation of the transaction in an unusual place, (3) insistent demand that the business be finished at once, (4) extreme emphasis on untoward consequences of delay, (5) the use of multiple persuaders by the dominant side against a single servient party, (6) absence of third-party advisers to the servient party, (7) statements that there is no time to consult financial advisers or attorneys. If a number of these elements are simultaneously present, the persuasion may be characterized as excessive. [Citation.] (Myerchin v. Family Benefits, Inc. (2008) 162 Cal.App.4th 1526, 1540.)

USAAs dealings with McLorg do not bear the hallmarks of undue influence. USAA notified McLorg of the adoption of Dialogue on at least three different occasions and provided him two full months to decide whether to assent to its terms. These are hardly facts that suggest a pattern of unreasonable or excessive persuasion in which USAA sought to take advantage of an employees particular vulnerabilities. It would appear that McLorg believes USAA took advantage of his financial and medical situation to coerce him into accepting the offer of continued employment, but there is no evidence to suggest that USAA was aware of, much less took advantage of, McLorgs individual situation. USAA implemented the Dialogue program company-wide in August 2004. McLorg was not singled out for inclusion in Dialogue, and there is nothing to indicate he was treated any differently than any other employee who was advised of the adoption of Dialogue. His claim of undue influence fails absent evidence that USAA somehow took unfair advantage of McLorgs individual financial and medical needs to persuade him to remain at USAA.[3]

III. Armendarizs Minimum Requirements

In Armendariz, our Supreme Court articulated five minimum requirements that must be satisfied for lawful arbitration of nonwaivable statutory civil rights in the workplace pursuant to a mandatory employment arbitration agreement: Such an arbitration agreement is lawful if it (1) provides for neutral arbitrators, (2) provides for more than minimal discovery, (3) requires a written award, (4) provides for all of the types of relief that would otherwise be available in court, and (5) does not require employees to pay either unreasonable costs or any arbitrators fees or expenses as a condition of access to the arbitration forum . . . . [Citation.] (Armendariz, supra, 24 Cal.4th at p. 102.)

Here, there is no dispute that Dialogue satisfies three of the five requirements. The program provides for a neutral arbitrator, requires a written award, and does not require employees to pay fees and costs that are unique to arbitration. Plaintiffs contend, however, that Dialogue fails to satisfy Armendarizs minimum requirements because the program does not guarantee adequate discovery or provide for all the types of relief otherwise available in court.

A. Adequate Discovery

Adequate discovery is indispensable for the vindication of statutory claims. [Citation.]  [A]dequate discovery does not mean unfettered discovery . . . . [Citation.] And parties may agree to something less than the full panoply of discovery provided in Code of Civil Procedure section 1283.05.^[[4]] [Citation.] However, arbitration agreements must ensure minimum standards of fairness so employees can vindicate their public rights. [Citations.] (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 715-716 (Fitz); accord Armendariz, supra, 24 Cal.4th at pp. 104-106.)

Under Dialogue, [t]he arbitrator shall have discretion to determine the form, amount, and frequency of discovery by the Parties. Discovery is permitted in any form permitted by the Federal Rules of Civil Procedure, as amended from time to time, subject to any restrictions imposed by the arbitrator.

Plaintiffs contend the Dialogue program gives totally unfettered discretion to the arbitrator regarding discovery without requiring any minimum level of discovery. The trial court agreed with plaintiffs, concluding that the arbitrator could allow only two depositions or otherwise reduce discovery authorized by law.

The case relied upon by plaintiffs, Fitz, supra, 118 Cal.App.4th 702, involved an arbitration agreement with significant limitations on discovery not present here. In Fitz, the arbitration agreement limited discovery to the sworn deposition statements of two individuals and any expert witnesses expected to testify at the arbitration hearing, unless the arbitrator found a compelling need to allow other discovery, i.e., unless the parties could demonstrate that a fair hearing would be impossible without additional discovery. (Id. at p. 709.)

The appellate court in Fitz held that the discovery provision was unlawful, and explained: Though [the employer] contends that the [arbitration agreements] limits on discovery are mutual because they apply to both parties, the curtailment of discovery to only two depositions does not have mutual effect and does not provide [the employee] with sufficient discovery to vindicate her rights. This is because the employer already has in its possession many of the documents relevant to an employment discrimination case as well as having in its employ many of the relevant witnesses. [Citations.] (Fitz, supra, 118 Cal.App.4th at p. 716.) The court further stated that the only way Fitz could gain access to the necessary information to prove the claim is to get permission from the arbitrator for additional discovery. However, the burden the [arbitration agreement] imposes on the requesting party is so high and the amount of discovery the [agreement] permits by right is so low that employees may find themselves in a position where not only are they unable to gain access to enough information to prove their claims, but are left with such scant discovery that they are unlikely to be able to demonstrate to the arbitrator a compelling need for more discovery. (Id. at pp. 717-718, fn. omitted.)

Because the arbitration agreement in Fitz contained a presumptive limit on discovery, adequate discovery was not guaranteed. The burden to overcome this presumptive limit was high, requiring a compelling need for additional discovery and a showing that a fair hearing would be impossible without it. (Fitz, supra, 118 Cal.App.4th at pp. 709, 716.) Here, by contrast, Dialogue contains no presumptive limit on discovery, nor does it impose an unreasonable burden to justify more than a minimal level of discovery.[5]

Contrary to plaintiffs contention, an arbitration agreement need not contain an express guarantee of a minimal level of discovery. In considering whether an arbitration agreement provides adequate discovery, the Supreme Court in Armendariz inferred that when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim. [Citation.] (Armendariz, supra, 24 Cal.4th at p. 106, italics added.) Thus, absent express language in an arbitration agreement limiting discovery, it must be assumed that the arbitrator will provide for discovery necessary to a fair and efficient resolution of the dispute. Because Dialogue contains no express limit on discovery, we must infer that the parties agreed to allow discovery necessary for a fair hearing of the claims presented to the arbitrator and we presume the arbitrator will permit this to occur.[6]

B. Limitation on Remedies

1. Attorney Fees

Rule 32.C of the Dialogue program rules provides that [a]ll attorneys fees shall be borne by the Party incurring them, except as otherwise provided by law or in the award of the arbitrator, or as provided for in the USAA Legal Assistance Plan. Plaintiffs object to this provision not because it limits their right to recover attorney fees but instead because it purportedly gives USAA the right to recover attorney fees that it would not be entitled to recover under California law.

Government Code section 12965, subdivision (b) authorizes a discretionary award of attorney fees to a prevailing party in an action brought under the California Fair Employment and Housing Act (FEHA) (Gov. Code  12900 et seq.). However, a prevailing defendant is entitled to an award of fees under this section only upon a finding that the plaintiffs action was frivolous, unreasonable, or without foundation. (Cummings v. Benco Building Services (1992) 11 Cal.App.4th 1383, 1387.)

Plaintiffs contend the attorney fee provision in Dialogue allows the arbitrator to award attorney fees to a prevailing employer even in the absence of a showing that the action was frivolous, unreasonable, or without foundation. Specifically, they focus on the exception allowing an award of attorney fees in the award of the arbitrator, which they suggest permits the arbitrator to make an award of attorney fees in any way he or she sees fit without regard for California law. For the reasons that follow, we disagree.

Paragraph 8.C of the program description for Dialogue clarifies that [t]he Program shall not be construed to grant additional substantive, legal, or contractual rights, remedies, or defenses which would not be applied by a court of competent jurisdiction in the absence of the Program, unless expressly authorized by these provisions. (Italics added.) The attorney fee provision at issue does not expressly grant the arbitrator authority to award attorney fees to an employer irrespective of a showing that the action was frivolous, unreasonable, or without foundation. Thus, construing paragraph 8.C together with the attorney fee provision in rule 32.C, the arbitrator must comply with California law when attorney fees are allocated in the award of the arbitrator to a party other than one who incurred the fees.

Plaintiffs object to this interpretation, citing the principle that specific contractual provisions control over general ones if the two are inconsistent. (See Code Civ. Proc.,  1859.) This principle is inapplicable, however, because the two provisions are not inconsistent. It is not inconsistent to say both that an arbitrator may award attorney fees and that his power to do so is limited by applicable law. Furthermore, [p]articular clauses of a contract are subordinate to its general intent. (Civ. Code,  1650.) Paragraph 8.C simply defines the limits of the arbitrators authority under rule 32.C.

Plaintiffs also urge that any ambiguity between paragraph 8.C and rule 32.C must be interpreted against the party who caused the uncertainty. California Civil Code section 1654 provides that [i]n cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist. This principle is irrelevant here because no uncertainty exists when standard rules of contractual interpretation are applied. Further, the interpretation advanced by USAA actually favors plaintiffs because it would prohibit an award of attorney fees to USAA absent a showing that the action was frivolous, unreasonable, or without foundation. Plaintiffs propose an interpretation of the attorney fee provision adverse to them that consequently renders the entire agreement unenforceable. Such an approach violates the rule that a contract must be interpreted in a manner that renders it legal, if it is possible to do so: A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties. (Civ. Code,  1643.)

2. Discovery and Expert Costs

Rule 32.D of the Dialogue Program Rules provides as follows: Discovery costs (e.g., court reporter fees for original deposition transcripts) shall be borne by the Party initiating the discovery. The cost of copies of deposition transcripts or other discovery shall be borne by the Party ordering the copy. Rule 32.E provides that [t]he fees and expenses of experts, consultants, and others retained or consulted by a Party shall be borne by the Party utilizing those services.

Plaintiffs claim these rules improperly limit the right of a prevailing employee to seek recovery of discovery costs and expert fees. On this point, we agree with plaintiffs and the trial court.

A court in its discretion may award discovery costs and expert witness fees to a prevailing plaintiff in a case brought under FEHA. (Gov. Code,  12965, subd. (b).) In addition, under certain circumstances a party is entitled to an award of discovery costs and/or expert witness fees. (See Code Civ. Proc.,  998, 1032, subd. (b), 1033.5, subd. (a)(3).)

Rule 32.D and rule 32.E limit this remedy by specifying that the parties shall bear their own discovery and expert witness costs. Shall is mandatory. There is no qualifying language that might allow an arbitrator to award discovery costs and expert witness fees to a prevailing plaintiff. These provisions violate the requirement in Armendariz that an arbitration agreement may not limit statutorily imposed remedies. (Armendariz, supra, 24 Cal.4th at p. 103.)

USAA contends the provisions do not impermissibly limit remedies. It claims the default rule for costs is found in rule 32.F, which provides that [e]xcept as otherwise provided by law or in the award of the arbitrator, all other expenses, fees, and costs of proceedings under these Rules shall be borne equally by the Parties who are not Employees/Applicants. While it is true this provision generally requires parties other than the employee to bear costs, and it allows the arbitrator to award certain costs and fees as permitted by law, the rule plainly applies to all other expenses, fees and costs not otherwise listed in other subparts of rule 32, which addresses fees and costs. Thus, although rule 32.F may be the default in the sense that it applies to costs and fees not otherwise listed in rule 32, it does not apply to discovery costs and expert witness fees, which are specifically addressed in rules 32.D and 32.E.

USAA also argues that, fairly read, rules 32.D and 32.E simply mean that the parties incurring discovery costs and expert witness fees will bear the costs in the first instance, just as they would in a court of law. According to USAA, nothing prevents the arbitrator from awarding costs and fees after an arbitration has concluded and the prevailing party is determined. This interpretation does not pass muster. The language of the rules specifies that the costs shall be borne by the party incurring the cost and contains no exception allowing an award of costs after the arbitrator issues an award. Furthermore, USAAs interpretation is undercut by language in rules 32.B, 32.C, and 32.F, each of which specifies that fees and/or expenses described in those rules shall be borne by the party incurring them except as otherwise provided by law or in the award of the arbitrator. If it were the case that the various subparts of rule 32 governing fees and expenses simply listed who incurred certain costs in the first instance, it would be unnecessary to include the qualifying language allowing the arbitrator to award costs to a party other than the one who incurred them. The fact that the qualifying language (i.e., except as otherwise provided by law or in the award of the arbitrator) is included in some subparts of rule 32 but not others indicates the arbitrator has no power to award costs described in the subparts lacking the qualifying language.

USAA also cannot avail itself of the general principle contained in paragraph 8.B of Dialogues program description, which provides that the arbitrator shall have the authority to order any and all relief a party could obtain from a court of competent jurisdiction.[7] This general principle is in direct conflict with rules 32.D and 32.E, which unequivocally establish that the arbitrator may not award discovery costs and expert witness fees to a prevailing party. Applying the rule that a specific provision controls over a general provision when the two are in conflict (Code Civ. Proc.,  1859), we must interpret Dialogue to require that parties bear their own discovery and expert costs.

IV. Unconscionability

In Armendariz, the court clarified that the fiveminimum requirements discussed in the preceding section of this opinion apply to the arbitration of unwaivable statutory claims, such as those under FEHA. (Armendariz, supra, 24 Cal.4th at p. 113.) In addition, regardless of the type of claim being arbitrated, a court must also consider objections that an arbitration agreement imposed on an employee is unconscionable. (Ibid.)

Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. [Citation.] The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. [Citation.] If the contract is adhesive, the court must then determine whether other factors are present which, under established legal ruleslegislative or judicialoperate to render it [unenforceable].  [Citation.] (Armendariz, supra, 24 Cal.4th at p. 113.)

 [U]nconscionability has both a procedural and a substantive element, the former focusing on  oppression  or  surprise  due to unequal bargaining power, the latter on  overly harsh  or  one-sided  results. [Citation.] The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. [Citation.] But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves. [Citations.] 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. (Armendariz, supra, 24 Cal.4th at p. 114.)

 Procedural unconscionability concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citation.] It focuses on factors of oppression and surprise. [Citation.] 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. [Citations.] (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.) The second component of procedural unconscionability encompasses an aspect of surprise, with the terms to which the party supposedly agreed being hidden in a prolix printed form drafted by the party seeking to enforce them. [Citations.] (Id. at pp. 1329-1330.)

There is little question but that Dialogue is a contract of adhesion. It was imposed on employees as a condition of continued employment and there was no opportunity to negotiate its terms. (See Armendariz, supra, 24 Cal.4th at pp. 114-115.) The oppression prong of the procedural unconscionability analysis is plainly met. USAA had the superior bargaining power and presented its employees with a take it or quit alternative of agreeing to a pre-dispute arbitration agreement that was not subject to modification.

The surprise prong of the analysis, however, is not established by the facts here. USAA gave employees multiple forms of notice announcing the Dialogue program several months before it was to be implemented. The terms of the agreement were not hidden in a long document, such as an employee manual, or printed in type too small to read. Nevertheless, we must agree with the trial court that Dialogue is procedurally unconscionable as a result of the adhesive and coercive manner in which it was introduced.

Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create   overly harsh  or  one-sided  results (Armendariz, supra, 24 Cal.4th at p. 114), that is, whether contractual provisions reallocate risks in an objectively unreasonable or unexpected manner. (Jones v. Wells Fargo Bank (2003) 112 Cal.App.4th 1527, 1539.) To be substantively unconscionable, a contractual provision must shock the conscience. [Citation.] (Id. at p. 1540.) In evaluating the issue,  the paramount consideration is mutuality.  (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1287.)

The trial court found that Dialogue is substantively unconscionable because it unreasonably restricts discovery, allows a prevailing employer to recover attorney fees under a less stringent standard than applied in court, and does not allow recovery of discovery costs and experts fees. For reasons explained earlier, we do not agree that Dialogues discovery and attorney fee provisions are substantively unconscionable.

With respect to the recovery of discovery costs and expert fees, our conclusion that rules 32.D and 32.E fail to satisfy the minimum requirements of Armendariz likewise supports the conclusion that the provisions are substantively unconscionable. Although the provisions impose a mutual restriction on the employee and employer, the effect of the restriction is not likely to be mutual. Because the employer has within its possession the vast majority of the evidence relevant to employment-related claims against it, it is not unreasonable to expect that employees incur greater discovery-related costs than employers. (Cf. Fitz, supra, 118 Cal.App.4th at p. 716.) In any event, a provision that deprives an employee of a remedy otherwise available in court could be characterized as overly harsh and objectively unreasonable.

Plaintiffs also argue that provisions allowing USAA unilaterally to amend or terminate Dialogue upon 30 days notice to current employees are substantively unconscionable.[8] As we explain, we do not believe our consideration of these provisions falls within the rubric of substantive unconscionability. Rather, like the trial court, we believe they are more appropriately considered within the context of the procedural unconscionability of the agreement. In addition, to the extent these provisions raise concerns about the validity of the agreement, they do so because they suggest the agreement may be illusory, i.e., that USAA is not bound by Dialogue because it can terminate or modify the program at any time.

A unilateral right to modify or terminate an agreement typically raises concerns about whether the contract is illusory. (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts,  229-231, pp. 263-266.) A contract is illusory and there is no valid contract when one of the parties assumes no obligation. (Scottsdale Ins. Co. v. Essex Ins. Co. (2002) 98 Cal.App.4th 86, 95.)

In 24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199 (24 Hour Fitness), a panel of this court held that an employee entered into a valid and enforceable agreement to arbitrate employment-related disputes with his employer. Among other things, the court rejected claims that the agreement was unconscionable. (Id. at pp. 1213.) The court also considered whether the arbitration agreement was illusory and fatally lacking in mutuality as a result of the employers unilateral right to modify any provision in the agreement. (Id. at pp. 1213-1214.) Reasoning that the employers discretionary power to modify the terms of the agreement necessarily carried with it the duty to exercise that right in good faith and in a fair manner, the court held that the modification provision as so construed did not render the contract illusory. (Id. at p. 1214.)

The modification and termination provisions in Dialogue do not render the agreement illusory. USAA must exercise its right to modify or terminate Dialogue fairly and in good faith. (24 Hour Fitness, supra, 66 Cal.App.4th at p. 1214.) Furthermore, USAA must give thirty days notice of its intention to modify or terminate Dialogue, and is bound to arbitrate disputes according to the rules in effect when an arbitration is instituted.

Although plaintiffs acknowledge authority establishing that a modification provision such as the one at issue here does not render a contract illusory, they purport to rely on authority establishing that such provisions are unconscionable. As support for their position, they cite a decision of the Ninth Circuit Court of Appeals, Ingle v. Circuit City Stores, Inc. (9th Cir. 2003) 328 F.3d 1165 (Ingle). In Ingle, a provision giving the employer the unilateral right to alter or terminate an arbitration agreement upon 30 days notice to employees was held to be substantively unconscionable. (Id. at p. 1179.)

We are not persuaded by the reasoning of Ingle. As support for its conclusion that the modification provision was substantively unconscionable, the Ingle court cited cases establishing that such a provision renders a contract illusory. (Ingle, supra, 328 F.3d at p. 1179, fn. 22.) None of the cases cited by the Ingle court addressed whether the provision was unconscionable, and none involved California state courts or applied California law. (Ibid.) Furthermore, the cases relied upon in Ingle are inconsistent with 24 Hour Fitness.

A modification or termination provision in an arbitration agreement is not a substantive term affecting the parties rights in an arbitration. Even if such provisions were severed, there would be no impact on the procedural or substantive rules governing the arbitration. Therefore, we do not think it is appropriate to characterize such provisions as substantively unconscionable. This is not to say that changes to an arbitration agreement should escape scrutiny. If terms are changed or added pursuant to a modification provision, the modified terms are themselves subject to scrutiny for substantive unconscionability.[9] Plus, as the trial court recognized, a unilateral modification provision adds to the procedural unconscionability of the agreement. Unilaterally imposing changed contract terms includes elements of both oppression and surprise, depending on the adequacy of the notice to employees.

We conclude that the Dialogue program is both procedurally and substantively unconscionable. However, unlike the trial court, we conclude that the only substantively unconscionable provisions are rules 32.D and 32.E, which compel the parties to bear their own discovery costs and expert witness fees.

V. Severance

USAA contends the trial court erred by refusing to sever the provisions it found substantively unconscionable. A ruling on severance is reviewed for abuse of discretion. (Murphy v. CheckN Go of California, Inc. (2007) 156 Cal.App.4th 138, 144.)

[T]he Legislature expressly and directly recognizes judicial discretion to sever objectionable provisions. The governing statute 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.  (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 658, quoting Civ. Code,  1670.5, subd. (a).)

Armendariz cited at least two reasons for severing unconscionable terms from an arbitration agreement instead of 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. [Citations.] The overarching inquiry is whether the interests of justice . . . would be furthered by severance. [Citation.] (Armendariz, supra, 24 Cal.4th at pp. 123-124.)

Armendariz identified three factors relevant to whether severance is appropriate. The first relates to the agreements chief objective. 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.) A second factor is whether the agreement contains more than one objectionable term. The fact that an arbitration agreement contains more than one unlawful provision may indicate a systematic effort to impose arbitration on an employee . . . as an inferior forum that works to the employer's advantage and may justify concluding that the arbitration agreement is permeated by an unlawful purpose. [Citation.] (Ibid., fn. omitted.) The third factor is whether there is no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement. (Id. at pp. 124-125.) In that situation the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms (id. at p. 125), which exceeds judicial power to cure a contracts illegality. Where the taint of illegality cannot be removed by severance or restriction, the court must void the entire agreement. (Ibid.)

In this case, the nature of the discretionary decision to sever has changed from that faced by the trial court, which concluded there were too many provisions at issue and it would require the Court to do more than strike terms . . . . Whereas the trial court concluded that Dialogue contains four substantively unconscionable terms, we disagree and conclude there are only two closely related provisions concerning costs that are substantively unconscionable.[10] Because we are not in a position to say how the trial court would have exercised its discretion to sever under these circumstances, we must remand the matter to allow the trial court to consider the issue anew. It is not for this court to make the discretionary decision whether to sever the unconscionable provisions. (See Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 92-93.)

Even if the trial court concludes upon remand that severance is otherwise appropriate, it must also consider whether the offending provisions were drafted in bad faith. (Id. at p. 93.) In Armendariz, the court held that a single unconscionable term drafted in bad faith could justify a refusal to enforce an arbitration agreement, because severing the provision and enforcing the agreement would encourage drafters of such agreements to overreach. An employer will not be deterred from routinely inserting . . . a deliberately illegal clause into the arbitration agreements it mandates for its employees if it knows the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter. (Armendariz, supra, 24 Cal.4th at pp. 124-125, fn. 13.) If the state of the law was sufficiently clear that the offending provision was illegal at the time the arbitration agreement was signed, that finding would support a conclusion it was drafted in bad faith. (Ibid.) Thus, if the trial court concludes upon remand that severance is otherwise appropriate, it shall determine whether rules 32.D and 32.E were drafted in bad faith and then exercise its discretion to sever the provisions.

Disposition

The order denying USAAs motions to compel arbitration is reversed and the matter remanded to permit the trial court to reconsider the issue of severance of unconscionable provisions consistent with this opinion. Each party shall bear its own costs on appeal.

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McGuiness, P.J.

We concur:

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Pollak, J.

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Siggins, J.

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[1] Dialogue excludes from its scope a limited subset of employment disputes not implicated by the plaintiffs complaints here. Among other things, Dialogue does not encompass claims for unemployment compensation or workers compensation benefits, or claims arising under a USAA insurance policy.

[2] Murray did not specifically address whether he had completed an onl