TAMANAHA v. DroneBASE, INC., Cal: Court of Appeal, 2nd Appellate Dist., 3rd Div. 2022
We begin by reviewing general principles of unconscionability. “`One common formulation of unconscionability is that it refers to “`an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.'” [Citation.] As that formulation implicitly recognizes, the doctrine of unconscionability has both a procedural and a substantive element.'” (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1133.)
“`”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. . . . [T]he 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).)” (Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243-1244 (Baltazar).)
On appeal, unconscionability findings are reviewed de novo if they are based on declarations that raise no meaningful factual disputes. If an unconscionability determination is based on the trial court’s resolution of conflicts in the evidence, we consider the evidence in the light most favorable to the court’s determination and review those aspects of the determination for substantial evidence. (Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138, 1144.)
“Substantive unconscionability focuses on overly harsh or one-sided results. (See Armendariz, supra, 24 Cal.4th at p. 114.) `In assessing substantive unconscionability, the paramount consideration is mutuality.’ [Citation.] This does not mean that parties may not choose to exclude particular types of claims from the terms of arbitration. However, `an arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.’ (Armendariz, supra, 24 Cal.4th at p. 120.)” (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 723.)
In Fitz v. NCR Corp., supra, 118 Cal.App.4th 702 (Fitz), the court considered the enforceability of an arbitration agreement that required arbitration of most disputes between an employer and employee, but exempted “`disputes over confidentiality/non-compete agreements or intellectual property rights.'” (Id. at p. 709.) The court concluded that this provision was substantively unconscionable because “it compels arbitration of the claims more likely to be brought by Fitz, the weaker party, but exempts from arbitration the types of claims that are more likely to be brought by NCR, the stronger party.” (Id. at p. 725.) It explained that the mandatory arbitration provision “`can only realistically be seen as applying primarily if not exclusively to claims arising out of the termination of employment, which are virtually certain to be filed against, not by, [the employer].'” (Ibid.) In contrast, “[a] substantial portion of the claims NCR is most likely to initiate against employees, `such as claims that an employee violated a non-competition agreement or divulged confidential information—need not be arbitrated.'” (Ibid.) Thus, although the arbitration exclusion was facially bilateral, it was unfairly one-sided in practice. (Ibid.)
The court similarly concluded in Davis v. Kozak (2020) 53 Cal.App.5th 897, 903 (Davis). There, an arbitration agreement required an employee to arbitrate “`[a]ny and all disputes which involve or relate in any way to [his] employment (or termination of employment) with Red Bull, except for obligations under the Employee Confidentiality Agreement with Red Bull.‘” (Italics added.) The court concluded the agreement was substantively unconscionable because it required the employee to arbitrate the claims he was most likely to bring against the employer, but effectively exempted from arbitration the types of claims Red Bull was most likely to bring against an employee. (Id. at p. 916.) The court explained that the confidentiality agreement required employees to maintain the confidentiality of the company’s confidential information, but contained no corresponding obligation by the company to protect employees’ confidential information. Thus, although the carve-out for claims under the confidentiality agreement facially applied to both employee and employer, any theoretical claim the employee might have against the employer for misuse of his intellectual property “is not a dispute involving the breach of any `obligations’ under the confidentiality agreement and would therefore fall within the scope of the parties’ arbitration agreement.” (Ibid.) Further, “and in a broader sense, the arbitration agreement effectively exempts from arbitration the types of claims Red Bull is most likely to bring against an employee such as [the plaintiff].” (Ibid.) Finally, the company failed to articulate any legitimate business reasons for the exemption. (Id. at p. 917.) Accordingly, the court said, the arbitration agreement contained “a `high’ degree of substantive unconscionability.” (Ibid.; see also Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 175 [agreement which required arbitration of most employment-related claims, but not unfair competition or intellectual property claims, was substantively unconscionable because it “require[ed] arbitration of most claims of interest to employees but exempt[ed] from arbitration most claims of interest to [employer]”].)