Fl LE IN CLERKS OFFICE SUPR~ME COURT, STATE OF WASH1NG1CN
DATE AUG L5 2013
lrla~9·
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
BARBARA BROWN and CINDY HIETT, No. 87953-2 Respondents, En Bane v. Filed -AUG 1 5 2013 MHN GOVERNMENT SERVICES, INC.; HEALTH NET, INC., and MHN SERVICES d/b/a MHN SERVICES CORPORATION, a Washington Corporation,
Appellants.
J.M. JOHNSON, J.-The narrow question before us is whether an
arbitration agreement signed by respondents Barbara Brown and Cindy Hiett
is permeated with unconscionability and therefore unenforceable under Brown v. MHN Government Services, et al., No. 87953-2
California law .1 We hold that the forum selection and punitive damages
provisions are not unconscionable and that the arbitrator selection, statute of
limitations, and fee shifting provisions are unconscionable. The
unconscionable taint cannot be removed through severance. We hold that
because the arbitration agreement is permeated with unconscionability, it is
unenforceable. We note that our holdings are limited to the facts of this case
because we must apply California law. We affirm the trial court's
September 30, 2011, order granting respondents Brown and Hiett's motion
to quash the demand for arbitration and denying appellant MHN
Government Services Inc.'s motion to compel arbitration.
FACTS AND PROCEDURAL HISTORY
In this case, we are asked to consider whether a particular arbitration
agreement is enforceable. The underlying action concerns, in part, Brown
and Hiett's claims under the Washington Minimum Wage Act, chapter 49.46
RCW. Specifically, they allege that they were unlawfully misclassified as
independent contractors and thus were not paid the appropriate overtime rate
for all hours worked.
1 The agreement in question contains a California choice of law provision. This is discussed in detail, infra p. 4.
2 Brown v. MHN Government Services, et al., No. 87953-2
Brown and Hiett are two mental health professionals who were
recruited by MHN to take short term positions providing counseling for
military personnel and their families. In mid-2008, MHN individually
mailed Brown and Hiett letters inviting each to apply for a military and
family life consultant position. Each filled out and submitted the paperwork
that requested general background information. Brown and Hiett were then
sent contracts in the mail labeled "Provider Services Task Order Agreement"
(PSTOA). Clerk's Papers (CP) at 33-34; 53-54. Each then signed and
returned the PSTOA. CP at 43-52; 63-71. The PSTOA contains a
"Mandatory Arbitration" provision, the enforceability of which is at issue
before us. CP at 49.
On June 14, 2011, Brown and Hiett filed a complaint in Pierce County
Superior Court, alleging state law wage claims on behalf of themselves and a
proposed class. CP at 1-10. On September 30, 2011, several motions were
made before Judge Edmund Murphy in superior court. MHN moved to
compel arbitration and stay the proceedings, and Brown and Hiett moved to
quash the demand for arbitration. Verbatim Report of Proceedings (VRP) at
2. Brown and Hiett claimed that five specific provisions of the arbitration
agreement are unconscionable: the forum selection, statute of limitations,
arbitrator selection, fee shifting, and punitive damages provisions. Judge
3 Brown v. MHN Government Services, eta!., No. 87953-2
Murphy denied the motion to compel arbitration and granted the motion to
quash the demand for arbitration. VRP at 44. This ruling was based on a
finding of both procedural unconscionability (VRP at 40) and that all five
contested provisions of the arbitration agreement are substantively
unconscionable (VRP at 41-44). The court decided against severing the
provisions it found unconscionable. VRP at 43.
MHN sought review in Division Two of the Court of Appeals of the
trial court's order. Judge Worswick certified this case for transfer to this
court pursuant to RCW 2.06.030. On October 3, 2012, the Supreme Court
commissioner issued a ruling accepting certification.
The PSTOA contains a choice of law provision that states that it "shall
be governed by and construed according to the laws of the State of
California." CP at 49. We generally enforce choice of law provisions.
McKee v. AT&T Corp., 164 Wn.2d 372, 384, 191 P.3d 845 (2008) (citing
Erwin v. Cotter Health Ctrs., 161 Wn.2d 676, 695-96, 167 P.3d 1112
(2007)). We disregard the choice of law provision and apply Washington
law if the following three prongs are met: (1) without the provision,
Washington law would apply; (2) the chosen state's law violates a
fundamental public policy of Washington; and (3) Washington's interest in
the determination of the issue materially outweighs the chosen state's
4 Brown v. MHN Government Services, eta!., No. 87953-2
interest. !d. (citing Erwin, 161 Wn.2d at 694-95).
The parties do not contest that California law applies to the
construction of the PSTOA. California's unconscionability law does not
violate Washington's public policy. We accordingly respect the choice of
law provision and apply California law.
STANDARD OF REVIEW
Under California law, appellate courts review the question of
arbitrability de novo. Greenspan v. Ladt, LLC, 185 Cal. App. 4th 1413,
1437, 111 Cal. Rptr. 3d 468 (2010). Where, as here, there are no relevant
disputed facts, contract interpretation is also reviewed de novo. Wolfv. Walt
Disney Pictures & Television, 162 Cal. App. 4th 1107, 1138, 76 Cal. Rptr.
3d 585 (2008). The party opposing arbitration bears the burden of showing
that the agreement is not enforceable. See Green Tree Fin. Corp.-Ala. v.
Randolph, 531 U.S. 79, 92, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000). Under
California law, the trial court's ruling on severability is reviewed for an
abuse of discretion. In re Marriage of Facter, 212 Cal. App. 4th 967, 985-
86, 152 Cal. Rptr. 3d 79 (2013). It is proper to decline to sever
unconscionable prov1s10ns if the agreement 1s permeated with
unconscionability. Armendariz v. Found. Health Psychcare Servs., Inc., 24
Cal. 4th 83, 124, 6 P.3d 669, 99 Cal. Rptr. 2d 745 (2000) (holding that the
5 Brown v. MHN Government Services, et al., No. 87953-2
trial court did not abuse its discretion in concluding that the arbitration
agreement was permeated by an unlawful purpose when there were two
unconscionable provisions). Such permeation can be indicated when there is
no single provision a court can strike to remove the unconscionable taint. Id.
at 124-25.
ANALYSIS
A threshold dispute as to whether an arbitration agreement is
unconscionable is ordinarily a decision for the court and not the arbitrator.
Hartley v. Superior Court, 196 Cal. App. 4th 1249, 1253-56, 127 Cal. Rptr.
3d 17 4 (20 11) (holding that an arbitration provision in a contract was not
clear and unmistakable in stating that the question of arbitrability was
subject to arbitration, so the court could not compel arbitration on the
threshold issue of the agreement's unconscionability). Here, the issue of
arbitrability has not been clearly and unmistakably delegated to the arbitrator
on the face of the contract. Therefore, it is proper for us to determine the
enforceability of the arbitration agreement.
The parties disagree about the application of AT&T Mobility LLC v.
Concepcion,_ U.S._, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), to the-
general contract defense of unconscionability under state law. In
Concepcion, customers brought a putative class action against AT&T,
6 Brown v. MHN Government Services, eta!., No. 87953-2
alleging that the company's offer of a free phone to anyone who signed up
for cell phone service was fraudulent because the company charged sales tax
on the retail value of the phone. The United States Supreme Court held that
the Federal Arbitration Act (FAA), 9 U.S.C. § 2, preempts California's
judicial rule concerning the unconscionability of class action arbitration
waivers in consumer contracts. Concepcion, 131 S. Ct. at 1753. Although
the California Supreme Court has not specifically addressed the application
of Concepcion to its unconscionability law, we note that review has been
granted in Sanchez v. Valencia Holding Co. in which the court may clarify
this issue. 201 Cal. App. 4th 74, 135 Cal. Rptr. 3d 19 (2011), superseded by
272 P.3d 976, 139 Cal. Rptr. 3d 2 (2012).
MHN argues for a broad reading of Concepcion, asserting that courts
cannot rely on general unconscionability principles if they interfere with the
fundamental attributes of arbitration such as its informality and speed.
Brown and Hiett advocate for a narrower reading that would not impair the
power of state courts to refuse enforcement of agreements under generally
applicable unconscionability principles. We agree with this narrower
reading of Concepcion.
In Concepcion, the United States Supreme Court interpreted the
7 Brown v. MHN Government Services, et al., No. 87953-2
FAA's savmgs clause2 to mean that arbitration agreements can be
invalidated by "'generally applicable contract defenses, such as fraud,
duress, or unconscionability,' but not by defenses that apply only to
arbitration or that derive their meaning from the fact that an agreement to
arbitrate is at issue." I d. at 17 46 (quoting Doctor's Assocs., Inc. v.
Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 134 L. Ed. 2d 902 (1996)).
Accordingly, state rules specific to arbitration that interfere with the
purposes of the FAA are preempted. Because California's unconscionability
principles relevant to this case apply equally to litigation and arbitration, we
apply them to the five contested provisions of the PSTOA.
A. California's Unconscionability Standard
Under California law, courts may choose not to enforce any contract
found '"to have been unconscionable at the time it was made,' or may 'limit
2 The validity of the arbitration agreement in Concepcion turned on the FAA's savings clause. 9 U.S.C. § 2 states:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
(Emphasis added.)
8 Brown v. MHN Government Services, et al., No. 87953-2
the application of any unconscionable clause."' I d. at 1746 (quoting CAL.
CN. CODE ANN. § 1670.5(a)). Unconscionability requires both a procedural
and substantive element, "but 'they need not be present in the same degree'
and are evaluated on "'a sliding scale.""' Pinnacle Museum Tower Ass 'n v.
Pinnacle Mkt. Dev., LLC, 55 Cal. 4th 223, 282 P.3d 1217, 1232, 145 Cal.
Rptr. 3d 514 (2012) (quoting Armendariz, 24 Cal. 4th at 114). The
procedural element concerns the manner in which the contract was
negotiated, focusing on oppression or surprise. Procedural oppression
generally concerns an inequality of bargaining power and an absence of real
negotiation or meaningful choice. Morris v. Redwood Empire Bancorp, 128
Cal. App. 4th 1305, 1319, 27 Cal. Rptr. 3d 797 (2005). Procedural surprise
generally relates to whether the challenged term is hidden in a standardized
form or beyond the reasonable expectations of the weaker party. Id. at 1321.
Substantive unconscionability concerns overly harsh or one-sided results.
Armendariz, 24 Cal. 4th at 114.
B. Procedural Unconscionability
The arbitration agreement at 1ssue is procedurally unconscionable.
While there does not appear to be procedural oppresswn, ambiguity
concernmg which set of American Arbitration Association (AAA) rules
applies presents procedural surprise.
9 Brown v. MHN Government Services, et al., No. 87953-2
The arbitration agreement lacks procedural oppresswn. The
arbitration provision was in the same typeface, font, and size as the rest of
the PSTOA and had a bold, underlined heading labeled "Mandatory
Arbitration." Brown and Hiett had time to read and consider the agreement
before signing. Both are sophisticated bargaining parties. Brown is a
licensed clinical social worker and a sole proprietor of her business. CP at
99. Likewise, Hiett represents herself as a marriage family therapist. CP at
109. They are highly educated professionals who voluntarily entered into an
agreement to arbitrate.
However, the arbitration agreement contains procedural surprise due
to its lack of clarity regarding which set of AAA rules would govern the
arbitration. The arbitration agreement provides, in part, "The parties agree
that any controversy or claim arising out of or relating to this Agreement ...
or the breach thereof, whether involving a claim in tort, contract or
otherwise, shall be settled by final and binding arbitration in accordance
with the provisions of the American Arbitration Association." CP at 49.
The AAA has upward of 20 sets of both industry-specific and general
categories of rules. Generally, arbitration agreements specify which rules
will apply or the parties agree on a set of rules if the case clearly fits in one
category or another. Here, it is unclear whether the parties would arbitrate
10 Brown v. MHN Government Services, eta!., No. 87953-2
under the employment rules or commercial rules, particularly given Brown
and Hiett's underlying claim that they were employees misclassified as
independent contractors.
MHN has changed its position several times regarding which set of
AAA rules is appropriate. This further supports Brown and Hiett's
argument that the ambiguity in the arbitration agreement has resulted in
procedural surprise. In the opposition to plaintiffs' motion to quash
arbitration, MHN cites specifically to the employment rules. CP at 141.
However, in the appellate briefing, MHN contends that "it is evident" that
the commercial rules, not the employment rules, should apply. Br. of
Appellants at 7 n.l. Where MHN, the drafter of the agreement, has failed to
maintain a consistent interpretation of the agreement's terms, we recognize
that the ambiguity concerning the AAA rules has presented procedural
surprise for Brown and Hiett.
This finding is supported by California case law that suggests that
procedural unconscionability can be present where rules are referenced in an
arbitration agreement but not attached. See, e.g., Harper v. Ultimo, 113 Cal.
App. 4th 1402, 1406, 7 Cal. Rptr. 3d 418 (2003) (holding that it was
oppressive to reference the Better Business Bureau rules but not attach them
to the agreement because the customer must go to another source to
11 Brown v. MHN Government Services, et al., No. 87953-2
determine the impact of what he is signing). The California Supreme Court
has granted review on two cases that found arbitration agreements
unconscionable in part because they did not attach copies of the applicable
AAA rules. Wisdom v. AccentCare, Inc., 202 Cal. App. 4th 591, 136 Cal.
Rptr. 3d 188, superseded by 273 P.3d 513, 139 Cal. Rptr. 3d 315 (2012);
Mayers v. Volt Mgmt. Corp., 203 Cal. App. 4th 1194, 137 Cal. Rptr. 3d 657,
superseded by 278 P.3d 1167, 137 Cal. Rptr. 3d 657 (2012).
C. Substantive Unconscionability
1. Forum Selection Provision
The arbitration agreement provides, in part, "The arbitration shall be
conducted in San Francisco, California." CP at 49. Brown and Hiett argue
that this provision is substantively unconscionable because anybody wishing
to arbitrate a claim against MHN would have to locate local counsel and
travel to California at great personal expense. They claim that this provision
is one-sided in that those signing the agreements would be less likely to have
resources to travel and obtain local counsel than MHN. We disagree and
find that the forum selection provision is not substantively unconscionable.
Forum selection provisions in arbitration agreements are evaluated for
whether the term is "unduly oppressive." Bolter v. Superior Court, 87 Cal.
App. 4th 900, 909, 104 Cal. Rptr. 2d 888 (2001). In Bolter, the court
12 Brown v. MHN Government Services, et al., No. 87953-2
severed an unconscionable arbitration agreement clause selecting Utah as the
forum. After reviewing extensive declarations from the parties concerning
their financial circumstances, family situations, and business arrangements,
the court recognized that "[u]nder the circumstances, the 'place and manner'
terms are unduly oppressive." Id. Here, the record is devoid of similar
declarations concerning the parties' circumstances. Brown and Hiett have
not alleged similar facts concerning the hardship of arbitrating in California.
We accordingly find that the forum selection provision is not substantively
unconscionable.
2. Punitive Damages Provision
The arbitration agreement provides, in part, "The arbitrator shall have
no authority to make material errors of law or to award punitive damages or
to add to, modify or refuse to enforce any agreements between the parties."
CP at 49. Brown and Hiett claim that the provision limiting punitive
damages deprives them of their right to statutory double damages under
RCW 49.52.070. 3 Under that provision, employees can be awarded
statutory double damages from an employer who willingly and intentionally
paid them less than is required by law. Following the United States
3 While the construction of the PSTOA is controlled by California law, Brown and Hiett have asserted state law claims under Washington law.
13 Brown v. MHN Government Services, et al., No. 87953-2
Supreme Court's lead in Paci.fiCare Health Systems, Inc. v. Book, 538 U.S.
401, 123 S. Ct. 1531, 155 L. Ed. 2d 578 (2003), we find that the punitive
damages provision is not substantively unconscionable.
In Paci.fiCare, the Court was asked to decide whether a party could be
compelled to arbitrate claims arising under the Racketeer Influenced and
Corrupt Organizations Act (RICO), 18 U.S.C. § 1961, even though the
arbitration agreement's limitation on punitive damages could be construed to
limit the arbitrator's authority to award statutory treble damages. 538 U.S.
at 402. The Court ultimately concluded that addressing the question of
whether the arbitration agreement would preclude RICO treble damages
would be premature. Id. at 404.
The Court noted that "[ o]ur cases have placed different statutory
treble-damages provisions on different points along the spectrum between
purely compensatory and strictly punitive awards." Id. at 405. The Court
further recognized that
[i]n light of our case law's treatment of statutory treble damages, and given the uncertainty surrounding the parties' intent with respect to the contractual term "punitive," the application of the disputed language to respondents' RICO claims is, to say the least, in doubt. And Vimar instructs that we should not, on the basis of "mere speculation" that an arbitrator might interpret these ambiguous agreements in a manner that casts their enforceability into doubt, take upon ourselves the authority to decide the antecedent question of how the
14 Brown v. MHN Government Services, et al., No. 87953~2
ambiguity is to be resolved.
I d. at 406-07 (citing Vi mar Seguros y Reaseguros, S.A. v. M/V Sky
Reefer, 515 U.S. 528, 115 S. Ct. 2322, 132 L. Ed. 2d 462 (1995)).
Washington law is similarly unclear with respect to where RCW
49.52.070 lies on the spectrum between purely remedial and purely punitive.
See RCW 49.52.070 (referring to the damages as "exemplary"); Schilling v.
Radio Holdings, Inc., 136 Wn.2d 152, 158, 961 P.2d 371 (1998) (also noting
the "exemplary" nature of the double damages provision); Morgan v.
Kingen, 141 Wn. App. 143, 161-62, 169 P.3d 487 (2007) ("the [RCW
49.52.070] damages are exemplary damages, not merely compensatory. As
exemplary damages, they are intended to punish and deter blameworthy
conduct." (emphasis added) (footnote omitted)).
We follow the lead of the United States Supreme Court in PacifiCare
and note that it would be premature to determine at this stage whether the
punitive damages provision would limit Brown and Hiett's ability to collect
statutory double damages under RCW 49.52.070. Accordingly, we find that
the punitive damages provision is not substantively unconscionable.
3. Statute of Limitations Provision
The arbitration agreement states, in part, "Arbitration must be initiated
within 6 months after the alleged controversy or claim occurred by
15 Brown v. MHN Government Services, eta!., No. 87953-2
submitting a written demand to the other party. The failure to initiate
arbitration within that period constitutes an absolute bar to the institution of
any proceedings." CP at 49. Under the Washington Minimum Wage Act,
parties have three years to bring a claim. Seattle Prof'! Eng 'g Emps. Ass 'n
v. Boeing Co., 139 Wn.2d 824, 837, 991 P.2d 1126, 1 P.3d 578 (2000).
Brown and Hiett assert that requiring parties to initiate arbitration within six
months is substantively unconscionable because it limits their right to
damages for violations occurring up to three years prior to their complaint.
We agree and find that the statute of limitations provision is substantively
California authority suggests that a six-month statute of limitations
clause in an arbitration agreement is substantively unconscionable where the
underlying statute (here, the Washington Minimum Wage Act) provides a
much longer period of time within which to assert a claim. Brown and Hiett
cite to Cuadra v. Millan 4 in support of their argument that the statute of
limitations provision would limit their recovery to the past six months'
worth of wage claims:
A cause of action for unpaid wages accrues when the wages first become legally due, i.e., on the regular payday for
4 952 P.2d 704, 17 Cal. 4th 855, 72 Cal. Rptr. 2d 687 (1998), abrogated on other grounds by Samuels v. Mix, 989 P.2d 701, 22 Cal. 4th 1, 91 Cal. Rptr. 2d 273 (1999)).
16 Brown v. MHN Government Services, et al., No. 87953-2
the pay period in which the employee performed the work; when the work is continuing and the employee is therefore paid periodically (e.g., weekly or monthly) a separate and distinct cause of action accrues on each payday, triggering on each occasion the running of a new period of limitations.
It follows that such an action is timely as to all paydays falling within the relevant limitations period. For the same reason, in calculating the amount of unpaid wages due in such an action the court will count back from the filing of the complaint to the beginning of the limitations period ... and will award all unpaid wages earned during that period.
I d. at 707 (citations omitted).
The California Supreme Court's recitation of how a court should
calculate back pay in a cause of action for unpaid wages is persuasive. It
appears that the statute of limitations provision in this case would, in fact,
limit the amount of available damages. Under California law, a statute of
limitations provision is substantively unconscionable if it severely limits the
time available to bring a statutory claim. See Martinez v. Master Prot.
Corp., 118 Cal. App. 4th 107, 117, 12 Cal. Rptr. 3d 663 (2004) (holding that
an employment arbitration agreement's six-month statute of limitations
unlawfully restricted employee's ability to vindicate his rights and was
therefore substantively unconscionable where the applicable statutes provide
significantly longer periods within which to assert a claim). We accordingly
find the statute of limitations provision substantively unconscionable.
17 Brown v. MHN Government Services, et al., No. 87953-2
4. Arbitrator Selection Provision
The arbitration agreement provides, m part, "A single, neutral
arbitrator who is licensed to practice law shall conduct the arbitration.
MHN shall provide Provider with a list of three neutral arbitrators from
which Provider shall select its choice of arbitrator for the arbitration." CP at
49. MHN suggests that because the AAA rules are incorporated by
reference into the agreement, some hybrid between what is written in the
agreement and the AAA rules will be used to select an arbitrator. See Br. of
Appellant at 31-3 3. Although the agreement allows MHN to select any three
neutral arbitrators, MHN claims that they are bound to select from a list
provided by the AAA. This is not the case. Under both the commercial and
employment rules, if the arbitration agreement provides its own method for
arbitrator selection, that method is used and the AAA does not provide a list
of neutral arbitrators. 5
Substantive unconscionability concerns overly harsh or one-sided
results. Armendariz, 24 Cal. 4th at 114. On its face, this arbitrator selection
5 Am. Arbitration Ass'n, Employment Arbitration Rules and Mediation Procedures 24 (Nov. 1, 2009), available at http://www.adr.org/aaa/ShowProperty?nodeld=/UCJV17ADRSTCCOU43o2-&revisiori:=::Jates treleased; Am. Arbitration Ass'n, Commercial Arbitration Rules and Mediation Procedures 19 (June 1, 2009), available at http://www.adr.org/aaa/ShowProperty?nodeid=/UCM/ADRSTG_004103&revision=lates treleased.
18 Brown v. MHN Government Services, et al., No. 87953-2
provision is substantively unconscionable. It allows MHN to select any
three arbitrators whom it purports to be neutral, from which Brown and Hiett
are bound to select the final arbitrator. Because the provision is both overly
harsh and one-sided in favor of MHN, we find the arbitrator selection
provision substantively unconscionable
5. Fee shifting Provision
The arbitration agreement provides, in part, "The prevailing party, or
substantially prevailing party's costs of arbitration, are to be borne by the
other party, including reasonable attorney's fees." CP at 49. Brown and
Hiett claim that this provision is substantively unconscionable because under
the Washington Minimum Wage Act, attorney fees can be recovered only by
a prevailing employee, not an employer. RCW 49.48.030. We agree and
find the fee shifting provision substantively unconscionable.
Here, some of the underlying claims fall under the Washington
Minimum Wage Act. Despite the choice of law provision, it is proper to
consider Washington cases that have evaluated fee shifting provisions in the
context of the underlying statutory claims.
In Walters, Division One of the Court of Appeals held that mandatory
fee shifting provisions in arbitration agreements are unconscionable where
the Washington Minimum Wage Act provides that only a prevailing
19 Brown v. MHN Government Services, et al., No. 87953-2
employee would be entitled to recover costs and fees. The risk of having to
pay the employer's expenses and fees was a significant deterrent to
employees contemplating initiating an action to vindicate their rights.
Walters v. A.A.A. Waterproofing, Inc., 151 Wn. App. 316, 321-22, 211 P.3d
454 (2009). Furthermore, the language in this agreement is mandatory,
requiring that costs "are to be borne by the other party." 6 CP at 49
(emphasis added). Cf Zuver v. Airtouch Commc 'ns, Inc., 153 Wn.2d 293,
310-11, 103 P.3d 753 (2004) (holding that an arbitration agreement's fee
shifting provision was not substantively unconscionable where the language
of the agreement is permissive rather than mandatory).
Mandatory fee shifting provisions in arbitration agreements are
substantively unconscionable where the Washington Minimum Wage Act
provides that only a prevailing employee would be entitled to recover costs
and fees. We find the fee shifting provision substantively unconscionable.
D. Severability
The trial judge found the agreement procedurally unconscionable and
that all five contested provisions are substantively unconscionable. VRP at
6 Due to the mandatory nature of this language, we decline to apply the reasoning in Pac(fiCare in this context. An arbitrator would not have discretion to enforce the fee shifting provision. This is distinct from the punitive damages context where the arbitrator would have some discretion to construe the punitive damages provision in light of the applicable statutory damages provisions.
20 Brown v. MHN Government Services, eta!., No. 87953-2
40-42. The PSTOA contains a severability provision which reads, "In the
event that any provision of this Agreement is rendered invalid or
unenforceable by any valid law or regulation of the State of California or of
the United States, or declared void by any tribunal of competent jurisdiction,
the remaining provisions of this Agreement shall remain in full force and
effect." CP at 48. The trial court declined to sever the unconscionable
provisiOns, finding that the agreement was permeated with
unconscionabililty and that MHN set up the arbitration provision to put itself
at an advantage. VRP at 43-44.
Under California law, the trial court's ruling on severability is
reviewed for an abuse of discretion. In re Marriage of Facter, 212 Cal.
App. 4th 967, 985, 152 Cal. Rptr. 3d 79 (2013); Samaniego v. Empire Today
LLC, 205 Cal. App. 4th 1138, 1144, 140 Cal. Rptr. 3d 492 (2012). It is
proper to decline to sever unconscionable provisions if the agreement is
permeated with unconscionability. Armendariz, 24 Cal. 4th at 124. Such
permeation can be indicated when there is no single provision a court can
strike to remove the unconscionable taint. ld. at 124-25.
Here, the trial court did not abuse its discretion in choosing not to
sever the unconscionable provisions. Even where three provisions are found
unconscionable rather than five, the agreement is permeated with
21 Brown v. MHN Government Services, et al., No. 87953-2
unconscionability and cannot be cured through severance. Notably, one of
the agreement's greatest defects-which set of AAA rules governs-cannot
be cured by severance alone.
CONCLUSION
We find that the arbitration agreement is procedurally unconscionable.
We also find that the forum selection and punitive damages provisions are
not substantively unconscionable while the arbitrator selection, statute of
limitations, and fee shifting provisions are. We hold that the agreement is
unconscionable and the trial court did not abuse its discretion in choosing
not to sever. We accordingly affirm the trial court.
22 Brown v. MHN Government Services, et al., No. 87953-2
WE CONCUR:
23 Brown v. MHN Government Services, et. al., No. 87953-2 (Gonzalez, J. concurring)
No. 87953-2
GONZALEZ, J. (concurring)-! agree with the majority's well-reasoned
conclusions that the arbitrator selection, statute of limitations, and fee shifting
provisions of the arbitration agreement are unconscionable. But the punitive
damages provision is unconscionable as well. Washington law provides that
employers who intentionally and willfully violate employees' rights under
chapter 49.52 RCW are liable for exemplary damages. The provision of the
arbitration agreement that removes that penalty is unfairly one-sided and
RCW 49.52.070 specifically provides (with some exceptions not relevant
here) that an employer who wrongfully withholds wages "shall be liable in a
civil action ... for twice the amount of the wages unlawfully rebated or
withheld by way of exemplary damages." Under Washington law, "exemplary
damages" is another term for "punitive damages." As we have explained in the
past, "[e]xemplary damages are punitive in nature." Kadoranian by Peach v.
Bellingham Police Dep 't, 119 Wn.2d 178, 188, 829 P.2d 1061 (1992) (citing
Barr v. Interbay Citizens Bank of Tampa, 96 Wn.2d 692, 698-99, 635 P.2d 441,
649 P.2d 827 (1981)). A competent arbitrator would no doubt so find. Indeed, Brown v. MHN Government Services, et. al., No. 87953-2 (Gonzalez, J. concurring)
even the standard legal dictionary defines punitive and exemplary damages as
synonymous terms. BLACK'S LAW DICTIONARY 448 (9th ed. 2009) (listing
"exemplary damages" as an alternate term for "punitive damages").
Washington appellate courts have used the terms "exemplary" and
"punitive" damages interchangeably, even when discussing the statute at issue
here. In Schilling v. Radio Holdings Inc., 136 Wn.2d 152, 157, 161, 961 P.2d
371 (1998), we affirmed a trial court judgment that included double damages
under RCW 49.52.070, which we referred to as a "punitive award." The Court
of Appeals similarly explained that "[a]s exemplary damages, [RCW
49.52.070's double damages] are intended to punish and deter blameworthy
conduct." Morgan v. Kingen, 141 Wn. App. 143, 161-62, 169 P.3d 487 (2007);
see also McKee v. AT&T Corp., 164 Wn.2d 372, 401, 191 P.3d 845 (2008)
(noting Washington's "limited examples of exemplary damages" while
analyzing a service agreement's limitation on punitive damages); Dailey v. N
Coast Life Ins. Co., 129 Wn.2d 572, 577, 919 P.2d 589 (1996) (noting that the
legislature has explicitly authorized punitive damages in RCW 9.73.230(11),
which literally provides for "exemplary damages").
We have also characterized statutes providing for double or treble
damage awards as punitive damages, even when those statutes do not use the
terms "punitive" or "exemplary." See, e.g., Barr, 96 Wn.2d at 699-700 (the
Consumer Protection Act, chapter 19.86 RCW, and laws prohibiting usury and
2 Brown v. MHN Government Services, et. al., No. 87953-2 (Gonzalez, I. concurring)
trespass to trees, shrubs, and timber provide narrow exceptions to the rule that
"punitive damages are contrary to public policy"). 1
Because RCW 49.52.070 offers specifically exemplary (or punitive)
damages, the court should not rely on PacifzCare Health Systems, Inc. v. Book,
538 U.S. 401, 123 S. Ct. 1531, 155 L. Ed. 2d 578 (2003). InPacifzCare, the
Supreme Court found that it was at least doubtful whether an arbitration
agreement's exclusion of punitive damages would prevent an arbitrator from
awarding treble damages under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. § 1961. Id. at 405-06. However, RICO
provides treble damages without identifying them as remedial or punitive. 18
U.S.C. § 1964(c). The Court explained that its prior cases had placed "treble-
damages provisions on different points along the spectrum between purely
compensatory and strictly punitive awards." PacifiCare, 538 U.S. at 405. In
contrast to RICO's treble damages, Washington's legislature specified that an 1 I recognize that an early decision of this court concluded that exemplary damages were not a form of punishment but rather provided actual damages for "undetermined loss and damage ... such as damage to reputation, damage to pride and to feeling, and damage of that character, some of which, it is true, are more or less sentimental." Levy v. Fleischner, 12 Wash. 15, 17-18,40 P. 384 (1895). However, later cases reason that "compensatory damages fully compensate the plaintiff for all injuries to person or property, tangible or intangible," Barr, 96 Wn.2d at 699-700, such that punitive or exemplary damages are separate from compensatory damages. Moreover, the statute in Levy authorized a potentially unlimited amount of exemplary damages, and the court was inclined to think "the legislature, in granting the jury the right to assess this peculiar, and not very well-defined, character of damages, to grant them only the right to assess actual damages, which could not be assessed, in the absence of this provision, under the general laws governing attachments." 12 Wash. at 17. In contrast, RCW 49.52.070 provides a specific measure of exemplary damages, most likely for the punitive purpose normally associated with that term.
3 Brown v. MHN Government Services, et. a!., No. 87953-2 (Gonzalez, J. concurring)
employer "shall be liable in a civil action ... for twice the amount of the wages
unlawfully rebated or withheld by way of exemplary damages." RCW
49.52.070 (emphasis added).
The conflict between RCW 49.52.070 and the arbitration agreement is
quite plain. The law allows employees to seek punitive damages from an
employer who willingly and intentionally pays them less than required, and the
agreement takes away the arbitrator's authority to award those damages. I
would hold the punitive damages provision of the arbitration agreement
unconscionable. I respectfully concur with the court's judgment that this
arbitration clause is unconscionable and unenforceable.
4 Brown v. MHN Government Services, et. al., No. 87953-2 (Gonzalez, J. concurring)