Michael Conyer v. Hula Media Services, LLC

An employee signed an acknowledgment of receipt of the

employee handbook. In it, he agreed he was bound by the

provisions of the handbook, and it was his responsibility to read

and familiarize himself with all its provisions. The handbook

contained an agreement to arbitrate disputes. The employer did

not highlight or otherwise call the employee’s attention to the

arbitration clause.

We hold the employee demonstrated his assent to the

arbitration clause by signing the acknowledgment, and the

employer had no duty to call the arbitration agreement to the

employee’s attention. We further find that provisions in the

arbitration clause concerning arbitrator’s fees and costs and

attorney fees are unenforceable, but they may be severed, and the

rest of the agreement is enforceable.

Accordingly, we reverse the trial court order denying the

employer’s motion to compel arbitration.

BACKGROUND

1. The Facts

Plaintiff Michael Conyer began working for defendant Hula

Media Services, LLC as a facility manager and senior engineer in

January 2017. Hula Media is a corporation that provides

postproduction technology and services for television and features

throughout the United States.

When he was hired, plaintiff received a copy of defendant’s

employee handbook. At that time, the handbook did not have an

arbitration clause. Plaintiff signed a “receipt and

acknowledgment” of that handbook, stating he understood and

agreed it was his responsibility to read it and that he was bound

by its provisions.

In August and October 2017, plaintiff submitted written

complaints to defendant’s then-president, alleging sexual

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harassment and retaliation by defendant’s chief executive officer,

Denine James-Nio, among other claims.

In November 2017, Tom Elias, a human resources

consultant for a company that performs those functions for

defendant, distributed copies of a revised employee handbook to

all defendant’s employees.

Plaintiff signed the “receipt and acknowledgment” page

(the final page of the handbook) and returned it to Mr. Elias on

November 7, 2017. Plaintiff does not remember signing the

receipt and acknowledgment, but he does not deny the signature

is his.

The language of the November 2017 receipt and

acknowledgment of the handbook is identical to the language in

plaintiff’s acknowledgment of the original handbook. In

pertinent part, both documents stated: “This is to acknowledge

that I have received a copy of the Employee Handbook. This

Handbook sets forth the terms and conditions of my employment

as well as the rights, duties, responsibilities and obligations of

my employment with the Company. I understand and agree that

it is my responsibility to read and familiarize myself with all of

the provisions of the Handbook. I further understand and agree

that I am bound by the provisions of the Handbook. [¶]

I understand the Company has the right to amend, modify,

rescind, delete, supplement or add to the provisions of this

Handbook, as it deems appropriate from time to time in its sole

and absolute discretion.”

The first four pages of the handbook contained the table of

contents. The subheading “Arbitration” appeared under the

heading “Communication and Problem Solving,” on the first page

of the table of contents, which indicated the arbitration provision

was on page 15. On page 15, a paragraph headed “Arbitration”

stated:

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“Arbitration: Mindful of the high cost of litigation, not only

in dollars but time and energy as well, Hula Media Services, LLC

intends to and [does] hereby establish a quick, final and binding

out-of-court dispute[] resolution procedure to be followed in the

unlikely event any controversy should arise out of or concerning

your employment with Hula Media Services, LLC. Accordingly,

the parties do hereby covenant and agree as follows: Any

controversy, dispute, or claim of whatever nature arising out of,

in connection with, or in relation to the interpretation,

performance or breach of your employment, including any claim

based on contract, tort, or statute, shall be settled, at the request

of any party to this employment relationship, by final and

binding arbitration conducted at a location determined by an

arbitrator in California administered by and in accordance with

the then existing Rules of Practice and Procedure of Judicial

Arbitration & Mediation Services, Inc. (JAMS), and judgment

upon any award rendered by the arbitrator(s) may be entered by

any state or federal court having jurisdiction thereof. The

arbitrator shall determine which is the prevailing party and shall

include in the award that party’s reasonable attorney fees and

costs. As soon as practicable after selection of the arbitrator, the

arbitrator or his/her designated representative shall determine a

reasonable estimate of anticipated fees and costs of the

arbitrator, and render a statement to each party setting forth

that party’s pro rata share of said fees and costs. Thereafter each

party shall, within then [sic] (10) days of receipt of said

statement, deposit said sum with the arbitrator. Failure of any

party to make such a deposit shall result in forfeiture by the nondepositing party of the right to prosecute or defend the claim,

which is the subject of the arbitration, but shall not otherwise

serve to abate, stay or suspend the arbitration proceedings.”

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On January 8, 2018, defendant terminated plaintiff’s

employment.

2. The Litigation

In August 2018, plaintiff sued Hula Media and CEO

Denine James-Nio (defendants), alleging sexual harassment and

six other causes of action under the Fair Employment and

Housing Act (FEHA, Gov. Code, § 12900 et seq.), as well as a

claim for failure to reimburse business expenses.

In November 2018, defendants filed a motion to compel

arbitration. A declaration from Mr. Elias stated he distributed

the revised handbook to all employees. “Along with all other

employees, I instructed Plaintiff to review the Handbook which

included the Arbitration Agreement and allowed him the

opportunity to review it. I also instructed Plaintiff to inform me

if he had any concerns or questions regarding the materials.

Lastly, I instructed Plaintiff to return the signed ‘Receipt and

Acknowledgment’ page of the Handbook to me so I could have a

copy placed in his personnel file.” Plaintiff did so on November 7,

2017, and he did not contact Mr. Elias with any questions or

concerns.

Defendants contended the Federal Arbitration Act (FAA,

9 U.S.C. § 1 et seq.) governs the agreement, because Hula Media

provides postproduction technology services throughout

California “as well as with other states throughout the country.”

Plaintiff does not dispute the FAA governs the agreement.

In opposition to defendants’ motion, plaintiff said he had

not agreed to arbitrate. His declaration stated he “never knew

the Company had ever adopted any arbitration policy or revised

its Handbook,” and that during his employment, “I never received

a copy of any revised version of the Employee Handbook and was

not informed that there had been a revision to the Handbook.”

Plaintiff stated that, “[c]onsidering how bad my employment

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situation was at that time, and my recent internal complaints . . .

I would not have agreed to sign an arbitration agreement in

November 2017.” He stated that Mr. Elias “never distributed a

revised Employee Handbook to me, nor did he ever discuss a

revised Handbook with me whatsoever.”

Plaintiff’s opposition argued that even if he had been given

a copy, he would never have known that defendants put an

arbitration clause in it “without notifying him whether and how

the Handbook had been changed.” Plaintiff also contended the

arbitration agreement was unconscionable, because of the

provisions requiring the employee to pay half the arbitrator’s fees

and costs within 10 days and mandating an award of attorney

fees to the prevailing party.

3. The Trial Court’s Order

The trial court denied defendants’ motion to compel

arbitration. The court recognized that ordinarily, a party’s

failure to read a contract constitutes a lack of the reasonable

diligence required of parties before they sign a contract. But the

court found the evidence did not support any lack of reasonable

diligence on plaintiff’s part. The court observed the receipt and

acknowledgment form plaintiff signed did not indicate the

handbook now contained an arbitration agreement, “or that it

was ‘revised’ or ‘added to’ at all.” The court accepted as true

plaintiff’s testimony that Mr. Elias did not inform him the

handbook contained an arbitration clause.

The court concluded it was reasonable for plaintiff to

assume the distribution of the handbook was routine, with no

particular reason for plaintiff to read it again, so it would be

“fundamentally unfair to presume that Plaintiff was aware of the

arbitration clause.” Having found no mutual assent to arbitrate,

the court found it unnecessary to address plaintiff’s

unconscionability defense to arbitration.

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Defendants filed a timely appeal from the trial court’s order

denying their motion to compel arbitration.

DISCUSSION

Defendants maintain the FAA applies to their agreement,

and plaintiff does not contend otherwise. The principles that

apply to arbitration under the FAA are well known. An

arbitration provision in a contract evidencing a transaction

involving commerce is valid and enforceable, except on grounds

that exist at law or in equity for the revocation of any contract.

(Pinnacle Museum Tower Assn. v. Pinnacle Market Development

(US), LLC (2012) 55 Cal.4th 223, 234-235 (Pinnacle).) The FAA

preempts state laws that require a judicial forum for claims the

parties agreed to resolve by arbitration. (Pinnacle, at p. 235.)

“Nonetheless, it is a cardinal principle that arbitration under the

FAA ‘is a matter of consent, not coercion.’ ” (Id. at p. 236.) “In

determining the rights of parties to enforce an arbitration

agreement within the FAA’s scope, courts apply state contract

law while giving due regard to the federal policy favoring

arbitration.” (Ibid.) State contract law in California includes the

principle that an arbitration clause within a contract “may be

binding on a party even if the party never actually read the

clause.” (Ibid.)

The party seeking arbitration has the burden to prove the

existence of an agreement to arbitrate, and the party opposing

arbitration must prove any defense, such as unconscionability.

Where the evidence is not in conflict, we review the trial court’s

denial of arbitration de novo. (Pinnacle, supra, 55 Cal.4th at

p. 236.)

1. Mutual Assent

Defendants argue plaintiff demonstrated his assent to the

arbitration clause by signing the acknowledgment of receipt of

the employee handbook, and his failure to read the handbook

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before signing the acknowledgment did not render the arbitration

clause unenforceable. Plaintiff argues that because defendants

did not inform him that an arbitration clause had been added to

the employee handbook, he did not consent to that clause.

Mutual assent to enter into a contract “ ‘ “is determined

under an objective standard applied to the outward

manifestations or expressions of the parties, i.e., the reasonable

meaning of their words and acts, and not their unexpressed

intentions or understandings.” ’ ” (Harris v. TAP Worldwide,

LLC (2016) 248 Cal.App.4th 373, 381 (Harris).) Plaintiff does not

deny the authenticity of his signature on the acknowledgment

page of the November 2017 employee handbook, although he does

not remember signing it. It follows, therefore, that he received

the handbook, despite his claims to the contrary. No evidence

shows plaintiff was required to sign the acknowledgment without

an opportunity to read the handbook first.

Plaintiff relies on Sparks v. Vista Del Mar Child and

Family Services (2012) 207 Cal.App.4th 1511, abrogated on other

grounds in Harris, supra, 248 Cal.App.4th at page 390, citing the

case multiple times in his brief and stating the case is “directly

on point.” Sparks held, in relevant part, the plaintiff was not

bound to arbitrate because the arbitration clause “was included

within a lengthy employee handbook” and “was not called to the

attention of plaintiff.” (Sparks, at p. 1514.) But in 2015, the

Supreme Court held that a party seeking to enforce an

arbitration agreement in a consumer contract has no duty to

point out the arbitration clause, and any state law to that effect

would be preempted by the FAA. (Sanchez v. Valencia Holding

Co., LLC (2015) 61 Cal.4th 899, 914 (Sanchez) [the defendant

“was under no obligation to highlight the arbitration clause of its

contract, nor was it required to specifically call that clause to [the

plaintiff’s] attention”].) The Sanchez court cited its previous

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holding in Rosenthal v. Great Western Fin. Securities Corp. (1996)

14 Cal.4th 394, 424 that “even when a customer is assured it is

not necessary to read a standard form contract with an

arbitration clause, ‘it is generally unreasonable, in reliance on

such assurances, to neglect to read a written agreement before

signing it.’ ” (Sanchez, at p. 915.)

Plaintiff insists he was “unaware that his signature on the

acknowledgment form was intended to create a contract,” and

what he signed was not on its face a contract, so that “the

holdings of typical contract cases” like Sanchez do not apply.

That, however, ignores the words on the face of the receipt, in

which plaintiff acknowledged the handbook sets forth the terms,

conditions, rights, duties, responsibilities and obligations of his

employment, and plaintiff expressly agreed he was bound by its

provisions. That is a contract. Sanchez found “[a]ny state law

imposing [an obligation to call attention to an arbitration clause]

would be preempted by the FAA.” (Sanchez, supra, 61 Cal.4th at

p. 914.) Sanchez did not limit its holding to “typical contract

cases” (whatever that may mean) nor say anything suggesting it

applied to consumer contracts but not employee contracts.

We follow Sanchez in finding defendants had no obligation

to point out to plaintiff that an arbitration clause had been added

to the November 2017 employee handbook. It has long been the

rule in California that a party is bound by a contract even if he

did not read the contract before signing it. That rule applies to

all contracts, including arbitration agreements. (Pinnacle,

supra, 55 Cal.4th at p. 236 [“An arbitration clause within a

contract may be binding on a party even if the party never

actually read the clause.”]; Madden v. Kaiser Foundation

Hospitals (1976) 17 Cal.3d 699, 710 [general rule is one who

assents to a contract is bound by its provisions and cannot

complain of unfamiliarity with the language]; 24-Hour Fitness,

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Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1215; ibid.

[“ ‘ “A party cannot use his own lack of diligence to avoid an

arbitration agreement.” ’ ”]; Brookwood v. Bank of America (1996)

45 Cal.App.4th 1667, 1674 [reasonable diligence requires reading

of contract before signing].)

Thus, the arbitration clause is binding, unless plaintiff

proves a generally applicable contract defense.

2. Unconscionability

Contract defenses that apply to all contracts, including the

defense of unconscionability, may invalidate arbitration

agreements without contravening the FAA. Unconscionability

has both procedural and substantive elements. “The procedural

element addresses the circumstances of contract negotiation and

formation, focusing on oppression or surprise due to unequal

bargaining power. . . . Substantive unconscionability pertains to

the fairness of an agreement’s actual terms and to assessments of

whether they are overly harsh or one-sided.” (Pinnacle, supra,

55 Cal.4th at p. 246, citations omitted.)

Defendants contend plaintiff did not prove either

procedural or substantive unconscionability. We disagree, but

conclude the unconscionable portion of the arbitration clause is

severable, and the remainder is enforceable.

“ ‘[C]ontracts of adhesion, although they are indispensable

facts of modern life that are generally enforced [citation], contain

a degree of procedural unconscionability even without any

notable surprises, and “bear within them the clear danger of

oppression and overreaching.” ’ ” (Baltazar v. Forever 21,

Inc. (2016) 62 Cal.4th 1237, 1244 (Baltazar).) The

acknowledgment form says the provisions of the handbook are

the nonnegotiable conditions of plaintiff’s employment. In

addition, in the acknowledgment, plaintiff said he understood

“the Company has the right to amend, modify, rescind, delete,

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supplement or add to the provisions of this Handbook, as it

deems appropriate from time to time in its sole and absolute

discretion.” We see no basis for requiring plaintiff to present

further proof that he could not negotiate the handbook’s

provisions, or that he had no meaningful choice about its terms.

Consequently, there is at least some degree of procedural

unconscionability in the agreement.

We agree with defendants that failure to provide plaintiff

with a copy of the JAMS rules does not increase the procedural

unconscionability of the arbitration agreement. Plaintiff does not

claim anything was hidden in those rules. (See Baltazar, supra,

62 Cal.4th at p. 1246 [where the plaintiff’s challenge to the

enforcement of an arbitration agreement has nothing to do with

the applicable arbitration rules, the defendant’s failure to attach

the rules “does not affect our consideration of [the plaintiff’s]

claims of substantive unconscionability”]; Nguyen v. Applied

Medical Resources Corp. (2016) 4 Cal.App.5th 232, 249

[“following Baltazar, the failure to attach the applicable

[American Arbitration Association] rules did not increase the

procedural unconscionability of the . . . arbitration provision”].)

That brings us to the substantive unconscionability

element. The arbitration clause requires each party to pay a pro

rata share of the arbitrator’s fees and costs. But an employer

that seeks to compel arbitration of an employee’s FEHA claims

cannot require the employee to pay fees and costs greater than

the amount to file a claim in court. (Armendariz v. Foundation

Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 112

(Armendariz) [“We do not believe the FEHA contemplates that

employees may be compelled to resolve their antidiscrimination

claims in a forum in which they must pay for what is the

equivalent of the judge’s time and the rental of the courtroom.”];

cf. Torrecillas v. Fitness International, LLC (2020) 52 Cal.App.5th

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485, 500 [requiring employee to pay costs equivalent to the costs

an employee would have to pay in court complies with

Armendariz].)

The arbitration clause also provides the arbitrator shall

award attorney fees to the prevailing party. But a prevailing

defendant in a FEHA case may only recover attorney fees when

the plaintiff’s action was frivolous, unreasonable or groundless.

(Chavez v. City of Los Angeles (2010) 47 Cal.4th 970, 985; see also

Gov. Code, § 12965, subd. (b).) The attorney fees provision here

violates Armendariz because it permits prevailing defendants to

recover attorney fees even if plaintiff’s action was not frivolous,

unreasonable or groundless. (See Serpa v. California Surety

Investigations, Inc. (2013) 215 Cal.App.4th 695, 709-710 (Serpa)

[requiring each party to bear their own attorney fees was

unenforceable because it would deprive the employee of an

unwaivable statutory remedy available if she prevailed on her

FEHA claim]; Serafin v. Balco Properties Ltd., LLC (2015)

235 Cal.App.4th 165, 183 (Serafin) [same; “[s]uch a modification

of California law is inappropriate under Armendariz”].)

3. Severance

Plaintiff has not shown that unconscionability so permeates

the arbitration clause that the arbitrator’s fees and costs and the

attorney fees provisions cannot be severed, leaving a fully mutual

and enforceable arbitration agreement. This is not a case where

we must reform the contract by augmenting it or otherwise

rewriting the parties’ agreement, which of course we cannot do.

Other courts have severed such provisions and enforced the

rest of the arbitration agreement. (See, e.g., Serafin, supra,

235 Cal.App.4th at p. 184 [severing provisions requiring both

parties to bear their own attorney fees and costs and enforcing

balance of arbitration agreement]; Serpa, supra, 215 Cal.App.4th

at p. 710 [attorney fees provision severed as it is “plainly

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collateral to the main purpose of the contract,” and remainder of

arbitration agreement enforced]; Gutierrez v. Autowest,

Inc. (2003) 114 Cal.App.4th 77, 92 [reversing denial of petition to

compel arbitration and remanding with instructions to consider

severing arbitration costs provision and enforcing the balance of

the agreement; the central purpose of the arbitration agreement

“was not to regulate costs, but to provide a mechanism to resolve

disputes [and] [b]ecause the costs provision is collateral to that

purpose, severance was available’’ (citation omitted)].)

The order denying defendants’ motion to compel arbitration is reversed. On remand, the trial court is directed to sever the offending provisions concerning arbitration fees and costs and attorney fees from the agreement and otherwise grant the motion to compel arbitration. Defendants shall recover costs of appeal.