Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00611/USCOURTS-caed-2_07-cv-00611-2/pdf.json

Parties Involved:
Servicemaster
Defendant
Ken Sinclair
Plaintiff

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28 1 Because oral argument will not be of material

assistance, the court orders this matter submitted on the briefs. 

E.D. Cal. Local Rule 78-230(h).

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

KEN SINCLAIR

NO. CIV. 07-611 FCD/KJM 

Plaintiff,

v. MEMORANDUM AND ORDER

THE SERVICEMASTER COMPANY, a

Delaware Corporation,

Defendant.

----oo0oo----

This matter comes before the court on defendant The

ServiceMaster Co.’s (“defendant” or “ServiceMaster”) motion to

compel arbitration and to stay these proceedings pending

arbitration of plaintiff Ken Sinclair’s (“plaintiff”) first

amended complaint against it. For the reasons set forth below,

defendant’s motion is GRANTED.1

///

///

///

///

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2 The facts of this case are taken from plaintiff’s

allegations in the first amended complaint, filed August 23, 2007

(Docket #21). Plaintiff originally filed this action on March

30, 2007. ServiceMaster moved to dismiss the complaint pursuant

to Fed. R. Civ. P. 12(b)(6); ServiceMaster did not move at this

time to compel arbitration. On August 2, 2007, the court granted

in part and denied in part ServiceMaster’s motion to dismiss. 

(Docket #20). Plaintiff was given leave to file a first amended

complaint. 

2

BACKGROUND2

Plaintiff was a long term employee of ServiceMaster. (Pl.’s

First Amended Compl., filed Aug. 23, 2007 (“FAC”), ¶ 5.) In

1998, plaintiff entered into a Founder’s Employment Agreement

(“Employment Agreement”) as one of the principals and founding

members of Four Season Landscape Maintenance, Inc., a predecessor

corporation of ServiceMaster. (Id.) The Employment Agreement

was for a five-year term, which then continued on a year-to-year

basis upon the same terms and conditions. (Id.) The Employment

Agreement binds successor corporations, which plaintiff alleges

includes ServiceMaster. (Id. ¶ 6 [citing Employment Agreement,

Ex. A to Compl., ¶ 10]). 

The Employment Agreement protects plaintiff’s employment

with ServiceMaster. (Id. ¶ 7.) The Agreement permits

ServiceMaster to terminate plaintiff for “cause” based upon a

“willful and material breach,” “gross negligence” or “willful

dishonesty, fraud or misconduct.” (Id.) Further, ServiceMaster

is required to provide plaintiff with 10 days written notice and

an opportunity to cure any willful and material breach of the

Employment Agreement before termination. (Id.)

In 2001, plaintiff received a Change in Control Severance

Agreement (“CIC”) as part of his executive compensation package. 

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3

(Id. ¶ 8.) The CIC was designed to provide protection to

ServiceMaster’s management team in the event of certain

reorganizations, mergers, or acquisitions. (Id.) In 2005,

plaintiff was granted a restricted stock award of 10,000 shares

under the ServiceMaster 2003 Equity Incentive Plan. (Id. ¶ 15.) 

The 2005 stock award was given pursuant to the terms of The

ServiceMaster Company Restricted Stock Award Agreement. 

Plaintiff also alleges he was promised, both orally by Rick

Ascolese (“Ascolese”) and in a written memorandum, that he would

receive restricted stock awards of 10,000 shares in 2006, 10,000

shares in 2007, and 8,000 shares in 2008. (Id.) 

ServiceMaster announced on November 28, 2006 that its Board

of Directors had decided to explore strategic alternatives

designed to maximize value for shareholders. (Id. ¶ 18.) In

January and February of 2007, plaintiff discussed his 2006 bonus

and expressed concerns to his immediate supervisor, Ascolese,

that he had not received his 2007 restricted stock award of

10,000 shares. (Id. ¶ 19.) Plaintiff did not receive an

answer, and plaintiff again pressed Ascolese for information

about the stock award on February 19 and 20, 2007. (Id.) 

Plaintiff did not receive a definitive answer, and Ascolese told

him that there were “many unknowns as it relates to the potential

change in control.” (Id.) 

ServiceMaster terminated plaintiff’s employment without

notice on March 8, 2007. (Id.) The termination was allegedly

for “cause” and was effective March 15, 2007. (Id. ¶ 21.) On

March 19, 2007, ServiceMaster announced that it had entered into

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a merger agreement to be acquired by an investment group. (Id.

¶ 24.) 

Plaintiff alleges that ServiceMaster’s Board of Directors

was aware of a change in control or attempted change in control

prior to his termination. (Id. ¶ 20.) Plaintiff further

alleges that there was no cause for his termination and that the

true reason for his termination was to deny him compensation due

and owing from ServiceMaster. (Id. ¶ 21.) 

More specifically, plaintiff alleges that ServiceMaster’s

actions in terminating plaintiff are in breach of both the CIC

and the restricted stock agreement. As such, plaintiff contends

that he is due all benefits under both agreements. (Id. ¶¶ 25-

27.) Furthermore, plaintiff contends ServiceMaster did not fully

compensate him following his wrongful termination in violation of

California Labor Code sections 201 and 227.3. (Id. ¶ 28.) 

ServiceMaster, plaintiff alleges, also failed to pay for

plaintiff’s vacation time earned but not used and failed to

provide plaintiff with his restricted stock award for 2007. 

(Id.)

On March 30, 2007, plaintiff filed this civil action against

defendant, alleging seven claims for relief. Defendant now moves

to compel arbitration of plaintiff’s claims, as stated in the

first amended complaint, for (1) wrongful termination in

violation of public policy; (2) breach of written contract for

the CIC; (3) breach of written contract for the restricted stock

award; (4) breach of the covenant of good faith and fair dealing,

(5) failure to pay wages due; (6) intentional infliction of

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3 Although the Act does not confer jurisdiction, the

court has jurisdiction pursuant to 28 U.S.C. § 1332, as the

parties are diverse and the amount in controversy exceeds

$75,000. 

4

 Paragraph 15 of the Employment Agreement states the

contract “shall . . . be construed according to the laws of the

State in which the Company’s headquarters are located on the date

hereof as shown in the Company’s address for notices set forth in

Section 12 hereof.” Paragraph 12 of the Employment Agreement

indicates Four Seasons’ headquarters were in California at the

time of execution. (Ex. A, Employment Agreement at ¶ 12). 

Therefore, California law applies in this case. See Ingle v.

Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003)

(“to evaluate the validity of an arbitration agreement, federal

courts should apply ordinary state-law principles that govern

formation of contracts.”). 

5

emotional distress; and (7) declaratory relief, pursuant to the

Federal Arbitration Act (“FAA”).

STANDARD

Employment contracts are governed by the FAA. 9 U.S.C. § 1,

et seq; Allied-Bruce Terminix Companies v. Dobson, 513 U.S. 265,

269 (1995).3 Questions concerning the interpretation and

enforceability of arbitration agreements subject to the FAA are

determined by federal standards. Moses H. Cone Memorial Hosp. v.

Mercury Constr., 460 U.S. 1, 22-24 (1983); see Slaughter v.

Stewart Enters., Inc., 2007 WL 2255221, at *2 (N.D. Cal. Aug. 3,

2007) (“Federal substantive law governs the question of

arbitrability.”). However, courts apply ordinary state law

contract principles in deciding whether the parties agreed to

arbitrate a particular dispute in the first place.4 First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

In ruling on a petition to compel arbitration, the court’s

inquiry is limited to determining (1) whether a valid agreement

to arbitrate exists and, if it does, (2) whether the agreement

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encompasses the dispute at issue. Chiron Corp. v. Ortho

Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). If

the finding is affirmative on both counts, then the FAA requires

the court to enforce the arbitration agreement in accordance with

its terms. Simula, 175 F.3d at 719. 

In determining the validity of an agreement, the court

considers whether the arbitration clause is procedurally and

substantively unconscionable. Davis v. O’Melveny & Myers, 485

F.3d 1066, 1072 (9th Cir. 2007). Procedural unconscionability

focuses on oppression or surprise due to unequal bargaining power

between the parties. Armendariz v. Foundation Health Psychcare

Services, 24 Cal. 4th 83, 114 (2000) (quoting A&M Produce Co. v.

FMC Corp., 135 Cal. App. 3d 473, 486-87 (1982)). “A contract is

oppressive if an inequality of bargaining power . . . precludes

the weaker party from enjoying a meaningful opportunity to

negotiate and choose the terms of the contract.” Ingle, 328 F.3d

at 1171. “Surprise” references the extent to which the terms of

the bargain are drafted by the party seeking to enforce the

contract and whether terms are hidden in the prolix printed form. 

Id. (citing Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519,

1532 (1997)). Substantive unconscionability “focuses on the

terms of the agreement and whether those terms are so one-sided

as to shock the conscience.” Soltani v. Western & Southern Life

Ins. Co., 258 F.3d 1038, 1043 (9th Cir. 2001) (emphasis in

original). In evaluating the substance of a contract, courts

must analyze the terms of the contract as of “the time [it] was

made.” A&M Produce Co., 135 Cal. App. 3d at 487. 

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In determining whether the arbitration clause encompasses

the dispute at issue, the Ninth Circuit has generally held

arbitration clauses to be “expansively interpreted.” Simula,

Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999). 

Therefore, a plaintiff’s allegations need only “touch matters”

covered by the contract containing the arbitration clause. 

Simula, Inc., 175 F.3d at 721 (citing Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 624 n. 13 (1985)). 

ANALYSIS

A. Validity of the Arbitration Clause 

The arbitration provision of the Employment Agreement

provides, in pertinent part: 

[w]ith the exception of the provisions hereof

providing for enforcement by means of

equitable remedies, any unresolved dispute or

controversy arising under or in connection

with this Agreement shall be settled

exclusively by arbitration, conducted before

a panel of three (3) arbitrators in Houston,

Texas, in accordance with the National Rules

for the Revolution of Employment Disputes of

the American Arbitration Association (“AAA”)

. . . (Ex. A to FAC, Employment Agreement 

¶ 14) 

Plaintiff concedes by his own allegations in the first amended

complaint that the Employment Agreement is valid and enforceable. 

(See e.g. FAC ¶¶ 5, 6, 7, 22 [alleging that plaintiff is a party

to the Employment Agreement, that the Agreement is binding as

between plaintiff and ServiceMaster, and that ServiceMaster, per

the express terms of the Agreement, may only terminate plaintiff

under certain conditions]). These allegations are incorporated

and re-alleged in each of plaintiff’s substantive claims for

relief. (Id. ¶¶ 30, 35, 40, 45, 49, 52, 57). 

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Nevertheless, despite these allegations, plaintiff now

contends that the arbitration clause is unenforceable as

unconscionable because it precludes him from recovering punitive

damages. (Pl.’s Opp’n to Mot., filed Oct. 26, 2007 (“Opp’n”), at

11). Courts have warned against arbitration clauses in

employment agreements. See Ingle, 328 F.3d at 1172-73;

Armendariz, 24 Cal. 4th at 114-15. In particular, arbitration

clauses that require only one party to arbitrate disputes have

been found to be unconscionable. See Armendariz, 24 Cal. 4th at

117 (holding at a minimum a “modicum of bilaterality” is

necessary in arbitration agreements); Kinney v. United HealthCare

Services Inc., 70 Cal. App. 4th 1322, 1132 (1999) (holding a

“unilateral obligation to arbitrate is itself so one-sided as to

be substantively unconscionable”). Other factors that may

indicate unconscionability include a forum selection clause of

the employer’s choice and preventing full recovery of damages by

employees, while placing no such restriction on employers. See

Armendariz, 24 Cal. 4th at 120-21. 

However, unlike in Armendariz, mutuality exists in the

present case. Both parties are held to arbitration. Morever,

plaintiff has alleged no harm resulting from the choice of forum

contained in the arbitration clause. Cf. Armendariz, 24 Cal. 4th

at 119-20. While defendant has not provided “justification” for

requiring disputes to be arbitrated in Houston, Texas,

plaintiff’s opposition suggests the forum is the result of

defendant’s acquisition of a Delaware corporation based in

Houston. (Opp’n at 1-2). This is a sufficiently reasonable

explanation for holding the arbitration in Houston. See

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Armendariz, 24 Cal. 4th at 120 (“[i]f an employer . . . [has]

reasonable justification for the arrangement . . . such an

agreement would not be unconscionable.”). 

Furthermore, contrary to plaintiff’s contention, bilaterally

precluding punitive damages is not enough to “shock the

conscience” and render the agreement substantively

unconscionable. While the arbitration clause prevents recovery

of punitive damages, both parties are similarly precluded. 

Therefore, plaintiff’s reliance on Armendariz is unfounded. In

Armendariz, the arbitration clause in question was held to be

unconscionable because the employee’s damages were limited but

the employer’s damages were not. Armendariz, 24 Cal. 4th at 121. 

Lastly, plaintiff relies on Armendariz to argue that the

arbitration agreement improperly limits statutorily imposed

remedies such as punitive damages. Only plaintiff’s fifth claim

for relief is based on a statute. Plaintiff’s claim for failure

to pay wages due arises under California Labor Code §§ 201,

227.3. However, neither of these sections provide for punitive

damages against violators. Therefore, the punitive damages

clause of the arbitration agreement would not preclude any remedy

plaintiff may be entitled to under statute. 

Thus, for all of the above reasons, the court finds the

arbitration clause binding and enforceable. 

B. Coverage of the Arbitration Clause

The Employment Agreement requires arbitration of “any

unresolved dispute or controversy arising under or in connection

with this Agreement.” (Ex. A to FAC, Employment Agreement 

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¶ 14). Plaintiff relies on Necchi v. Necchi Sewing Machine Sales

Corp., 348 F.2d 693 (2d Cir. 1965) to argue this clause should be

narrowly construed and limited to matters arising directly from

the contract. (Opp’n at 7). However, the Ninth Circuit has held

language of this sort to be “expansively interpreted.” See

Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999)

(concluding phrase “arising in connection with” suggests a

broader scope than “arising out of” or “arising under”) (citing

Good(E) Bus. Sys., Inc. v. Raytheon Co., 614 F. Supp. 428, 429

(W.D. Wis. 1985)). As such, the phrase “‘[a]rising in connection

with’ reaches every dispute between the parties having a

significant relationship to the contract and all disputes having

their origin or genesis in the contract.” Simula, Inc., 175 F.3d

at 721. Therefore, plaintiff’s allegations need only “touch

matters” covered by the Employment Agreement. Id. (citing

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 624 n. 13 (1985)). 

Here, each of plaintiff’s claims hinge on the validity and

enforceability of the Employment Agreement. (FAC ¶¶ 5, 6, 7,

22). Moreover, plaintiff’s claims each specifically incorporate

the Employment Agreement. (Id. ¶¶ 30, 35, 30, 45, 49, 52, 57) 

Therefore, plaintiff’s claims all sufficiently “touch matters”

covered by the Employment Agreement. See Boucher v. Alliance

Title Co., Inc., 127 Cal. App. 4th 262, 272 (2005) (as in

Boucher, plaintiff’s claims “rely on, make reference to, and

presume the existence of” the employment agreement). 

Specifically, plaintiff’s first claim for relief for

wrongful termination in violation of public policy asserts that

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defendant terminated plaintiff “in order to avoid paying his

wages and compensation.” (Id. ¶ 31). Plaintiff’s claim

necessarily requires a determination of the compensation

plaintiff may be entitled, as an employee, under Section 2 of the

Employment Agreement. As such, this claim is subject to

arbitration. 

Plaintiff’s second claim for relief alleges defendant

breached the CIC by failing to provide plaintiff with notice of

plaintiff’s alleged breach of his duties and responsibilities;

failing to provide plaintiff with a reasonable opportunity to

remedy the alleged breach; and wrongfully terminating plaintiff

without cause and in violation of public policy. (FAC ¶ 37). 

Plaintiff argues the CIC contains the explicit terms governing

his employment, including the procedures and standards for

termination, and that this agreement, unlike the Employment

Agreement, does not contain an arbitration clause. (Opp’n at 8

[citing CIC, ¶ 1(c)(1)]). 

That the CIC itself does not contain an arbitration clause

is of no consequence to the motion because the 

factual allegations underlying plaintiff’s claim that the CIC was

breached “touches matters” covered by the Employment Agreement. 

For example, plaintiff’s first amended complaint alleges his

“exemplary” job performance led to the Employment Agreement, and

that the CIC constituted “part of his executive compensation

package.” (FAC ¶¶ 5, 8). Plaintiff further alleges that his

“accomplishments as an employee of ServiceMaster [under the

Employment Agreement]” and his generally “outstanding performance

in 2004” warranted the stock award. (Id. ¶¶ 14, 15) (emphasis

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added). Plaintiff cannot now excise the Employment Agreement

from his complaint. Therefore, plaintiff’s second claim for

relief for breach of the CIC sufficiently touches matters

encompassed by the Employment Agreement and is thus also subject

to arbitration. 

Plaintiff’s third claim for relief for breach of the

restricted stock agreement alleges defendant failed to pay

plaintiff the benefits due under the agreement. (Id. ¶ 41). 

Plaintiff contends he performed all the terms and conditions

required under the agreement until he was wrongfully terminated. 

However, as noted above, plaintiff’s duties as an employee, his

compensation, and termination are all issues encompassed by the

Employment Agreement. Indeed, both the CIC and stock agreement

are necessarily intertwined with the Employment Agreement. 

Contrary to plaintiff’s bald assertion, it is the Employment

Agreement, and not the CIC, that delineates “all the necessary

terms of [plaintiff’s] employment.” (Opp’n at 10). Therefore,

this claim is likewise subject to arbitration. 

Plaintiff’s fourth claim for relief alleges breach of the

covenant of good faith and fair dealing. Plaintiff argues that

since the standards for “cause” are sufficiently set forth in the

CIC, reference to the Employment Agreement is unnecessary. 

(Opp’n at 8-9). However, this claim is derivative of the second

and third claims for breach of contract. As such, it is also

subject to arbitration. 

Plaintiff’s fifth claim for relief for failure to pay wages

due alleges defendant “was required to make payment of wages upon

cessation of employment.” (FAC ¶ 50). Plaintiff’s claim touches

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upon the circumstances of his termination. Moreover, plaintiff’s

claim rests on a determination of the wages due to him under the

Employment Agreement. See Simula, Inc., 175 F.3d at 724-25

(holding independent tort claims derived from non-disclosure

agreements lacking arbitration clauses were nonetheless subject

to arbitration since parties entire relationship was dependent on

contract containing arbitration clause). Consequently,

plaintiff’s fifth claim for relief is subject to arbitration.

Plaintiff’s sixth claim for relief for intentional

infliction of emotional distress alleges defendant’s termination

of plaintiff’s employment was “extreme and outrageous.” While

plaintiff contends reference to the Employment Agreement is

unnecessary, plaintiff’s allegations require a determination of

the compensation due to him under the Employment Agreement. 

Moreover, adjudication of the claim will likely require a

determination of whether defendant’s termination of plaintiff was

just under the Employment Agreement. See Mathis v. Pacific Gass

& Electric Co., 75 F.3d 498, 505 (9th Cir. 1996) (noting that

party’s exercise of its contractual rights can only rarely form

the basis of a claim for intentional infliction of emotional

distress). For these reasons, this claim is subject to

arbitration.

Finally, plaintiff’s seventh claim for relief for

declaratory judgment seeks a determination that defendant is

bound by the employment, control and stock agreements. This

claim directly concerns the Employment Agreement and therefore is

subject to arbitration. 

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5 Defendant’s motion to dismiss amended causes of action,

currently set for hearing on November 30, 2007, is DENIED as moot

and the hearing on said motion is VACATED.

14

CONCLUSION

For the foregoing reasons, defendant’s motion to compel

arbitration and to stay plaintiff’s claims pursuant to the

Federal Arbitration Act, 9 U.S.C. § 1 et seq., is GRANTED. The

Clerk of the Court is directed to enter a stay of this action in

its entirety pending resolution of the underlying arbitration

proceedings.5 

IT IS SO ORDERED.

DATED: November 14, 2007.

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