Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00633/USCOURTS-caed-2_07-cv-00633-1/pdf.json

Parties Involved:
Blue Cross of California
Defendant
Wayne Dahlgren
Defendant
Kathi Sherwood
Plaintiff

Document Text:

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1

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

KATHI SHERWOOD,

NO. CIV. S-07-633 LKK/DAD

Plaintiff,

v.

O R D E R

BLUE CROSS; WAYNE DAHLGREN,

in his official and/or agency 

capacity, not in his individual 

capacity,

Defendants.

 /

Plaintiff has brought this action against her former employer,

alleging age discrimination, negligence, and violation of public

policy. Pending before the court is defendants’ petition to compel

arbitration pursuant to the Federal Arbitration Act and to stay the

present proceedings. For the reasons explained below, the court

finds that, as written, the arbitration agreement does not to apply

to plaintiff and that even if it did, it would be unenforceable for

unconscionability. Accordingly, the court denies defendant’s

petition.

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1

 The complaint parenthetically refers to this cause of action

as a "Tameny claim," a reference to the California Supreme Court

decision, Tameny v. Atlantic Richfield Co., 27 Cal.3d 167 (1980),

authorizing such claims.

2

I. Background

Plaintiff Kathi Sherwood was an employee of defendant Blue

Cross of California for 25 years. Compl. ¶ 10, 30. In 2006,

plaintiff unsuccessfully applied for the position of account

manager. Id. ¶ 17, 21. The individual chosen to fill the position

was a younger, 24 year old woman. Id. ¶ 21. At the time of the

incident, plaintiff was 51 years old. Id. ¶ 30. Two weeks later,

plaintiff provided written notice that she would be leaving Blue

Cross in four weeks and hopefully train a replacement during that

time period. Id. ¶ 27. On May 30, 2006, the third week after she

provided notice, the Human Resources manager asked if she would

like to leave early and that they would pay her through the week.

Id. ¶ 29.

She subsequently filed the present lawsuit, which alleges five

causes of action against defendants Blue Cross of California and

Wayne Dahlgren, one of her former supervisors. Her first two

causes of action are for unlawful age discrimination: one under

California’s Fair Employment and Housing Act, Cal. Gov. Code §§

12900 et seq., and the second under the Age Discrimination in

Employment Act, 29 U.S.C. §§ 621-634. Her third and fourth causes

of action are for negligence and negligence per se. Finally, her

fifth cause of action is for “Violation of Fundamental Public

Policy.”1 

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2

 Presumably, given that plaintiff alleges that she was an

employee at Blue Cross of California for 25 years, she was already

working at Blue Cross at this time but was simply applying for a

new position within Blue Cross.

3

Defendants maintain that plaintiff’s claims must be submitted

to arbitration. They base this assertion on three documents

(collectively, the “arbitration agreement”). First, on February

15, 2001, plaintiff signed an application for employment.2 Decl.

of Diana Craig, Ex. A. At the bottom of that application, the

following appeared: “I understand that as an employee of the

Company, I will be subject to the the [sic] Company Arbitration

policy. Thus, in the event of my involuntary termination, I agree

to submit any dispute related to that termination to final and

binding arbitration, as more fully described in the Human Resources

Arbitration policy.” Id. 

Second, a letter dated February 23, 2001 confirming

plaintiff’s offer of employment contained the following paragraph:

“[T]he . . . position [] is covered under the bargaining unit

agreement with Blue Cross of California and Office & Professional

Employees International Union, Local 29. As an employee of Blue

Cross of California, you will be subject to the Company’s binding

arbitration procedures, as more fully described in Human Resources

Policy #613, Arbitration, and the enclosed brochure.” Craig Decl.,

Ex. B. The letter was signed by plaintiff on March 5, 2001. When

plaintiff was promoted to sales in August 2005, she ceased to be

part of the union.

Third, the company’s arbitration policy (Human Resources

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3

 Nevertheless, as explained below, defendants maintain that

the agreement remains enforceable because the agreement is not

substantively unconscionable.

4

Policy #613) was attached to the offer letter. That policy

provides that, “By entering into the employment relationship, the

Company and its associates subject to the policy consent to the

resolution by binding arbitration of all claims arising out of or

related to the termination of that relationship (and for associates

commencing employment in 2001 or later, all legal disputes).”

Craig Decl., Ex. C.

Plaintiff maintains that at some point during her employment

she “was told to just quickly sign off on a bunch of forms.” Decl.

of Kathi Sherwood ¶ 3. She allegedly “did not get the chance to

read, much less understand, the mandatory binding arbitration

clauses and legalese in the thick papers I was given and told I

must sign.” Id. She further maintains that “[she] signed the

forms because [she] was told that [she] must sign or that [she]

simply could not be hired with Blue Cross” and that “[i]t was

presented on a ‘take ir or leave it’ basis.” Id. ¶¶ 3, 4.

Defendants “concede that plaintiff’s employment was conditioned on

agreeing to arbitrate, which renders the arbitration agreement

procedurally unconscionable.”3 Defs.’ Reply at 3. 

II. Standard

The Federal Arbitration Act permits a party aggrieved by the

failure to arbitrate to petition a United States district court for

an order compelling arbitration. 9 U.S.C. § 4. The district court

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4 For example, the February 2001 letter referencing the

arbitration policy extended an offer of employment to plaintiff for

the position of a Customer Service Representative. Craig Decl.,

Ex. B (“On behalf of WellPoint Health Networks, Inc., I am pleased

5

must otherwise have jurisdiction over the subject matter of the

suit under Title 28 but for the arbitration agreement.

If the court is satisfied that “the making of the agreement for

arbitration or the failure to comply therewith is not in issue,”

the court must order the parties to proceed to arbitration. Id.

III. Analysis

Plaintiff argues that (1) the arbitration agreement only

applies to employees who have been involuntarily terminated, and

that (2) the arbitration agreement is unconscionable and therefore

unenforceable. The court finds that both of these reasons

constitute valid and independent grounds for denying the petition

to compel arbitration.

A. Scope of Arbitration Agreement

The initial task before the court is to determine the scope

of the arbitration agreement. The company’s arbitration policy

states that it applies to “all claims arising out of or related to

the termination of that relationship (and for associates commencing

employment in 2001 or later, all legal disputes).” Craig Decl.,

Ex. C. Here, plaintiff alleges that she was an employee of Blue

Cross for 25 years. Compl. ¶ 10. Although she may have moved

internally within the company over that period of time, it would

be unreasonable to read the phrase, “associates commencing

employment in 2001 or later,” as applying to her.4 A reasonable

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to confirm the following offer of employment as a Customer Service

Representative, for Blue Cross of California.”). Although neither

party has explained the relationship between WellPoint and Blue

Cross of California, presumably WellPoint is part of Blue Cross of

California, given that the latter is the named defendant.

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employee in plaintiff’s situation -- which is to say, an employee

who had been with Blue Cross of California for two and a half

decades -- would not read that phrase as encompassing her.

Rather, plaintiff was subject to the portion of the

arbitration policy specifying its application to “all claims

arising out of or related to the termination of that relationship.”

Craig Decl., Ex. C. Here, plaintiff argues that the policy applies

only when an employee is “terminated” or fired, rather than when

an employee resigns. Arguably, the policy is employing the word

“termination” in the literal sense, by which the policy would apply

to any claims related to the cessation of the employer-employee

relationship, rather than only claims related to the termination

of the employee by the employer. After all, the phrase employed

is “termination of th[e] relationship,” not “termination of the

employee.”

Nevertheless, in the present case, that interpretation is

squarely at odds with the language contained in the employment

application form. That form provides: “I understand that as an

employee of the Company, I will be subject to the Company

Arbitration policy. Thus, in the event of my involuntary

termination, I agree to submit . . . to . . . arbitration.” Craig

Decl., Ex. A. In light of how “termination” is used here, it would

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be unreasonable to conclude that the same word employed elsewhere,

and in connection with the same subject matter (arbitration),

changed and expanded to include voluntary resignations. Despite

the general directive to resolve doubts concerning the scope of

arbitrable issues in favor of arbitration, Moses H. Cone Mem. Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983), interpreting

“termination” to include voluntary resignations would require the

court to rewrite the terms of the contract and thereby upset the

reasonable expectations of the employee.

Perhaps recognizing as much, defendants do not argue for this

interpretation of the contract. Rather, they argue that they in

fact terminated plaintiff from her position, at least based on the

allegations made and causes of actions asserted. Specifically,

defendants claim that plaintiff “has alleged she was constructively

terminated, and that she was wrongfully terminated in violation of

public policy.” Defs.’ Reply at 8. 

A careful reading of plaintiff’s complaint does not bear out

this conclusion. The crux of plaintiff’s allegations with regard

to discrimination is a failure to promote claim. Although it

appears that she resigned after what she felt was discriminatory

conduct, she does not allege that the discontinuation of her

employment was an adverse employment action, or that it otherwise

constitutes cognizable legal injury. Similarly, she has not

claimed that she was wrongfully discharged in violation of public

policy; rather, she claims that the defendants’ failure to promote

her due to discriminatory reasons also violates California public

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5

 How, and whether, this construction bears upon the scope of

recovery is not before the court and the court will not speculate

upon that question.

6 The court declines to find the arbitration inapplicable for

the alternate grounds urged by plaintiff: that the arbitration

policy only applied so long as plaintiff was a member of the union

and lost effect once when was promoted to a sales position in

August 2005. Although the offer letter noted that her position was

covered by the union’s collective bargaining agreement, and stated

in the next sentence that she was subject to the company’s

arbitration policy, the two topics are unrelated. If anything, it

appears that this juxtaposition was to first highlight plaintiff’s

rights under the bargaining agreement but then remind plaintiff

that these rights (and presumably certain others as well) were

subject to vindication through arbitration.

8

policy, thereby opening up the possibility of tort damages.

In sum, the court interprets the arbitration policy, fairly

construed in light of the language employed by the employment

application, as applying only to claims arising out of or related

to the termination of an employee by the employer.5 Here, because

plaintiff has not alleged that she was terminated or constructively

discharged by her employer, the court finds the arbitration

agreement inapplicable.6

B. Unconscionability

The Federal Arbitration Act provides that arbitration

agreements generally “shall be valid, irrevocable, and enforceable”

except when grounds “exist at law or in equity for the revocation

of any contract.” 9 U.S.C. § 2. “To evaluate the validity of an

arbitration agreement, federal courts ‘should apply ordinary

state-law principles that govern the formation of contracts.’”

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

2003). 

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9

Under California law, an arbitration agreement is

unenforceable if it is both procedurally and substantively

unconscionable. Fitz v. NCR Corp., 118 Cal. App. 4th 702, 714

(2004). “However, both elements need not be present in the same

degree. Generally, a sliding scale approach is taken; that is,

‘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.’” Id.;

Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th

83, 114 (2000).

1. Procedural Unconscionability

Procedural unconscionability exists when, for example, the

contract is adhesive and offered on a take-it-or-leave-it basis,

is a prerequisite for employment, and may not be modified by job

applicants. Ingle, 328 F.3d at 1171. “When a party who enjoys

greater bargaining power than another party presents the weaker

party with a contract without a meaningful opportunity to

negotiate, ‘oppression and, therefore, procedural

unconscionability, are present.’” Id. at 1172. As noted above,

all these elements of procedural unconscionability are present.

Plaintiff also indicates that she “was told to just quickly sign

off on a bunch of forms” and that the arbitration policy was “one

of dozens of pages which I had been handed.” Sherwood Decl. ¶ 3.

Accordingly, defendants concede that the element of procedural

unconscionability is present.

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2. Substantive Unconscionability

Substantive unconscionability concerns the terms of the

agreement and whether those terms are one-sided. Circuit City v.

Mantor, 335 F.3d 1101, 1107 (9th Cir. 2003). Because the court

applies a sliding scale with respect to the requisite degree of

procedural and substantive unconscionability, and the degree of

procedural unconscionability in this case is significant,

plaintiff’s burden of proving substantive unconscionability is not

onerous. 

Here, there is the minimal quantum of substantive

unconscionability required to find the arbitration agreement

unenforceable. First, although parties may agree to “less than the

full panoply of discovery” to which they are normally entitled,

Armendariz, 24 Cal. 4th at 105, there is nevertheless a minimum

threshold of discovery that must be present. Here, the arbitration

policy provides that each party has the right to take the

deposition of only one individual. Craig Decl., Ex. C. In Fitz,

the court found that an arbitration agreement that limited

depositions to two individuals ran afoul of “minimum standards of

fairness in arbitration so that employees subject to mandatory

arbitration agreements can vindicate their public rights in an

arbitral forum.” 118 Cal. App. 4th at 719; see also Ferguson v.

Countrywide Credit Indus., Inc., 298 F.3d 778, 786 (9th Cir. 2002)

(arbitration agreement unconscionable where discovery provision

limited depositions to four corporate representative). Here, the

restriction on depositions is twice as severe as that in Fitz.

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Although the arbitration policy provides that the parties may

make additional requests for discovery to the arbitrator, the

agreement directs that “[i]n evaluating such requests, the

Arbitrator shall take into account the parties’ mutual desire to

have a fast, cost-effective dispute resolution mechanism.” Craig

Decl., Ex. C. A similar clause permitting additional depositions

in the discretion of the arbitrator in Fitz did not save the

agreement from unenforceability. 118 Cal. App. 4th at 717

(“Granting the arbitrator discretion to determine whether

additional discovery is necessary . . . is an inadequate safety

valve.”).

Furthermore, although defendants might argue that the

limitation on discovery is mutual, this ignores the practical

reality of employment disputes. Oftentimes, “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.” Mercuro v. Superior Court, 96 Cal.

App. 4th 167, 183 (2002). Accordingly, although limitations on

discovery may ostensibly apply to both parties, they work in effect

to disadvantage only the employee. 

Second, the arbitration policy states that if the associate

initiates the claim, the employee must contribute “an amount not

to exceed two hundred fifty dollars.” Craig Decl., Ex. C. In

2003, the Ninth Circuit found that a mandatory filing fee of $75

without any provision for waiver in cases of indigence contributed

to a finding of substantive unconscionability. Ingle, 328 F.3d at

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1177. Here, the language employed in the agreement is somewhat

ambiguous, given that it states that the employee must contribute

an amount but that the amount may not greater be greater than $250.

Fairly read, however, it simply appears to impose a $250 filing

fee.

While the amount is not particularly objectionable, as in

Ingle there is no provision for waiver in cases of indigence.

Ordinarily, while this factor would not be entitled to much weight,

given the particular circumstances of this case -- where defendants

have conceded the element of procedural unconscionability and where

there are other examples of substantive unconscionability -- it is

at least a relevant consideration.

While the court could attempt to sever the substantively

unconscionable provisions of the arbitration agreement in order to

save the remaining provisions, Cal. Civ. Code § 1670.5 (permitting

severance); Craig Decl., Ex. C (severance provision), where

defendants have openly admitted that the contract was procedurally

unconscionable, this result would not be in the interests of

justice. Armendariz, 24 Cal. 4th at 124 (“The overarching inquiry

is whether the interests of justice . . . would be furthered by

severance.”) (internal quotation marks omitted). “If the central

purpose of the contract is tainted with illegality, then the

contract as a whole cannot be enforced.” Id. Here, the undisputed

element of procedural unconscionability permeates the entire

agreement, rendering the entire agreement unenforceable.

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IV. Conclusion

For the two independent reasons set forth above, the court

DENIES defendant’s petition to compel arbitration.

IT IS SO ORDERED.

DATED: September 13, 2007.

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