Court Opinion

ID: 4155112
Source: CourtListenerOpinion
Date Created: 2017-03-23 19:02:50.692401+00
Date Added: 2024-06-11T07:46:33.865777
License: Public Domain

Filed 3/23/17
                           CERTIFIED FOR PUBLICATION

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                             FIRST APPELLATE DISTRICT

                                      DIVISION ONE

WILSON FARRAR,
        Plaintiff and Respondent,
                                                    A146944
v.
DIRECT COMMERCE, INC.,                              (San Francisco City & County
                                                    Super. Ct. No. CGC-15-546622)
        Defendant and Appellant.

        Plaintiff Wilson Farrar has sued her former employer, defendant Direct
Commerce, Inc., alleging causes of action for breach of contract, conversion, wrongful
termination, breach of the covenant of good faith and fair dealing, and failure to pay
wages owed and waiting time penalties. Farrar, who was hired by the company as its
vice president of business development, negotiated an employment agreement set forth in
a six-page offer letter detailing, inter alia, her compensation, additional bonus structure,
and stock options. The agreement also included an arbitration provision, set off by the
same kind of underlined heading and spacing as the other enumerated paragraphs of the
agreement. The trial court denied Direct Commerce’s petition to compel arbitration on
the ground of the arbitration provision was procedurally and substantively
unconscionable. While the arbitration provision is one-sided, as it excludes any claims
arising from the confidentiality agreement Farrar also signed, we conclude that offending
exception is readily severable and, on this record, should have been severed. We
therefore reverse and remand for arbitration.
                                       BACKGROUND
        In November 2010, Farrar and Direct Commerce’s founder and president, Bruce
Hanavan, began discussions about her joining the company as vice president of business

                                              1
development. Direct Commerce creates and markets software, allowing businesses to
receive automated payment information, invoices and purchase orders from suppliers and
purchasers, and sells its products throughout the United States.1
       Farrar stated in her declaration opposing arbitration that, at the time, she was
unemployed and had not been employed for a number of months (although in her two-
page resume she represented she was working for her own company). She had extensive
work experience, however, having founded and sold two successful technology
companies and worked in sales and/or business development for 22 years. She had
consulted at director-level positions for Hewlett Packard and Adobe, had founded a
consulting company, and had been vice president of sales in a number of start-up
companies. She additionally held herself out as being experienced in negotiating
contracts.
       On December 1, 2010, Hanavan sent Farrar an e-mail entitled “First Stab at a
Structure.” Hanavan sketched out a proposed base pay, commission structure for
additional pay which included a percentage on implementation and monthly fees based
on deals made by the sales team, and stock options based on “success criteria.”
Additionally, Hanavan outlined Farrar’s anticipated job responsibilities. Hanavan sent
another e-mail on December 17, entitled “Compensation” and discussing the goal of
growing the company, Farrar’s potential commission percentage, and timing of
commission payouts. Farrar, in turn, prepared a December 20, 2010, document titled
“Discussion Purposes,” outlining her job title, base salary, commission, stock options,
expenses, computer needs, and benefits. In short, Farrar negotiated over her job title and
duties, compensation, bonuses and stock options.
       On December 31, Hanavan sent Farrar, as an attachment to an e-mail, a six-page,
offer letter setting forth the terms and conditions of her proposed employment. Paragraph

       1
          Accordingly, it is undisputed this case is governed by the Federal Arbitration
Act, title 9 United States Code section 1 et seq. (See Aviation Data, Inc. v. American
Express Travel Related Services Co., Inc. (2007) 152 Cal. App. 4th 1522, 1534.)

                                              2
13, entitled “Arbitration” and in the same font and graphic style as the other paragraphs,
provided:
               “13. Arbitration. If any dispute arises relating to your employment
       or its termination, the dispute will be referred to and resolved by binding
       arbitration before a neutral arbitrator. This means that there will be no trial
       before a judge or jury or hearing before any state or federal administrative
       body of any dispute relating to your employment by Direct Commerce or
       the termination of that employment. The arbitration will be held in San
       Francisco, California and administered by the American Arbitration
       Association in accordance with that organization’s rules. The arbitrator
       will have authority to decide on an appropriate remedy, provided that the
       arbitrator may only grant a remedy which a court of law could award under
       similar circumstances. The award of the arbitrator will be final and binding
       on all parties and may be enforced in any court having jurisdiction over the
       matter. The types of claims that are subject to arbitration will include, but
       will not be limited to, claims of improper termination of employment,
       claims of unlawful discrimination and claims of sexual or other forms of
       harassment. However, the following types of disputes will not be required
       to be submitted to arbitration: (a) any claim for compensable injury under
       California’s Worker’s Compensation Law; or (b) any claim based on or
       related to the Confidentiality and Inventions Agreement between you and
       Direct Commerce.”

       In his e-mail, Hanavan told Farrar he would be “around all weekend” and he had a
copy of the proposed offer letter if “you want to talk.” Farrar replied she would “ ‘read
this carefully and respond very soon.’ ” Thereafter, Farrar continued to negotiate about
her economic package.
       However, Farrar stated in her opposing declaration that, based on her December
conversations with Hanovan, she “was led to believe that outside of the compensation
portion of the offer letter,” the remaining proposed terms of employment were “non-
negotiable” and terms to which all employees had to agree. Hanavan, in his reply
declaration, did not dispute this. In fact, in his initial declaration, he explained why the
company “has its employees sign a separate Assignment of Inventions and
Confidentiality Agreement” and why claims related to this agreement are excluded from
the arbitration provision.

                                              3
       On January 5, 2011, Hanavan sent Farrar a revised offer letter. The final offer
letter was also six pages in length and its enumerated paragraphs were also set off by
underlined headings and separated from other paragraphs by double spacing. Paragraph
13 provided:
               “13. Arbitration. If any dispute arises relating to your employment
       or its termination, the dispute will be referred to and resolved by binding
       arbitration before a neutral arbitrator. This means that there will be no trial
       before a judge or jury or hearing before any state or federal administrative
       body of any dispute relating to your employment by Direct Commerce or
       the termination of that employment. The arbitration will be held in San
       Francisco, California and administered by ADR Services, Inc. in
       accordance with that organization’s rules. The arbitrator will have
       authority to decide on an appropriate remedy, provided that the arbitrator
       may only grant a remedy which a court of law could award under similar
       circumstances. The award of the arbitrator will be final and binding on all
       parties and may be enforced in any court having jurisdiction over the
       matter. The types of claims that are subject to arbitration will include, but
       will not be limited to, breach of contract, claims of improper termination of
       employment, claims of unlawful discrimination and claims of sexual or
       other forms of harassment. However, the following types of disputes will
       not be required to be submitted to arbitration: (a) any claim for
       compensable injury under California’s Worker’s Compensation Law; or (b)
       any claim based on or related to the and Assignment of Inventions &
       Confidentiality Agreement between you and Direct Commerce.”

       Thus, this paragraph differed from the arbitration paragraph in the initial offer
letter in three respects: First, the initial offer letter specified arbitration would be before
the American Arbitration Association (AAA), while the final letter provided arbitration
would be administered by ADR Services, Inc. (ADR). Second, the final offer letter
added “breach of contract,” to the “type of claims” subject to arbitration. Third, the
provision of the final offer letter identifying claims excluded from arbitration referred to
an “Assignment of Inventions & Confidentiality Agreement,” rather than to what the
initial offer letter had called a “Confidentiality and Inventions Agreement.”
       Both the initial offer letter and the final offer letter referred to confidentiality in
two other paragraphs. Paragraph 8 of the initial offer letter, entitled “Confidential

                                                4
Information,” stated “Direct Commerce anticipates that it will develop key proprietary
information crucial to its business” and provided Farrar would, as a condition of her
employment, sign “a Confidentiality Agreement in the form delivered to you by Direct
Commerce.” The closing paragraph of the initial offer letter, before the signature block,
also asked Farrar to “[p]lease also sign the Assignment of Inventions and Confidentiality
Agreement enclosed with this letter and return it to us, together with the signed copy of
this letter.” Paragraph 8 of the final offer letter was likewise entitled “Confidential
Information,” and similarly stated, “Direct Commerce has developed and will continue to
develop key proprietary information crucial to its business” and provided Farrar, as a
condition of her employment, would “sign a Confidentiality Agreement in the form
delivered to you by Direct Commerce.” The closing paragraph of the final offer letter,
before the signature block, again asked Farrar to “[p]lease also sign the Assignment of
Inventions and Confidentiality Agreement enclosed with this letter and return it to us,
together with the signed copy of this letter.”
       Although Farrar signed the final offer letter on January 6, 2011, she states in her
opposing declaration that she did not actually receive the confidentiality agreement until
four days later, on January 10, 2011, when she started her employment. Farrar makes no
claim, however, that she objected to either the initial or final offer letter because the
referenced confidentiality agreement was not attached. Nor does she claim that she ever
asked for and was refused a copy of the confidentiality agreement.
       In Hanavan’s e-mail to Farrar attaching the final offer letter, he pointed out he had
“added the section about evaluating commission for Ongoing Fees at the end of year 2.”
He made no mention of the changes to paragraph 13 or of any other wording changes in
the final offer letter.
       The final offer letter and agreement provided Farrar with a $100,000 salary, plus
commissions and the opportunity for stock options. Direct Commerce was assisted by
counsel during the negotiations with Farrar. Farrar was not represented, but makes no
claim she asked for additional time or for the opportunity to review the offer letter with
counsel and was refused.

                                                 5
       Four years later, Direct Commerce terminated Farrar’s employment, and in June
2015, she sued the company, alleging breach of contract, conversion, wrongful
termination, breach of the covenant of good faith and fair dealing and failure to pay
wages owed and waiting time penalties.
       Direct Commerce moved to compel arbitration.
       The trial court denied its petition, concluding the arbitration provision was both
procedurally and substantively unconscionable. It ruled the provision was procedurally
unconscionable because Farrar “had no meaningful choice whether or not to accept the
arbitration agreement” and she was “ ‘surprised’ (as that term is used in the arbitration
agreement case law) by the change in providers, the absence of the rules attached, and the
Confidentiality Agreement not given to her until after she signed the letter of agreement.”
It ruled the provision was substantively unconscionable because of the exclusion for trade
secret claims.
                                       DISCUSSION
       “Unconscionability ‘ “ ‘refers to “ ‘an absence of meaningful choice on the part of
one of the parties together with contract terms which are unreasonably favorable to the
other party.’ ” As that formulation implicitly recognizes, the doctrine of
unconscionability has both a procedural and a substantive element, the former focusing
on oppression or surprise due to unequal bargaining power, the latter on overly harsh or
one-sided results.’ ” ’ (Baltazar v. Forever 21, Inc. (2016) 62 Cal. 4th 1237, 1243 . . .
(Baltazar).)” (Nguyen v. Applied Medical Resources Corp. (2016) 4 Cal.App.5th 232,
246 (Nguyen).)
       “Both procedural and substantive unconscionability must be present for the court
to refuse to enforce a contract under the doctrine of unconscionability although ‘they
need not be present in the same degree.’ (Baltazar, supra, 62 Cal.4th at p. 1243.)
Essentially, the court applies a sliding scale to the determination: ‘ “[T]he more
substantively oppressive the contract term, the less evidence of procedural
unconscionability is required to come to the conclusion that the term is unenforceable,
and vice versa.” ’ (Pinnacle Museum Tower Assn. v. Pinnacle Market Development

                                             6
(US), LLC (2012) 55 Cal. 4th 223, 247 . . . (Pinnacle).)” (Nguyen, supra, 4 Cal.App.5th
at p. 247.)
       “ ‘The ultimate issue in every case is whether the terms of the contract are
sufficiently unfair, in view of all relevant circumstances, that a court should withhold
enforcement.’ (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal. 4th 899, 912 . . . ;
see Baltazar, supra, 62 Cal.4th at p. 1245 [‘[c]ommerce depends on the enforceability, in
most instances, of a duly executed written contract[;] [a] party cannot avoid a contractual
obligation merely by complaining that the deal, in retrospect, was unfair or a bad
bargain’].)” (Nguyen, supra, 4 Cal.App.5th at p. 247.)
       “The trial court’s unconscionability determination, absent conflicting extrinsic
evidence, is a question of law subject to de novo review. (Pinnacle, supra, 55 Cal.4th at
p. 236.) ‘ “However, where an unconscionability determination ‘is based upon the trial
court’s resolution of conflicts in the evidence, or on the factual inferences which may be
drawn therefrom, we consider the evidence in the light most favorable to the court’s
determination and review those aspects of the determination for substantial evidence.’ ” ’
(Lhotka v. Geographic Expeditions, Inc. (2010) 181 Cal. App. 4th 816, 820–821 . . .
(Lhotka).)” (Nguyen, supra, 4 Cal.App.5th at p. 247.)
       In this case, the facts are undisputed. Accordingly, whether the arbitration
provision, set forth in paragraph 13, is procedurally and substantively unconscionable
present legal questions we examine anew. “ ‘In keeping with California’s strong public
policy in favor of arbitration, any doubts regarding the validity of an arbitration
agreement are resolved in favor of arbitration.’ ” (Nguyen, supra, 4 Cal.App.5th at
p. 247, quoting Lhotka, supra, 181 Cal.App.4th at p. 821.)
Procedural Unconscionability
       “ ‘ “[T]here are degrees of procedural unconscionability. At one end of the
spectrum are contracts that have been freely negotiated by roughly equal parties, in which
there is no procedural unconscionability . . . . Contracts of adhesion that involve surprise
or other sharp practices lie on the other end of the spectrum. Ordinary contracts of
adhesion, although they are indispensable facts of modern life that are generally enforced,

                                              7
contain a degree of procedural unconscionability even without any notable surprises, and
‘bear within them the clear danger of oppression and overreaching.’. . .” [Citation.] . . .
[C]ourts must be “particularly attuned” to this danger in the employment setting, where
“economic pressure exerted by employers on all but the most sought-after employees
may be particularly acute.” ’ (Baltazar, supra, 62 Cal.App.4th at p. 1244.)” (Nguyen,
supra, 4 Cal.App.5th at p. 246.)
       This case differs from many employment cases where applicants for staff or lower
level positions fill out a form employment application or are subsequently presented with
a form employment agreement on a take-it-or-leave it basis. (Compare Baltazar, supra,
62 Cal.4th at pp. 1241–1242.) Here we are dealing with a negotiated employment
agreement for a top level executive who had extensive experience in sales and business
development and held herself out as being experienced in contract negotiations. Thus,
the instant case falls closer to that end of the procedural unconscionablity spectrum where
contracts “ ‘have been freely negotiated by roughly equal parties’ ” than it does to the
other end of the spectrum, where a decidedly stronger party has employed “ ‘sharp
practices’ ” and “ ‘surprised’ ” the weaker party, resulting in significant procedural
unconscionability. (Baltazar, supra, 62 Cal.4th at p. 1244, quoting Gentry v. Superior
Court (2007) 42 Cal. 4th 443, 469 (Gentry), abrogated in part by statute as stated in
Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal. 4th 348, 366.)
       Farrar has averred, however, and Direct Commerce has not disputed, that while
she was able to negotiate the economic terms of her employment, she believed she could
not negotiate other terms, including the arbitration provision and the requirement that she
sign a separate confidentiality agreement.
       In Armendariz, the Supreme Court explained “ ‘[t]he term [contract of adhesion]
signifies a standardized contract, which, imposed and drafted by the party of superior
bargaining strength, relegates to the subscribing party only the opportunity to adhere to
the contract or reject it.’ ” (Armendariz v. Foundation Health Psychare Services, Inc.
(2000) 24 Cal. 4th 83, 113, abrogated in part on another ground in AT&T Mobility LLC v.
Concepcion (2011) 563 U.S. 333, 339–340, quoting Neal v. State Farm Ins. Cos. (1961)

                                              8
188 Cal. App. 2d 690, 694; see Armendariz, at p. 115 [the agreements were “imposed on
employees as a condition of employment and there was no opportunity to negotiate”].)
       Armendariz cited with approval to Stirlen v. Supercuts, Inc. (1997) 51 Cal. App. 4th
1519 (Stirlen), in which the Court of Appeal “concluded that the [employment]
agreement was one of adhesion, even though the employee in question was a high-level
executive, because of the lack of opportunity to negotiate.” (Armendariz, supra,
24 Cal.4th at p. 116.) In Stirlen, the plaintiff “appear[ed] to have had no realistic ability
to modify the terms of the employment contract. Undisputed evidence show[ed] that the
terms of the contract, which were cast in generic and gender-neutral language, were
presented to him after he accepted employment and were described as standard
provisions that were not negotiable.” (Stirlen, at p. 1534.) The plaintiff in Stirlen did
negotiate a side agreement covering stock options, bonus, and retirement plans and other
“ ‘extras,’ ” but this was set forth in a separate letter agreement executed more than a
month before he signed what the letter agreement referred to as the “ ‘standard
employment contract.’ ” (Ibid.)
       While the record in the instant case indicates Farrar had a greater opportunity to
negotiate the terms and conditions of her employment than did the plaintiff in Stirlen, the
fact remains she apparently had no opportunity to negotiate over the arbitration provision
or the requirement that she sign a confidentiality agreement, and apparently all
employees had to agree to these two conditions of employment. Accordingly, in these
two respects, the agreement was “adhesive.” (See Sanchez, supra, 61 Cal.4th at p. 915
[adhesive nature of contract “sufficient to establish some degree of procedural
unconscionability”].)
       We therefore turn to the question of the “degree” of procedural unconscionability
afflicting the agreement, since that governs the degree of scrutiny that should be brought
to bear in analyzing its substantive fairness. (See Baltazar, supra, 62 Cal.4th at
pp. 1245–1246 [while the adhesive nature of an employment contract requires that a court
“be ‘particularly attuned’ ” to a claim of unconscionability, a court will not subject such a

                                              9
contract “to the same degree of scrutiny as ‘[c]ontracts of adhesion that involve surprise
or other sharp practices’ ”], quoting Gentry, supra, 42 Cal.4th at p. 469.)
       Baltazar, which was decided after the trial court ruled in this case, provides
instructive guidance on this issue. In Baltazar, the plaintiff claimed the fact AAA rules
were not attached to the adhesive employment agreement heightened its procedural
unconscionability, thus calling for “closer scrutiny” of the agreement’s substantive
fairness. (Baltazar, supra, 62 Cal.4th. at p. 1246.) The Supreme Court first observed
there was no element of “surprise” because Baltazar knew about the arbitration provision;
in fact, she initially objected to it. (Id. at p. 1245 [she “was not lied to, placed under
duress, or otherwise manipulated into signing the arbitration agreement”].) It then ruled
failure to attach the arbitration rules was not an exacerbating feature of the adhesive
contract because the plaintiff’s unconscionability claim was not based on the substance of
the AAA rules, themselves. (Id. at p. 1246.)
       Following Baltazar, the Court of Appeal in Nyugen, also rejected an argument that
failure to attach arbitration rules elevated the procedural unconscionability of an adhesive
employment agreement. The plaintiff did not “claim he was lied to or otherwise
manipulated into signing” the form employment application, but asserted failure to attach
the AAA rules heightened the procedural unconscionability of the agreement, militating
“ ‘closer scrutiny’ ” of its substantive fairness. (Nyugen, supra, 4 Cal.App.5th at
pp. 248–249.) The appellate court disagreed—“Baltazar removed the nonprovision or
nonattachment of the AAA rules as a basis for increasing the procedural
unconscionability level.” (Id. at p. 249.)
       Here, as in Baltazar and Nyugen, Farrar cannot reasonably claim to be “surprised”
by the arbitration provision in the final offer letter. She received the offer letter before
she commenced work, so she “knew about the arbitration agreement.” (Baltazar, supra,
62 Cal.4th at p. 1245.) The arbitration provision was clearly set forth in the final offer
letter and easily read. (See Sanchez, supra, 61 Cal.4th at p. 914 [business “was under no
obligation to highlight the arbitration clause . . . nor was it required to specifically call
that clause to [the plaintiff’s] attention”].) The provision was also largely the same as the

                                               10
arbitration provision in the initial offer letter. While Farrar claims there were significant
differences between the arbitration paragraphs in the initial and final offer letters, that is
not the case. The arbitration provision in the final offer letter replaced AAA with ADR,
an equally well-known and reputable provider, added breach of contract claims to what
was merely an illustrative list of claims subject to an inclusive arbitration provision with
two specific exceptions, which remained the same, and made a slight modification in the
title of the confidentiality agreement.
       Nor, on this record, can Farrar point to the claimed failure to provide her with a
copy of the confidentiality agreement referenced in the arbitration provision as a basis for
heightened substantive scrutiny. The confidentiality agreement was referenced in three
different sections of both the initial and final offer letter— paragraph eight (entitled
“Confidential Information”), paragraph 13 (entitled “Arbitration”), and the final
paragraph above the signature block. When Hanavan e-mailed Farrar the initial offer
letter, he expressly invited her to call him if she wanted to discuss the proposal, and the
parties thereafter continued to negotiate the agreement. Thus, Farrar had every
opportunity to obtain a copy of the confidentiality agreement, and there is no evidence
she ever asked for a copy and was refused.2
       In sum, on this record, there is no evidence of “oppression” or “sharp practices,”
on the part of the company. Accordingly, heightened scrutiny of the arbitration provision
is not warranted.
Substantive Unconscionability
       In recent years, the Supreme Court has discussed substantive unconscionability at
some length. (See Baltazar, supra, 62 Cal.4th at pp. 1246–1250; Sanchez, supra, 61
Cal.4th at pp. 915–922; Armendariz, supra, 24 Cal.4th at pp. 113–121.)

       2
         Farrar claims in passing in her respondent’s brief that she is challenging the
substance of ADR’s rules and of the confidentiality agreement. But, she has provided no
analysis or discussion in that regard. Rather, she asserts the fact copies of the rules and
the confidentiality agreement were not attached to the final offer letter heightens its
procedural unconscionability, an assertion we reject in light of Baltazar and Nyugen.

                                              11
       “ ‘The unconscionability doctrine ensures that contracts, particularly contracts of
adhesion, do not impose terms that have been variously described as “ ‘ “overly
harsh” ’ ” (Stirlen [, supra,] 51 Cal.App.4th [at p.] 1532 . . . ), “ ‘unduly oppressive’ ”
(Perdue v. Crocker National Bank (1985) 38 Cal. 3d 913, 925 . . .), “ ‘so one-sided as to
“shock the conscience” ’ ” (Pinnacle [, supra,] 55 Cal.4th [at p.] 246 . . .), or “unfairly
one-sided” (Little [v. Auto Stiegler, Inc. (2003)] 29 Cal.4th [1064,] 1071 . . .). All of
these formulations point to the central idea that the unconscionability doctrine is
concerned not with “a simple old-fashioned bad bargain” (Schnuerle v. Insight
Communications Co. (Ky.2012) 376 S.W.3d 561, 575 . . .), but with terms that are
“unreasonably favorable to the more powerful party” (8 Williston on Contracts (4th ed.
2010) § 18:10, p. 91). These include “terms that impair the integrity of the bargaining
process or otherwise contravene the public interest or public policy; terms (usually of an
adhesion or boilerplate nature) that attempt to alter in an impermissible manner
fundamental duties otherwise imposed by the law, fine-print terms, or provisions that
seek to negate the reasonable expectations of the nondrafting party, or unreasonably and
unexpectedly harsh terms having to do with price or other central aspects of the
transaction.” (Ibid.)’ ” (Baltazar, supra, 62 Cal.4th at pp. 1244–1245, quoting Sonic-
Calabasas A, Inc. v. Moreno (2013) 57 Cal. 4th 1109, 1145 (Sonic II).)
       Accordingly, “[a] party cannot avoid a contractual obligation merely by
complaining that the deal, in retrospect, was unfair or a bad bargain. Not all one-sided
contract provisions are unconscionable; hence the various intensifiers in our
formulations: ‘overly harsh,’ ‘unduly oppressive,’ ‘unreasonably favorable.’ (See
Pinnacle, supra, 55 Cal.4th at p. 246 [‘A contract term is not substantively
unconscionable when it merely gives one side a greater benefit . . . .’].)” (Sanchez, supra,
61 Cal.4th at p. 911, italics omitted.)
       “An evaluation of unconscionability is highly dependent on context. (See
Williams v. Walker–Thomas Furniture Co. (D.C. Cir. 1965) 121 U.S. App.D.C. 315 . . .
[‘The test is not simple, nor can it be mechanically applied.’].) The doctrine often
requires inquiry into the ‘commercial setting, purpose, and effect’ of the contract or

                                              12
contract provision. (Civ. Code, § 1670.5, subd. (b); accord, Sonic II, supra, 57 Cal.4th at
pp. 1147–1148; Walker–Thomas Furniture, at p. 450 [unconscionability must ‘be
considered “in the light of the general commercial background and the commercial needs
of the particular trade or case” ’].)” (Sanchez, supra, 61 Cal.4th at pp. 911–912; see
Sonic II, supra, 57 Cal.4th at p. 1146 [“the unconscionability inquiry requires a court to
examine the totality of the agreement’s substantive terms as well as the circumstances of
its formation to determine whether the overall bargain was unreasonably one-sided”].)
       The “Carve-Out” for Confidentiality Claims
       Farrar claims the arbitration provision is substantively unconscionable because of
what she calls the “carve-out” for “any claim based on or related to the and Assignment
of Inventions & Confidentiality Agreement between you and Direct Commerce.” Farrar
maintains this exception makes the arbitration provision unduly one-sided because these
are the claims the company is most likely to bring, whereas the claims she is most likely
to bring must be arbitrated. She cites Armendariz as dispositive on this point.
       This oversimplifies Armendariz. In that case, the arbitration provision “was
limited in scope to employee claims regarding wrongful termination.” (Armendariz,
supra, 24 Cal.4th at p. 120.) “Although it did not expressly authorize litigation of the
employer’s claims against the employee . . . such was the clear implication of the
agreement.” (Ibid.) “The unconscionable one-sidedness of the arbitration agreement”
was “compounded” by the fact it did “not permit the full recovery of damages for
employees, while placing no such restriction on the employer.” (Id. at p. 121.) Thus,
Armendariz did not deal with an otherwise encompassing arbitration provision with a
carve-out, but rather, dealt with a narrow arbitration provision that pertained solely to
employee claims and also curtailed employee remedies.
       However, as we have observed, Armendariz cites favorably to Stirlen, and in
Stirlen the arbitration provision included a carve-out for certain claims, including “those
relating to the protection of the employer’s intellectual and other property.” (Armendariz,
supra, 24 Cal.4th at p. 116.) That was not all, however. The arbitration provision also
excluded “enforcement of a postemployment covenant not to compete,” required the

                                             13
employee to waive any jurisdictional challenge to litigation commenced in state or
federal court, limited any damages recovered by the employee to “ ‘ “actual damages for
breach of contract, less any proper offset for mitigation,” ’ ” and provided that upon the
filing of an arbitration claim, payments of any salary and benefits would “cease
‘ “without penalty to the Company,” ’ pending the outcome of the arbitration.” (Ibid.) It
additionally included a one-year limitations period for all arbitral claims, stated no
equitable doctrines could toll that period, and limited the powers of the arbitrator.
(Stirlen, supra, 51 Cal.App.4th at p. 1529.)
          The Court of Appeal characterized the employer as “[i]mplicitly conceding” the
“manifest one-sidedness” of the provision (Stirlen, supra, 51 Cal.App.4th at p. 1534), and
the Supreme Court in Armendariz described the lower appellate court as concluding the
provision lacked “even the ‘modicum’ ” of bilaterality. (Armendariz, supra, 24 Cal.4th at
p. 116.) The Supreme Court, thus, summarized Stirlen as a case in which “[t]he
employee pursuing claims against the employer had to bear not only with the inherent
shortcomings of arbitration—limited discovery, limited judicial review, [and] limited
procedural protections—but also significant damage limitations.” (Armendariz, at
p. 116.) “The employer, on the other hand, in pursuing its claims, was not subject to
these disadvantageous limitations and had written into the agreement special advantages,
such as the waiver of jurisdictional objections by the employee if sued by the employer.”
(Ibid.)
          The arbitration provision at issue here is not limited to employee wrongful
termination claims, as in Armendariz. Nor is it laden with the panoply of employer-
favorable provisions that stacked the deck in Stirlen. (See Carbajal v. CWPSC, Inc.
(2016) 245 Cal. App. 4th 227, 247 (Carbajal) [arbitration provision allowed employer to
obtain injunctive relief, waived bond requirement, waived right to attorney fees if
employee prevailed on Labor Code claims, provided employer with unilateral right to
appeal any arbitral ruling contrary to class action waiver].) It does, however, contain an
express exception for “any claim” based on the confidentiality agreement. (It also

                                               14
excludes claims under the worker’s compensation law, an exception to which Farrar has
no objection.)
       In Baltazar, the Supreme Court considered whether a provision allowing “ ‘either
party hereto may apply to a California court for any provisional remedy’ ” rendered the
arbitration agreement substantively unconscionable because the employer was far more
likely to avail itself of provisional judicial remedies, for example, in connection with a
trade secret claim or claim involving confidential information. (Baltazar, supra,
62 Cal.4th at pp. 1241, 1246–1247.) The court concluded this provision did no more than
restate the law, which allows for provisional judicial remedies in connection with arbitral
claims, and did not place the plaintiff at “an unfair disadvantage” even if such remedies
were more likely to be sought by the employer. (Id. at p. 1248.)
       The court also concluded providing that, during the course of an arbitration, the
parties would take “ ‘all necessary steps’ ” to protect the company’s trade secrets and
proprietary information, was not substantively unfair, even if it benefited the employer,
rather than the employee. (Baltazar, supra, 62 Cal.4th at p. 1250.) “ ‘ “[A] contract can
provide a ‘margin of safety’ that provides the party with superior bargaining strength a
type of extra protection for which it has a legitimate commercial need without being
unconscionable.” ’ Here, the basis for the extra measure of protection is a legitimate
commercial need to protect Forever 21’s ‘valuable trade secrets and proprietary and
confidential information’ from public disclosure. Although Baltazar may dislike the
wording of the confidentiality provision, she does not dispute that it is based on a
legitimate commercial need.” (Ibid.; see Sanchez, supra, 61 Cal.4th at pp. 921–922
[retention of “self-help” remedies, such as repossession, did not contribute to the
unconscionability of an adhesive auto sales contract; “remedy of repossession of
collateral is an integral part of the business of selling automobiles on credit and fulfills a
‘ “legitimate commercial need” ’ ” ], quoting Armendariz, supra, 24 Cal.4th at p. 117].)
       Thus, here, if the carve-out for claims arising out of the confidentiality agreement
were limited to securing provisional judicial remedies, under Baltazar, it could not be
considered substantively unconscionable at all. However, the exception is for more than

                                              15
immediate, provisional judicial remedies—it wholly excludes claims arising out of the
confidentiality agreement from arbitration.
       While a contract “ ‘ “can provide a ‘margin of safety’ that provides the party with
superior bargaining strength a type of extra protection for which it has a legitimate
commercial need without being unconscionable” ’ ” (Baltazar, supra, 62 Cal.App.4th at
p. 1250, quoting Armendariz, supra, 24 Cal.4th at p. 117), several courts have concluded
a complete carve-out for confidentiality-related claims results in unfair one-sidedness. In
Stirlen, for example, the arbitration provision excluded claims pertaining to patent
infringement, improper use of confidential information and competition. (Stirlen, supra,
51 Cal.App.4th at p. 1536.) The employer claimed “ ‘[s]imple business realities
underscore a need for this type of immediate access to court-ordered relief, which is
simply not present in the context of the standard employment dispute.’ ” (Ibid.) While
the court acknowledged that might justify a need for provisional judicial relief, such relief
was already secured by Code of Civil Procedure section 1281.8, subdivision (b). (Stirlen,
at p. 1537.) It could not justify a complete exclusion of infringement and confidentiality
claims. (Ibid.; see Carlson v. Home Team Pest Defense, Inc. (2015) 239 Cal. App. 4th
619, 634–635 (Carlson) [arbitration provision excluded employer claims seeking to
enforce anticompetitive covenants and confidentiality provisions; thus, employer was
“exempt from having to arbitrate its most likely claims” against the employee, whereas
employee “was required to relinquish her access to the courts for all of her nonstatutory
claims”].)
       We therefore conclude substantive unconscionability is present in the case at hand,
given that the carve-out is not limited to provisional judicial remedies as was the case in
Baltazar, but instead is a wholesale exception for “any claim based on or related to the
and Assignment of Inventions & Confidentiality Agreement between you and Direct
Commerce.”
       Severability
       Civil Code section 1670.5, subdivision (a) provides: “If the court as a matter of
law finds the contract or any clause of the contract to have been unconscionable at the

                                              16
time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable result.”
Comment two of the Legislative Committee comment on the statutes states: “Under this
section the court, in its discretion, may refuse to enforce the contract as a whole if it is
permeated by the unconscionability, or it may strike any single clause or group of clauses
which are so tainted or which are contrary to the essential purpose of the agreement, or it
may simply limit unconscionable clauses so as to avoid unconscionable results.” (Cal.
Civ. Code, § 1670.5, Legis. Comm. Comments, n. 2.)
       Thus, as the Supreme Court observed in Armendariz, while a trial court has
considerable discretion with respect to severability, the statute contemplates that refusal
to enforce an agreement altogether should be limited to situations where the agreement is
“ ‘permeated’ ” by unconscionability. (Armendariz, supra, 24 Cal.4th at p. 122.) The
court analogized to the law governing severance of illegal contract provisions. “Courts
are to look to the various purposes of the contract. If the central purpose of the contract
is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality
is collateral to the main purpose of the contract, and the illegal provision can be
extirpated from the contract by means of severance or restriction, then such severance
and restriction are appropriate.” (Id. at p. 124.)
       The high court concluded two factors in Armendariz weighed against severance of
the provisions rendering the arbitration agreement unconscionable. First, the agreement
contained “more than one unlawful provision”—i.e., it was wholly unilateral, requiring
only the employee to arbitrate her claims, and it had an “unlawful damages provision”
that attempted to limit any damages the employee recovered. (Armendariz, supra,
24 Cal.4th at p. 124.) “Such multiple defects indicate a systematic effort to impose
arbitration on an employee not simply as an alternative to litigation, but as an inferior
forum that works to the employer’s advantage.” (Ibid.) Second, “in the case of the
agreement’s lack of mutuality, such permeation is indicated by the fact that there is no
single provision a court can strike or restrict in order to remove the unconscionable taint

                                              17
from the agreement. Rather, the court would have to, in effect, reform the contract, not
through severance or restriction, but by augmenting it with additional terms.” (Id. at
pp. 124–125.) This was so because the arbitration provision was limited to employee
claims, and thus would have had to have been rewritten and expanded to also include
employer claims. (See id. at pp. 91–92, 120–121.)
       Other cases in which severance has been denied have also involved arbitration
provisions with numerous unconscionable features. (E.g., Carbajal, supra,
245 Cal.App.4th at pp. 247, 254 [arbitration agreement contained “three substantively
unconscionable terms”]; Carlson, supra, 239 Cal.App.4th at pp. 634–636, 639–640 [in
addition to excluding employer claims based on anticompetitive covenants and
confidentiality provisions, there were “other one-sided provisions”].)
       As we have explained, the arbitration provision in the instant case is afflicted with
only one substantively unconscionable provision, the exception for claims arising from
the confidentiality agreement (as we have noted, Farrar does not challenge the exception
for worker’s compensation claims). The provision otherwise applies to “any dispute”
that “arises relating to your employment or its termination,” and broadly states, “[t]he
types of claims that are subject to arbitration will include, but will not be limited to,
breach of contract, claims of improper termination of employment, claims of unlawful
discrimination and claims of sexual or other forms of harassment.” This language is
similar to that in the arbitration provision at issue in Baltazar, which the Supreme Court
held was not one-sided and by its plain terms made “clear that the parties mutually
agree[d] to arbitrate all employment-related claims.” (Baltazar, supra, 62 Cal.4th at
p. 1249.)
       Thus, in this case, the one aspect in which the arbitration provision is substantively
unconscionable is readily remedied—by severing out the exception for claims arising
from the confidentiality agreement. This is not a case in which the arbitration provision
is “permeated” by unconscionability and, thus, would have to be “reformed” in order to
eliminate unconscionability. (See Armendariz, supra, 24 Cal.4th at p. 125.) Nor does
severing out the offending carve-out result in an agreement contrary to that intended by

                                              18
Direct Commerce. The company retains its statutory rights under the Code of Civil
Procedure section 1281.8, subdivision (b) to seek provisional judicial remedies pending
arbitration, satisfying any need for “quick judicial intervention” to “safeguard” its
“proprietary information.” We therefore conclude, on this record, the trial court abused
its discretion in refusing to sever out the offending exception for claims arising from the
confidentiality agreement.
The Armendariz Cost Issue
       For the first time on appeal, in her respondent’s brief, Farrar maintains the
arbitration provision should not be enforced because it does not meet the enforceability
requirements set forth in Armendariz for mandatory employment arbitration agreements
that pertain to unwaivable statutory rights—and specifically, the requirement that an
employee not pay costs unique to arbitration. (Armendariz, supra, 24 Cal.4th at pp. 110–
113.) That Farrar did not make this argument in the trial court is understandable, given
that the bulk of her allegations concern an alleged breach of her employment agreement
and not an alleged violation of unwaivable statutory rights and, moreover, the alleged
breach of contract is the predicate for her claimed failure to timely pay wages. Although
we could disregard this belatedly raised contention as being waived, Armendariz provides
a ready roadmap as to how to address it.3
       In Armendariz, the arbitration provision had no “specific provisions on arbitration
costs.” (Armendariz, supra, 24 Cal.4th at p. 113.) Accordingly, to foreclose any
possibility that the former employees might be subject to costs over and above what they
would incur in pursuing their claims in court, the Supreme Court “interpret[ed] the
arbitration agreement . . . as providing”—consistent with the court’s holding that a
mandatory arbitration agreement covering FEHA (California Fair Employment and

       3
           Merely because an issue is one of law, does not give a party license to raise it for
the first time on appeal, as Farrar appears to suggest. Whether an appellate court will
entertain a belatedly raised legal issue always rests within the court’s discretion. (Poet,
LLC v. State Air Resources Bd. (2013) 218 Cal. App. 4th 681, 750–751.)

                                              19
Housing Act4) claims “impliedly obliges the employer to pay all types of costs that are
unique to arbitration”—that “the employer must bear the arbitration forum costs.” (Ibid.)
Notably, the court resolved this issue independently of, and, indeed, prior to, considering
whether the arbitration agreement was substantively unconscionable. (See id. at pp. 113–
127.)
        Here, the arbitration provision also has no “specific provisions on arbitration
costs.”5 (Armendariz, supra, 24 Cal.4th at p. 113.) Following the approach used by the
Supreme Court in Armendariz, we interpret the arbitration provision as impliedly
providing that “the employer must bear the arbitration forum costs.” (Ibid.; see Nguyen,
supra, 4 Cal.App.5th at pp. 255–256 [affirming ruling that the defendant employer “ ‘pay
all the costs of the arbitration other than those the plaintiff would necessarily pay in a
court proceeding’ ”].)
                                        DISPOSITION
        The order denying Direct Commerce’s petition to compel arbitration is reversed
and the matter remanded with directions to sever the exception for claims arising from
the confidentiality agreement, declare an implied requirement that Direct Commerce bear
arbitration forum costs, and grant the company’s petition to compel arbitration. Parties to
bear their own costs on appeal.

        4
            Government Code section 12900 et seq.
        5
          Rather, Farrar points to the ADR general arbitration rules as potentially making
her jointly and severally liable for the costs of arbitration. There is no impediment,
however, to a more specific, implied contractual requirement that an employer bear the
arbitration forum costs in cases involving nonwaivable statutory rights.

                                              20
                                                _________________________
                                                Banke, J.

We concur:

_________________________
Humes, P.J.

_________________________
Margulies, J.

A146944, Farrar v. Direct Commerce, Inc.

                                           21
Trial Court: San Francisco City and County Superior Court

Trial Judge: Hon. Harold E. Kahn

Counsel:

Sheppard, Mullin, Richter & Hampton LLP, Littler Mendelson, Nancy E. Pritikin and
Krista Stevenson Johnson for Defendant and Appellant.

McGuinn, Hillsman & Palefsky, Cliff Palefsky and Scott M. Stillman for Plaintiff and
Respondent.

                                          22