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Farrar v. Direct Commerce, Inc.

California Court of Appeals, First District, First Division

March 23, 2017

WILSON FARRAR, Plaintiff and Respondent,
v.
DIRECT COMMERCE, INC., Defendant and Appellant.

         San Francisco City and County Superior Court, No. CGC-15-546622 Hon. Harold E. Kahn Judge

          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.

          BANKE, J.

         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 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 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.

         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 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.

         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 ...


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