Smith v. VMware, Inc. et al

Northern District of California, cand-4:2015-cv-03750

Order by Hon. Thelton E. Henderson granting {{76}} Motion to Compel Arbitration, and dismissing without prejudice. Signed on 01/05/16. (tehlc1S, COURT STAFF)

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2 1 UNITED STATES DISTRICT COURT 2 NORTHERN DISTRICT OF CALIFORNIA 3 4 DANE SMITH, Case No. 15-cv-03750-TEH 5 Plaintiff, ORDER GRANTING DEFENDANT'S 6 v. MOTION TO COMPEL ARBITRATION 7 VMWARE, INC., 8 Defendant. 9 10 This matter came before the Court on December 21, 2015 for a hearing on 11 Defendant's motion to compel arbitration. After carefully considering the parties' written 12 and oral arguments, the Court now GRANTS Defendant's motion and hereby DISMISSES Northern District of California United States District Court 13 all of Plaintiff's remaining claims without prejudice. 14 15 BACKGROUND 16 Plaintiff Dane Smith ("Smith") is a former employee of Defendant VMware, Inc. 17 ("VMware"), a large software company which specializes in cloud infrastructure and 18 virtualization software, and contracts with the United States Government. Smith worked at 19 VMware's headquarters in Palo Alto from 2005 to 2010. Mot. at 6 (Docket No. 76). 20 Prior to starting his employment with VMware, Smith received an offer letter, 21 which contained some terms of employment, such as his salary and benefits, but did not 22 mention arbitration. Ex. 1 to Smith Decl. at 4-5 (Docket No. 77-1). On his first day of 23 work on August 1, 2005, Smith signed a "Key Employment Agreement" ("the 24 Agreement"), which stated in pertinent part: 25 I agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of 26 this Agreement, shall be settled by arbitration to be held in Santa Clara County, California, in accordance with the rules 27 then in effect of the American Arbitration Association. 28 2 1 Ex. A to Gannaway Decl. at 5 (Docket No. 76-2). From 2005 to 2008, Smith worked as 2 Vice President of Sales for the Americas. Opp'n at 5 (Docket No. 77). While employed in 3 that position, Smith discovered that the United States Government was not receiving the 4 appropriate price on VMware products, and began investigating VMware's pricing 5 practices. Id. Smith was demoted in 2008 and again in 2009, and was terminated in 6 January of 2010, effective March 15, 2010. Id. at 5-6. 7 Smith contends that he was retaliated against – and ultimately terminated – because 8 of his investigation of VMware's fraudulent federal pricing practices. Id. at 5-6. He filed 9 a complaint in the United States District Court for the Eastern District of Virginia on July 10 9, 2010, alleging representative claims on behalf of the United States, as well as claims of 11 retaliation and wrongful termination, under the False Claims Act ("FCA"). Id. at 6-7. 12 The complaint was initially sealed pending resolution of the FCA representative Northern District of California United States District Court 13 claims, which were settled in June of 2015. Id. at 5 n.2; Order on Dismissal Stip. (Docket 14 No. 57). Thus, Smith's only remaining claims are his FCA retaliation and wrongful 15 termination claims. Opp'n at 6-7. Among other relief, Smith seeks compensatory, 16 statutory and punitive damages, as well as reinstatement to his pre-retaliation job position, 17 as permitted under the FCA. 18 19 LEGAL STANDARD 20 The Federal Arbitration Act ("FAA") applies to arbitration agreements in any 21 contract affecting interstate commerce. See Circuit City Stores, Inc. v. Adams, 532 U.S. 22 105, 119 (2001); 9 U.S.C. § 2. Section 4 of the FAA ensures that "private agreements to 23 arbitrate are enforced according to their terms." Volt Info. Scis., Inc. v. Bd. of Trs. of 24 Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989). Accordingly, a party to an 25 arbitration agreement can petition a United States District Court for an order directing that 26 "arbitration proceed in the manner provided for in such agreement." 9 U.S.C. § 4. 27 Under the FAA, arbitration agreements "shall be valid, irrevocable, and enforceable 28 save upon such grounds as exist at law or in equity for the revocation of any contract." 9 2 2 1 U.S.C. § 2. "[T]he FAA's purpose is to give preference (instead of mere equality) to 2 arbitration provisions." Mortensen v. Bresnan Commc'ns, LLC, 722 F.3d 1151, 1160 (9th 3 Cir. 2013). Nonetheless, arbitration "is a matter of consent, not coercion." Volt, 489 U.S. 4 at 479. In accordance with this principle, the Supreme Court has held that parties may 5 agree to limit the issues subject to arbitration, and to arbitrate according to specific rules. 6 Id; Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 628 (1985). 7 "The party seeking arbitration bears the burden of proving the existence of an 8 arbitration agreement, and the party opposing arbitration bears the burden of proving any 9 defense, such as unconscionability." Pinnacle Museum Tower Assn. v. Pinnacle Market 10 Dev., LLC, 55 Cal. 4th 223, 236 (2012). Furthermore, "the party resisting arbitration bears 11 the burden of proving that the claims at issue are unsuitable for arbitration." Green Tree 12 Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 91 (2000) (internal citations omitted). A court Northern District of California United States District Court 13 must defer to arbitration "unless it may be said with positive assurance that the arbitration 14 clause is not susceptible of an interpretation that covers the asserted dispute," and "doubts 15 should be resolved in favor of coverage." AT&T Tech, Inc. v. Commc'ns Workers of Am., 16 475 U.S. 643, 650 (1986). 17 18 DISCUSSION 19 In ruling on a motion to compel arbitration, a district court's inquiry is two-fold. 20 The Court decides "(1) whether a valid agreement to arbitrate exists; and if it does, (2) 21 whether the agreement encompasses the dispute at issue." Cox v. Ocean View Hotel Corp., 22 533 F.3d 1114, 1119 (9th Cir. 2008) (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 23 207 F.3d 1126, 1131 (9th Cir. 2000)). At the outset, this Court notes that Judge Davila 24 considered the enforceability of the same arbitration provision 1 in a 2012 suit by a 25 1 26 Defendant attached both Smith's "Key Employment Agreement" and Laughlin's "Employment Agreement" to demonstrate the similarity of the agreements to the Court. 27 Exs. A and B, respectively, to Gannaway Decl. The Court notes that the titles of the agreements differ slightly; and Smith's "Category of Employment" box is not checked, 28 while Laughlin's agreement has the "Regular Employee" box checked. Other than those differences, the agreements – including the arbitration provisions – are identical. 3 2 1 different VMware employee, Elizabeth Laughlin ("Laughlin"). Laughlin v. VMware, Inc., 2 No. 11-CV-005530, 2012 WL 298230 (N.D. Cal. Feb. 1, 2012). Laughlin did not file suit 3 under the FCA; rather her claim was a misclassification claim. Id. at *1. In Laughlin, 4 Judge Davila ultimately found the arbitration clause valid, despite some unconscionability, 5 because the substantively unconscionable provisions could be severed. Id. at 7. 6 7 I. The Agreement is Valid and Enforceable 8 Arbitration clauses may be invalidated "based on the same grounds as exist in law 9 or in equity for revocation of a contract," such as fraud, duress, or unconscionability. 9 10 U.S.C. § 2; Laughlin, 2012 WL 298230, at *2. Thus, to assess the validity of an arbitration 11 clause, the Court applies state law; here, California state law applies. 2 Smith argues that 12 the arbitration clause, and the Agreement as a whole, is invalid due to unconscionability. Northern District of California United States District Court 13 "Under California law, a contractual clause is unenforceable if it is both 14 procedurally and substantively unconscionable." Davis v. O'Melveny & Myers, 485 F.3d 15 1066, 1072 (9th Cir. 2007). Procedural unconscionability focuses on "oppression or 16 surprise due to unequal bargaining power;" substantive unconscionability focuses on 17 "overly harsh or one-sided results." Armendariz v. Found. Health Psychcare Servs., Inc., 18 24 Cal. 4th 83, 114 (2000) (internal quotation marks and citations omitted). Both elements 19 must be present, but courts employ a "sliding scale," whereby a stronger showing on one 20 may make up for a weaker showing on the other. Id. Smith bears the burden of proving 21 unconscionability. Pinnacle, 55 Cal. 4th at 236. 22 23 /// 24 /// 25 /// 26 27 2 Defendant's headquarters are in Palo Alto, California, and the Agreement specifies that it 28 "will be governed by the laws of the State of California as they apply to contracts…" Ex. A to Gannaway Decl. at 6. 4 2 1 A. Some procedural unconscionability exists, but it is insufficient to 2 invalidate the Agreement on its own. 3 Turning to procedural unconscionability, the Court considers "the manner in which 4 the contract was negotiated and the circumstances of the parties at that time;" not only 5 focusing on the contract itself. Soltani v. W. & S. Life Ins. Co., 258 F.3d 1038, 1042 (9th 6 Cir. 2001) (quoting Kinney v. United Healthcare Servs., Inc., 70 Cal. App. 4th 1322, 1327 7 (1999)). Courts consider whether an agreement was a contract of adhesion – a 8 standardized contract imposed on a party of weaker bargaining strength on a "take it or 9 leave it" basis. Armendariz, 24 Cal. 4th at 113. Courts also consider whether the 10 presentation of the contract constituted "oppression" or "surprise." Id. at 114. 11 Smith points out that the Agreement at issue was presented on a pre-printed form 12 which was not tailored in any way to Smith – in fact, the box indicating the applicable Northern District of California United States District Court 13 "category of employment" was not even checked, and Smith's name and position were 14 nowhere in the Agreement. Opp'n at 7; Ex. A to Gannaway Decl. at 2. It is undisputed 15 that this was a standardized contract; thus it could be considered a contract of adhesion 16 depending on the bargaining power of the parties and the circumstances under which it was 17 presented. Smith alleges that he was not given the opportunity to negotiate the terms of 18 the Agreement, and that the Agreement was provided on a take it or leave it basis. Opp'n 19 at 7. Smith also argues that VMware, as one of the largest software companies in the 20 world, had much greater bargaining power than a single employee. Id. 21 "Oppression" is present when the person against whom the contract is sought to be 22 enforced had such little bargaining power that no real negotiation occurred. Ingle v. 23 Circuit City Stores, Inc., 328 F.3d 1165, 1172 (9th Cir. 2003). While it is true that a large 24 company has greater bargaining power than a single employee, the Court finds it important 25 to note that Smith was not a low-level employee; rather he was an Executive with a base 26 salary of $225,000 (and could earn up to $450,000 per year) plus stock options. Ex. 1 to 27 Smith Decl. The burden is on Smith to demonstrate unconscionability; the Court finds that 28 5 2 1 he did not meet this burden. Smith alleged no specific facts that he was pressured to sign 2 the Agreement quickly, or that he wanted more time or to consult with an attorney but 3 could not. At oral argument, Smith's counsel emphasized that VMware did not provide 4 any examples of employees who had negotiated away their arbitration provisions, and thus 5 there must be no opportunity. However, the Court accepting this extrapolation would 6 improperly shift the burden of proof to VMware. 7 Finally, Smith points to the fact that he was not given a copy of the American 8 Arbitration Association ("AAA") Rules referenced in the Agreement. Opp'n at 10. The 9 Court finds that the failure to attach a copy of the rules did not render the Agreement 10 procedurally unconscionable, because of the lack of surprise due to the availability of the 11 rules online. Lane v. Francis Capital Managm't LLC, 224 Cal. App. 4th 676, 691 (2014) 12 ("There could be no surprise, as the arbitration rules referenced in the agreement were Northern District of California United States District Court 13 easily accessible to the parties – the AAA rules are available on the Internet."). 14 Furthermore, as an Executive for a software company, this Court finds it difficult to 15 believe that Smith would have any trouble locating the AAA Rules. 16 For these reasons, the Court finds the Agreement to be somewhat procedurally 17 unconscionable due to the standardized nature of the contract itself, but not to such a great 18 extent that it would invalidate the agreement without a strong showing of substantive 19 unconscionability that could not be severed from the Agreement. 20 21 B. Some provisions of the Agreement are substantively unconscionable. 22 Turning to substantive unconscionability, the Court focuses on the terms of the 23 Agreement, and whether the results are "overly harsh" or "one-sided," and whether 24 mutuality exists. Armendariz, 24 Cal. 4th at 114; Pokorny v. Quixtar, Inc., 601 F.3d 987, 25 997-98 (9th Cir. 2010). "A contract term is not substantively unconscionable when it 26 merely gives one side a greater benefit; rather the term must be 'so one-sided as to shock 27 the conscience.'" Pinnacle, 55 Cal. 4th at 246 (quoting 24 Hour Fitness, Inc. v. Super. Ct, 28 66 Cal. App. 4th 1199, 1213 (1998)). Here, Smith argues that the substantively 6 2 1 unconscionable terms of the arbitration clause are: (1) the cost splitting and attorney's fees 2 provision; (2) the choice of forum provision; and (3) the use of AAA Rules. 3 4 1. Fee- and Cost-Splitting Provisions 5 The arbitration clause in the Agreement provides that VMware and Smith "shall 6 each pay one-half of the costs and expenses of such arbitration, and each of [them] shall 7 separately pay [their] counsel fees and expenses." Ex. A to Gannaway Decl. at 5. 8 In the context of an arbitration agreement, a "fee-splitting provision is not per se 9 substantively unconscionable under California law … [although] to the extent the fee- 10 splitting provision would impede [a plaintiff] from vindicating statutory rights, it would be 11 unenforceable and illegal under California law as contrary to public policy." Nagrampa v. 12 MailCoups, Inc., 469 F.3d 1257, 1285 (9th Cir. 2006); see also Armendariz, 24 Cal. 4th at Northern District of California United States District Court 13 110-11 (arbitration process cannot require employee to "bear any type of expense that the 14 employee would not be require to bear if he or she were free to bring the action in court."). 15 Here, if Smith were to prevail on his claim in court, he would be awarded his attorney's 16 fees because the Fair Labor Standards Act provides a one-way fee shifting provision to 17 benefit prevailing employees. See 29 U.S.C. § 216(b). Here, the fee-shifting provision in 18 the Agreement would deny Smith this statutory right and force him to bear the additional 19 expense of his attorney's fees; thus, the provision is substantively unconscionable. 20 Similarly, a cost-splitting provision is unconscionable if it creates a "substantial 21 economic barrier to justice." Circuit City, 279 F.3d at 894. Here, the clause requires the 22 parties to share the costs and expenses of arbitration – which can be extremely high – and 23 the arbitrator cannot alter this allocation. Thus, the cost-splitting provision is also 24 unconscionable. 25 26 /// 27 /// 28 /// 7 2 1 2. Choice of Forum 2 The choice of forum clause at issue in the Agreement reads as follows: 3 b. Equitable Remedies. I agree that it would be impossible 4 or inadequate to measure and calculate the Company's damages from any3breach of the covenants set forth in Section 5 2, 3 and 5 herein. Accordingly, I agree that if I breach any such Section, the Company will have available, in addition to 6 any other right or remedy available, the right to obtain an injunction from a court of competent jurisdiction restraining 7 such breach or threatened breach and to specific performance of any such provision of this Agreement. 8 9 Ex. A to Gannaway Decl. at 5. In Laughlin, Judge Davila found the provision at first to be 10 substantively unconscionable due to the one-sided nature of the clause, but found that the 11 clause was reasonably justified by a business purpose, and was therefore not 12 unconscionable. Laughlin, 2012 WL 298230, at *6 ("[W]ithout the ability to restrain Northern District of California United States District Court 13 breaches of intellectual property, subsequent arbitration could be rendered meaningless."). 14 The Court agrees with Judge Davila, and finds that the clause is reasonably justified by a 15 business purpose, and is necessary to protect VMware's intellectual property. The plain 16 language of the provision is sufficiently narrow: it only grants provisional injunctive relief 17 from breaches of VMware's intellectual property. Furthermore, such a provision in a 18 software company's employment agreement is not so one-sided as to shock the conscience. 19 The Court is also unconvinced by Smith's argument that there is no business 20 purpose to preclude employees from the same relief. The equitable relief that Smith seeks 21 – reinstatement to his pre-retaliation job position – is not related to intellectual property, 22 and is also available through arbitration. See Rule 39(d), AAA Emp't Arbitration Rules & 23 Mediation Procedures ("AAA Rules") at 29. 4 24 25 26 3 Sections 2, 3 and 5 are titled "Confidential Information," "Inventions," and "No 27 Solicitation of Employees," respectively; all three sections concern VMware's intellectual property. 4 28 The AAA Rules are available at ADRSTG_004362&revision=latestreleased. 8 2 1 3. AAA Rules 2 Finally, the arbitration clause states that the arbitration will proceed "in accordance 3 with the rules then in effect of the American Arbitration Association." Ex. A to Gannaway 4 Decl. at 5. Such language incorporates the applicable AAA Rules into the terms of the 5 Agreement itself. Cox, 533 F.3d at 1122. Smith contends that the AAA Rules make the 6 Agreement substantively unconscionable, noting by way of example that discovery is not 7 guaranteed under the AAA Rules but is instead subject to the discretion of the arbitrator. 8 The AAA Rule relating the discovery states: 9 The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or 10 otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the 11 expedited nature of arbitration. 12 Rule 9, AAA Rules at 19. Smith cites Winston v. Academi Training Center, No. 12-CV- Northern District of California United States District Court 13 767, 2013 WL 989999 (E.D. Va. Mar. 13, 2013), for the proposition that unconscionability 14 is increased when discovery is limited. However, Winston did not involve the AAA Rules, 15 but rather rules set forth by the defendant company providing that "no discovery is allowed 16 in arbitration." Id. at *2. Here, the Court finds that allowing, "full and fair exploration of 17 the issues in dispute" does not curtail discovery to the extent that the AAA Rule pertaining 18 to discovery is substantively unconscionable. A benefit of arbitration is the expedited 19 nature of the proceedings; thus it does not "shock the conscience" that the arbitrator would 20 have the power to limit discovery as s/he sees fit. 21 22 C. The substantively unconscionable provisions can be severed. 23 An unconscionable provision of an arbitration agreement may be severed to retain 24 the remaining provisions. Rent-A-Center, West, Inc., v. Jackson, 561 U.S. 63, 71-72 25 (2010). However, under California law, an arbitration agreement that is "permeated" or 26 "tainted" with multiple unconscionable provisions, such that the provisions cannot be 27 severed without reforming the contract, is unenforceable. Armendariz, 24 Cal. 4th at 123- 28 25. Courts consider whether the offending clauses are central or collateral to the purpose 9 2 1 of the agreement, and what the resulting agreement will look like after severance. Davis, 2 485 F.3d at 1066, 1084 (severance not possible if striking provisions would "gut" 3 agreement). If the number of unconscionable provisions indicate "a systematic effort to 4 impose arbitration on the employee" with the purpose of disadvantaging the employee, 5 severance is not possible. Armendariz, 24 Cal. 4th at 124. 6 Here, the Court has identified two areas of substantive unconscionability – the cost- 7 splitting and attorney's fees provisions – which are found in the same sentence of the 8 Agreement. The Court finds that these provisions are easily severable, as they do not 9 permeate the Agreement; also the presence of a severability clause 5 makes severance more 10 feasible. See, e.g,. Grabowski v. Robinson, No. 10-CV-1658, 2011 WL 4353998, at *18 11 (S.D. Cal. Sept 19, 2011) (three unconscionable provisions did not permeate agreement, 12 and agreement had a severability clause; thus unconscionable provisions were severable). Northern District of California United States District Court 13 Smith has not met his burden of showing that the Agreement is so permeated with 14 unconscionability that severance is not possible, and the unconscionability that is present 15 does not indicate a systematic effort to disadvantage Smith. Thus, the Court severs the 16 cost-splitting and attorney's fees provisions from the Agreement pursuant to California 17 Civil Code Section 1670.5. 18 At oral argument, Smith's counsel argued that if the fee- and cost-splitting 19 provisions were severed from the Agreement, Smith would be left unsure about his rights 20 in arbitration. However, as noted before, the reference to the AAA Rules in the Agreement 21 serves to incorporate the Rules themselves into the Agreement, so when the provisions are 22 severed from the Agreement, the fee and cost allocation will be governed by the applicable 23 AAA Rules. Notably, Rule 39(d) states: "The arbitrator may grant any remedy or relief 24 that would have been available to the parties had the matter been heard in court including 25 awards of attorney's fees and costs, in accordance with applicable law." AAA Rules at 29. 26 27 5 The severability clause provides that "[i]f one or more of the provisions in this 28 Agreement is deemed void by law, then the remaining provisions will continue in full force and effect." Ex. A to Gannaway Decl. at 6. 10 2 1 Thus, when the claims are submitted to arbitration, Smith will not only have injunctive 2 relief in the form of reinstatement available (in accordance with the FCA), but if he 3 prevails he will recover his attorney's fees (in accordance with the mandatory fee-shifting 4 provision of the FLSA). 5 6 II. The Agreement Covers the Dispute at Issue 7 Courts deny motions to compel arbitration if "it may be said with positive assurance 8 that the arbitration clause is not susceptible of an interpretation that covers the asserted 9 dispute." AT&T, 475 U.S. at 650. Furthermore, under the FAA, any doubts that courts 10 may have about the scope of arbitrable issues should be resolved in favor of arbitration. 11 Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25 (1983). Here, 12 the dispute at issue is retaliation and wrongful termination. The language in the Northern District of California United States District Court 13 Agreement defining the scope of arbitration reads: "I agree that any dispute or controversy 14 arising out of or relating to any interpretation, construction, performance or breach of this 15 Agreement, shall be settled by arbitration…" Ex. A to Gannaway Decl. at 5. 16 The language "arising out of or relating to" and "any dispute or controversy" makes 17 the clause very broad and inclusive. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 18 914, 922 (9th Cir. 2011); Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999) 19 (such language "reaches every dispute between the parties having a significant relationship 20 to the contract and all disputes having their origin or genesis in the contract"); EFund 21 Capital Partners v. Pless, 150 Cal. App. 4th 1311, 1322 (2007) (such language "extends 22 beyond contract claims to encompass tort causes of action"). However, Smith contends 23 that because of the language only considers claims arising out of or relating to the 24 Agreement, not the employment relationship, the wording is not as broad as it seems. 6 25 Smith also argues that FCA claims are not claims for violating the Agreement; they are 26 separate and independent claims from the contract itself. 27 6 28 Smith cites U.S. v. Paige, 566 F. App'x 500 (6th Cir. 2014). However, the Paige clause was not as broad as the clause here, because it did not contain the "relating to" language. 11 2 1 As a matter of logic, the Court finds that the Agreement sets forth the relationship 2 between the parties and their rights therein; thus, both retaliation and wrongful termination 3 claims, at the very least, relate to the parties' relationship. Because the language is very 4 broad and the employment claims at issue relate to the Agreement, and the Court must 5 resolve disputes in favor of arbitration, the Court finds that the arbitration clause 6 encompasses the remaining FCA claims. 7 8 III. The Court Exercises its Discretion to Dismiss the Entire Action 9 Section 3 of the FAA requires courts to stay actions pending arbitration. 9 U.S.C. § 10 3. However, the Court has discretion to dismiss the action in its entirety, rather than stay 11 the action, if all of the remaining claims asserted in the complaint must be submitted to 12 arbitration. Sparling v. Hoffman Constr. Co., 846 F.2d 635, 638 (9th Cir. 1988). Here, all Northern District of California United States District Court 13 remaining claims must be arbitrated, so the Court exercises its discretion and dismisses the 14 remaining claims. 15 16 CONCLUSION 17 For the reasons stated above, the Court GRANTS Defendant's motion to compel 18 arbitration. All of Plaintiff's remaining claims shall be submitted to arbitration; thus, the 19 Court DISMISSES the entire action without prejudice. 20 21 IT IS SO ORDERED. 22 23 Dated: 01/05/06 _____________________________________ THELTON E. HENDERSON 24 United States District Judge 25 26 27 28 12