Ellis v. McKinnon Broadcasting Co.
23 Cal. Rptr. 2d 80, 18 Cal.App.4th 1796, 93 Cal. Daily Op. Serv. 7358 (1993)
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Rule of Law:
A contract provision that denies an employee commissions on sales for which payment is received after the employee's termination is unconscionable and unenforceable if it results from unequal bargaining power, surprise, and is substantively unreasonable as it exacts a penalty far in excess of any detriment to the employer.
Facts:
- In December 1986, KUSI hired John Ellis as an advertising account executive under an oral agreement for a 20 percent commission on collections, a $2,166 monthly draw, and a three-month salary guarantee.
- Approximately two weeks after Ellis started, KUSI presented him with a written employment contract, stating it was a mere 'formality,' which Ellis signed after scanning for his commission rate and draw.
- The written contract, which superseded prior oral agreements, contained a clause stating that no commissions would be paid to Ellis on advertising fees received by KUSI after his employment terminated.
- In June 1987, KUSI presented Ellis with a virtually identical second written contract, which he also signed.
- On March 17, 1989, Ellis voluntarily left KUSI after becoming aware of the forfeiture provision upon rereading his contract.
- After Ellis's departure, KUSI collected nearly $100,000 in advertising fees from sales Ellis had made during his employment, but Ellis did not receive commissions on these collections.
Procedural Posture:
- John Ellis brought his claim regarding unpaid commissions before the Labor Commission.
- The Labor Commission found in Ellis's favor and awarded him damages.
- McKinnon Broadcasting Co. (KUSI) obtained a trial de novo in the superior court.
- The superior court, acting as a court of first instance for the de novo trial, found in favor of KUSI.
- John Ellis appealed the superior court's decision to the California Court of Appeal, Fourth Appellate District.
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Issue:
Is a forfeiture provision in an employment contract, which denies an advertising salesperson commissions on fees collected after termination for sales made before termination, unconscionable and thus unenforceable?
Opinions:
Majority - Wiener, Acting P.J.
Yes, the forfeiture provision denying an advertising salesperson commissions on fees collected after termination for sales made before termination is unconscionable and thus unenforceable. The court first determined that the contract was unambiguous. While Ellis argued that "earned" (in one section) and "collected" (in another) created ambiguity, the court reconciled these by reading the contract as a whole, particularly paragraphs 4(a) and 4(b), which clearly linked commission payment to collection and denied post-termination commissions. However, the court found the provision unconscionable, applying the two-pronged test from A & M Produce Co. v. FMC Corp. (procedural and substantive unconscionability). Procedural unconscionability was present due to both "surprise" (Ellis was presented with the contract without warning, told it was a "formality," and had no reason to suspect an "unusual" forfeiture term, especially given he had moved for the job) and "oppression" (unequal bargaining power; KUSI was a corporation, Ellis a single employee, and the contract was a preprinted form with limited negotiable terms). Substantive unconscionability was found because the provision was "overly harsh" and lacked justification. KUSI's arguments that the provision accounted for postsale servicing (which was only 10-15% of the job) or the initial guaranteed salary were unpersuasive, as the nearly $20,000 forfeiture was grossly disproportionate to any potential detriment to KUSI. The court rejected the applicability of Division of Labor Standards Enforcement v. Dick Bullis, Inc. because it did not consider unconscionability and involved a different factual scenario where the "sale" wasn't complete until delivery. Because the provision was both procedurally and substantively unconscionable, it was deemed unenforceable, and the judgment was reversed with directions to enter judgment for Ellis.
Analysis:
This case significantly reinforces the application of the unconscionability doctrine to employment contracts, particularly in California. It demonstrates that courts will scrutinize standard form contracts for terms that exploit unequal bargaining power and lead to unfair, disproportionate outcomes, even if the terms are unambiguous. The decision highlights the "sliding scale" approach to unconscionability, where strong evidence of substantive unconscionability can overcome weaker showings of procedural unconscionability, protecting employees from forfeiture clauses that amount to an unreasonable penalty. This case serves as a cautionary tale for employers drafting standardized agreements, emphasizing the need for justifiable and balanced contractual terms.
