Judge: Alison Mackenzie, Case: 24STCV23557, Date: 2024-12-05 Tentative Ruling
Case Number: 24STCV23557 Hearing Date: December 5, 2024 Dept: 55
NATURE OF PROCEEDINGS: Hearing on Defendants' Motion
to Compel Arbitration
Defendants' Motion
to Compel Arbitration is granted.
BACKGROUND
Plaintiff Casey Keisuke
Deguchi filed this PAGA action against his employer Paramount Exclusive Insurance Services (Paramount),
and its owner Shahab Kohen (collectively
“Defendants”), alleging labor code
violations.
The causes of action are: (1) Failure to Furnish Timely and
Accurate Itemized Wage Statements; (2) Failure to Pay Minimum Wages; (3)
Failure to Pay Overtime Wages; (4) Failure to Provide Meal Periods; (5) Failure
to Provide Rest Periods; (6) Failure to Provide Personnel File; (7) Failure to
Provide Sick Leave; (8) Failure to
Reimburse Business Expenses; (9) Violation of the Unfair Competition Law; (10) Willful
Misclassification of Employee; (11) Failure to Pay Compensation Due Upon
Separation; and (12) Civil Penalties Under the California Private Attorney’s
General Act.
Defendants filed a Motion to Compel Arbitration. Plaintiff filed
an opposition.
LEGAL STANDARD
“On petition of a party to an arbitration agreement alleging
the existence of a written agreement to arbitrate a controversy and that a
party to the agreement refuses to arbitrate that controversy, the court shall
order the petitioner and the respondent to arbitrate the controversy if it
determines that an agreement to arbitrate the controversy exists….” Code Civ.
Proc. § 1281.2. “The party seeking arbitration bears the burden of proving the
existence of an arbitration agreement, and the party opposing arbitration bears
the burden of proving any defense, such as unconscionability.” Pinnacle
Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012)
55 Cal.4th 223, 236 (Pinnacle)
ANALYSIS
On or around April 17, 2019, Plaintiff signed an Arbitration
Agreement acknowledging his obligation to submit disputes arising out of his
commission agreements and out of his work relationship with Defendants to
arbitration. Declaration of Kristina Rodriguez (“Rodriguez Decl.”) ¶ 7, Ex. 1; Declaration
of Casey Deguchi (“Deguchi Decl.”) ¶ 6.
A. Governing Law
As an initial matter, Defendants argue that the parties’ arbitration
agreement is governed by the Federal Arbitration Act (FAA). The FAA applies to arbitration
agreements arising out of transactions involving interstate commerce. 9 U.S.C.
§ 2. The term “commerce,” as in used in section 2 of FAA, invokes a “full
exercise of constitutional power” and “signals an intent to exercise Congress'
commerce power to the full.” Allied-Bruce
Terminix Cos. v. Dobson (1995) 513 U.S. 265, 277. Paramount engages in
transactions involving interstate commerce by writing out-of-state insurance
policies for clients out-of-state and across the United States. (Rodriguez Decl.,
¶ 3). However, “contracting parties may agree that the FAA will not govern
their arbitration even if the contract involves interstate commerce.” Mastick
v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1263 (Mastick)
(citing Volt Info. Scis. v. Bd. of Trs. (1989) 489 U.S. 468, 470).
Here, the arbitration agreement provides “This Agreement
shall be construed and controlled by the laws of the State of California….” Rodriguez
Decl. Ex. 1. This California choice-of-law provision is sufficient to show the
parties’ intent that the California Arbitration Act (CAA), Cal. Civ. Proc. Code
Ann. § 1280 et seq, not the FAA, apply to these proceedings. See
Mastick, supra, 209 Cal.App.4th at p. 1263 (holding CAA applied where
arbitration agreements said they were “governed by the laws of the State of
California”). Accordingly, the CAA governs the arbitration agreement.
B. Unconscionability
Plaintiff argues that the agreement is not enforceable
because it is unconscionable.
Like any other contract, arbitration agreements are
subject to a defense of unconscionability. Armendariz v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83,113 (Armendariz). “The
general principles of unconscionability are well established. A contract is
unconscionable if one of the parties lacked a meaningful choice in deciding
whether to agree and the contract contains terms that are unreasonably
favorable to the other party. Unconscionability has both a procedural and a
substantive element. The party resisting enforcement of an arbitration
agreement has the burden to establish unconscionability.” Ramirez v. Charter
Communications, Inc. (2024) 16 Cal.5th 478, 492 (citations omitted)
(internal quotation marks omitted).
“[P]rocedural and substantive unconscionability must both
be present in order for a court to exercise its discretion to refuse to
enforce a contract or clause under the doctrine of unconscionability. But they
need not be present in the same degree. Essentially a sliding scale is invoked
which disregards the regularity of the procedural process of the contract
formation, that creates the terms, in proportion to the greater harshness or
unreasonableness of the substantive terms themselves. In other words, the more
substantively oppressive the contract term, the less evidence of procedural
unconscionability is required to come to the conclusion that the term is
unenforceable, and vice versa.” Baltazar v. Forever 21, Inc.
(2016) 62 Cal.4th 1237, 1243-44 (Baltazar) (cleaned up).
1. Procedural Unconscionability
Plaintiff argues that the agreement is procedurally
unconscionable because it is a contract of adhesion, is confusing and contains
surprises, and Defendant did not provide Plaintiff with a copy of the
arbitration rules.
A “contract of adhesion” is “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, supra, 24 Cal.4th at 113 (quoting Neal v.
State Farm Ins. Cos. (1961) 188 Cal. App. 2d 690, 694. “[C]ontracts of
adhesion, although they are indispensable facts of modern life that are
generally enforced, contain a degree of procedural unconscionability even
without any notable surprises, and bear within them the clear danger of
oppression and overreaching.” Baltazar, supra, 62 Cal.4th 1237, 1244
(citation omitted) (internal quotation marks omitted).
“[C]ourts will more closely scrutinize the substantive
unconscionability of terms that were ‘artfully hidden’ by the simple expedient
of incorporating them by reference rather than including them in or attaching
them to the arbitration agreement. Baltazar, supra, 62 Cal.4th at p.
1246. In Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1405-06, the
court found an arbitration agreement procedurally unconscionable where it did
not include a copy of the arbitration rules but instead incorporated them by
reference, and the rules limited the damages and remedies available to
dissatisfied customers. However, failure to provide a copy of the arbitration
rules supports a finding of procedural unconscionability only when the
substantive unconscionability claim relates to those rules. Balazar 62
Cal.4th, supra, at p. 1246. Where the challenge concerns only
matters that were clearly delineated in the agreement the employee signed, the
employer’s failure to attach the arbitration rules does not affect the level of
procedural unconscionability. Ibid.
Here, the agreement was a contract of adhesion. The contract
was offered on a take-it-or-leave-it basis, and Plaintiff had no ability to
negotiate the terms. See Deguchi Decl., ¶ 5. Therefore, there is at
least a low level of procedural unconscionability.
Plaintiff’s argument that there is additional procedural
unconscionability because he was surprised when Defendants moved to compel
arbitration because he did not understand the agreement when he signed is
without merit. See Brookwood v. Bank of America (1996) 45 Cal.App.4th
1667, 1674 (holding “plaintiff was ‘bound by the provisions of the
[arbitration] agreement regardless of whether [she] read it or [was] aware of
the arbitration clause when [she] signed the document.’” [quoting Macaulay
v. Norlander (1992) 12 Cal. App. 4th 1, 6]).
Likewise, Defendants’ failure to provide a copy of the
arbitration rules does not create additional procedural unconscionability
because Plaintiff does not argue that those rules are substantively
unconscionable. See Balazar 62 Cal.4th, supra,
at p. 1246.
Accordingly, the Court finds a low level of procedural
unconscionability typical of mandatory employment arbitration agreements.
2. Substantive Unconscionability
Plaintiff argues that the arbitration agreement is
substantively unconscionable because it lacks mutuality, and conflicts with fairness
factors identified in Armendariz.
Substantive unconscionability focuses on the actual terms of
the agreement and evaluates whether they create overly harsh or one-sided
results as to shock the conscience. Suh v. Superior Court (2010) 181
Cal.App.4th 1504, 1515.
“When, as here, there is no other indication of oppression
or surprise, the degree of procedural unconscionability of an adhesion
agreement is low, and the agreement will be enforceable unless the degree of
substantive unconscionability is high.” Serpa v. California Surety
Investigations, Inc. (2013) 215 Cal.App.4th 695, 704 (citation omitted)
(internal quotation marks omitted).
i. Mutuality
First, Plaintiff argues that the arbitration agreement is
substantially unconscionable because it lacks mutuality.
“An arbitration agreement imposed in an adhesive context
lacks basic fairness and mutuality if it requires one contracting party, but
not the other, to arbitrate all claims arising out of the same transaction or
occurrence or series of transactions or occurrences.” Armendariz, surpa 24
Cal.4th at p. 120.
Plaintiff argues that while the terms of the agreement facially
apply to both parties, because he did not know an agreement to arbitration
existed and was not given a copy, in practice only Defendants could have chosen
when to compel arbitration and when to file claims in court. Opp. at p.
6:20-23. However, Plaintiff concedes he signed the agreement and does not argue
that he requested a copy of the arbitration agreement and was not given one.
Moreover, Defendants gave Plaintiff the opportunity to review the agreement,
and he submitted the signed agreement without asking any questions. Rodriquez
Decl. ¶ 8. Plaintiff’s failure of due diligence does not create an issue of
mutuality. See Rowland v. PaineWebber Inc. (1992) 4 Cal.App.4th
279, 286 (“Reasonable diligence requires the reading of a contract before
signing it. A party cannot use his own lack of diligence to avoid an
arbitration agreement.”).
ii. Armendariz Factors
Second, Plaintiff argues that the agreement is substantively
unconscionable because it conflicts with the fairness factors identified in Armendariz.
Under Armendariz an arbitration agreement is not per
se unconscionable if it “(1) provides for neutral arbitrators, (2) provides for
more than minimal discovery, (3) requires a written award, (4) provides for all
of the types of relief that would otherwise be available in court, and (5) does
not require employees to pay either unreasonable costs or any arbitrators' fees
or expenses as a condition of access to the arbitration forum.” Armendariz, supra,
24 Cal.4th at p. 102 (citation omitted) (internal quotation marks omitted).
Plaintiff argues that the agreement fails to provide for
neutral arbitrators because it limits the pool of arbitrators to retired
California Superior Court judges from the JAMS panel. Rodriguez Decl., Ex. 1.
Citing Mercuro v. Superior Court (2002) 96 Cal.App.167 (Mercuro),
Plaintiff argues that this limited pool of arbitrators gives Defendants a
strategic advantage as repeat players of arbitration. Opp. at p. 8:12-21. In Mercuro,
the court found an arbitration agreement unconscionable where defendant
threatened plaintiff into signing it, lacked mutuality, and the pool of
arbitrators was small. Mercuro, supra, 96 Cal.App. at p. 179.
The facts of Mercuro are readily distinguishable from
those here. In Mercuro the pool of arbitrators consisted of only eight
people; Plaintiff has not offered any evidence that the present pool is so
limited. Mercuro, supra, 96 Cal.App. at p. 178. Additionally, the Mercuro
court found a high degree of procedural unconscionability because the
defendant threatened to blackball the plaintiff from the securities industry if
he did not sign the agreement. Id. at p. 175. Moreover, the arbitration
agreement lacked mutuality, as it exempted from arbitration the types of claims
defendant was most likely to bring against plaintiff. Id. at p.176. The
court explicitly held that it was “not prepared to say without more evidence
the ‘repeat player effect’ is enough to render an arbitration agreement
unconscionable.” Id. at p. 179.
Next, Plaintiff argues that the agreement chills employees
from bringing any claims against defendants because it requires the employees
to cover fees for arbitration.
“[T]he arbitration agreement or arbitration process cannot
generally require the employee to bear any type of expense
that the employee would not be required to bear if he or she were free to bring
the action in court.” Armendariz v. supra, Cal.4th at pp. 110-111. “This
means ‘the employer [must] pay all types of costs that are unique to
arbitration,’ including the arbitrator's fee.”
Mercuro, supra, 96 Cal.App. at p.181 (quoting Armendariz v. supra,
Cal.4th at p.113).
Here, the arbitration agreement states, “Any appointed
arbitrator shall have the right to award attorneys' fees to the prevailing
party, though the fees for the arbitration shall be shared equally between the
Parties, with each Party to bear its own attorneys' fees.” Rodriguez Decl., Ex.
1. This is an unconscionable cost-splitting provision, because it requires
Plaintiff to pay costs unique to arbitration. However, that does not provide a
basis to void the arbitration agreement because such provisions are severable.
See Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1478 (“we have
little difficulty concluding the interests of justice would be furthered by
severance of the cost provision, which …. is plainly ‘collateral to the main
purpose of the contract.’” [quoting Armendariz at p. 124]). Therefore,
the cost-splitting provision is unenforceable, but the rest of the agreement
remains intact.
After severing the cost-splitting provision, the agreement has
a low level of procedural unconscionability and no substantive
unconscionability. Accordingly, the agreement is enforceable.
C. PAGA
Plaintiff argues that the arbitration agreement either acts
as a wholesale waiver of the right to bring representative PAGA claims, or it
permits representative PAGA claims to proceed in arbitration.
An employee’s right to bring a PAGA action “is unwaivable.” Iskanian
v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 383 (Iskanian)
(overruled on other grounds in Viking River Cruises, Inc. v. Moriana
(2022) 596 U.S. 639, 662 (Viking River)). “There is no individual
component to a PAGA action because ‘every PAGA action … is a representative
action on behalf of the state.’” Kim
v. Reins International California, Inc. (2020) 9 Cal.5th 73, 87 (quoting Iskanian,
supra, 59 Cal.4th 348, 383 Additionally, “California law prohibits the
enforcement of an employment agreement provision that requires an employee to
individually arbitrate whether he or she qualifies as an “aggrieved employee”
under PAGA, and then (if successful) to litigate the remainder of the
“representative action in the superior court.” Perez v. U-Haul Co. of
California (2016) 3 Cal.App.5th 408, 421.
In Viking River, the United States Supreme Court
considered a predispute employment contract with an arbitration provision
specifying that ‘[i]n any arbitral proceeding, the parties could not bring any
dispute as a class, collective, or representative PAGA action.’” Viking
River, supra, 596 U.S., at p. 647. The Court held that the FAA does not
preempt the state’s rule against wholesale waiver of PAGA claim but does
preempt California’s state law rule that “PAGA actions cannot be divided into
individual and non-individual claims.” Ibid. Under the FAA, an
arbitration agreement is enforceable against individual claims but waiver of
non-individual representative claims is not. Ibid. The employee retains
standing to bring representational claims, which may be stayed pending the
outcome of the arbitration. Adolph v. Uber Technologies, Inc. (2023) 14
Cal.5th 1104, 1125.
Plaintiff argues that the arbitration agreement at issue
here, unlike in Viking River, is silent on its effect on representative
action claims. Opp. at p. 12: 14:15. Despite Defendants’ assertion that “Plaintiff
fails to identify any meaningful differences between the PAGA waiver in this
Arbitration Agreement and the agreement in Viking River,” it is Defendants
who fail to identify any PAGA waiver provision at all. Reply at p. 10:9-10.
Because the agreement does not address representative
actions, Plaintiff requests that the court determine whether it can bring the representative
PAGA claims into arbitration. However, whether Plaintiff’s representative PAGA claims
are within the scope of the parties’ arbitration agreement is a matter
delegated to the arbitrator. Rodriguez Decl., Ex. 1 (“Any controversy claim or
dispute … including the determination of the scope or applicability of this
Agreement to arbitrate … shall be adjudicated by binding arbitration); see Rent-A-Center,
W., Inc. v. Jackson (2010) 561 U.S. 63, 68-69 (“parties can agree to
arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties
have agreed to arbitrate or whether their agreement covers a particular
controversy.”).
As explained above, this case is governed by the CAA and not
the FAA. Therefore, the FAA, as interpreted by the U.S. Supreme Court, does not
preempt the California state law that PAGA actions cannot be divided into
individual and non-individual claims. See Viking River, supra 596
U.S., supra at p. 662. Accordingly, if the arbitrator finds that the
representative PAGA claims are not within the scope of the arbitration
agreement, Defendant may not compel Plaintiff to arbitrate either the
individual or representative PAGA claims. See Perez, supra, Cal.App.5th at
p. 421.
CONCLUSION
Defendants' Motion to Compel Arbitration is granted.