Judge: Armen Tamzarian, Case: 23STCV22167, Date: 2024-01-31 Tentative Ruling

Case Number: 23STCV22167    Hearing Date: January 31, 2024    Dept: 52

Defendants Gori Company, LLC, Sky Kim, and Hyun Joong Kim’s Motion to Compel Arbitration and Stay Action

Defendants Gori Company, LLC, Sky Kim, and Hyun Joong Kim move to compel arbitration of this action by plaintiff Patrick Yi.

Unconscionability

Unconscionability requires both procedural and substantive unconscionability using a sliding scale.  (Serafin v. Balco Properties Ltd., LLC (2015) 235 Cal.App.4th 165, 185.)  “Procedural unconscionability focuses on the elements of oppression and surprise.”  (Id. at p. 177.)  “Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create overly harsh or one-sided results.  (Ibid., internal quotes omitted.)  “Generally, the burden is on the party opposing arbitration to show an arbitration agreement is unconscionable.”  (Saheli v. White Memorial Medical Center (2018) 21 Cal.App.5th 308, 330.)

A. Procedural Unconscionability

Plaintiff shows, at most, minimal procedural unconscionability.  “ ‘Arbitration contracts imposed as a condition of employment are typically adhesive.’ ” (Davis v. Kozak (2020) 53 Cal.App.5th 897, 906 (Davis).)  “By itself, however, adhesion establishes only a ‘low’ degree of procedural unconscionability.”  (Id. at p. 907.)  Plaintiff states the contract “was presented to me without any opportunity for negotiation.  I had no chance to discuss or modify the terms of the agreement, and it was presented to me as a non-negotiable condition.”  (Yi Decl., ¶ 2.)  But plaintiff does not answer a key question: a non-negotiable condition of what?

The agreement containing the arbitration provision is a “Stock Restriction Agreement,” not an employment agreement.  (Yi Decl., ¶ 2; Kim Decl., Ex. 1.)  Plaintiff’s complaint alleges, “In January 2022, Plaintiff joined Gori as a co-founder and assumed the role of CTO.”  (Comp., ¶ 19.)  It further alleges, “In July 2022, Plaintiff was presented with a Stock Restriction Agreement.”  (¶ 23.)  Plaintiff thus had worked for Gori Company, LLC as a high-ranking officer for months before being presented with or signing the arbitration agreement.  He presents no evidence he was required to sign it as a condition of employment.

Plaintiff also argues the agreement is procedurally unconscionable because it does not include a copy of the AAA rules.  Any resulting procedural unconscionability “depends in some manner on the substantive unfairness of a term or terms contained within … the rules applicable to the dispute.”  (Davis, supra, 53 Cal.App.5th at p. 909.)  Plaintiff does not identify any substantively unfair terms in AAA’s rules.

B. Substantive Unconscionability

Assuming plaintiff establishes any procedural unconscionability, he shows at most a single substantively unconscionable provision.  He argues only the provision requiring arbitration to be conducted in Santa Clara County is substantively unconscionable because he lives in Orange County.  (Opp., p. 7.)  He relies on the following authority: “Forced arbitration at a location in Northern California for an employee living in Southern California would be unreasonable, and unanticipated.  ‘Substantive unconscionability may be shown if the disputed contract provision falls outside the nondrafting party’s reasonable expectations.’ ”  (Murrey v. Superior Court (2023) 87 Cal.App.5th 1223, 1247 (Murrey).)  Though it quotes authority about substantive unconscionability, this portion of Murrey appears in its section about procedural unconscionability.  (Ibid.) 

Assuming this provision is substantively unconscionable, it would be severable.  “The strong legislative and judicial preference is to sever the offending term and enforce the balance of the agreement” unless the agreement is “permeated by unconscionability.”  (Lange v. Monster Energy Company (2020) 46 Cal.App.5th 436, 453, internal quotes, citations, and alterations omitted.)  This agreement is not permeated by unconscionability.  It has no more than one unconscionable provision.  Moreover, defendants have agreed to waive that provision.  Their reply brief states, “[I]f this is an inconvenience to Yi, Gori hereby stipulates that the arbitration may take place in Orange County.”  (Reply, p. 8.) 

Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA)

            Plaintiff argues the EFAA prohibits enforcing the arbitration agreement in this action.  The EFAA “voids predispute arbitration clauses in cases … involving sexual harassment allegations.”  (Murrey, supra, 87 Cal.App.5th at p. 1230.)  Defendants argue the EFAA does not apply for two reasons. 

A. Does the EFAA Only Apply to Arbitrations Under the FAA?

First, defendants contend the EFAA only applies to arbitrations under the Federal Arbitration Act (FAA), not the California Arbitration Act (CAA).  The EFAA amends the FAA.  (See Murrey, supra, 87 Cal.App.5th at p. 1234 [EFAA “added two sections to the FAA”].)  “The FAA governs arbitration provisions in contracts that involve interstate commerce.  …  When the FAA applies, it preempts any contrary state law and is binding on state as well as federal courts.”  (Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1263 (Mastick).)  “Nevertheless, contracting parties may agree that the FAA will not govern their arbitration even if the contract involves interstate commerce.”  (Ibid.)

The parties’ agreement necessarily involves interstate commerce because it is “by and between Gori Company, a Delaware corporation” and California resident Patrick Yi and concerns “the Plan of Conversion by which the Company converted from Gori Company, LLC, California limited liability company, to Gori Company, a Delaware corporation.”  (Kim Decl., Ex. 1, p. 1.)  The agreement does, however, provide for “binding arbitration under the arbitration rules set forth in California Code of Civil Procedure section 1280 through 1294.2, including section 1283.05 (the ‘Rules’) and pursuant to California law.”  (Kim Decl., Ex. 1, § 7.L(1).) 

Defendants provide no authority that the EFAA cannot apply when the parties agree to arbitrate under the CAA instead of the FAA.  Defendants cite only a practice guide for that proposition.  (Reply, p. 2, citing Rutter Guide.)

The text of the EFAA does not support that conclusion.  It provides, “Notwithstanding any other provision of this title [the FAA], at the election of the person alleging conduct constituting a sexual harassment dispute …,  no predispute arbitration agreement … shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.”  (9 U.S.C. § 402(a).)  Rather than applying in conjunction with the FAA, the EFAA is an exception to the FAA.  It applies “[n]otwithstanding” the FAA.  Moreover, it broadly provides that “no predispute arbitration agreement … shall be valid or enforceable” rather than prohibiting enforcement only of agreements providing for arbitration under the FAA. 

Defendants’ reliance on Mastick is misplaced.  There, the court addressed a specific provision of the CAA: “When the parties have agreed to be governed by California law, section 1281.2, subdivision (c) does not conflict with the FAA or frustrate its objectives.  The FAA simply requires courts to enforce arbitration provisions in accordance with the terms in the agreement.”  (209 Cal.App.4th at p. 1264.)  As the court noted, the California Supreme Court had already held “the procedural provisions of the FAA and section 1281.2 do not conflict.”  (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 390 (Cronus).)

Here, the potential conflict is not merely procedural.  And, unlike Code of Civil Procedure section 1281.2(c), allowing the parties’ contract to preclude plaintiff from invoking the EFAA would constitute “ ‘ “an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” ’ ”  (Cronus, supra, 35 Cal.4th at p. 385, quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 477.)  Congress’s purpose and objective in enacting the EFAA was to permit plaintiffs who allege sexual harassment to avoid enforcement of their otherwise binding agreements.  Holding him to that agreement directly obstructs that purpose.    

B. Does the Complaint Allege a Valid Sexual Harassment Claim?

Defendants also argue the EFAA does not apply because plaintiff’s complaint does not allege a “plausible” sexual harassment claim.  (See Yost v. Everyrealm, Inc. (S.D.N.Y. 2023) 657 F.Supp.3d 563, 588.)  This argument relies on the plausibility standard for pleading under the Federal Rules of Civil Procedure.  (See Ashcroft v. Iqbal (2009) 556 U.S. 662, 678.)  California civil procedure has no plausibility requirement for complaints.  California courts must accept factual allegations as true regardless of their plausibility.  (Hacker v. Homeward Residential, Inc. (2018) 26 Cal.App.5th 270, 280 [on demurrer, “the facts alleged in the pleading are deemed to be true, however improbable they may be”].)

Defendants make a colorable argument on whether plaintiff’s factual allegations suffice to constitute a cause of action for sexual harassment.  But that issue is not properly before the court in this motion to compel arbitration.  The court finds the prudent procedure is to deny this motion without prejudice.  If defendants defeat plaintiff’s sexual harassment claim or claims before trial, they may then move to compel arbitration again.

Disposition

            Defendants Gori Company, LLC, Sky Kim, and Hyun Joong Kim’s motion to compel arbitration is denied without prejudice.  Defendants shall file a responsive pleading within 25 days.