Judge Bruce G. Iwasaki, Case 21STCV17058 2022-08-31 Tentative Ruling

Moving Party: Defendants Thomas St. John, Thomas St. John Inc., Thomas St. John Group Limited

In this employment action filed in May 2021, Nonyelum Nwasike (Plaintiff or Nwasike) filed an eleven-count complaint against her employer, Thomas St. John Group Limited (TSJ Group), TSJ/Merlyn Licensing, B.V., Thomas St. John, Inc. (TSJ), and Thomas St. John individually (collectively Defendants). The allegations include retaliation, breach of contract, harassment, wrongful termination, and a request for injunctive relief. The injunctive relief is aimed at “invalidating the arbitration clause and ordering the American Arbitration Association to dismiss the pending claims against Plaintiff in that forum.”

On February 17, 2021, about three months before the Complaint was filed in this case, Defendants TSJ and TSJ Group filed a demand for arbitration against Nwasike for declaratory relief, permanent injunction, and conversion. (Reese Decl., ¶ 3, Ex. A.) The arbitration case was as to whether Plaintiff was owed any equity interest or unpaid salary, and whether she misappropriated trade secrets. (Id. at ¶ 3.)

On February 23, 2022, Defendants Thomas St. John individually, TSJ, and TSJ Group moved to compel arbitration of Plaintiff’s lawsuit. They argue that issues of arbitrability should be delegated to the arbitrator, the Federal Arbitration Act governs the agreement, and the agreement is enforceable. Section 9 of the Employment Agreement provides:

9. ARBITRATION. Except with respect to breaches of Section 4 of this Agreement, the parties agree that any dispute, controversy or claim, whether based on contract, tort, statute, discrimination, retaliation or otherwise, relating to, arising from or connected in any manner to this Agreement, or to any alleged breach of this Agreement, or arising out of or relating to Employee's employment or termination of employment, shall, upon the timely written request of either party be submitted to and resolved by binding arbitration. The arbitration shall be conducted in Los Angeles, California. The arbitration shall proceed in accordance with the National Rules for Resolution of Employment Disputes of the American Arbitration Association (“AAA”) in effect at the time the claim or dispute arose, unless other rules are agreed upon by the parties. Unless otherwise agreed to by the parties in writing, the arbitration shall be conducted by one arbitrator who is a member of the AAA and who is selected pursuant to the methods set out in the National Rules for Resolution of Employment Disputes of the AAA. Any claims received after the applicable/relevant statute of limitations period has passed shall be deemed null and void. The award of the arbitrator shall be a reasoned award with findings of fact and conclusions of law. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement, to enforce an arbitration award or to vacate an arbitration award. However, in actions seeking to vacate an award, the standard of review to be applied by said court to the arbitrator’s findings of fact and conclusions of law will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. Company will pay the actual costs of arbitration excluding Employee's attorneys’ fees.

Plaintiff opposes the motion to compel arbitration. She argues that California law governs the dispute, the Court must determine gateway issues of the unconscionability of the arbitration, and the agreement is both procedurally and substantively unconscionable. She also contends that she is suing Thomas St. John individually, and he cannot compel arbitration because he is not a signatory.

Defendants’ reply reiterates that the Federal Arbitration Act is controlling, issues of arbitrability must go to the arbitrator, and the agreement is not unconscionable. They further argue that Thomas St. John has the right to compel arbitration as a third-party beneficiary.

The parties do not dispute that Nwasike signed the agreement; nor do they dispute the validity of the arbitration agreement. The question here is whether the threshold issue of arbitrability should be delegated to the arbitrator. The U.S. Supreme Court has characterized the question of “ ‘who (primarily) should decide arbitrability’ ” as “rather arcane.” (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 945.) As discussed below, resolution of the matter is a fact-specific inquiry.

Based on the pleaded facts, the Court finds that the arbitration agreement’s incorporation by reference of the American Arbitration Association’s rules constitutes a delegation of arbitrability to the arbitrator. The motion to compel arbitration is granted.

Under Code of Civil Procedure section 1281.2, a court may order arbitration of a controversy if it finds that the parties have agreed to arbitrate that dispute. Because the obligation to arbitrate arises from contract, the court may compel arbitration only if the dispute in question is one in which the parties have agreed to arbitrate. (Weeks v. Crow (1980) 113 Cal.App.3d 350, 352.) Since arbitration is a favored method of dispute resolution, arbitration agreements should be liberally interpreted, and arbitration should be ordered unless the agreement clearly does not apply to the dispute in question. (Id. at p. 353; Segal v. Silberstein (2007) 156 Cal.App.4th 627, 633.)

In ruling on a petition to compel arbitration, a court must determine two threshold matters: first, whether an enforceable agreement to arbitrate exists; and second, whether that agreement encompasses the dispute at issue. (See Code Civ. Proc., § 1281.2.)

The second question of arbitrability is generally decided by the court unless the parties have “clearly and unmistakably” delegated that issue to the arbitrator. (AT&T Technologies v. Communications Workers (1986) 475 U.S. 643, 649; Jarboe v. Hanlees Auto Group (2020) 53 Cal.App.5th 539, 548 [“Contract language empowering the arbitrator to determine arbitrability must be clear and unmistakable”].) Prior to that analysis, the Court first decides whether the Federal Arbitration Act or California Arbitration Act applies here.

The California Arbitration Act, not the Federal Arbitration Act, applies in evaluating the motion to compel arbitration.

Defendants contend that the Federal Arbitration Act (FAA) applies, while Plaintiff argues that the California Arbitration Act (CAA) applies. The Court finds that the CAA applies, but the applicability is immaterial because the analysis is the same under either law. (Nelson v. Dual Diagnosis Treatment Center, Inc. (2022) 77 Cal.App.5th 643, 655 [“[Defendant’s] insistence on the FAA’s application is puzzling because there is no disagreement between California law and the FAA regarding arbitrability. Under both, until shown otherwise, ‘courts presume that the parties intend courts, not arbitrators, to decide . . . disputes about “arbitrability” ’ ”].)

“ ‘[T]he question is not whether the parties adopted the CAA’s procedural provisions: The state’s procedural statutes (§§ 1281, 1290) apply by default because Congress intended the comparable FAA sections (9 U.S.C. §§ 3, 4, 10, 11) to apply in federal court. The question, therefore, is whether the parties expressly incorporated the FAA's procedural provisions into their agreements.’ ” (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 345.)

The party that contends the FAA applies bears the burden to demonstrate that the arbitration agreement is in a “ ‘contract evidencing a transaction involving commerce.’ ” (Woolly v. Superior Court (2005) 127 Cal.App.4th 197, 211; 9 U.S.C. § 2.) “The United States Supreme Court has determined that the phrase ‘ “involving commerce” ’ in the FAA is the functional equivalent of the term ‘ “affecting commerce,” ’ which is a term of art that ordinarily signals the broadest permissible exercise of Congress’ commerce clause power.” (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1097.) In determining if the FAA applies, “the pertinent question is whether the contract evidences a transaction involving interstate commerce, not whether the dispute arises from the particular part of the transaction involving interstate commerce.” (Id. at p. 1101.)

Defendants provide the declaration of Marlena Kaplan, Chief Operating Officer for TSJ, who attests that the company provides accounting services globally and therefore “regularly engages in interstate commerce.” (Kaplan Decl., ¶ 3.) However, “the presence of interstate commerce [is] not sufficient, by itself to make the FAA’s procedural provisions, including its provisions regarding judicial review . . . applicable in California state courts. (Mave Enterprises, Inc. v. Travelers Indemnity Co. (2013) 219 Cal.App.4th 1408, 1429.) By default, a state court “applies its own procedural law—here, the procedural provisions of the CAA—absent a choice-of-law provision expressly mandating the application of the procedural law of another jurisdiction.” Thus, the FAA’s substantive provision applies to the arbitration, but the procedural provisions do not apply unless the contract expressly incorporates it. (Ibid.).

Here, Section 8 of the Employment Agreement specifies that “This Agreement shall be governed by and construed in accordance with the internal laws of the State of California.” Therefore, the Court finds that the California Arbitration Act applies to the Arbitration Provision. (See Duffens v. Valenti (2008) 161 Cal.App.4th 434, 452 [“Where an arbitration provision contains California choice of law language, the parties’ intent is inferred that state law will apply for resolving motions to compel arbitration”]; Harris v. Bingham McCutchen LLP (2013) 214 Cal.App.4th 1399, 1407 [“But, to the extent a state law is not inconsistent with the Federal Arbitration Act's policies, choice-of-law clauses are interpreted to incorporate the chosen state’s laws governing the enforcement of arbitration agreements”]; Mount Diablo Medical Center v. Health Net of Cal. (2002) 101 Cal.App.4th 711, 726 [“where the state arbitration provision is not inconsistent with the FAA policy of enforcing arbitration procedures chosen by the parties, choice-of-law clauses making no explicit reference to arbitration commonly have been interpreted to incorporate the state’s law governing the enforcement of arbitration agreements”].)

Defendant relies on Woley, Ltd. v. Foodmaker, Inc. (9th Cir. 1998) 144 F.3d 1205 and Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52. However, the California Supreme Court expressly declined to follow Woley, Ltd. v. Foodmaker. (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393, fn. 8.) Our Supreme Court also distinguished Mastrobuono v. Shearson Lehman Hutton, Inc. on its facts, noting that the policy at issue in Mastrobuono “directly impeded the FAA’s goals, thus triggering the FAA preemption.” (Id. at p. 393 [contrasting Mastrobuono with Volt Information Sciences, Inc. v. Board of Trustees (1989) 489 U.S. 468, in which the state policy “furthered the federal goal of encouraging arbitration” and thus the choice-of-law clause was not preempted].)

While the parties dispute which arbitration statute applies, neither side addresses the effect of applying one law over the other. Therefore, neither party discussed whether in this case the California law is inconsistent with the FAA. Here, the issue is whether the delegation provision – delegating to the arbitrator, through incorporation of AAA rules, the issue of arbitrability – is valid and enforceable. Under both the CAA and FAA, the analysis is the same. (Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 240-242 (Tiri) [“Because [Code of Civil Procedure] section 1281 and 9 United States Code section 2, part of the FAA, are interpreted the same under controlling precedent, it makes no difference to the outcome of this case if one but not the other applies”].)

Under both the FAA and the CAA, parties may delegate issues of arbitrability to the arbitrator, including disputes regarding the scope and the enforceability of the arbitration agreement and whether the arbitration agreement is unconscionable. (Aanderud v. Superior Court (2017) 13 Cal. App. 5th 880, 891-892; Tiri, supra, 226 Cal.App.4th at p. 240-241; Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 553 (Dream) [“California law is consistent with federal law on the question of who decides disputes over arbitrability…‘Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.’ ”].)

A delegation clause must meet two requirements to be enforced. “First, the language of the clause must be clear and unmistakable. [Citation.] Second, the delegation must not be revocable under state contract defenses such as fraud, duress, or unconscionability.” (Tiri, supra, 226 Cal.App.4th at p. 242; see also Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 68-69, fn. 1.) The “clear and unmistakable” test reflects a “heightened standard of proof” that reverses the typical presumption in favor of the arbitration of disputes. (Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 787 (Ajamian).)

The Court first decides whether the language is clear and unmistakable. Here, the delegation clause is not explicitly in the arbitration paragraph itself. Instead, the arbitration states that it shall proceed “in accordance with the National Rules for Resolution of Employment Disputes of the American Arbitration Association (‘AAA’) in effect at the time the claim or dispute arose.” In other words, the arbitration clause incorporates the AAA Employment rules.

Plaintiff contends that the incorporation clause is unclear. She argues that the “National Rules for Resolution of Employment Disputes” (National Rules) on the AAA website is in the archive section and has no expiration date nor is there a delegation clause. (Waizman Decl., Ex. B.) However, she concedes that under the “Active Rules” section, there is a separate set of rules titled “Employment Arbitration Rules and Mediation Procedures” (Employment Arbitration Rules) in which a footnote on page 10 indicates that the “National Rules for the Resolution of Employment Disputes have been re-named the Employment Arbitration Rules and Mediation Procedures.” (Id. at Ex. C.) While Plaintiff argues it is “difficult to determine which AAA Rules apply,” the argument is unavailing given that she was able to locate the rules with relative ease. (See Gilbert Street Developers, LLC v. La Quinta Homes, LLC (2009) 174 Cal.App.4th 1185, 1193 [discussing cases where AAA rules were properly incorporated because “the parties could go look up the AAA rules to which they were agreeing beforehand”].) Accordingly, the AAA rules were incorporated by reference into the Employment Agreement. There is no unclarity with respect to which rules were intended to apply.

Rule 6(a) of the Employment Arbitration Rules states that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to existence, scope or validity of the arbitration agreement.” (Waizman Decl., Ex. C.) This is a delegation clause authorizing the arbitrator to rule on issues of arbitrability and enforceability.

Plaintiff argues two issues: (1) the original National Rules does not contain delegation language and (2) Defendants’ cited cases do not address an employer-employee dispute.

The first argument is unpersuasive because the arbitration agreement applies the AAA rules “in effect at the time the claim or dispute arose.” Here, Paragraph 17 of the Complaint alleges that Plaintiff began her employment after January 2018. While Plaintiff states that the earlier National Rules have no expiration date, the later Employment Arbitration Rules clarify that it supersedes the National Rules and that “Any arbitration agreements providing for arbitration under its National Rules for the Resolution of Employment Disputes shall be administered pursuant to these Employment Arbitration Rules and Mediation Procedures.” The Employment Arbitration Rules indicate an effective date of November 1, 2009. (Waizman Decl., Ex. C.) Thus, the Employment Arbitration Rules apply.

Whether incorporation of the external AAA Employment Arbitration Rules demonstrates a clear and unmistakable intent to delegate issues of arbitrability to an arbitrator.

For Plaintiff’s second argument – whether delegation applies to an employment contract – the Court considers both California state law and federal law on the issue of delegation by incorporation of external arbitration rules.

Plaintiff relies on Ajamian, supra, 203 Cal.App.4th 771, to argue that issues of arbitrability should not be delegated to the arbitrator. Ajamian involved a chief executive officer who signed an employee handbook with an arbitration provision that incorporated the “rules of the National Association of Securities Dealers, Inc. (or, at [CantorCO2e’s] sole discretion, the American Arbitration Association or any other alternative dispute resolution organization) now in force.” (Ajamian, supra, 203 Cal.App.4th at p. 777.) The plaintiff CEO sued the employer for discrimination, harassment, and Labor Code violations. (Id. at p. 779.) The employer moved to compel arbitration, which the trial court denied.

The Court of Appeal affirmed. The appellate court discussed numerous federal and California cases which held that “reference to the rules of arbitration services . . . constitutes clear and unmistaken evidence that the parties intended to delegate the issue to the arbitrators. (Id. at pp. 788-790.) However, the Court “seriously question[ed]” how incorporation of AAA rules “provides clear and unmistakable evidence that an employer and an employee intended to submit the issue of the unconscionability of the arbitration provision to the arbitrator, as opposed to the court.” (Id. at p. 790.) The Court reasoned that the mere reference to such rules does not give sufficient notice:

Assuming that an employee reads the arbitration provision in the proposed agreement, notes that disputes will be resolved by arbitration according to AAA rules, and even has the wherewithal and diligence to track down those rules, examine them, and focus on the particular rule to which appellants now point, the rule merely states that the arbitrator shall have “the power” to determine issues of its own jurisdiction, including the existence, scope and validity of the arbitration agreement. This tells the reader almost nothing, since a court also has power to decide such issues, and nothing in the AAA rules states that the AAA arbitrator, as opposed to the court, shall determine those threshold issues, or has exclusive authority to do so, particularly if litigation has already been commenced. (Ibid.)

However, the Court of Appeal expressly declined to rule on “whether an unqualified incantation of AAA rules establishes a clear and unmistakable delegation.” (Ajamian, supra, 203 Cal.App.4th at p. 791.) The Court determined that the “reference to AAA rules in this case was insufficient for another reason: the Employment Agreement did not mandate that AAA rules would necessarily apply. Instead, the arbitration clause stated that the arbitration would be held according to NASD rules, AAA rules, or the rules of ‘any other alternative dispute resolution organization’ selected by CantorCO2e in its sole discretion.” (Ibid.) This open-ended and disjunctive language did not evince a “clear and unmistakable” intent by the parties to delegate arbitrability to the arbitrator because the employer could unilaterally select a different set of rules altogether. Furthermore, the Court noted that additional language in the employment contract authorized a “ ‘court of competent jurisdiction’ ” to determine whether other provisions in the contract were impermissibly broad. This created further ambiguity militating against a finding of a clear and unmistakable delegation. (Id. at pp. 792-794.)

Here, Plaintiff does not point to additional ambiguity within the Employment Agreement itself, or show that incorporation of the AAA rules was ambiguous or left to the sole discretion of the employer. (See Ajamian, supra, 203 Cal.App.4th at p. 791.) To be sure, the Ajamian court’s doubts about whether incorporation of AAA rules by itself evince a clear and unmistakable delegation have some force. But that discussion is non-binding dicta and the circumstances the court considered are distinguishable from this one.

For their part, Defendants rely upon three California Court of Appeal cases to argue that “delegation clauses incorporated by reference through arbitration providers” are enforceable. But none of them is similar enough to this matter to be dispositive.

The first case, Dream, supra, 124 Cal.App.4th 546, involved a commercial business acquisition contract between two business entities. The contract contained “comprehensive dispute resolution provisions contained in nine separately numbered paragraphs spanning four pages of single-spaced text” and the parties crafted “broad language to express their agreement to avoid litigation as a means of dispute resolution.” As relevant here, the contract specified that “arbitration will be in accordance with the AAA Commercial Arbitration Rules.” The rules stated that the arbitrator “ ‘shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.’ ” (Ibid.) In discussing the issue of arbitrability, the Court of Appeal relied on the federal case, Shaw Group Inc. v. Triplefine Intern. Corp. (2d Cir. 2003) 322 F.3d 115 (Shaw).[1] The Dream court explained that “[i]t is difficult to imagine how parties could state any more comprehensively than they did in the Contract the intent to avoid litigation at every step of the dispute resolution process” and that the delegation provision through incorporation was “clear and unmistakable evidence of the intent that the arbitrator will decide whether a Contested Claim is arbitrable . . . [¶] even without a recital in the contract that the arbitrator will decide any dispute over arbitrability.” (Id. at p. 557.)

Defendants’ second case, Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110 (Rodriguez), was terse and conclusory. In Rodriguez, plaintiff homeowners sued a contractor for negligent repairs. The work contract contained an arbitration clause incorporating the “Construction Industry Arbitration Rules of the American Arbitration Association currently in effect.” (136 Cal.App.4th at p. 1116.) Rule 8(a) of those rules provide that the “ ‘arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.’ ” (Id. at p. 1123.) The appellate court again cited to the Second Circuit case of Shaw and held that by incorporating the rules into their agreement, the parties “clearly evidenced their intention to accord the arbitrator the authority to determine issues of arbitrability.” (Ibid.)

Defendants’ third case, Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1556-1557, fn. 3, is inapposite because the arbitration agreement in that case contained a separate clause granting the arbitrator exclusive authority to resolve issues of arbitrability in addition to the agreement’s incorporation of the AAA rules.

The California cases cited by the parties are inapplicable. The discussion in Ajamian was limited to dicta. Moreover, other provisions in the contract created ambiguity that foreclosed delegation to the arbitrator. Neither of the two relevant cases cited by Defendants involved an employment contract. Dream involved two highly sophisticated corporations engaged in a commercial transaction and a contract that contained “comprehensive dispute resolution provisions.” And Rodriguez involved a repair contract between homeowners and their contractor. None of these cases arose from an employment agreement in which the delegation provision consisted of an “unqualified incantation of AAA rules.” (Ajamian, supra, 203 Cal.App.4th at p. 791.)

The Court notes that recently, Nelson v. Dual Diagnosis Treatment Center, Inc., supra, distinguished Rodriguez and Dream Theater on the basis that none of those cases considered the issue of whether “incorporation binds an unsophisticated party.” (77 Cal.App.5th at p. 657.) Again, however, this was dicta, and that Court ultimately resolved the issue against the defendant because of other ambiguities in the contract. (Id. at p. 657.)

Because there is no California case with analogous facts, the Court looks to federal law. (Tiri, supra, 226 Cal.App.4th at p. 240.) California courts have “looked to the FAA when considering delegation clauses [citation] and have long held that the rules governing these clauses are the same under both state and federal law.” (Ibid.)

Before 2015, numerous federal circuit courts have held that incorporation of the AAA rules was sufficient to constitute a valid delegation. (Contec Corp. v. Remote Solution, Co., Ltd. (2d Cir. 2005) 398 F.3d 205, 208 [“when, as here, parties explicitly incorporate [AAA] rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”]; Petrofac, Inc. v. Dynmcdermott Petroleum Operations Co. (5th Cir. 2012) 687 F.3d 671, 675 [“We agree with most of our sister circuits that the express adoption of these [AAA] rules presents clear and unmistakable evidence that the parties agreed to arbitrate arbitrability”]; Fallo v. High-Tech Institute (8th Cir. 2009) 559 F.3d 874, 878 [“the arbitration provision's incorporation of the AAA Rules . . . constitutes a clear and unmistakable expression of the parties’ intent to leave the question of arbitrability to an arbitrator”]; Terminix Internat. Co. LP v. Palmer Ranch Limited. Partnership (11th Cir. 2005) 432 F.3d 1327, 1332 [“By incorporating the AAA Rules . . . into their agreement, the parties clearly and unmistakably agreed that the arbitrator should decide whether the arbitration clause is valid”].)

In 2015, the Ninth Circuit decided Brennan v. Opus Bank (9^th Cir. 2015) 796 F.3d 1125 (Brennan). In that case, the plaintiff was the Executive Vice President and Director for Strategy and Corporate Development for defendant bank. He sued the bank for wrongful termination and wage violations. (Brennan, supra, 796 F.3d at pp. 1126-1127.) The Employment Agreement required binding arbitration “in accordance with the Rules of the American Arbitration Association,” of which one such rule granted the arbitrator the “ ‘power to rule on his or her own jurisdiction.’ ” (Id. at p. 1128.) Consistent with the holdings in other circuits, the Ninth Circuit held that “incorporation of the AAA rules constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability.” (Id. at p. 1130.)

The court in Brennan cautioned that its holding “should not be interpreted to require that the contracting parties be sophisticated or that the contract be ‘commercial’ before a court may conclude that incorporation of the AAA rules constitutes ‘clear and unmistakable evidence of the parties’ intent. Thus, our holding does not foreclose the possibility that this rule could also apply to unsophisticated parties or to consumer contracts.” (Brennan, supra, 796 F.3d at p. 1130.) However, the Ninth Circuit seemed to offer a mixed message when it expressly limited its holding “to the facts of the present case, which do involve an arbitration agreement ‘between sophisticated parties.’ ” (Id. at p. 1131.) It was undisputed in Brennan that the plaintiff “was a sophisticated party, an experienced attorney and businessman (a partner at Jones Day from 1984 to 2001, and Senior Vice President, General Counsel, and Deputy Chief Legal Officer of Washington Mutual from 2001 to 2008), who executed an executive-level employment contract with Opus Bank, a sophisticated, regional financial institution.” (Brennan, 796 F.3d 1125 at p. 1131.)

The Ninth Circuit again declined to decide “whether the Brennan rule applies when one or more party is unsophisticated” in Galilea, LLC v. AGCS Marine Insurance Co. (9th Cir. 2018) 879 F.3d, 1052, 1062. Interestingly, despite that language, the Ninth Circuit reversed the district court’s finding that the plaintiffs were not sophisticated. The trial court noted that “[n]either of [plaintiffs] were attorneys or insurance professionals, and they did not consult with an attorney or an insurance broker before purchasing the policy from the Insurers.” Thus, the district court found that “a party that is sophisticated for sailing purposes is not necessarily sophisticated for contract and arbitration law purposes.” (Galilea, LLC v. AGCS Marine Insurance Co. (D.Mont., Apr. 4, 2016, No. CV 15-84-BLG-SPW) 2016 U.S. Dist. Lexis 45866, *7-8.) The Ninth Circuit did not discuss the district court’s analysis, and instead appeared to make a contrary factual finding that plaintiffs were sophisticated: they “formed a limited liability company under Nevada law to own and maintain a yacht worth more than a million dollars. In addition, [plaintiff] owns and operates a financial services company, also incorporated under Nevada law.” (Galilea, LLC v. AGCS Marine Insurance Co., supra, 879 F.3d at p. 1062.)

The Mona Lisa quality of the Brennan court’s discussion about whether parties’ sophistication affects the delegation question has yielded two lines of cases reaching opposite results: (1) reading Brennan broadly to mean that regardless of the parties’ sophistication, incorporation of the AAA rules is alone sufficient to constitute clear and unmistakable evidence of delegating arbitrability to the arbitrator, or (2) the parties’ level of sophistication is a factor in the analysis of whether delegation is clear and unmistakable. (Esquer v. Education Management Corp. (S.D.Cal. 2017) 292 F.Supp.3d 1005, 1011-1012 [recognizing split in cases].)

Federal district courts in California are split as to whether a court should engage in a sophistication analysis in deciding whether mere incorporation of external arbitration rules alone constitute “clear and unmistakable” intent to delegate issues of arbitrability.

Under the first broad reading of Brennan, several California federal district courts have applied the holding to unsophisticated parties.[2] These cases contend they represent the majority. (See, e.g., Maybaum v. Target Corp. (C.D.Cal., May 3, 2022, No. 22-cv-00687-MCS-JEM) 2022 U.S. Dist. Lexis 80466, *5 [“[T]he majority of courts have concluded that Brennan applies equally to sophisticated and unsophisticated parties”]; Torres v. Secure Communication Systems (C.D.Cal., Jul. 25, 2020, No. SACV 20-00980-JVS(JDEx)) 2020 U.S. Dist. Lexis 204104, *10 [collecting cases]; McLellan v. Fitbit, Inc. (N.D.Cal., Oct. 11, 2017, No. 3:16-CV-00036-JD) 2017 U.S. Dist. Lexis 168370, *7 [collecting cases to demonstrate that “[t]he ‘greater weight of authority has concluded that the holding of [Brennan] applies similarly to non-sophisticated parties’ ”]; Miller v. Time Warner Cable Inc. (C.D.Cal., Dec. 27, 2016, No. 16-cv-00329-CAS-ASX) 2016 U.S. Dist. Lexis 179444, *5 [finding that “the greater weight of authority has concluded that the holding of [Brennan] applies similarly to non-sophisticated parties” and therefore, “incorporation of AAA’s rules clearly and unmistakably shows the parties’ intent to delegate the issue of arbitrability to the arbitrator” in the context of a consumer subscriber agreement].) Indeed, Brennan itself acknowledged that the “vast majority of the circuits that hold that incorporation of the AAA rules constitutes clear and unmistakable evidence of the parties’ intent to do so without explicitly limiting that holding to sophisticated parties or to commercial contracts. [Citations.]” (Brennan, supra, 796 F.3d at pp. 1130-1131.)

In contrast, other California federal district courts have limited the scope of Brennan to cases involving sophisticated parties. Noteworthy is that these decisions also assert that they reflect the majority of decisions. (See, e.g., Eiess v. USAA Federal Savings Bank (N.D.Cal. 2019) 404 F.Supp.3d 1240, 1253 [finding that “the majority of the lower courts in the Ninth Circuit have ‘held that incorporation of the AAA rules was insufficient to establish delegation in consumer contracts involving at least one unsophisticated party’ ”]; Yan Guo v. Kyanic, Inc. (C.D.Cal. 2018) 311 F.Supp.3d 1130, 1156 [finding that clear and unmistakable intent “is not necessarily shown as to an unsophisticated party to whom such intent is attributed solely by the incorporation by reference of the rules of the AAA”]; Ingalls v. Spotify USA, Inc. (N.D.Cal., Nov. 14, 2016, No. C 16-03533 WHA) 2016 U.S. Dist. Lexis 157384, *9-10 [recognizing the split, but finding that “two ordinary consumers who could not be expected to appreciate the significance of incorporation of the AAA rules, did not clearly and unmistakably intend to delegate the issue of arbitration to an arbitrator”]; Meadows v. Dickey’s Barbecue Restaurants, Inc. (N.D.Cal. 2015) 144 F.Supp.3d 1069, 1078-1079 [finding that Brennan did not apply because the individual franchisee plaintiffs did not have “legal training or experience dealing with complicated contracts and “were each far less sophisticated than Dickey’s, a well-established franchisor corporation”].)

If this Court agrees that no sophistication analysis is necessary, then Brennan is persuasive, and the incorporation of the Employment Arbitration Rules constitutes “clear and unmistakable” evidence of the parties’ intent to delegate issues of arbitrability to the arbitrator. In that case, this Court lacks authority to evaluate whether the entirety of the arbitration clause is unconscionable, and the motion to compel must be granted. Given the split in authority, however, this Court concludes that it must determine these parties’ sophistication.

The Court finds that both of the parties were sophisticated, and thus incorporation of AAA rules reflected an intent to delegate arbitrability to the arbitrator.

While there are no definitive rules as to when a party is considered sophisticated, a review of federal and state cases provides some guidance. Factors such as personal education, line of work, professional knowledge and experience are relevant. (See McLellan v. Fitbit, Inc. (N.D.Cal., Oct. 11, 2017, No. 3:16-CV-00036-JD) 2017 U.S. Dist. Lexis 168370, *10.)

Sophisticated parties typically possess a high acumen of business knowledge or experience with negotiating contracts. Thus, businessmen, entrepreneurs, and executive-level positions have been considered sophisticated by federal courts. (Newcombe-Dierl v. Amgen (C.D.Cal, May 26, 2022, No. CV 22-2155-DMG (MRWx)) 2022 U.S. Dist. Lexis 140079, *9-10 [plaintiff was “Vice President Quality,” an executive position, and knew how to negotiate her compensation and the arbitration agreement, and was therefore not an unsophisticated party]; Caviani v. Mentor Graphics Corp. (N.D.Cal., Sept. 18, 2019, No. 19-cv-01645-EMC) 2019 U.S. Dist. Lexis 160105, *15-16 [“Plaintiff is a well-versed businessman, an MBA-program attendee, fluent in English, and had a 15-year history of business dealings”]; Smith v. Nerium Internat., LLC (C.D.Cal., Sept. 10, 2019, No. SACV 18-01088JVS(PLAx)) 2019 U.S. Dist. Lexis 222601, *2 [“Chief Field Officers and Master Distributors” were sophisticated parties]; Gountoumas v. Giaran, Inc. (C.D.Cal., Nov. 21, 2018, No. CV 18-7720-JFW(PJWx)) 2018 U.S. Dist. Lexis 223702, *16 [“Plaintiff does not qualify as an unsophisticated party . . . [as a] Chief Marketing Officer . . . and qualified to serve as Chief Executive Officer”]; Khraibut v. Chahal (N.D.Cal., Mar. 18, 2016, No. C15-04463 CRB) 2016 U.S. Dist. Lexis 35514, *18 [“savvy entrepreneur”].) In addition, some courts have found some degree of sophistication in positions in which it is “required to obtain a license in order to practice their profession” such as real estate agents. (Galen v. Redfin Corp. (N.D.Cal., Dec. 1, 2015, No. 14-cv-05229-TEH) 2015 U.S. Dist. Lexis 161111, *17-18; see also Appel v. Concierge Auctions, LLC (S.D.Cal., Apr. 13, 2018, No. 17-cv-02263-BAS-MDD) 2018 U.S. Dist. Lexis 63046, *13-14 [“self-described real estate investors that have engaged in various real estate ventures . . . [and] are not the ‘ordinary customers who could not be expected to appreciate the significance of incorporation of the AAA rules’ ”].)

In contrast, unsophisticated parties are typically those with less experience in business dealings, such as blue-collar workers. (Roman v. Jan-Pro Franchising Int'l, Inc. (N.D.Cal., Aug. 2, 2022, No. C 16-05961 WHA) 2022 U.S. Dist. Lexis 137190, *16 [“janitors . . . [and] unit franchisees [who] are primarily immigrant workers, of whom many do not speak English” are not sophisticated]; Calzadillas v. Wonderful Co., LLC (E.D.Cal., June 3, 2019, No. 1:19-cv-00172-DAD-JLT) 2019 U.S. Dist. Lexis 92706, *13-14 [“seasonal agricultural workers who, according to the allegations of the complaint, have performed their employment for less than minimum wage . . . are ‘far less sophisticated’ than defendant”]; (Vargas v. Delivery Outsourcing, LLC (N.D.Cal., Mar. 14, 2016, No. 15-cv-03408-JST) 2016 U.S. Dist. Lexis 32634, *22 [“unsophisticated luggage delivery driver”]; see also Carbajal v. CWPSC, Inc. (2016) 245 Cal. App. 4th 227, 245 [college student was not sophisticated].) Courts have also found that small business owners such as franchisees or distributors, are not sophisticated. (Yan Guo v. Kyani, Inc., supra, 311 F.Supp.3d at p. 1135 [“distributors of certain health and wellness products”]; Money Mailer, LLC v. Brewer (W.D.Wash., Apr. 8, 2016, No. C15-1215RSL) 2016 U.S. Dist. Lexis 47928, *6 [“while [plaintiff franchisee] had been a small business owner and a sales and general manager, he appears to have had no legal experience”]; Meadows, supra, 144 F.Supp.3d at p. 1079 [“no evidence that any Plaintiff [franchisee] had legal training or experience dealing with complicated contracts”].) One court has applied the lack of legal training to a “non-law professor” who obtained graduate degrees in Epidemiology and Biostatistics, and Genetic and Molecular Epidemiology, but who otherwise was not an entrepreneur and did not possess a professional license in a legal or related field. (Mikhak v. Univ. of Phoenix (N.D.Cal., June 21, 2016, No. C16-00901 CRB) 2016 U.S. Dist. Lexis 80705, *13-15; see also Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1535 [‘ “experienced but legally unsophisticated businessmen may be unfairly surprised by unconscionable contract terms’ ”].)

Here, the Thomas St. John entities are sophisticated because they provide domestic and international business management, tax, and accounting services. (Kaplan Decl., ¶ 3.)

The Court also concludes that Plaintiff Nwasike should be deemed a sophisticated party for purposes of interpreting the delegation clause in the arbitration provision. Nwasike avers that she has a background in tax and accounting and was hired as the “Tax Compliance Director,” for which she was recruited. (Nwasike Decl., ¶¶ 2-3, 6.) Furthermore, the director position appears to be a high-level position within the company given that Nwasike was required to “complete a two-part technical assessment” and engage in multiple rounds of interviews. (Id. at ¶¶ 2-3.) Presumably, the position required that she possessed a Certified Public Accountant license. Indeed, Nwasike’s e-mails indicate that she held both a CPA license and an MBA degree. (Id. at Ex. E.) Thus, she is required to “obtain a license in order to practice [her] profession.” (Galen v. Redfin Corp. (N.D.Cal., Dec. 1, 2015, No. 14-cv-05229-TEH) 2015 U.S. Dist. Lexis 161111, *17-18; Bus. & Prof. Code, § 5093) The area of tax is also related to the legal field and is complex, such that obtaining a license in that field requires some level of sophistication.

More importantly, Nwasike concedes that she has experience negotiating contracts. She avers to engaging in back-and-forth negotiations with the company as to the terms of the compensation package and probationary period. (Nwasike Decl., ¶ 6.) She ultimately was successful in increasing her compensation package and reducing her probationary period. (Id. at ¶ 7.) Thus, she had some leverage in the relationship. While she did not negotiate the arbitration clause within the agreement, she also admits that she “never had a job before where [she] understood an arbitration agreement to be negotiable.” Accordingly, the Court finds that Nwasike is more like the executive-level employees and businesspersons than a blue-collar worker or someone who would otherwise have minimal business experience. She understood the consequences of the arbitration clause’s delegation provision through the incorporation of the AAA rules. For these reasons, the Court concludes that the parties clearly and unmistakably intended to delegate the arbitrability question to the arbitrator.

The Court acknowledges that these federal cases did not directly analyze the parties’ intent in “clearly and unmistakably” delegating issues of arbitrability to the arbitrator. However, under California law, “ ‘[t]he general rule is that the terms of an extrinsic document may be incorporated by reference in a contract so long as (1) the reference is clear and unequivocal, (2) the reference is called to the attention of the other party and he consents thereto, and (3) the terms of the incorporated document are known or easily available to the contracting parties.’ ” (B.D. v. Blizzard Entertainment, Inc. (2022) 76 Cal.App.5th 931, 953.) Here, these factors are met: the arbitration clause unequivocally requires arbitration “in accordance with the National Rules of Resolution of Employment Disputes of the American Arbitration Association.” The acronym “AAA” is in quotations and underlined. In addition, the parties were required to separately sign the bottom of the arbitration agreement (Paragraph 9), as evidence that they reviewed that section. Finally, the most recent rules were easily available through an Internet search.

Once a court finds that the agreement clearly and unmistakably delegates arbitrability issues to the arbitrator, the remaining question is whether the delegation provision is itself unconscionable.

Plaintiff argues that the contract was adhesive because she was required to sign the standard agreement as a prerequisite for employment and presented on a “take it or leave it” basis. She also argues oppression because her husband was in the hospital during this time.

“The procedural element of the unconscionability analysis concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. [Citation.] The element focuses on oppression or surprise. [Citation.] ‘Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.’ [Citation.] Surprise is defined as ‘ “the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.” ’ [Citation.]” (Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 581.)

One federal court contemplated that the “sophistication” analysis is more appropriate in an unconscionability analysis of the delegation provision itself. (Esquer v. Education Management Corp., supra, 292 F.Supp.3d at p. 1012, fn. 2 [citing California appellate cases that sophistication may be a factor in analyzing procedural unconscionability].) The Court therefore incorporates its analysis above and finds that Plaintiff is sophisticated.

As to her other arguments, the Court agrees that there is some degree of procedural unconscionability here. A contract of adhesion is prepared by the party of superior bargaining strength and forces the subscribing party the opportunity to adhere to the contract or reject it. (Walnut Producers of California v. Diamond Foods, Inc. (2010) 187 Cal.App.4th 634, 645.) However, “ ‘[A]bsent unusual circumstances, use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives.’ ” (Id. at p. 646.)

The Court finds minimal procedural unconscionability. While Plaintiff’s opposition contends that the recruiter pressured her into signing the Employment Agreement, she admits that she had more than one week to review the Employment Agreement and the corresponding arbitration clause. (Nwasike Decl., ¶¶ 7-8; Caviani v. Mentor Graphics Corp. (N.D.Cal., Sept. 18, 2019, No. 19-cv-01645-EMC) 2019 U.S. Dist. Lexis 160105, *16 [“Plaintiff was in possession of the Agreement for multiple days (which included a weekend) and had ample time to find and read the JAMS rules”].) This contrasts with Plaintiff’s cited case, Stirlen v. Supercuts, Inc., supra, in which the contract was presented to the employee after he accepted employment and contained a myriad of other unconscionable terms such as waivers of the right to challenge jurisdiction, suspension of salary if employer initiates arbitration as to certain matters, and a restriction of remedies. (Stirlen, supra, 51 Cal.App.4th at pp. 1528-1529, 1534.) Thus, this was not a take-it-or-leave-it transaction.

While the Court is sympathetic to Plaintiff’s personal circumstances, she does not describe how her husband’s hospitalization and subsequent death created oppression or surprise such that there was “no real negotiation and an absence of meaningful choice.” Indeed, she was able to negotiate other terms of her employment during that time. (Nwasike Decl., ¶ 6.)

To the extent that Plaintiff argues that she was never provided with a copy of the AAA rules of arbitration, this is not facially unconscionable. “The failure to attach a copy of arbitration rules could be a factor supporting a finding of procedural unconscionability where the failure would result in surprise to the party opposing arbitration.” (Lane v. Francis Capital Management LLC (2014) 224 Cal. App. 4th 676, 690.) However, the failure to attach the rules, by itself, is not “sufficient to sustain a finding of procedural unconscionability.” (Ibid.) Moreover, the rules were clear in this case – the “National Rules for Resolution of Employment Disputes of the American Arbitration Association (“AAA”) in effect at the time the claim or dispute arose.” The most recent rules were available on the Internet and while Plaintiff was not a lawyer, she had ample time to look up and review the rules. Therefore, this is not a situation where the failure to attach the arbitration rules would have resulted in surprise. (See also Poublon v. C.H. Robinson Co. (9th Cir. 2017) 846 F.3d 1251, 1262 [“incorporation by reference, without more, does not affect the finding of procedural unconscionability”].) At best, this amounts to minimal procedural unconscionability.

There must be both procedural and substantive unconscionability for Plaintiff to meet her burden of establishing unconscionability as a defense. However, “ ‘they need not be present in the same degree.’ [Citation.] Instead, they are evaluated on ‘ “a sliding scale.” ’ ” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125.) Thus, “ ‘[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to’ conclude that the term is unenforceable. [Citation.] Conversely, the more deceptive or coercive the bargaining tactics employed, the less substantive unfairness is required.’ ” (Id. at pp. 125-126.) The Court next evaluates Plaintiff’s claims that the delegation clause is substantively unconscionable.

Plaintiff’s argument as to substantive unconscionability focuses on the lack of mutuality in the overall arbitration agreement. She argues there the arbitration clause allows the company to unilaterally pursue certain claims in court by excluding “breaches of Section 4.” She also contends that Section 8 of the contract only requires the employee, but not the employer, to submit to personal jurisdiction in California.

“ ‘A provision is substantively unconscionable if it “involves contract terms that are so one-sided as to ‘shock the conscience,’ or that impose harsh or oppressive terms.” [Citation.] The phrases ‘harsh,’ ‘oppressive,’ and ‘shock the conscience’ are not synonymous with “unreasonable.” Basing an unconscionability determination on the reasonableness of a contract provision would inject an inappropriate level of judicial subjectivity into the analysis. “With a concept as nebulous as ‘unconscionability’ it is important that courts not be thrust in the paternalistic role of intervening to change contractual terms that the parties have agreed to merely because the court believes the terms are unreasonable. The terms must shock the conscience.” [Citations.]’ ” (Walnut Producers of California, supra, 187 Cal.App.4th at pp. 647-648.)

Delegation clauses are enforceable unless the party resisting arbitration can show the delegation clause specifically—not the arbitration agreement as a whole—is unconscionable. (Tiri, supra, 226 Cal.App.4th at p. 244); see also Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1559 [“whether the arbitration agreement as a whole is ultimately held to be unenforceable will have no bearing on the enforcement of the delegation clause itself”]; see also Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 72 [delegation clause must be treated as valid unless the party resisting arbitration “challenged the delegation provision specifically.”].) “If the party’s challenge is directed to the agreement as a whole—even if it applies equally to the delegation clause—the delegation clause is severed out and enforced; thus, the arbitrator, not the court, will determine whether the agreement is enforceable.” (Malone, supra, 226 Cal.App.4th at p. 1559.) This is a higher and much more difficult burden to meet: for example, in asserting that a discovery limitation was unconscionable, an employee would have to argue that the limitation “causes the arbitration of his claim that the Agreement is unenforceable to be unconscionable.” (Rent-A-Center, West, Inc., supra, 561 U.S. at p. 74.)

Here, as in Brennan, there are “three agreements–each nested inside the other”: (1) Nwasike’s Employment Agreement, (2) the arbitration provision (section 9), and (3) the delegation clause (incorporation of the AAA rules which delegates enforceability questions to the arbitrator). Plaintiff must specifically address why the delegation provision is unconscionable. (Brennan, supra, 796 F.3d at p. 1133.)

As to the arbitration provision generally, the Court finds much to warrant a finding that it is unconscionable. The clause expressly excludes arbitration of “breaches of Section 4 of this Agreement,” which relate to covenants not to solicit customers and employees, confidential information, and proprietary rights. In other words, this limitation “requires the employee to arbitrate the claims he or she is mostly likely to bring, but allows the employer to go to court to pursue the claims it is most likely to bring.” (Carbajal v. CWPSC, Inc., supra, 245 Cal.App.4th at p. 248.) Courts have “repeatedly” found such restrictions to be substantively unconscionable. (Ibid.)

Plaintiff also contends that Section 8 of the agreement unilaterally subjects Plaintiff to consent to the jurisdiction of state and federal courts in California. But Plaintiff does not elaborate on how this would be unconscionable – there is no claim that Defendants would avail itself of the law of some other state or jurisdiction. And Section 9 clarifies that the arbitration “shall be conducted in Los Angeles, California.” (Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 201-202 [“A forum selection clause within an adhesion contract will be enforced ‘as long as the clause provided adequate notice to the [party] that he was agreeing to the jurisdiction cited in the contract’ ”].) Thus, Plaintiff has not met her burden in establishing that Section 8 is unreasonable.

However, both of these arguments are directed to the enforceability of the arbitration provision and the overall Employment Agreement, not the terms of delegation. Because the arbitration clause incorporated the AAA rules, this included Rule 6(a), which grants to the arbitrator the “power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” (Waizman Decl., Ex. C, italics added.) This includes Plaintiff’s unconscionability arguments above, which do not address the provision that incorporates the delegation clause. Thus, Plaintiff’s arguments as to the validity and unconscionability of the arbitration clause are for the arbitrator to decide. (Brennan, supra, 796 F.3d at p. 1133; Aanderud v. Superior Court (2017) 13 Cal.App.5th 880, 884 [“We conclude that the delegation clause is enforceable and therefore it is the arbitrator, not the court, who is required to determine the enforceability of the arbitration provision”].)

On its face, the AAA incorporation clause, which implements a delegation of the arbitrability determination to the arbitrator, does not lack mutuality. The clause incorporates the AAA Employment Arbitration rules, “unless other rules are agreed upon by parties.” Thus, both sides are equally bound. There is nothing to suggest that this incorporation clause is unreasonably favorable to Defendants. (Tiri, supra, 226 Cal.App.4th at p. 249.)

In any event, the Court is not persuaded by Plaintiff’s argument that the unconscionable provisions cannot be severed out and the rest of the agreement enforced. The Court has discretion to refuse to enforce the entire contract if it is “ ‘permeated’ by unconscionability.” That is, the agreement “ ‘ “contains more than one unlawful provision.” ’ ” (Ajamian, supra, 203 Cal.App.4th 771, 803; see also Civ. Code, § 1670.5, subd. (a).) Given the low degree of procedural unconscionability and the Court’s finding that there is a lack of mutuality because of the exclusion of certain claims from arbitration, the Court may exercise its discretion to sever out the delegation provision for enforcement. (Cf. Carbajal v. CWPSC, Inc., supra, 245 Cal.App.4th at p. 254 [no abuse of discretion to decline to sever because the arbitration agreement contained “three substantively unconscionable terms”].)

The Court finds that arbitrability – including whether the arbitration agreement is unconscionable – is delegated to the arbitrator.

Thomas St. John, individually, may compel arbitration because the Complaint alleges that he is a managing agent of the Companies.

The Court finds that the incorporation clause clearly and unmistakably delegated the issues of arbitrability, including the enforceability of the agreements, to the arbitrator. Thus, the Court need not reach the issue of whether Thomas St. John individually may compel arbitration. (Henry Schein, Inc. v. Archer & White Sales, Inc. (2019) 586 U.S. ___ [139 S.Ct. 524, 529] [“When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless”].) However, because the issue may be framed as whether an arbitration agreement between Nonyelum Nwasike and Thomas St. John exists, the Court briefly considers the arguments.

Plaintiff argues that Defendant Thomas St. John individually has no right to compel arbitration. She states that he is not a signatory, she is suing him in his individual capacity and is not alleging an alter ego theory of liability, and equitable estoppel does not apply because the sexual harassment claims are not “inextricably intertwined” with the Employment Agreement.

There are six theories by which a non-signatory to a contract may be bound by the contract’s arbitration provisions: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing or alter ego, (5) estoppel, and (6) third-party beneficiary. (Bautista v. Fantasy Activewear, Inc. (2020) 52 Cal.App.5th 650, 657, fn. 6.)

Agency is applicable here. Non-signatories sued as agents of a signatory may enforce an arbitration agreement. (Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1284.) For example, in Dryer v. Los Angeles Rams (1985) 40 Cal.3d 406, 418, the plaintiff sued the Rams and various individuals “in their capacities as “ ‘owners, operators, managing agents, and in control [sic] of’ ” the Rams for breach of contract. (Dryer, supra, 40 Cal.3d at pp. 409–410, 418.) The California Supreme Court reversed the trial court’s denial of defendants’ petition to compel arbitration, holding that if “the individual defendants, though not signatories, were acting as agents for the Rams, then they are entitled to the benefit of the arbitration provisions.” (Id. at p. 418; Thomas v. Westlake (2012) 204 Cal.App.4th 605, 614; Valley Casework v. Comfort Construction, Inc. (1999) 76 Cal.App.4th 1013, 1021 [“In many cases, nonparties to arbitration agreements are allowed to enforce those agreements where there is sufficient identity of parties. For example, defendants who are not signatories to an arbitration agreement, but who are acting as agents for the party to the arbitration provision, may be allowed to enforce the arbitration clause”].)

Here, in relevant part, the Employment Agreement requires arbitration of “any dispute, controversy or claim, whether based on contract, tort, statute, discrimination, retaliation or otherwise, relating to, arising from or connected in any manner to this Agreement, or to any alleged breach of this Agreement, or arising out of or relating to Employee's employment or termination of employment.” The lawsuit falls within the agreement. Despite Plaintiff’s argument that her sexual harassment claim is not related to the Employment Agreement, the acts upon which the claim is based upon “aris[es] out of” her employment. (Complaint, ¶¶ 53(a)-(j) [“St. John also subjected Plaintiff to frequent and repeated harassing conduct . . . throughout her employment with the Company”]; 24 Hour Fitness, Inc. v. Superior Court, supra, 66 Cal.App.4^th 1199, 1210 [“all of [plaintiff’s claims] involve[d] claimed episodes of harassment arising from her employment”].)

While Plaintiff argues that she is suing Thomas St. John in his individual capacity and is not alleging alter ego liability, this is not supported by the Complaint. She names Thomas St. John individually, but her seventh cause of action for “Harassment Based Upon Sex and/or Gender in Violation of the FEHA)” is alleged against “All Defendants.” (Complaint, p. 22.) While Plaintiff does not use the words “alter ego,” she seems to be asserting a form of reverse alter ego liability in Paragraph 54 of the Complaint: “In addition, the Company is also liable for St. John’s clear campaign of frequent and repeated harassment based on sex and/or gender.”

Notably, the Complaint alleges that Thomas St. John was a managing agent of the entities and that at all relevant times, he acted as a supervisor. (Id. at ¶¶ 56, 110.) Plaintiff also alleges that “[t]he Company’s conduct, as described in paragraphs 17-55 above, was performed or ratified by its Managing Agents.” (Id. at ¶ 65.) These allegations in the Complaint “constitute judicial admissions.” (Westra v. Marcus Millichap Real Estate Investment Brokerage Co., Inc., supra, 129 Cal.App.4th at p. 766.) Therefore, Plaintiff alleges that Thomas St. John was an agent of the Defendant entities and he may compel arbitration as a non-signatory.

Alternatively, equitable estoppel may apply here. Under that doctrine in “both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 271.) “By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement.” (Id. at p. 272.) “[I]f a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot ‘ “ ‘have it both ways’ ” ’; the signatory ‘cannot, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the defendant is a non-signatory.’ ” (Goldman v. KPMG, LLP, supra, 173 Cal.App.4th at p. 220.)

Plaintiff contends the arbitration provision does not apply to sexual harassment claims because it is unrelated to her employment. The argument lacks merit. The scope of the arbitration provision extends to “any dispute, controversy or claim, whether based on contract, tort, statute, discrimination, retaliation or otherwise, relating to, arising from or connected in any manner to this Agreement, or to any alleged breach of this Agreement, or arising out of or relating to Employee’s employment or termination of employment.” This language is “very broad” and encompasses the harassment claims. (Larkin v. Williams, Woolley, Cogswell, Nakazawa & Russell (1999) 76 Cal.App.4th 227, 230.) The “arising out of or relating to” language is sufficient to put Plaintiff on notice that sexual harassment claims are subject to arbitration. As corroborated by the allegations in the Complaint, the entire dispute, including Plaintiff’s claim of sexual harassment, arises from or relates to her employment. In other words, the entire dispute as alleged would not have arisen at all but for Plaintiff’s employment. (See Simula Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 721 [the phrase “arising in connection with” in an arbitration agreement is construed broadly, and the factual allegations at issue “need only ‘touch matters’ covered by the contract containing the arbitration clause and all doubts are to be resolved in favor of arbitration”].)

The Court also briefly notes that Thomas St. John is alleged to be a “major shareholder of the Company.” (Complaint, ¶ 11.) In addition, Section 7 of the Employment Agreement states that it applies to the entities “and its respective affiliates, successors, and assigns.” (See also Valley Casework v. Comfort Construction, Inc., supra, 76 Cal.App.4th at p. 1021 [“An individual partner may be required to submit to arbitration where the partnership has agreed to that manner of dispute resolution”].) However, because Thomas St. John as an individual nonsignatory may compel arbitration under theories of agency or equitable estoppel, the Court does not consider whether he is third-party beneficiary.

Because on the facts, the incorporation of the AAA rules in the arbitration provision represents a clear and unmistakable intent to delegate issues of arbitrability to the arbitrator, the Court grants Defendants’ motion to compel arbitration.

[1] Shaw involved a “complex commercial dispute” between corporations in which the arbitration provision required “all disputes” to be submitted to the International Chamber of Commerce (ICC). The ICC’s rules allowed the arbitrator to resolve disputes about its own jurisdiction. (322 F.3d at p. 118.) Thus, the “broadly worded” agreement “unmistakably evidences the parties’ intent to arbitrate questions of arbitrability.” (Id. at pp. 124-125.)

[2] In the context of class actions, one federal court has questioned the practicality of a sophistication analysis: “The factors that might make someone ‘sophisticated’ are poorly suited to a standard definition that parties can rely upon to avoid uncertainty or surprise in the meaning of the instrument they signed. A party-by-party assessment of sophistication under some loose amalgam of personal education, line of work, professional knowledge, and so on would undermine contract expectations in potentially random and inconsistent ways.” (McLellan v. Fitbit, Inc. (N.D.Cal., Oct. 11, 2017, No. 3:16-CV-00036-JD) 2017 U.S. Dist. Lexis 168370, *10.)

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