Judge Bruce G. Iwasaki, Case Number: 23STCV26514, Date: 2024-08-16 Tentative Ruling

Moving Party: Defendants Trellis Advisors LP and Jeffrey Luzzi (Joined by Defendants Lotus Domaine Management LLC, Lotus Domaine III, LP, Lotus Domaine III GP LP, Lotus Domaine III-A LP, and Lotus Domaine Associates LLC)

Tentative Ruling: The Motion to Compel Arbitration is granted. The action is stayed pending arbitration. The following provisions are severed: (1) section 15.1 of the employment agreement in its entirety; (2) section 2 of the arbitration agreement in its entirety; (3) section 6 of the arbitration agreement, referencing Austin Texas and Texas Rules of Civil Procedure; (4) section 7 of the arbitration agreement in its entirety; (5) section 8 of the arbitration agreement following “Each party will pay its own Costs (as defined below) and attorneys' fees. . . ”; (6) section 11.1 of the employment agreement in its entirety; and (7) section 7.1 to the extent that it references “compensation.” The Lotus Defendants’ notice of joinder is granted.

This is an action for wrongful termination and for violations of the Labor Code. Plaintiff William Rossetter (“Plaintiff”) initiated this action on October 30, 2023. Plaintiff filed the operative First Amended Complaint (“FAC”) against Defendants Trellis Advisors LLC, Trellis Advisors LP, Lotus Domaine Management LLC, Lotus Domaine III LP, Lotus Domaine III GP LP, Lotus Domaine III-A LP, Lotus Domaine Associates LLC, Terra Rossa Family Office LP, Terra Rossa Family Office LLC, and Jeffrey Luzzi (collectively, “Defendants”), alleging the following causes of action: (1) Civil Penalties Pursuant to the Labor Code Private Attorneys General Act of 2004; (2) Retaliation in Violation of Labor Code § 98.6; (3) Retaliation in Violation of Labor Code § 1102.5; (4) Wrongful Discharge in Violation of Public Policy; (5) Failure to Timely Pay Earned Wages During Employment in Violation of Labor Code § 204; (6) Failure to Provide Complete and Accurate Wage Statements in Violation of Labor Code § 226; (7) Failure to Pay All Wages Timely Upon Separation of Employment in Violation of Labor Code §§ 201, 202 and 203; (8) Unfair Business Practices in Violation of Business and Professions Code §§ 17200, et seq.; (9) Accounting; (10) Declaratory Relief; and (11) Intentional Infliction of Emotional Distress.

On February 13, 2024, Defendants Trellis Advisors LLC, Terra Rossa Family Office LP, and Terra Rossa Family Office, LLC filed their joint answer to the FAC.

On March 22, 2024, Defendants Lotus Domaine Management LLC, Lotus Domaine III, LP, Lotus Domaine III GP LP, Lotus Domaine III-A LP, and Lotus Domaine Associates LLC (collectively, the “Lotus Defendants”) filed their answer to the FAC.

On June 25, 2024, Defendants Trellis Advisors LP (“Trellis”) and Jeffrey Luzzi (“Luzzi”) (collectively, hereinafter “Movants”) filed the instant motion to compel arbitration pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2, and the California Arbitration Act on the ground that Plaintiff entered into a valid and enforceable arbitration agreement in connection with his employment with Trellis. These defendants further request that the current action be stayed during the pendency of arbitration. The Lotus Defendants join in this motion pursuant to the theory of agency and equitable estoppel.

California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-972.) The petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, the party opposing the petition then bears the burden of proving by a preponderance of the evidence any fact necessary to demonstrate that there should be no enforcement of the agreement, and the trial court sits as a trier of fact to reach a final determination on the issue. (Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, 413.) The Court is empowered by Code of Civil Procedure section 1281.2 to compel parties to arbitrate disputes pursuant to an agreement to do so.

Under the California law, arbitration agreements are valid, irrevocable, and enforceable, except on such grounds that exist at law or equity for voiding a contract. (Winter v. Window Fashions Professions, Inc. (2008) 166 Cal.App.4th 943, 947.) The party moving to compel arbitration must establish the existence of a written arbitration agreement between the parties. (Code Civ. Proc. § 1281.2.) In ruling on a motion to compel arbitration, the court must first determine whether the parties actually agreed to arbitrate the dispute, and general principles of California contract law help guide the court in making this determination. (Mendez v. Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 541.)

Here, Movants submit evidence that Plaintiff signed an employment agreement on August 13, 2022 that included an arbitration provision as part of his promotion from Managing Direct of Deal Origination to Managing Direct/V.P. of Deal Origination. (Motion at pp. 10-11; Luzzi Decl. ¶¶ 3-6, Exhs. 1-4; see also Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218 [“With respect to the moving party's burden to provide evidence of the existence of an agreement to arbitrate, it is generally sufficient for that party to present a copy of the contract to the court.”].)

Any dispute, claim, action, causes of action, or controversy of any kind relative to the validity, construction, performance, application or interpretation of this Agreement shall be submitted to final and finding arbitration . . . . . . No Jury. The Company and Employee give up each of the rights to trial by jury for claims covered by this Agreement. The Company and Employee further understand that arbitration represents an alternative to a jury trial, and that each is giving up any right that each may otherwise have for a civil court action, which would allow a judge or jury to decide any issue or dispute.

Based on this evidence, the Court finds that Movants have met their initial burden and that the arbitration agreement exists between the parties. Notably, Plaintiff does not deny signing the arbitration agreement. Instead, Plaintiff contends that the arbitration agreement is unenforceable because it is unconscionable and severance would not cure the defects found therein. The Court shall address this issue next.

Next, Plaintiff argues that the arbitration agreement is unenforceable because it is procedurally and substantively unconscionable. (Opposition at pp. pp. 3-15.)

An agreement is unenforceable if it is both procedurally and substantively unconscionable. (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125; Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910.) But procedural and substantive unconscionability need not be present in the same degree. (OTO, supra, 8 Cal.5th at 125.) Courts use a “sliding scale” approach—“the more substantively unconscionable the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz v. Found Health Psychcare Servs., Inc. (2000) 24 Cal.4th 83, 114.) Under general contract principles, unconscionability has both a procedural and substantive element, with the former focusing on oppression or surprise due to unequal bargaining power, and the latter focusing on overly harsh or one-sided rules (Armendariz, supra, 24 Cal.4th at p. 114.) Both procedural and substantive unconscionability must be present in order for a court to exercise its discretion to refuse to enforce a contract on the basis of unconscionability. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.)

“Procedural unconscionability pertains to the making of the agreement; it focuses on the oppression that arises from unequal bargaining power and the surprise to the weaker party that results from hidden terms or the lack of informed choice.” (Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 795.) Arbitration clauses are often found in adhesion contracts (standardized contracts drafted by a party of superior bargaining power and presented to the weaker party on a take-it-or-leave-it basis). (See, e.g., Armendariz, supra, 24 Cal.4th at 113-114.)

Here, Plaintiff argues that the arbitration agreement is procedurally unconscionable because it is an adhesion contract and it imposes another state’s laws in the interpretation of the agreement. (Opposition at pp. 4-5.)

As to the former argument, Movants contend that the arbitration agreement is not a contract of adhesion because Plaintiff had an opportunity to consult with an attorney before signing the agreement. (Reply at pg. 4.) However, this argument is not persuasive because, upon review of the arbitration agreement, there is no indication that Plaintiff had an opportunity to opt-out of the arbitration provision. Nevertheless, the mere fact an adhesion contract is involved does not per se render the arbitration provision unenforceable because such contracts are “an inevitable fact of life for all citizens—businessman and consumer alike.” (Graham v. Scissor-Tail, Inc.¿(1981) 28 Cal.3d 807, 817.)

With regard to the latter argument, Movants argue that the choice of law provision should not suggest that the agreement is procedurally unconscionable because they are willing to stipulate for arbitration to be held in Los Angeles County. (Reply at 5.) While Movants are willing to stipulate to not enforce this provision, such choice of law provisions have been found to be procedurally unconscionable because it would require an employee to hire an out-of-state attorney in order to fully grasp the legal ramifications of the arbitration agreement. (See Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 244.) Additionally, under Labor Code section 925, employers are prohibited for requiring an employee to adjudicate their claims that arising in California outside of California. (Lab. Code, § 925, subds. (a)(1)-(2).)

The Court finds that there is a moderate degree of procedural unconscionability because the arbitration agreement is an adhesion contract and it contains an unlawful – and thus, in California, unenforceable – choice of law provision.

Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether the terms create overly harsh or one-sided results as to shock the conscience. (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1515; Sanchez, supra, 61 Cal.4th at 910-911 [an “old-fashioned bad bargain” or a contract term which “merely gives one side a greater benefit” insufficient].)

Here, Plaintiff argues that the arbitration agreement has a high degree of substantive unconscionability for the following reasons. First, Plaintiff contends that the agreement is one-sided because it excludes claims that Movants could bring for provisional injunctive relief, permanent injunctive relief, and specific performance relating to confidentiality, trade secret claims, non-compete and non-solicitation claims. (Opposition at pp. 6-7; Luzzi Decl., Exh. 4 at § 7.) Plaintiff argues that this is one-sided because he must arbitrate all of his claims and results in a lack of mutuality. (Ibid., relying on Murrey v. Superior Court (2023), 87 Cal.App.5th 1223, 1251-1252.)

In reply, Movants argue that this provision is not substantively unconscionable because it merely amounts to a bad bargain and they are permitted to include such terms for extra protection as a margin of safety based on commercial needs. (Reply at pg. 7, relying on Pinnacle Museum Tower Ass’n v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246 and Balthazar v. Forever 21, Inc. (2016) 62 Cal. 4th 1237, 1250.) This argument is unpersuasive because the arbitration agreement does not merely permit Movants to seek preliminary injunctive relief through the courts as was the case in Balthazar. Instead, through the arbitration agreement, Movants seek to retain the advantage of adjudicating their specific claims through the courts but require Plaintiff to go through arbitration for any and claims that arise from his employment. This lack of mutuality has been found to increase an agreement’s substantive unconscionability. (See Murrey, supra, 87 Cal.App.5th at 1251-1252.)

Second, Plaintiff argues that the arbitration agreement is substantively unconscionable because it requires him to waive protections that are afforded to California employees by requiring Plaintiff to agree that money damages are not an adequate remedy for a breach of the employment agreement. (Opposition at pp. 7-8, relying on Alberto v. Cambrian Homecare (2023) 91 Cal.App.5th 482, 492-493.) Movants effectively concede that this provision is substantively unconscionable on the basis that it can be severed from the arbitration agreement. (Reply at pg. 8.)

Third, Plaintiff argues that the arbitration agreement improperly increases his risk of paying for Defendant’s attorney fees and costs. (Opposition at pp. 8-9, relying on Wherry v. Award, Inc. (2011) 192 Cal.App.4th 1242, 1248-1249; Luzzi Decl., Exh. 4 at §§ 8-9.) Plaintiff points out that the Labor Code only awards attorney’s fees and costs to an employer if a claim had been brought in bad faith. (See Lab. Code §218.5.) Movants effective concede that this provision is substantively unconscionable by stating that this provision can be severed. (Reply at pp. 8-9.)

Fourth, Plaintiff contends that the arbitration agreement improperly puts him at risk of paying arbitration costs in excess of what it would cost to file a lawsuit in court by authorizing the arbitrator to award all costs to the prevailing party. (Opposition at pp. 9-10; Luzzi Decl., Exh. 4 at §§ 8-9.) Again, Defendants have conceded that this provision is substantively unconscionable because they have stipulated to pay the arbitration fees upfront. (Reply at pg. 8.)

Fifth, Plaintiff argues that the employment agreement improperly precludes employees from discussing their salary with others during their employment and thereafter, and if this provision is violated, Movants are permitted to seek remedies through the court. (Opposition at pg. 10; Luzzi Decl., Exh. 3, §§ 7.1, 7.2, Exh. 4 §§ 3, 7.) Plaintiff points out that employers are prohibited from enforcing such a requirement under Labor Code §§ 1197.5(k)(1).

Movants contend that Plaintiff misrepresents the clause pertaining to employee wages because confidential information does not include information that is independently known by the employee. (Reply at pg. 9.) But under section 7.1 of the employment agreement, confidential information “includes: personnel information, including the identity of employees of the Company, their responsibilities, competence, abilities, and compensation.” (Luzzi Decl., Exh. 3 at § 7.1.) Thus, if an employee discussed salary information, Movants are permitted under the arbitration agreement to seek equitable remedies from the court. (Luzzi Decl., Exh. 4 at § 7.) As discussed above, this one-sided remedy is substantively unconscionable. Additionally, because discussing one’s or other’s wages is a substantive right under Labor Code § 1197.5(k)(1), the employment agreement improperly restricts this right under Labor Code § 925. (See Alberto, supra, 91 Cal.App.5th at 493 [“A facially illegal provision, in direct contravention of the Labor Code, is unconscionable.”].)

Sixth, Plaintiff argues that the arbitration agreement is substantively unconscionable because it requires arbitration to be held in Texas in violation of Labor Code § 925(a)(1). (Opposition at pp. 10-11; Luzzi Decl., Exh. 3 at § 15.1, Exh. 4 at §§ 6, 7, 10.) As stated above within the analysis for procedurally unconscionability on this issue, the Court agrees. Defendants effectively concede that this provision is unconscionable because they are willing to stipulate to arbitrate the dispute in Los Angeles County.

Seventh, Plaintiff asserts that the arbitration agreement is substantively unconscionable because it requires the application of Texas law. The Court agrees. Because Texas law does not allow for the private enforcement of the Labor Code, the incorporation of Texas law to arbitration agreement involving a California employee is substantively unconscionable. (Pinela, supra, 238 Cal.App.4th at 251-252.) Furthermore, Movants have effectively conceded this issue because they are willing to stipulate to the application of California Law. (Reply at pg. 7.)

Lastly, Plaintiff asserts that the non-compete provision found within the employment agreement increases the degree of substantive unconscionability because under California law an employee has the right to compete with his former employer in a fair and legal manner. (Opposition at pg. 13, relying on Bus. & Prof. Code § 16600; Luzzi Decl., Exh. 11.1(b)-(e).) Defendants concede this issue by stating that any provision relating to non-solicitation can be severed.

Because of the multiple defects found within the arbitration agreement, Plaintiff argues that the instant motion should be denied because the agreement is permeated with unlawfulness, rending it impossible to cure these defects through severance. (Opposition at pp. 13-14.)

Just last month our Supreme Court explained that “no bright line rule requires a court to refuse enforcement if a contract has more than one unconscionable term. Likewise, a court is not required to sever or restrict an unconscionable term if an agreement has only a single such term. Instead, the appropriate inquiry is qualitative and accounts for each factor Armendariz identified. At the outset, a court should ask whether ‘the central purpose of the contract is tainted with illegality.’ ” (Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 546, quoting Armendariz, supra, 24 Cal.4th at pg. 124 (italics in original).) “If no ‘reformation is required,’ the offending provision can be severed or limited, and ‘the rest of the arbitration agreement left intact,’ then severance or restriction is the preferred course for provisions that are collateral to the agreement's main purpose.” (Id. at 547, quoting (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1075.)

In its seminal opinion in Armendariz, our Supreme Court concluded two factors weighed against severance: (1) the fact that the arbitration agreement contained more than one unlawful provision; and (2) regarding lack of mutuality, the fact that there was “no single provision a court can strike or restrict in order to remove the unconscionable taint from the agreement.” (Armendariz, supra, 24 Cal.4th at pp. 124–125.)

Here, as stated above, several provisions found within the arbitration agreement are unlawful under California Law. However, the Court declines to find that the “central purpose” of the arbitration agreement is “tainted with illegality.” Based on the severance clause within the arbitration agreement, it is clear that the purpose of this agreement is to ensure that the disputes between the parties are resolved through arbitration. It states: “If any portion of this Exhibit B is held invalid or unenforceable, other than the limitation of the arbitrator's jurisdiction to individual employee claims, this portion of the Agreement shall be modified to the minimum extent necessary to make it or its application valid.” (Luzzi Decl., Exh. 4 at § 12.) This is in contrast to the arbitration clause in Graham Oil Co. v. ARCO Products Co., a Div. of Atlantic Richfield Co. that contained a survival clause despite having illegal provisions within that clause. (Id., (9th Cir. 1994) 43 F.3d 1244, 1248-1249, as amended (Mar. 13, 1995).)

The Ramirez decision noted that “if the contract contains a severance clause, the court should take it into account as an expression of the parties’ intent that an agreement curable by removing defective items can otherwise be enforced.” (Ramirez, supra, 16 Cal.5^th at p. 547.) Here, paragraph 12 of the arbitration agreement provides that if any portion of it is found invalid (other than the arbitrator’s jurisdiction limited to individual employee claims) the “Agreement shall be modified to the minimum extent necessary to make it or its application valid.”

Here, unlike the arbitration agreement in Armendariz, the Court is capable of severing the unlawful provisions without needing to reform the agreement. For instance, the choice of venue provision and governing law provisions found within the employment agreement and arbitration agreement can be severed without issue because Labor Code section 925 by operation of law that the action shall be adjudicated in California and that California law shall govern. (Lab. Code § 925(b).) Thus, section 15.1 of the employment agreement and section 2 of the arbitration agreement are deemed severed in their entirety. Likewise, the following language from section 6 of the arbitration agreement is severed: “to be held in Austin, Texas. Discovery in any arbitration proceeding shall be conducted according to the Texas Rules of Civil Procedure.”

Moreover, the provision that permits Movants, not Plaintiff, to seek equitable relief from the court can be severed without issue. (See Manning v. Parsons Transp. Group, Inc. (E.D. Cal. 2016) 2016 U.S. Dist. LEXIS 76733 at *9.) Thus, section 7 of the arbitration agreement is deemed severed.

Furthermore, with regard to section 8 of the arbitration agreement for arbitration fees and costs that permits the prevailing party to recover all of their expenses, including attorney’s fees, this provision can be severed following the language after it states “Each party will pay its own Costs (as defined below) and attorneys' fees. . . .” (Luzzi Decl,, Exh. 4 at ¶ 8.) This is because courts have interpreted arbitrations agreements that lack cost provisions to “implicitly include an agreement to proportion costs in a manner that is reasonable for the plaintiff.” (Little, supra, 29 Cal.4th at 1080-1081.) Thus, the costs unique to arbitration would still be borne by the employer.

Moreover, with regard to the non-compete provisions and the prohibition of salary discussion found within the employment agreement, severance of these provisions is feasible. Because section 11.1 and a portion of section 7.1 that references compensation violate California law, the Court deems these provisions severed.

Accordingly, because the arbitration agreement is not permeated with illegality and reformation of the agreement is not required, severance of the illegal provisions is the proper course of action. (See Little, supra, 29 Cal.4th at 1075.) Consequently, the following provisions are severed: (1) section 15.1 of the employment agreement in its entirety; (2) section 2 of the arbitration agreement in its entirety; (3) section 6 of the arbitration agreement, referencing Austin Texas and Texas Rules of Civil Procedure; (4) section 7 of the arbitration agreement in its entirety; (5) section 8 of the arbitration agreement following “Each party will pay its own Costs (as defined below) and attorneys' fees. . . ”; (6) section 11.1 of the employment agreement in its entirety; and (7) section 7.1 to the extent that it references “compensation.”

“[A]bsent some ambiguity in the agreement. . . it is the language of the contract that defines the scope of disputes subject to arbitration.” (EEOC v. Waffle House Inc. (2002) 534 U.S. 279.)

Here, Movants argue that all of Plaintiff’s claims are subject to arbitration because they arise from his employment. (Motion at pg. 16.) The Court finds that the arbitration agreement is not ambiguous. It states that arbitration applies to “Any dispute, claim, action, causes of action, or controversy of any kind relative to the validity, construction, performance, application or interpretation of this Agreement shall be submitted to final and finding arbitration” (Luzzi Decl, Exh. 4 at § 6.) Thus, Plaintiff’s claims relating to his employment fall within the scope of the arbitration agreement.

Accordingly, the Court finds that Plaintiff’s claims are subject to arbitration.

The Lotus Defendants move to join the instant motion, contending that each of them are covered by the arbitration agreement because the FAC alleges that they are agents of the Movants. (Notice of Joinder at pg. 4, relying on Thomas v. Westlake (2012) 204 Cal. App. 4th 605, 613; FAC ¶¶ 8, 10.) Thus, the Lotus Defendants argue that Plaintiff is bound to arbitrate his individual claims against them. Notably, Plaintiff has failed to provide any response to this argument.

Under the circumstance, the Court finds that arbitration of Plaintiff’s claims against the Lotus Defendants because they are alleged to be agents of the Movants. Courts have found that an agent of a signatory may enforce an arbitration agreement (24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199; Dreyer v. Los Angeles Rams (1985) 40 Cal.3d 406, 418.)

Accordingly, the Court finds that the arbitration agreement applies to all parties in this action.

If a party applies to a court “for an order to arbitrate a controversy which is an issue involved in an action or proceeding pending before a court of this State and such application is undetermined, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until the application for an order to arbitrate is determined and, if arbitration of such controversy is ordered, until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.” (Code of Civ. Proc., § 1281.4.)

Because the Court has found that arbitration is warranted in this matter, the Court also stays the proceedings during the pendency of the arbitration process.

Based on the foregoing, the arbitration agreement is valid and enforceable with the illegal and unconscionable provisions severed from both the arbitration agreement and corresponding employment agreement. The Court grants Movant’s motion to compel arbitration. The Court reiterates that the following provisions are severed and unenforceable with respect to the arbitration proceedings here: (1) section 15.1 of the employment agreement in its entirety; (2) section 2 of the arbitration agreement in its entirety; (3) section 6 of the arbitration agreement, referencing Austin Texas and Texas Rules of Civil Procedure; (4) section 7 of the arbitration agreement in its entirety; (5) section 8 of the arbitration agreement following “Each party will pay its own Costs (as defined below) and attorneys' fees. . . ”; (6) section 11.1 of the employment agreement in its entirety; and (7) section 7.1 to the extent that it references “compensation.”

The Court further grants the Lotus Defendants’ notice of joinder, requiring that the claims asserted against them are also subject to arbitration. The Court further stays the proceedings during the pendency of the arbitration process.

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