Judge: Daniel S. Murphy, Case: 22STCV27650, Date: 2022-11-21 Tentative Ruling

Case Number: 22STCV27650    Hearing Date: November 21, 2022    Dept: 32

BACKGROUND

            On August 24, 2022, Plaintiff Nida Lakhia filed this employment action against Defendants Yoonsuk Jung, In Soo Jung, Dong In Entech Co., Ltd., and Wayb, Inc. The complaint alleges FEHA and Labor Code violations and seeks penalties under PAGA. Pursuant to the U.S. Supreme Court’s recent decision in Viking River Cruises, Inc. v. Moriana, Defendant Wayb presently moves to compel arbitration of Plaintiff’s claims, including the individual PAGA claims. Defendant Jung, Wayb’s CEO, subsequently filed a joinder to the motion.

LEGAL STANDARD

The Federal Arbitration Act (“FAA”) states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The term “involving commerce” is interpreted to mean simply “affecting commerce” to give the FAA the broadest reach possible, and does not require a transaction that is actually “within the flow of interstate commerce.” (See Allied-Bruce Terminix Co. v. Dobson (1995) 513 U.S. 265, 273-74; Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 56.) Moreover, parties may agree to apply the FAA notwithstanding any effect on interstate commerce. (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 355.)

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, 971-72.) California law states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

DISCUSSION

I. Existence of a Valid Agreement

“The moving party ‘can meet its initial burden by attaching to the motion or petition a copy of the arbitration agreement purporting to bear the opposing party's signature.’” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165, quoting Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 543-44.)

Prior to beginning employment, Plaintiff signed an employment agreement with Defendant, which contains an arbitration clause stating: “The parties agree that any and all disputes, claims or controversies arising out of or relating to the provisions of this Agreement or Employee's employment with WAYB, including but not limited to allegations of wrongful discharge, discrimination, harassment, or any violation of federal and state constitution, statutes or regulations, or the scope or applicability of the Agreement to arbitrate that are not resolved by their mutual agreement, shall be submitted to and decided by final and binding arbitration before JAMS.” (Jung Decl., Ex. 4.) The agreement is hand-signed by Plaintiff and Defendant Jung as CEO of Defenant Wayb.

Plaintiff does not dispute the existence of the agreement or that she signed it. Thus, Defendant has established the existence of an arbitration agreement covering the claims at issue.

II. Dissolved Entity

Plaintiff argues that because Defendant Wayb dissolved as a California corporation and reformed as a Delaware corporation (Shirazi Decl., Ex. F), it is a foreign corporation doing business in California, rendering it unable to pursue this motion. (Opp. 11:18-13:22.) “A foreign corporation . . . which transacts intrastate business without complying with Section 2105 shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state . . . .” (Corp. Code, § 2203(c).) The prohibition on maintaining an action or proceeding only applies while the foreign corporation is not in compliance with Corporations Code section 2105. Plaintiff has no evidence that Wayb is not in compliance with Section 2105. In fact, Plaintiff’s own evidence actually shows that Wayb has complied with Section 2105. (See Shirazi Decl., Ex. F [Statement and Designation for Out-of-State Stock Corporation]; Corp. Code, § 2105 [foreign corporation shall file “a statement and designation signed by a corporate officer”].) Defendant’s evidence shows that Wayb was approved by the California Secretary of State to conduct intrastate business. (Jung Reply Decl., Ex. 5.)

The employment agreement provides that “WAYB shall assign this Agreement and all rights and obligations hereunder to any corporation or other business entity which succeeds to all or substantially all of the business of WAYB through merger, consolidation, corporate reorganization or by acquisition of all or substantially all of the assets of WAYB.” (Jung Decl., Ex. 4, § 12.) Practically all of Defendant’s operations remain the same after the conversion, and all assets were transferred to the Delaware corporation. (Jung Reply Decl. ¶¶ 6, 8.) Therefore, the Delaware Wayb is a successor entitled to enforce the agreement.

In sum, Defendant can pursue this motion despite its corporate status.  

III. Labor Code section 229

            Plaintiff argues that Labor Code section 229 prohibits arbitration in this case. (Opp. 16:11-20.) Section 229 provides: “Actions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.” (Lab. Code, § 229.) However, the FAA preempts state laws that discriminate against arbitration, including Section 229. (Perry v. Thomas (1987) 482 U.S. 483, 491.) Under the FAA, the only bases for revoking an arbitration agreement are those that apply to contracts generally. (See 9 U.S.C. § 2.)

            The FAA applies to this agreement because Defendant conducts interstate business. (See Jung Decl. ¶ 4 [Wayb sells products nationwide through websites and third party companies].) Plaintiff argues that the FAA does not apply because “Plaintiff was hired and exclusively rendered services in California as a Financial Navigation accountant from her residence in California.” (Opp. 16:26-28.) However, interstate commerce is defined broadly for purposes of the FAA, and the FAA’s reach is not limited to situations in which the individual employee conducts interstate work. (See Allied-Bruce Terminix Co., supra, 513 U.S. at pp. 273-74; Citizens Bank, supra, 539 U.S. at p. 56.) While Plaintiff may have physically remained in California while working for Defendant, she provided financial services to a company that sold products nationwide. Thus, the transaction “affects” interstate commerce, and the FAA applies. (Ibid.) Because the FAA applies, it preempts Labor Code section 229. (See Perry, supra, 482 U.S. at p. 491.)

IV. Labor Code section 432.6

            Labor Code section 432.6 prohibits an employer from requiring an employee to arbitrate FEHA claims as a condition of employment. However, “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” (Id., subd. (f).) As discussed above, the FAA applies and preempts Labor Code provisions that discriminate against arbitration.

V. Unconscionability

Unconscionability has both a procedural and a substantive element. (Aron v. U-Haul Co. of California (2006) 143 Cal.App.4th 796, 808.) Both elements must be present for a court to invalidate a contract or clause. (Ibid.) However, the two elements need not be present in the same degree; courts use a sliding scale approach in assessing the two elements. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 242.)  

            a. Procedural Unconscionability

            Procedural unconscionability “focuses on two factors: ‘oppression’ and ‘surprise.’ ‘Oppression’ arises from an inequality of bargaining power which results in no real negotiation and ‘an absence of meaningful choice.’ ‘Surprise’ involves 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.” (Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 484, internal citations and quotations omitted.)   

            Plaintiff argues that the agreement is procedurally unconscionable because it was a condition of employment. (Opp. 19:26-20:15.) Courts have recognized that adhesion contracts in the employment context always contain some degree of procedural unconscionability. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.) However, the mere fact that an arbitration agreement is a condition of employment is not dispositive. (Ibid.) Absent evidence of oppression or surprise, the degree of procedural unconscionability will be low. (Ibid.)

            Plaintiff further argues that “Defendant did not explain the advantages and/or disadvantages of the arbitration agreement to Plaintiffs.” (Opp. 20:16-17.) However, there is no indication that Plaintiff was prevented from seeking further information about arbitration prior to signing the agreement. “[O]ne who signs an instrument which on its face is a contract is deemed to assent to all its terms.” (Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1049.) “No law requires that parties dealing at arm's length have a duty to explain to each other the terms of a written contract, particularly where, as here, the language of the contract expressly and plainly provides for the arbitration of disputes arising out of the contractual relationship.” (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1674.)

            Lastly, Plaintiff argues that “the arbitration agreement was buried in a stack of mandatory hiring paperwork. Rather, the arbitration agreement was not presented to Plaintiff as a stand-alone document with a separate title and heading for each section.” (Opp. 20:24-27.) Plaintiff cites no authority for the proposition that an arbitration agreement must be a standalone document. The provision is clearly labeled under its own section within the employment contract. (See Jung Decl., Ex. 4, § 15.) The agreement is not “visually impenetrable,” nor does it “challenge the limits of legibility.” (See OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 128.) Even if the agreement was presented along with other documents, Plaintiff still signed it and is responsible for reading it. (See 24 Hour Fitness, Inc. v. Superior Ct. (1998) 66 Cal.App.4th 1199, 1215 [“A party cannot use his own lack of diligence to avoid an arbitration agreement”].)

            Therefore, there is a minimal degree of procedural unconscionability.

b. Substantive Unconscionability

Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create overly harsh or one-sided results as to shock the conscience. (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1515.)

With regards to a mandatory employment arbitration agreement, the Supreme Court has imposed the following requirements: (1) the agreement must provide for a neutral arbitrator; (2) the agreement must provide for more than minimal discovery; (3) the arbitration decision must be written and disclose the essential findings and conclusions upon which an award is based; (4) the agreement must provide for all of the types of relief that would otherwise be available in court; and (5) the agreement must not require employees to pay the costs of arbitration. (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 102.) The agreement in this case satisfies the Armendariz factors. (See Jung Decl., Ex. 4.) Plaintiff does not challenge this aspect of the agreement.

Instead, Plaintiff argues that the agreement is substantively unconscionable because the “arbitration provision provides a carve-out for the confidentiality, and anti-competition claims that only Defendant WayB has the right to bring.” (Opp. 21:10-12.) Plaintiff does not point to any part of the contract reserving Defendant’s right to bring an action in court. In reality, the arbitration provision applies to “any and all disputes, claims or controversies arising out of or relating to the provisions of this Agreement or Employee's employment with WAYB,” which includes claims by either Plaintiff or Defendant. (See Jung Decl., Ex. 4, § 15.) Plaintiff also argues that Business and Professions Code section 16600 prohibits noncompetition clauses in employment contracts. (Opp. 21:16-22:18.) These provisions are unrelated to the arbitration provision, which is still enforceable. Even if these provisions rendered the arbitration provision unconscionable, they may be severed. (See Armendariz, supra, 24 Cal.4th at p. 124.)   

In sum, the arbitration provision is not substantively unconscionable.

VI. Disposition of PAGA Claims

            Overturning the Iskanian rule, the U.S. Supreme Court held that individual PAGA claims may be split off and compelled to arbitration if the parties so agree. (See Viking River, supra, 142 S.Ct. at pp. 1923-24.) Here, the parties have agreed to arbitrate all claims arising out of Plaintiff’s employment. (Jung Decl., Ex. 4.) Therefore, Plaintiff’s individual PAGA claims must be compelled to arbitration.

            The Court in Viking River held that a plaintiff loses standing to assert a representative PAGA claim once her own individual claims are compelled to arbitration because “a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action.” (Viking River, supra, 142 S.Ct. at p. 1925.) However, the California Supreme Court, interpreting the language of the Labor Code, held otherwise in ruling that a plaintiff retains PAGA standing even after their individual claims are settled. (Kim v. Reins International California, Inc. (2020) 9 Cal.5th 73, 80.)

Only an “aggrieved employee” has standing to sue under PAGA. (Lab. Code, § 2699, subd. (a).) An “aggrieved employee” is defined as someone “who was employed by the alleged violator” and “against whom one or more of the alleged violations was committed.” (Id., subd. (c).) This does not require an employee to actually maintain a claim against the employer to have standing. “The remedy for a Labor Code violation, through settlement or other means, is distinct from the fact of the violation itself.” (Kim, supra, 9 Cal.5th at p. 84.) “The Legislature defined PAGA standing in terms of violations, not injury. [Plaintiff] became an aggrieved employee, and had PAGA standing, when one or more Labor Code violations were committed against her. (See § 2699(c).) Settlement [would] not nullify these violations.” (Ibid.) By the same logic, arbitration of the individual claims would also not nullify those violations.

The U.S. Supreme Court in Viking River cited to Kim in passing but did not substantively discuss the central logic of Kim, as outlined above. Viking River provides no justification for repudiating Kim’s interpretation of PAGA standing. Indeed, Justice Barrett referred to the Court’s analysis of state law as “unnecessary to the result,” and Justice Sotomayor acknowledged that “if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.” (Viking River, supra, 142 S.Ct. at pp. 1925-26; see also Wisconsin v. Mitchell (1993) 508 U.S. 476, 483 [SCOTUS is “bound by a state court's construction of a state statute”].) The U.S. Supreme Court in Viking River did not purport to overturn any part of Kim. This Court will follow Kim on a purely state law matter. The issue of PAGA standing has nothing to do with arbitration and is not preempted by the FAA. Therefore, Plaintiff retains standing to assert the representative PAGA claims. The question of whether Plaintiff is an exempt employee goes to the merits of the case and cannot be addressed in this motion.

CONCLUSION

            Defendant Wayb, Inc.’s motion to compel arbitration is GRANTED as to Plaintiff’s individual PAGA claims. The remaining representative PAGA claims are stayed.