Judge David S. Cunningham, Case Number: 24STCV21118, Date: 2025-02-03 Tentative Ruling

Judge: David S. Cunningham, Case: 24STCV21118, Date: 2025-02-03 Tentative Ruling

Moving Party: Capstone Green Energy LLC (“Capstone”) and Erick Kim (collectively “Defendants”)

Opposing Party: Mark Estrada and Ricardo Montalvo (collectively “Plaintiffs”)

Estrada worked for Capstone from June 2016 to late July 2024. (See Estrada Decl., ¶ 2; see also Scholl Decl., ¶ 4.)[1]

Montalvo started working for Capstone in June 2023 and still works there. (See Montalvo Decl., ¶ 2.)

Plaintiffs allege that Defendants subjected them and other current and former employees to multiple wage-and-hour violations.

“[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable.” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4^th 394, 413.)

“Under ‘both federal and state law, the threshold question . . . is whether there is an agreement to arbitrate.’” (Cruise v. Kroger Co. (2015) 233 Cal.App.4^th 390, 396, emphasis in original.)

The burden of proof rests with the petitioner. (See Rosenthal, supra, 14 Cal.4^th at 413 [requiring the petitioner to prove the existence of the agreement “by a preponderance of the evidence”].) To meet the burden, “the provisions of the written agreement and the paragraph that provides for arbitration . . . must be stated verbatim or a copy must be physically or electronically attached to the petition and incorporated by reference.” (Cal. Rules of Court, rule 3.1330; see also Condee v. Longwood Management Corp. (2001) 88 Cal.App.4^th 215, 218 [same].)

“Competent evidence is required to establish both the existence of the arbitration agreement and any ground for denial.” (Knight, et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group December 2023 Update) ¶ 5:321.) “The verified petition (and attached copy of the agreement) normally proves the existence of the arbitration agreement. Affidavits or declarations may be necessary when factual issues are tendered.” (Ibid.)

Estrada signed Capstone’s arbitration agreement on April 15, 2022. (See Scholl Decl., ¶ 3.)

The agreement is attached to the declaration of Capstone’s director of human resources, Raymond Scholl, at exhibits 1 and 2. It:

* states that “any controversy, claim or dispute between” the employee and Capstone “and/or any of [Capstone’s] related entities, holding companies, parents, subsidiaries, divisions, officers, shareholders, directors, employees, agents, insurers, vendors, customers, predecessors, successors, and assigns . . . will be submitted to final and binding arbitration” (id. at Exs. 1, 2);

* excludes certain claims from arbitration – e.g., claims for sexual assault (see ibid.);

BY AGREEING TO THIS BINDING MUTUAL ARBITRATION PROVISION, BOTH I AN COMPANY GIVE UP ALL RIGHTS TO A TRIAL BY JURY. This Mutual Agreement is to be construed as broadly as is permissible under applicable law. I understand that this Agreement is voluntary and my decision to accept or reject it will not impact my employment in any way.

I HAVE READ, UNDERSTAND AND VOLUNTARILY AGREE TO THE ABOVE ARBITRATION AGREEMENT.

Facts and terms like these normally suffice to establish an agreement to arbitrate; however, Plaintiffs raise an assent challenge. They claim they do not remember signing the agreement and no one explained the meaning of arbitration to them. (See Estrada Decl., ¶¶ 4-10; see also Montalvo Decl., ¶¶ 4-11.)

The Court disagrees. Lack of memory is not a defense. Nor is failure to read and understand. (See, e.g., Ramos v. Westlake Services LLC (2015) 242 Cal.App.4^th 674, 687 [“[T]he fact that [the plaintiff] signed a contract in a language he may not have completely understood would not bar enforcement of the arbitration agreement. If [the plaintiff] did not speak or understand English sufficiently to comprehend the English Contract, he should have had it read or explained to him.”].) The key point is that, undisputedly, Plaintiffs’ signatures appear on the agreement.

Despite the plain language stating that the FAA governs, Plaintiffs contend the Court should find the FAA inapplicable, and apply the California Arbitration Act instead, due to an exception. They claim the FAA does not apply to transportation workers. (See Opposition, pp. 13-15.)

Section 1 of the FAA “exempts . . . ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce[]’” – i.e., transportation workers – “from the statute’s ambit[.]” (Southwest Airlines Co. v. Saxon (2022) 596 U.S. 450, 454 (“Southwest”).) “The party opposing arbitration bears the burden of demonstrating that the exemption applies.” (Performance Team Freight Systems, Inc. v. Aleman (2015) 241 Cal.App.4^th 1233, 1241.) To establish the exemption, the opposing party must show that the agreement is “both a ‘contract of employment’ and one entered into with a ‘worker’ of the type described in” section 1. (Amos v. Amazon Logistics, Inc. (4^th Cir. 2023) 74 F.4^th 591, 596.)

On the current record, Plaintiffs do not meet the first element. The agreement is titled “BINDING MUTUAL AGREEMENT TO ARBITRATE CLAIMS[.]” (Scholl Decl., Exs. 1, 2, emphasis in original.) The only other document in the record is a confidentiality agreement signed by Estrada. (See Yetgin Decl., Ex. A.) Plaintiffs do not demonstrate that either document constitutes an employment contract as opposed to a standalone agreement or is part of an employment contract.

A continuance is needed to resolve the second element. Plaintiffs declare that they played a role in packaging items for shipping, and Estrada states that he “unload[ed] units and materials shipped from China[.]” (Estrada Decl., ¶ 3; see also Montalvo Decl., ¶ 2.) In reply, Defendants submitted new evidence, arguing that Plaintiffs’ job duties did not impact interstate commerce. (See Campos Decl.; see also Hays Decl.; Reply, pp. 9-10.) The extent of such work and whether and how it affected interstate commerce is not adequately developed on this record, so supplemental briefing and/or an evidentiary hearing with testimony is necessary.

Unconscionability is a contract defense. (See Torrecillas v. Fitness International, LLC (2020) 52 Cal.App.5^th 485, 492.) Under the FAA (assuming it applies), unconscionability can be utilized to “invalidate [an] arbitration agreement[].” (Ibid.) Courts apply state law to test whether the agreement is unconscionable. (See, e.g., Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal.App.4^th 1105, 1119.)

“[U]nconscionability has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114, internal quotation marks omitted.) “The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.” (Ibid.) “But they need not be present in the same degree.” (Ibid.) “Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.” (Ibid.) “In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.)

The burden to prove that the arbitration agreement is unconscionable belongs to the party opposing arbitration. (See Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4^th 771, 795.)

For procedural unconscionability, Plaintiffs claim the agreement is a contract of adhesion. (See Opposition, pp. 4-5.)

“[A] predispute arbitration agreement is not invalid merely because it is imposed as a condition of employment.” (Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal.App.4th 1105, 1122–1123.) Stated another way, “the mandatory nature of an arbitration agreement does not, by itself, render the agreement unenforceable.” (Ibid.; see also Knight, supra, at ¶ 5:146 [“The mere fact an adhesion contract is involved does not per se render the arbitration clause unenforceable. Rationale: Such contracts are ‘an inevitable fact of life for all citizens – businessman and consumer alike.’”], emphasis in original.)

Further, the agreement provides: “I HAVE READ, UNDERSTAND AND VOLUNTARILY AGREE TO THE ABOVE ARBITRATION AGREEMENT.” (Scholl Decl., Exs. 1, 2.)

For substantive unconscionability, Plaintiffs contend (1) the confidentiality agreement bars employees from discussing compensation (see Opposition, pp. 6-7), (2) only Capstone is permitted to seek injunctive relief (see id. at pp. 7-9), (3) the arbitration agreement waives representative Private Attorneys General Act (“PAGA”) claims (see id. at p. 9), (4) the scope is overbroad and one-sided (see id. at pp. 10-11), and (5) the duration is infinite. (See id. at p. 12.)

Point (1) is unavailing. The confidentiality agreement is a separate document; Estrada signed it years before he signed the arbitration agreement; there is no evidence showing that Montalvo ever signed it; and Plaintiffs’ evidence fails to show that it should be read together with the arbitration agreement and other onboarding documents as a single contract. (See Yetgin Decl., ¶¶ 3-5, Ex. A.)

Point (2) is also unavailing. The injunctive-relief provision is in the confidentiality agreement. (See Opposition, p. 8; see also Yetgin Decl., Ex. A, § 7.) Again, Plaintiffs do not show that the confidentiality agreement and arbitration agreement should be treated as one contract.

The Court rejects point (3). The complaint does not allege a representative PAGA claim.

As a matter of guidance, though, prior to Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906 (“Viking River”), Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4^th 348 controlled. “Iskanian’s principal rule prohibits waivers of ‘representative’ PAGA claims in the first sense.” (Viking River, supra, 142 S.Ct. at 1916, underlined case name added.) “That is, it prevents parties from waiving representative standing to bring PAGA claims in a judicial or arbitral forum.” (Ibid., emphasis in original.) “But Iskanian also adopted a secondary rule that invalidates agreements to separately arbitrate or litigate ‘individual PAGA claims for Labor Code violations that an employee suffered,’ on the theory that resolving victim-specific claims in separate arbitrations does not serve the deterrent purpose of PAGA.” (Id. at 1916-1917, underlined case name added; see also, e.g., Knight, supra, at ¶ 5:49.4m [citing California case law for the proposition that a “single count under PAGA could not be ‘split into an arbitrable individual claim and a nonarbitrable representative claim”].)

In Viking River, the plaintiff “executed an agreement to arbitrate any dispute arising out of her employment.” (Viking River, supra, 142 S.Ct. at 1916.) “The agreement contained a ‘Class Action Waiver’ providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action.” (Ibid.) “It also contained a severability clause specifying that if the waiver was found invalid, any class, collective, representative, or PAGA action would presumptively be litigated in court.” (Ibid.) “But under that severability clause, if any ‘portion’ of the waiver remained valid, it would be ‘enforced in arbitration.’” (Ibid.)

“After leaving her position” with the defendant, the plaintiff “filed a PAGA action . . . in California court.” (Ibid.) “Her complaint contained a claim that [the defendant] had failed to provide her with her final wages within 72 hours, as required by” Labor Code sections 101 and 102. (Ibid.) “But the complaint also asserted a wide array of other code violations allegedly sustained by other . . . employees, including violations of provisions concerning the minimum wage, overtime, meal periods, rest periods, timing of pay, and pay statements.” (Ibid.) The defendant “moved to compel arbitration of [the plaintiff’s] ‘individual’ PAGA claim” – i.e., “the claim that arose from the violation she suffered — and to dismiss her other PAGA claims.” (Ibid.) “The trial court denied that motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable ‘representative’ claims.” (Ibid.)

The Court of Appeal’s ruling “was dictated by . . . Iskanian.” (Ibid., underlined case name added.) “Iskanian’s principal prohibition required the lower courts to treat the representative-action waiver” in Viking River “as invalid insofar as it was construed as a wholesale waiver of PAGA standing.” (Id. at 1917, underlined case name added.) “The agreement's severability clause, however, allowed enforcement of any ‘portion’ of the waiver that remained valid, so the agreement still would have permitted arbitration of [the plaintiff’s] individual PAGA claim even if wholesale enforcement was impossible.” (Ibid.) “But because” Iskanian “prohibits division of a PAGA action into constituent claims, the state courts refused to compel arbitration of that claim[.]” (Ibid.)

The United States Supreme Court granted review and reversed, holding, eight to one, that the FAA preempts Iskanian “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” (Id. at 1924.) The opinion instructs:

This holding compels reversal in this case. The agreement between [the defendant] and [the plaintiff] purported to waive “representative” PAGA claims. Under Iskanian, this provision was invalid if construed as a wholesale waiver of PAGA claims. And under our holding, that aspect of Iskanian is not preempted by the FAA, so the agreement remains invalid insofar as it is interpreted in that manner. But the severability clause in the agreement provides that if the waiver provision is invalid in some respect, any “portion” of the waiver that remains valid must still be “enforced in arbitration.” Based on this clause, [the defendant] was entitled to enforce the agreement insofar as it mandated arbitration of [the plaintiff’s] individual PAGA claim. The lower courts refused to do so based on the rule that PAGA actions cannot be divided into individual and non-individual claims. Under our holding, that rule is preempted, so [the defendant] is entitled to compel arbitration of [the plaintiff’s] individual claim.

The remaining question is what the lower courts should have done with [the plaintiff’s] non-individual claims. Under our holding in this case, those claims may not be dismissed simply because they are “representative.” Iskanian’s rule remains valid to that extent. But as we see it, PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding. Under PAGA's standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action. [Citation.] When an employee's own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit. [Citation.] As a result, [the plaintiff] lacks statutory standing to continue to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.

* Iskanian is preempted to the extent it bars dividing PAGA claims into individual and representative claims;

* the defendant is allowed to compel the plaintiff’s individual PAGA claim to arbitration; and

* once the plaintiff’s individual PAGA claim is compelled to arbitration, he or she lacks standing to maintain the representative PAGA claim.

The High Court’s standing ruling is nonbinding. The California Supreme Court reversed it in Adolph.

This is a recurring issue in numerous cases on the Court’s docket. In light of Iskanian, Viking River, and Adolph, the Court’s approach has been to compel individual PAGA claims to arbitration and to stay representative PAGA claims until the arbitrations finish. If there were a representative PAGA claim alleged in the complaint, the Court would be inclined to do the same here.

Turning to points (4) and (5), Plaintiffs rely on Cook v. University of Southern California (2024) 102 Cal.App.5^th 312, a May 2024 decision from the Second District Court of Appeal. (See Opposition, pp. 9-12.) There, the trial court found the arbitration agreement substantively unconscionable in three ways and held that the unconscionable provisions could not be severed. The Second District affirmed all three points. First, the panel found the scope unconscionable because the agreement covered all claims, not just employment-related claims. (See Cook, supra, 102 Cal.App.5^th at 321-325.) Second, the duration was unconscionable because the agreement stated that it would survive Cook’s employment and could only be “revoked” if Cook and USC’s president signed a written termination request that “expressly mention[ed] the arbitration agreement.” (Id. at 326; see also id. at 325.) Third, the agreement lacked mutuality because it “require[d] Cook to arbitrate . . . all claims she [] ha[d] against USC” and USC’s “related entities” without requiring the “‘related entities’ to arbitrate their claims against [her].” (Id. at 326; see also id. at 327-328.)

SCOPE – “[b]y its express terms,” the Cook agreement covered “all claims, whether or not arising out of Employee’s University employment, remuneration or termination, that Employee may have against the University or any of its related entities . . . ; and all claims that the University may have against Employee.” (Cook, supra, 102 Cal.App.5^th at 321.) “The plain language of the agreement require[d] Cook to arbitrate claims that [were] unrelated to her employment with USC.” (Ibid.; see also id. at 325 [“The arbitration agreement drafted by USC applies to all claims ‘whether or not arising out of Employee's University employment, remuneration or termination.’ If USC had been concerned about capturing termination or retaliation claims related to Cook’s employment, it simply could have limited the scope of the agreement to claims arising out of or relating to her employment or termination. It is difficult to see how it is justified to expect Cook—as a condition of her employment at the university—to give up the right to ever sue a USC employee in court for defamatory statements or other claims that are completely unrelated to Cook's employment.”].)

Pursuant to this Binding Mutual Agreement to Arbitrate (‘Agreement’), I agree that to the fullest extent allowed by law, any controversy, claim or dispute between me and Capstone Green Energy Corporation, and/or any of its related entities, holding companies, parents, subsidiaries, divisions, officers, shareholders, directors, employees, agents, insurers, vendors, customers, predecessors, successors, and assigns (collectively, “Company”) will be submitted to final and binding arbitration as the sole and exclusive remedy, regardless of whether the dispute is initiated by Company or me. . . .

DURATION – to repeat, the Second District found the duration of the USC agreement unconscionable because it expressly survived Cook’s employment and could only be “revoked” if Cook and USC’s president signed a written termination request that “expressly mention[ed] the arbitration agreement.” (Cook, supra, 102 Cal.App.5^th at 326.)

Capstone’s agreement does not say that it survives termination, and there is no mention of revocation. (See Scholl Decl., Exs. 1, 2.)

The trial court also found the agreement was unconscionable because it lacked mutuality. The agreement requires Cook to arbitrate any and all claims she may have against USC “or any of its related entities, including but not limited to faculty practice plans, or its or their officers, trustees, administrators, employees or agents, in their capacity as such or otherwise.” However, the agreement does not require USC's “related entities” to arbitrate their claims against Cook.

Under Armendariz, a modicum of bilaterality is required in arbitration agreements. Still, nothing in Armendariz supports the conclusion that the presence of a modicum of bilaterality renders an agreement per se conscionable. The presence of a modicum of bilaterality will not save a clause that is, in practical effect, unjustifiably one-sided. There is no question that it is more difficult for a party to enforce an arbitration agreement against a nonsignatory than it is for a nonsignatory to enforce an arbitration agreement against a party. This is intentional, as arbitration is “a voluntary means of resolving disputes, and this voluntariness has been its bedrock justification.” [Citation.] “Arbitration is consensual in nature. The fundamental assumption of arbitration is that it may be invoked as an alternative to the settlement of disputes by means other than the judicial process solely because all parties have chosen to arbitrate them. [Citations.] Even the strong public policy in favor of arbitration does not extend to those who are not parties to an arbitration agreement or who have not authorized anyone to act for them in executing such an agreement.” [Citation.]

As a result, nonsignatories may enforce an arbitration agreement against a party to the agreement simply by showing they are intended third-party beneficiaries of the arbitration agreement. [Citation.] Where the agreement requires arbitration of claims against certain classes of third parties, nonsignatories can make “a prima facie showing sufficient to allow them to enforce the arbitration clause as third party beneficiaries” simply by showing they fall within one of the classes of beneficiaries identified by the contract. [Citation.]

Conversely, for Cook to enforce the arbitration agreement against USC's agents or employees as third-party beneficiaries, she would have to show they actually accepted a benefit under the agreement. [Citation.] It is difficult to imagine how Cook could carry this burden to compel USC's employees and agents to arbitration unless those specific agents or employees first moved to compel arbitration under the agreement. While it is theoretically possible for Cook to make this showing, it is unlikely. [Citation.]

The plain language of the arbitration agreement thus provides a significant benefit to USC's related entities without any reciprocal benefit to Cook.

USC has offered no justification for this one-sided treatment. [Citation.] We find the trial court did not err in holding the arbitration agreement was substantively unconscionable for lack of mutuality in the claims that are subject to arbitration.

Capstone’s agreement is different. It requires arbitration of “any controversy, claim or dispute between” the employee and any person or entity that falls within the “Company” definition, which is Capstone and/or “any of its related entities, holding companies, parents, subsidiaries, divisions, officers, shareholders, directors, employees, agents, insurers, vendors, customers, predecessors, successors, and assigns[.]” (Scholl Decl., Exs. 1, 2.) The obligation to arbitrate is a two-way obligation.

On balance, the Court finds Cook distinguishable. Capstone’s overbroad scope, alone, does not create a high enough degree of substantive unconscionability to find the agreement unenforceable, especially considering the meager degree of procedural unconscionability. Moreover, the overbroad scope is not detrimental to Plaintiffs here given that the complaint solely alleges employment-related claims and does not allege non-employment-related claims. Under these circumstances, having only one of the Cook defects is insufficient to deny enforcement and to defeat the motion to compel.

[1] Kim managed Estrada at Capstone. (See Complaint, ¶ 5.)

[2] The agreement carves out a handful of claims that are required to be carved out by law – e.g., sexual-harassment claims and administrative claims before the National Labor Relations Board and Equal Employment Opportunity Commission. (See ibid.) But the overall scope is overbroad like the Cook agreement was.