Judge: John J. Kralik, Case: 23BBCV00882, Date: 2023-12-08 Tentative Ruling

Case Number: 23BBCV00882    Hearing Date: December 8, 2023    Dept: NCB

Superior Court of California

County of Los Angeles

North Central District

Department B

BACKGROUND

A.    Allegations

Plaintiff End of the Rose, LLC (“Plaintiff”) alleges that it entered into a written contract on September 28, 2016 with Defendants Deinstitutionalized, LLC (“Deinstitutionalized”) and Christopher Ray (“Ray”).  

According to Exhibit A of the complaint, the agreement was entered between Deinstitutionalized and Sinjin Rosa, LLC (investor, Plaintiff’s former name).  The parties agreed that Sinjin would become an executive producer of a Webisode tentatively entitled, “Fractured” whereby Sinjin agreed to invest $300,000.  In return, Deinstitutionalized (producer) guaranteed Sinjin a return on investment of 20% of investment or $60,000 and after recoupment and ROI, the balance of gross receipts shall be considered “net receipts” and would be shared as follows: 50% of 100% to Sinjin and 50% to Deinstitutionalized. 

Plaintiff alleges that on March 30, 2021, Defendants failed to pay $300,000 recoupment, $60,000 return on investment, and 50% of the net receipts estimated at $200,000, and failing to provide accurate reports each time monies were due and payable.  Total, Plaintiff alleges it suffered damages in the amount of $681,291.20. 

            The complaint, filed April 21, 2023, alleges causes of action for: (1) breach of contract; (2) common counts; and (3) fraud.

            On November 1, 2023, Plaintiff filed an Amendment to Complaint naming William Fitzgerald Webb as Doe 1. 

B.     Motion on Calendar

On July 7, 2023, Defendants filed a motion to compel arbitration.

On November 27, 2023, Plaintiff filed an opposition brief.

On December 1, 2023, Defendants filed a reply brief.  

DISCUSSION

            Defendants move to compel Plaintiff to submit to arbitration. 

Defendants argue that arbitration is proper pursuant to the arbitration provisions contained in the parties’ September 28, 2016 agreement between Plaintiff and Deinstitutionalized.  The agreement is attached as Exhibit A to the complaint and states in relevant part:

            6. PARTNERSHIP

            It is agreed and understood that this Agreement constitutes a Partnership. For this first season of the Webisode. If any future agreements shall be negotiated in good faith when the time arises. If web is picked up for a second season or run SINJIN ROSA, LLC will have first right of refusal. Any disputes that may arise shall be handled by binding arbitration in the State of California. Prevailing party shall be entitled to recovery of their reasonable attorneys fees. No more than $10,000. 

(Compl., Ex. A [9/28/16 Agreement at ¶6] [emphasis added].)

            Defendants argue that the agreement specifically calls for the parties to resolve their disputes through arbitration through paragraph 6.  They argue that they have not waived their right to compel arbitration as this motion is their first filing in the case. 

            In opposition, Plaintiff argues that the contract at issue is invalid due to Defendant’s fraudulent conduct, including misrepresentations and promise without intent to perform the agreement.  Plaintiff also argues that the arbitration language is procedurally and substantively unconscionable.

             The Court will first address Plaintiff’s arguments regarding unconscionability.  Unconscionability is a valid reason for refusing to enforce an arbitration agreement under CCP § 1281 because it is a reason for refusing to enforce contracts generally.  (Armendariz v. Found. Health Psychcare Servs. (2000) 24 Cal. 4th 83, 113 to 127.)  A contract will be found to be unconscionable when: (1) it is adhesive, in that all or part of the contract falls outside the reasonable expectations of the weaker party; and (2) equitably, the terms unreasonably favor the other party.  (Stirlen v. Supercuts (1997) 51 Cal.App.4th 1519, 1530-33.)  Unconscionability has both a "procedural" and a "substantive" element.  Both procedural and substantive elements must be present in order for a Court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.  (Id. at 1532.) 

            Procedural unconscionability has to do with matters relating to freedom of assent.  (Id.)  The procedural element focuses on two factors: oppression and surprise.  (Id.)  "Oppression" arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice.  (Id.)  "Surprise" involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the printed form drafted by the party seeking to enforce the disputed terms.  (Id.) 

            Plaintiff argues that the agreement is procedurally unconscionable because the arbitration term is inconspicuously added at the end of the provision of paragraph 6 entitled “PARTNERSHIP” and it is unclear whether the arbitration provision applies to the sixth paragraph only or the entirety of the agreement.  The agreement itself is only 2 pages in length and is thus relatively short.  The arbitration provision is stated under the section entitled “PARTNERSHIP.”  Despite its odd and inartful placement, the arbitration term clearly states that any disputes shall be handled by binding arbitration.  The arbitration term is short, but this is a short contract.

Moreover, there is no evidence that the agreement or the arbitration term were non-negotiable or that Plaintiff made any attempt to negotiate such terms and was denied.  (See Bolanos v. Khalatian (1991) 231 Cal.App.3d 1586 [holding that arbitration agreement was enforceable because the plaintiff’s declaration did not say that she could not read or understand the agreement and because she did not offer any evidence that she was forced or tricked into signing the agreement].) Plaintiff has not included any declaration in support of the opposition to the motion that it (or its principal/agent) attempted to ask questions about or negotiate the terms of the agreement or the arbitration term and that he or she was denied such requests.  There is no evidence by Plaintiff showing that the signatory on Plaintiff’s behalf was misled by the terms or unable to understand/read the 2-page agreement.  There is also no evidence showing who drafted the agreement and whether there was an inequality of bargaining power.  Thus, the Court finds that there is no procedural unconscionability present.

            Substantive unconscionability considers whether the agreement reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.  (Stirlen, supra, 51 Cal.App.4th at 1532.)  Substantive unconscionability involves the imposition of harsh or oppressive terms on one who has assented freely to them.  (Id.)  It focuses on the terms of the agreement and whether those terms are so one-sided as to “shock the conscience”.  (Morris v. Redwood Empire Bancorp (2005) 128 Cal. App. 4th 1305, 1322-23.)

            Plaintiff argues that the arbitration language unfairly benefits Defendants as it limits recovery of attorney’s fees to $10,000 where Plaintiff has already performed under the contract by tendering $300,000 to Defendants, thereby discouraging Plaintiff from taking costly legal action that is likely to exceed $10,000.  Plaintiff also argues that an arbitrator may not be able to compel non-parties for deposition and other discovery available in civil litigation. 

            Absent any evidence to the contrary, the term limiting attorney’s fees to $10,000 is mutually beneficial or mutually concerning to both parties.  While Plaintiff argues that this limits its attorney’s fees to $10,000, this equally limits Defendant’s ability to recover attorney’s fees from Plaintiff in the event it prevails in arbitration (or at trial).  It may very well be that the attorney’s fees provision was included to encourage settlement and arbitration of the matter.  In addition, while the breadth of discovery may be limited in arbitration, the Code of Civil Procedure still provides means for the parties to conduct depositions (CCP § 1283) and the rules of the arbitrator too will provide discovery parameters. 

            For these reasons, the Court finds that Plaintiff has not shown the existence of procedural and substantive unconscionability in the arbitration term. 

            As discussed above, the agreement includes an explicit arbitration provision.  While the arbitration clause is not as artfully pled as most other arbitration provisions, this in itself does not invalidate the provision.

            Thus, the Court grants the motion to compel arbitration.  However, the Court will compel the 1^st and 2^nd causes of action for breach of contract and common counts will be compelled to arbitration.  The scope of the arbitration provision states: “Any disputes that may arise shall be handled by binding arbitration in the State of California.”  The claims that arise out of the agreement are the breach of contract and common count claims.  However, the 3^rd cause of action for fraud does not “arise out of” the agreement.  (For example, had the scope of the arbitration term been broader to include “any and all claims that arise out of or are related to the agreement,” then the fraud claim would arguably have been included in the arbitration provision.)  As such, the 3^rd cause of action shall be stayed pending the outcome of the arbitration. 

            Lastly, Plaintiff argues that the motion should be denied, arguing the agreement is invalid due to Defendants’ purported fraud in inducing Plaintiff to enter the agreement.  While this is potentially a ground to oppose the motion, Plaintiff has produced no evidence to show that the arbitration agreement was procured by fraud.  Because of the peculiar wording of the contract, the Court is not ordering the fraud claims to arbitration.

CONCLUSION AND ORDER

Defendants’ motion to compel arbitration is granted.  The 1^st and 2^nd causes of action will be compelled to arbitration and the 3^rd cause of action will be stayed pending the arbitration.  The arbitration shall take place through the American Arbitration Association and the commercial rules shall apply for this commercial dispute. 

The Court sets a Status Conference re: Status of Arbitration for June 5, 2024 at 8:30 a.m.

Plaintiff shall provide notice of this order.

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