Judge: Lon F. Hurwitz, Case: 22-01246372, Date: 2023-06-16 Tentative Ruling

1. Motion to Compel Arbitration

2. Status Conference

Motion to Compel Arbitration

Moving Party: Defendant Subzero Constructors, Inc.

Responding Party: Plaintiff Federico Moncada

SERVICE: February 21, 2023, by email. Amended notice, served March 6, 2023, by email.

RELIEF SOUGHT: Defendant Subzero Constructors, Inc. seeks an order compelling Plaintiff Federico Moncada to submit his individual wage and hour and Private Attorneys’ General Act (PAGA) claim to binding arbitration in accordance with the parties’ arbitration agreement. Defendant also seeks to dismiss the remaining class and representative PAGA claims

UPCOMING EVENTS: None

FACTS/OVERVIEW: This is a putative wage-and-hour class and PAGA action. On February 16, 2022, Plaintiff Federico Moncada, an individual, on behalf of himself and all others similarly situated (“Plaintiff”), filed his original Complaint (ROA 2) against Defendant Subzero Constructors, Inc. (“Defendant”) alleging the following 10 causes of action:

1. Failure to Pay All Minimum Wages

2. Failure to Pay All Overtime Wages

3. Failure to Provide Rest Periods and Pay Missed Rest Period Premiums

4. Failure to Provide Meal Periods and Pay Missed Meal Period Premiums

5. Failure to Maintain Accurate Employment Records

6. Failure to Pay Wages Timely During Employment

7. Failure to Pay All Wages Earned and Unpaid at Separation

8. Failure to Indemnify All Necessary Business Expenditures

9. Failure to Furnish Accurate Itemized Wage Statements

10. Violations of Unfair Competition Law

Pursuant to a stipulation of the parties, Plaintiff filed the operative First Amended Complaint on September 27, 2022, adding a cause of action for PAGA penalties. (ROA 27, 34, 37.)

Plaintiff alleges he was an hourly, non-exempt construction worker for Defendants. Plaintiff’s duties included general construction duties.

On February 21, 2023, Defendant filed the current Motion to Compel Arbitration. (ROA 51.) Plaintiff opposes (ROA 57), and Defendant replies (ROA 83).

CONTENTIONS AND ANALYSIS:

Statement of the Law

Under Code of Civil Procedure section 1281.2, a party to an arbitration agreement may move to compel arbitration if another party to the agreement refuses to arbitrate. A party moving to compel arbitration under Section 1281.2 must prove by a preponderance of the evidence that: (1) The parties entered into a written agreement to arbitrate; and (2) one or more of the claims at issue are covered by that agreement. (Code Civ. Proc., § 1281.2; Villacreses v. Molinari (2005) 132 Cal.App.4th 1223, 1230.) If the moving party meets this burden, the burden shifts to the resisting party to prove by a preponderance of evidence a defense to enforcement of the agreement. (Id., at p. 1230.)

California law favors the enforcement of valid arbitration agreements. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 320; In re Tobacco I (2004) 124 Cal.App.4th 1095, 1103.) Any doubts to arbitration will be resolved against the party asserting a defense to arbitration, whether the issue is construction of contract language, waiver, delay or any other defense to arbitrability. (Erickson, supra, 35 Cal.3d at p. 320; In re Tobacco I, supra, 124 Cal.App.4th at p. 1103.)

Merits

Defendant is a California-based company that provides design, engineering, and construction services in the cold storage industry across the United States. [ROA 53, Declaration of Scott Devine (“Devine Decl.”), ¶ 17.] During his employment with Defendant, Plaintiff worked on projects for various national manufacturers and distributors. [Ibid.]

Is There an Enforceable Agreement?

In resolving petitions to compel arbitration, courts must first determine whether the agreement exists—i.e., whether the parties actually entered into a valid contract agreeing to arbitrate certain disputes—and whether it is enforceable. (Pinnacle Museum Tower Ass’n v. Pinnacle Market Develop. (US), LLC (2012) 55 Cal.4th 223, 236.) The moving party has the initial burden under CRC 3.1330 to prove the existence of an agreement to arbitrate.

If the moving party meets its initial burden and the opposing party disputes the existence of the agreement, then “the opposing party bears the burden of producing evidence to challenge the authenticity of the agreement.” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165.) The opposing party may do this by declaring under penalty of perjury that the party never saw or does not remember seeing the agreement, or that the party never signed or does not remember signing the agreement. (Ibid.; see also, Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 546; Espejo v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1054.)

If the opposing party meets its burden, then the burden shifts back to the moving party to establish with admissible evidence the existence of a valid arbitration agreement. “The burden of proving the agreement by a preponderance of the evidence remains with the moving party.” (Gamboa, supra, 72 Cal.App.5th at pp. 165-166.)

Here, Defendant contends that Plaintiff signed an Arbitration Agreement (“Agreement”) that precludes any group, class, or representative action. In support, Defendant provides the declaration of Scott Devine, VP Field Operations for Defendant. [Devine Decl., ¶ 3.] Devine attests that in his role, he is personally familiar with, and has oversight of, the preparation and retention of business records pertaining to Defendant’s personnel files and employment agreements and policies, including the Handbook. [Id. at ¶ 4.]

Devine attests that during his onboarding process on or about July 14, 2021, Plaintiff was presented several employment-related documents to review and sign, including the Acknowledgement of the Employee Handbook that specifically referred to arbitration. [Devine Decl., ¶¶ 9, 10.] The Acknowledgment contained an express promise to abide by the terms of the Agreement that was contained in the Handbook. [Id. at ¶ 10, Exh. A, p. 43.] Devine attests that Plaintiff voluntarily printed his name and date, and signed the Acknowledgement verifying that he read, understood, and agreed that any employment disputes would be settled by binding arbitration. [Id. at ¶¶ 11, 14, Exh. B.] Devine further attests that the Handbook, including the Agreement and Acknowledgment, is written in plain English. According to Devine, Plaintiff never indicated that he had limited literacy in English or had trouble understanding any of the onboarding documents. Devine further attests that Plaintiff did not ask any questions about the Agreement and Acknowledgement before signing the documents. [Id. at ¶ 13.]

Devine’s declaration and attachments do little to establish the existence of an enforceable arbitration agreement. The Agreement is contained on Page 40 of the Employee Handbook and does not include a signature line or other means of acknowledgment. [See, Devine Decl., Exh. A, p. 40.] Although there is a reference to “Arbitration” in the Handbook’s table of contents, neither this reference nor the Agreement itself are specifically highlighted or presented in bold or underscored lettering. Two copies of the “Acknowledgement of Receipt” for the entire Handbook are on Pages 43 and 44, with one being the Employee’s Copy and the other the Employer’s Copy. [Id. at pp. 43-44.] The Acknowledgement contains six paragraphs summarizing some of the important points in the Handbook. [Ibid.] In the fifth paragraph of the Acknowledgement, it refers to the requirement to submit employment disputes to binding arbitration. However, it does not specifically refer to the Agreement on Page 40, nor does it include a place for an employee to specifically acknowledge this provision. [Ibid.]

The Employer’s Copy of the Acknowledgement purportedly signed by Plaintiff that is attached to Devine’s declaration is notable in that it appears to be in a different font than the one in Exhibit A. [See, Devine Decl., Exh. B.] More importantly, the employee signature and date line only contain Plaintiff’s first name and the date. In addition, the writing that purports to be a “signature” looks identical to the writing that purports to be Plaintiff’s “printed” name. It is also noted that the line for Plaintiff’s “printed” name contains both his first and last names. [Ibid.] The format of the Agreement is problematic. Courts have held that “[t]o support a conclusion that an employee has relinquished his or her right to assert an employment-related claim in court, there must be more than a boilerplate arbitration clause buried in a lengthy employee handbook given to new employees. At a minimum, there should be a specific reference to the duty to arbitrate employment-related disputes in the acknowledgment of receipt form signed by the employee at the commencement of employment.” (Sparks v. Vista Del Mar Child & Family Services (2012) 207 Cal.App.4th 1511, 1522, abrogated on another ground as stated in Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 385-390; see also, Mitri v. Arnel Mgmt. Co. (2007) 157 Cal.App.4th 1164, 1167, 1173.)

In this instance, the Agreement was buried at the end of the 44-page Handbook and was included on the same page containing a provision regarding “Resignation.” [Devine Decl., Exh. A, p. 40.] Although the Acknowledgment contained a specific reference to the obligation to arbitrate disputes, it too was buried in the fifth paragraph of the document and was not highlighted in any manner. Moreover, Plaintiff’s purported “signature” on the Acknowledgment is incomplete and undistinguishable from what purports to be Plaintiff’s “printed” name. Therefore,  Defendant has not established the existence of a valid agreement to arbitrate.

Arbitrability

Even if the Court did find the existence of a valid arbitration agreement, Defendant’s argument in favor of an Order compelling arbitration fails in other ways.

Defendant contends the Agreement is governed by the Federal Arbitration Act (“FAA”) because its business and Plaintiff’s employment involves interstate commerce. As argued by Defendant, the parties expressly agreed to arbitration as the exclusive means to resolve all disputes arising out of Plaintiff’s employment. In addition, Defendant contends that the Court may not decide the issue of arbitrability because under the Agreement, the parties clearly delegated this issue to the arbitrator.

Nevertheless, Defendant contends that even if this Court chooses to rule on the issue of arbitrability, it should be found that all of Plaintiff’s claims must be compelled to arbitration, and the class and representative PAGA claims must be dismissed or stayed pending arbitration. Defendant contends that under Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906, Plaintiff’s individual wage-and-hour and PAGA claims must be compelled to arbitration and the class and representative PAGA claims dismissed.

In opposition, Plaintiff contends Defendant waived its right to demand arbitration of this matter because it did not seek to compel arbitration until more than a year after this action was initiated. As argued by Plaintiff, Defendant has taken numerous actions that are inconsistent with the desire to arbitrate, including vigorously litigating the case and intentionally hiding the Agreement from Plaintiff during discovery.

Regarding the Agreement itself, Plaintiff contends it is unenforceable. As argued by Plaintiff, the Agreement was hidden in the Handbook and does not include a signature line or any other means for an employee to acknowledge it. In addition, Plaintiff contends the Agreement is unenforceable because it is illusory. Plaintiff also argues the Agreement is procedurally and substantively unconscionable. Lastly, Plaintiff contends that since the Agreement is silent on class and representative claims, the holding in Viking River does not apply to this litigation.

The issue of whether the Court or the arbitrator determines questions of arbitrability should be addressed first. The entirety of the Agreement provides as follows:

Sometimes despite the parties’ best efforts, disputes about employment and termination matters cannot be resolved between the employee and the Company. In such an event, in order to expedite the dispute process and to minimize legal costs for both the employee and the Company, any and all disputes and claims that relate to the employee’s employment, to this Manual, or to the employee’s termination with or without cause, including but not limited to claims of unlawful discrimination, breach of contract, wrongful termination, and emotional distress (but excluding claims for any work-related injury) shall be settled by final and binding arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. The employee and the Company each shall pay the fees and/or expenses of his/her/its respective attorneys and witnesses, as well as all other expenses connected with presenting their respective cases in arbitration. All other costs shall be shared equally between the employee and the Company.

The arbitrator shall have full authority to issue any order and award available in a court of law. The decision and award of the arbitrator shall be final and binding. [Devine Decl., Exh. A, p. 40.]

Contrary to Defendant’s assertion, this “delegation” clause does not delegate the determination of arbitrability to the arbitrator. Instead, it only generally provides that if a matter is compelled to arbitration, the arbitrator’s decisions, orders, and award are binding. However, this clause does not say anything about the arbitrator having the right to determine issues of arbitrability or enforceability. Therefore, the determination of arbitrability is left to this Court.

Waiver

The question of whether Defendant waived its right to compel arbitration is dispositive. Waiver usually “denotes the voluntary relinquishment of a known right…,” but “it can also refer to the loss of a right as a result of a party’s failure to perform an act it is required to perform, regardless of the party’s intent to relinquish the right.” (Saint Agnes Med. Ctr. V. PacifiCare of California (2003) 31 Cal.4th 1187, 1195.) The law favors arbitration, and waiver will not be “lightly inferred.” The party claiming the other waived the right to arbitrate “bears a heavy burden of proof.” (Ibid.)

Courts have considerable flexibility to determine when waiver occurs. Generally, a defendant waives the right to compel arbitration when it acts inconsistently with an intent to arbitrate, and its conduct prejudices the plaintiff’s case. (See, e.g., Spracher v. Paul M. Zagaris, Inc. (2019) 39 Cal.App.5th 1135, 1139.) However, “no single test delineates the nature of the conduct that will constitute a waiver of arbitration.” (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1195.) Instead, given the “ ‘ “variety of contexts”’” in which waiver may be found, the following factors are relevant to the determination:

 “ ‘ “(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether ‘the litigation machinery has been substantially invoked’ and the parties ‘were well into preparation of a lawsuit’ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place’; and (6) whether the delay ‘affected, misled, or prejudiced’ the opposing party.”’” (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1196; see also, Quach v. California Commerce Club, Inc. (2022) 78 Cal.App.5th 470, 477-478, rev. grntd. 8/24/22 (Case No. S275121), cited for persuasive value pursuant to CRC 8.1115.) Although no one factor is predominant, prejudice has been found to be a “critical” factor under California law. (Saint Agnes Med. Ctr., supra, 31 Cal.4th at p. 1196.)

Here, in the current litigation, it is noted that Plaintiff filed his Complaint on February 16, 2022 (ROA 2), and Defendant answered on April 21, 2022 (ROA 11). [ROA 62, Declaration of Megan E. Ross (“Ross Decl.”), ¶¶ 3, 4.] On May 24, 2022, Plaintiff propounded discovery. On August 15, 2022, Defendant served its discovery responses, including a redacted copy of the Employee Handbook that redacted the Agreement. [Id. at ¶ 5.]

On September 13, 2022, the parties filed their Joint Case Management Statement. (ROA 17.) In response to the question of whether the parties had stipulated to judicial arbitration or any other form of alternative dispute resolution, Defendant stated, “At this time, Defendant does not contend that this action should be referred to arbitration.” (ROA 17, Sec. 6.) On November 30, 2022, the parties filed another Joint Case Management Statement. (ROA 43.) Defendant again stated that it did not contend that the action should be referred to arbitration. (ROA 43, Sec. 6.)

On December 13, 2022, the parties finalized a Belaire-West notice and sent it to ILYM Group to initiate the mailing to putative class members. The notices were mailed on January 5, 2023. [Ross Decl., ¶ 9.] A few days later, Plaintiff’s counsel requested unredacted copies of the Employee Handbook and other documents. However, Defendant’s counsel purportedly indicated that the redactions were due to “relevance” and “privacy” concerns. [Id. at ¶¶ 10, 11.] On February 10, 2023, ILYM Group sent the parties a final report and contact list from the Belaire-West mailing. [Id. at ¶ 12.] Four days later, on February 14, 2023, AFTER Defendant received the final report and contact list from ILYM Group, and one year after this litigation was initiated—Defendant’s counsel notified Plaintiff’s counsel that “the efforts made to address the redaction issue you brought up, led to the discovery of an Arbitration Agreement.” [Ross Decl., ¶ 13.] It was at this point that Defendant purportedly demanded arbitration. [Id.].

Unconscionability

Turning to the defense of unconscionability, it is first noted: “[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. Found. Health Psychcare Servs., Inc. (2000) 24 Cal. 4th 83, 114.) “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.” (Id.) “But they need not be present in the same degree.” (Id.) “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.” (Id.) “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.” (Id.) The agreement must: 1) provide for a neutral arbitrator; 2) provide for more than minimal discovery; 3) require the arbitrator to issue a written decision; 4) provide for the same remedies that would otherwise be available to the employee in court; and 5) not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum. (Id.)

“Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.” (OTO, L.L.C. v. Kho (2019) 8 Cal. 5th 111, 126.) “The circumstances relevant to establishing oppression include, but are not limited to (1) the amount of time the party is given to consider the proposed contract; (2) the amount and type of pressure exerted on the party to sign the proposed contract; (3) the length of the proposed contract and the length and complexity of the challenged provision; (4) the education and experience of the party; and (5) whether the party's review of the proposed contract was aided by an attorney.” (Id. at 126-127.) “With respect to preemployment arbitration contracts, . . . ‘the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.’” (Id. at 127.) “This economic pressure can also be substantial when employees are required to accept an arbitration agreement in order to keep their job.” (Id. [significant oppression when “[t]he agreement was presented to Kho in his workspace, along with other employment-related documents,” “[n]either its contents nor its significance was explained,” and “Kho was required to sign the agreement to keep the job he had held for three years”].) Further, arbitration provisions that are lengthy and full of legal jargon contribute the surprise element. (Id. at 128 [“The single dense paragraph covering arbitration requires 51 lines,” the text is “visually impenetrable” and “challenge[s] the limits of legibility.”].)

Here, the Agreement appears to be a contract of adhesion. An agreement imposed on an employee as a condition of employment, with no opportunity to negotiate, is an “adhesive” contract which may be procedurally unconscionable. (Navas v. Fresh Venture Foods, LLC (2022) 85 Cal.App.5th 626, 633, citing to Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 115.)

But there must also be substantive unconscionability to find the Agreement is unenforceable. Here, although the terms of the Agreement may be too broad and vague, they do not expressly limit Plaintiff’s ability to obtain adequate discovery. However, the Agreement requires Plaintiff to pay the costs and fees associated with presenting his case in arbitration, including his own attorneys’ fees. Plaintiff is also required to split all other costs with Defendant. Moreover, although the Agreement refers to the Employment Dispute Resolution Rules of the American Arbitration Association, these rules apparently were not provided to Plaintiff nor is it stated which arbitration organization would conduct the arbitration (i.e., JAMS).

The fee and cost-shifting provisions are problematic and makes pursuing a case more difficult and expensive for Plaintiff. They also likely make it more difficult for Plaintiff to find an attorney willing to take his case. (See, e.g., Beco v. Fast Auto Loans, Inc. (2022) 86 Cal.App.5th 292, 312.) When added to the adhesive nature of the Agreement, this is enough for the Court to find that the Agreement is unconscionable and unenforceable. The Court need not reach the issue regarding Plaintiff’s purported language barrier.

It is noted that the Agreement does not contain a severability clause. Therefore, to the extent any provision is found unenforceable, the entirety of the Agreement must be found unenforceable.

RULING:

Defendant Subzero Constructors, Inc.’s Motion to Compel Arbitration is DENIED on the grounds that (1) there is no enforceable arbitration agreement; (2) the Defendant, by its actions and conduct for 1 year prior to the filing of this Motion as set forth hereinabove, including two specific representations to this Court indicating that there was no contention that this case was subject to any arbitration clause [9/13/22 and 11/30/22 Joint Case Management Statements]; and (3) the Arbitration Agreement contained in the Employee Handbook being procedurally and substantively unconscionable as set forth hereinabove, IT IS ORDERED THAT Plaintiff Federico Moncada’s claims against Defendant Subzero Constructors, Inc. be adjudicated in this civil action.

The Court notes that any one of the three bases set forth for this Ruling is enough to deny this Motion.

Clerk to give Notice.

The Status Conference is continued to August 2, 2023 at 1:30 p.m..