Judge Lon F. Hurwitz, Case 22-01284687 2023-09-01 Tentative Ruling

Judge: Lon F. Hurwitz, Case: 22-01284687, Date: 2023-09-01 Tentative Ruling

1. Motion to Compel Arbitration

2. Status Conference

Motion to Compel Arbitration

FACTS/OVERVIEW: This is a putative wage-and-hour class action. On October 3, 2022, Plaintiff Ismael Hernandez, on behalf of a class of similarly situated individuals, and himself, individually (“Plaintiff”), filed a Complaint against Defendant Ladera Lending, Inc. (“Defendant”). (ROA 2). The Complaint alleges the following eight causes of action:

1. Unlawful Wage Forfeiture;

2. Failure to Reimburse Employment Expenses;

3. Failure to Provide Meal and Rest Periods;

4. Failure to Provide Accurate Wage Statements;

5. Waiting Time Penalties;

6. Unlawful Business Practices;

7. Unfair Business Practices; and

8. Declaratory Relief.

Plaintiff alleges he was employed by Defendant as a mortgage banker, and his terms of employment were governed by a Compensation Agreement. The Compensation Agreement included a provision regarding the bonus structure under which Plaintiff would be compensated for work performed on loan transactions. Plaintiff alleges Defendant has refused to compensate him and the putative class members for work performed on loan transaction that were not “closed and funded” before the employees’ employment was terminated. In addition, Plaintiff alleges some members of the putative class were not reimbursed for business expenses related to remote work. Plaintiff also alleges Defendant did not provide lawful meal and rest periods and/or failed to pay meal and rest break premiums. The Complaint defines a putative Class and three Subclasses.

On December 19, 2022, Defendant filed a Notice of Related Case identifying Howes v. Ladera Lending, Inc., OCSC Case No. 30-2022-01259890-CU-OE-CXC, as a related case.1 (ROA 20).

On May 8, 2023, Defendant filed the current Motion to Compel Arbitration and Stay or Dismiss Proceedings. (ROA 40). In its tentative ruling, the Court denied the motion on the ground that the arbitration agreement was unconscionable. (ROA 66). However, after oral argument at the July 21, 2023 hearing, the Court granted Defendant’s request to address in writing some of the issues raised sua sponte by the Court in its tentative ruling. The Court granted the request, and ordered the parties to submit supplemental briefing on the issue of conscionability. The supplemental briefs were timely filed, and this matter is now before the Court. (Ibid.)

OBJECTIONS: (ROA 74)

Plaintiff objects to certain sections of Defendant’s supplemental brief on the ground they go beyond the scope of this Court’s specific briefing parameters, which restricted the parties to address those specific factors regarding unconscionability that were not addressed in Plaintiff’s opposition to the Motion to Compel Arbitration, but were identified in the Court’s tentative ruling. Plaintiff argues that Defendant did not comply with this restriction, but instead improperly re-briefed and further briefed factors and issues previously raised in Plaintiff’s original opposition. As a result, Plaintiff objects to the following sections of Defendant’s supplemental brief and the Supplemental Declaration of Jacqueline Herrick:

Herrick Supplemental Declaration

a. Page 1, lines 15-17 – SUSTAINED

b. Page 1, lines 5-6 – SUSTAINED

Supplemental Reply Brief

a. Page 1, lines 11-12 – SUSTAINED

b. Page 1, line 26 to Page 2, line 5 – SUSTAINED

c. Page 8, line 12 to Page 9, line 7 -- SUSTAINED

CONTENTIONS AND ANALYSIS:

Statement of the Law

Unconscionability has both a “procedural” and a “substantive” element. (Armendariz v. Found. Health Psychcare Servs., Inc. (2000) 24 Cal. 4th 83, 114.) An analysis of procedural unconscionability “begins with an inquiry into whether the contract is one of adhesion.” (Armendariz, supra, 24 Cal.4th at p. 113.) An agreement imposed on an employee as a condition of employment, with no opportunity to negotiate, is typically an “adhesive” contract which may be procedurally unconscionable. (Navas v. Fresh Venture Foods, LLC (2022) 85 Cal.App.5th 626, 633, citing to Armendariz, supra, 24 Cal.4th at p. 115.) “The pertinent question … is whether circumstances of the contract’s formation create such oppression or surprise that closer scrutiny of its overall fairness is required.” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126.)

“ ‘ “ ‘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.’”’ [Citations.]” (OTO, supra, 8 Cal.5th at p. 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.’” (OTO, supra, 8 Cal.5th at 127.) Further, arbitration provisions that are lengthy and full of legal jargon contribute to the surprise element. (Id. at 128.

As for the substantive unconscionability prong, it examines the fairness of a contract’s terms and determines whether they are “overly harsh.” (OTO, supra, 8 Cal.5th at p. 129.) “Unconscionable terms ‘ “impair the integrity of the bargaining process or otherwise contravene the public interest or public policy”’ or attempt to impermissibly alter fundamental legal duties. [Citation.]” (Ibid.) Under Armendariz, arbitration agreements must provide for: (1) a neutral arbitrator; (2) more than minimal discovery; (3) a written award; (4) all the types of relief that would otherwise be available in court; and (5) the requirement that the employer pays the arbitrator’s fees or expenses. (Armendariz, supra, 24 Cal.4th at p. 102.)

Merits

In its tentative ruling, this Court found that the subject arbitration agreement had “elements of both procedural and substantive unconscionability such that it is rendered unenforceable.” The Court went on to find that the unconscionable provisions could not be severed, and that “the Agreement is so ‘permeated’ with procedural and substantive unconscionability that it cannot be saved. [Citation.]” [Minute Order, 7/21/2023 (ROA 66), p. 6.]

Procedural Unconscionability

Regarding procedural unconscionability, the Court found that the extremely small font, the visually dense single paragraph, and the complexity of the Agreement were problematic.

In addition, the Court discussed the opacity of the capitalized and bolded concluding sentence to the paragraph: “I UNDERSTAND BY VOLUNTARILY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH I AND THE COMPANY GIVE UP OUR RIGHTS TO TRIAL BY JURY.” Regarding this sentence, the Court found, “While this may have placed the Plaintiff on notice of the contents of the paragraph, it cannot be said that this sentence would define the contents of the paragraph in lay terms sufficient to enable the Plaintiff to understand its contents. Notice does not equal comprehension or the ability to comprehend pursuant to the OTO standards. And given the maladies of the Agreement …, it cannot be said that the Agreement survives a procedural unconscionability analysis.” [Minute Order, 7/21/2023 (ROA 66), p. 5-6.]

In its supplemental brief, Defendant takes issue with this Court’s analysis—specifically, the Court’s reliance on OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111. Defendant contends the elements of procedural unconscionability present in OTO are absent in this case.

First, Defendant contends that the physical formatting of the Agreement is not dispositive. In attempting to distinguish the Agreement in this litigation from that in OTO, Defendant contends that the version of the Agreement provided with its moving papers does not accurately represent the version signed by Plaintiff. According to Defendant, the version attached to the Declaration of Jacqueline Herrick (ROA 38) was produced in a condensed format as the document that is generated after an employee reviews and electronically signs the Agreement. In her supplemental declaration, Ms. Herrick now attests that the PDF of the Agreement she provided with her original declaration “is not a representation of the true format and font size of the Arbitration Agreement displayed on Mr. Hernandez’s computer screen that he would have reviewed as part of his onboarding process with Ladera Lending.” [Supplemental Declaration of Jacqueline Herrick (“Herrick Supp. Decl.”) (ROA 68), ¶ 4.] However, as noted by Plaintiff, Herrick has not provided a computer screen shot of what she now contends is the “true format and font size” of the Agreement as presented to Plaintiff. Therefore, Defendant has not negated this element of procedural unconscionability.

Defendant also contends that this Court’s focus on the length of the arbitration paragraph is “overstated.” As argued by Defendant, the Agreement is not procedurally unconscionable because the provision was not buried in a lengthy document. Defendant contends the Agreement is distinguishable from that found in OTO and other cases because of its short length, its clear title, and the bold and capitalized statement that Plaintiff was “voluntarily” agreeing to binding arbitration. In addition, Defendant contends that since Plaintiff had “sufficient time” to review the document, this mitigates any unfair surprise or oppression that might give rise to procedural unconscionability.

Regarding this Court’s determination that the complexity of the Agreement, its inclusion of legal jargon, and references to statutes point to a finding of procedural unconscionability, Defendant contends a similar argument was rejected in Cisneros Alvarez v. Altamed Health Services Corp. (2021) 60 Cal.App.5th 572. But, contrary to Defendant’s contention, the arbitration provision in Cisneros Alvarez is distinguishable. Indeed, the appellate court expressly found that the agreement in that case was not long or physically difficult to read, there were no lengthy sentences, and the statutory references were explained in lay terms and necessary to define the claims covered by arbitration. (Id. at p. 592.)

Here, however, as found by this Court, the second sentence in the arbitration provision spans 9 lines of text and, as noted by Plaintiff, consists of 239 words. The sentence also contains five lengthy parentheticals referencing various statutory schemes and acts, such as the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the National Labor Relations Act, and others. While some of these references may have been necessary to define or clarify claims covered by the Agreement, others were not linked to any specific possible claims and none of them were explained in lay terms.

Defendant also took exception to this Court’s finding that “[n]otice does not equal comprehension or the ability to comprehend pursuant to the OTO standards.” According to Defendant, this finding regarding procedural unconscionability does not have any support in OTO or other case law. Defendant argues that pursuant to this logic, even arbitration agreements with clear waivers of jury trial rights would be rendered unconscionable if a plaintiff testified that he or she did not “comprehend” the provision.

Defendant’s argument is unavailing. As a preliminary matter, the finding of procedural unconscionability does not rest on a singular factor. Therefore, a plaintiff simply stating that he or she did not understand an arbitration provision, without other factors, would not render that provision unconscionable. More substantively, Defendant is incorrect that OTO did not look to the element of comprehension of an agreement. In noting the visual impenetrability and complexity of the text and the legalistic language, the OTO court held: “It cannot be said that [defendant] was attempting to hide the ball by burying the arbitration clause in an otherwise prolix agreement, since the Agreement consists almost entirely of the arbitration clause. Yet the Agreement is drafted and composed in a manner … to thwart rather than promote understanding.” (OTO, supra, 14 Cal.App.5th at pp. 708-709.)

Defendant has not demonstrated that this Court’s original findings regarding the procedural unconscionability of the Agreement are not supported by the facts and the law.

Substantive Unconscionability

For the substantive unconscionability prong, this Court found that the Agreement failed to state under which rules and procedures the arbitration would be conducted, was silent on the issue of payment of arbitration fees and costs, and was not clear as to whether the arbitrator has full authority to award all relief and remedies otherwise available in court. In addition, the Court found that the Agreement was partially silent regarding its scope since it was not clear whether there was an implicit exemption from arbitration for claims that are more likely to be asserted by Defendant. As a result, the Court found the Agreement had elements of substantive unconscionability.

Regarding the first factor, Defendant contends the Agreement is not substantively unconscionable simply because it does not state which rules and procedures will govern any arbitration proceeding. According to Defendant, the express language of the Agreement incorporates the “procedures” of the California Arbitration Act. In citing to Cruise v. Kroger Co. (2015) 233 Cal.App.4th 390, and Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, Defendant argues that when arbitration rules are not defined in an agreement, it is presumed that the CAA governs the arbitration procedures. Defendant contends that virtually identical agreements have been found valid and enforceable.

Defendant’s arguments are not well taken, and its reliance on the Cruise and Little cases is misplaced. As a preliminary matter, the CAA pertains to the enforcement of contractual arbitration agreement under state law versus federal law. It does not provide the specific procedures and rules for initiating and conducting arbitration proceedings. As for the cases relied upon by Defendant, Little’s findings were made in the context of a suit alleging wrongful demotion and discharge where the arbitration provision placed a monetary threshold on arbitration appeals. (Little, supra, 29 Cal.4th at p. 1069.) That is not the situation here. In Cruise, the defendant submitted evidence that it had an internal dispute resolution program and arbitration policy that governed any arbitration proceedings. (Cruise, supra, 233 Cal.App.4th at pp. 399-400.) Again, that is not the situation here.

Instead, in the current litigation, it was found that the Agreement did not state which substantive dispute resolution rules (i.e., JAMS, AAA, etc.) would govern an arbitration proceeding. Courts have held that the failure to provide the applicable arbitration rules is a factor that supports procedural unconscionability because an employee “is forced to go to another source to find out the full import of what he or she is about to sign—and must go to that effort prior to signing.” (Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 84.)

It has also been found that the failure to provide the arbitration rules also relates to substantive unconscionability. “[C]ourts will more closely scrutinize the substantive unconscionability of terms that were ‘artfully hidden’ by the simply expedient of incorporating them by reference rather than including them in or attaching them to the arbitration agreement.” (Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1246; see also, Lane v. Francis Capital Mgmt., LLC (2014) 224 Cal.App.4th 676, 692 [arbitration agreement was not substantively unconscionable, because AAA rules referenced in agreement, although not attached, were easily accessible online].) Therefore, even to the extent it could be found, as Defendant argues, that the Agreement incorporates the CAA and provides that an arbitration proceeding will conform with the procedures of the CAA, this still requires a finding of substantive unconscionability. To the extent that Plaintiff might have read the provisions of the CAA, he would not have found how to initiate an arbitration proceeding, the forms for submitting an arbitration demand, or a list of potential neutrals.

Regarding the issue of mutuality, Defendant is correct that the Agreement as written does not destroy its bilateral nature. Courts have held, “Absent some indicia in the agreement that arbitration is limited to the employee’s claims against the employer, the use of the ‘I agree’ language in an arbitration clause that expressly covers ‘all disputes’ creates a mutual agreement to arbitrate all claims arising out of the applicant’s employment.” (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1466.)

It is somewhat troubling that the Agreement does not specifically reference the types of claims that an employer is more likely to bring against an employee. But it is noted that the Agreement also does not specifically exclude such claims from being submitted to arbitration. While the Court does not agree with Defendant’s statement that the Agreement “is permeated with mutuality,” the Court does agree that it contains a “modicum of bilaterality.”

Defendant is correct that the Agreement’s silence as to the allocation of costs and scope of remedies also does not bar its enforcement. (Little, supra, 29 Cal.4th at p. 1075, fn. 1.)

However, although Defendant has demonstrated the Agreement has a lower level of substantive unconscionability that originally found by the Court, there is still an element of substantive unconscionability due to the failure to provide the applicable rules and procedures governing an arbitration. This, combined with the high level of procedural unconscionability, is enough to support the Court’s original finding that the Agreement is unconscionable, and thus unenforceable.

RULING:

Defendant Ladera Lending, Inc.’s Motion to Compel Arbitration is DENIED on the ground it is unconscionable. IT IS ORDERED THAT Plaintiff Ismael Hernandez’s individual and class claims against Defendant Ladera Lending, Inc. shall be adjudicated in this civil action.

Clerk to give notice of the Court’s ruling.

Status Conference

Per the Joint Statement filed by Counsel on 8/23/23, a new defendant was added on 8/4/23. Additionally, Plaintiff’s Counsel has requested an Informal Discovery Conference (“IDC”).

The Court continues the Status Conference to 10/25/23 at 1:30 p.m. to allow the new party to file a responsive pleading. To the extent that both sides would like an IDC, the Parties may schedule one with the Court’s Clerk on any available Tuesday or Thursday at 10 a.m. or 2 p.m.

Clerk to give Notice.