Judge: Lon F. Hurwitz, Case: 22-01284687, Date: 2023-09-27 Tentative Ruling

Motion to Compel Arbitration

RELIEF SOUGHT: Defendant Ladera Lending, Inc. seeks an order to compel Plaintiff Ismael Hernandez to submit all claims to binding individual arbitration, and dismissing or staying this action pending completion of arbitration.

UPCOMING EVENTS: Status Conference, August 23, 2023.

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). Plaintiff opposes, and Defendant replies.

REQUESTS FOR JUDICIAL NOTICE:

In opposition, Plaintiff asks this Court to take judicial notice of the following documents:

1. Docket from Howes v. Ladera Lending, Inc., OCSC Case No. 2022-01259890;

2. Docket from Ochinero v. Ladera Lending, Inc., C.D. Cal. Case No. 8:19-cv-01136-JVS-ADS;

3. Class Action Complaint in Ochinero v. Ladera Lending, Inc.;

4. Final Approval Order, dated July 19, 2021, in Ochinero v. Ladera Lending, Inc.

Since Exhibit 1 is part of the case file in a related case, judicial notice shall be granted pursuant to Evidence Code section 452, subdivision (d). Judicial notice is denied as to Exhibits 2-4 on the grounds of relevance.

In reply, Defendant asks this Court to take judicial notice of the Motion for Preliminary Approval, filed January 14, 2021, in Ochinero v. Ladera Lending, Inc., C.D. Cal. Case No. 8:19-cv-01136-JVS-ADS. Judicial notice is denied on the ground of relevance.

EVIDENTIARY OBJECTIONS:

Defendant submits evidentiary objections to the Declaration of Ismael Hernandez filed in support of Plaintiff’s opposition. The rulings are as follows:

1. Para. 7 – SUSTAINED, hearsay

2. Para. 10 – SUSTAINED, hearsay

3. Para. 14 – SUSTAINED, hearsay

4. Para. 15, ln. 3 – OVERRULED

5. Para. 15, lns. 4-6 – SUSTAINED, hearsay

6. Para. 18 – OVERRULED

7. Para. 19 - OVERRULED

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

Is Arbitration Agreement Unconscionable?

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 to prove the existence of an agreement to arbitrate by either reciting verbatim or providing a copy of the alleged agreement. (CRC, rule 3.1330; Condee v. Longwood Mgmt. Corp. (2001) 88 Cal.App.4th 215, 219.)

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.)

Here, Defendant contends Plaintiff must arbitrate the claims asserted in the Complaint. According to Defendant, at the time he was hired, Plaintiff signed a document entitled “Comprehensive Agreement Employment At-Will and Arbitration” (“Agreement”) that contains the operative agreement to arbitrate all employment-related disputes. [Declaration of Jacqueline Herrick (“Herrick Decl.”) (ROA 38), ¶¶ 4-9, Exh. A.] Defendant contends the Agreement expressly states that it is governed by the Federal Arbitration Act (“FAA”). [Ibid.]

Plaintiff does not dispute the existence or authenticity of the Agreement. He also does not dispute the applicability of the FAA. Instead, Plaintiff contends the Agreement was procedurally and substantively unconscionable.

On the issue of unconscionability, Defendant contends the Agreement satisfies the requirements set forth in Armendariz v. Foundation Health Psychcare Services (2000) 24 Cal.4th 83. However, although Defendant discusses whether the Agreement was substantively unconscionable, it does not discuss the “procedural” element of the unconscionability analysis except in reply.

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.)

Here, Plaintiff contends the Agreement was a contract of adhesion. According to Plaintiff, he was required to sign the Agreement as part of his onboarding process when he was hired, and the Agreement was presented to him without any opportunity to discuss or negotiate its terms. [Declaration of Ismael Hernandez (“Hernandez Decl.) (ROA 54), ¶ 16.] Plaintiff states he was “rushed” through the process and was simply instructed to “just click through” and “e-sign” all of the numerous onboarding forms he was given to sign on his first day of employment. In addition, Plaintiff contends the Agreement was never specifically brough to his attention, nor was it explained to him that he was waiving his right to take any employment dispute claims to court. As a result, Plaintiff contends the Agreement was presented on a take-it-or-leave it basis and was imposed as a condition of employment. [Id. at ¶¶ 11-18.] In support, Plaintiff cites to OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111.

In reply, Defendant contends Plaintiff has not demonstrated the Agreement was adhesive. As a preliminary matter, Defendant contends Plaintiff has not demonstrated that he was prevented from reading the Agreement, or that he was actually required to sign it. Defendant argues that failure to read a contract before signing it is not a reason to preclude its enforcement.

Moreover, Defendant argues that the express terms of the Agreement indicate its voluntary nature. Defendant notes the first sentence states, “I also acknowledge that the Company promotes a voluntary system of alternative dispute resolution ….” [Herrick Decl., ¶¶ 8-9, Exh. A.] In addition, the Agreement concludes by stating that the employee is “voluntarily agreeing” to the arbitration provision. [Ibid.] As a result, Defendant contends this demonstrates that Plaintiff was not required to execute the Agreement as a condition of employment.

Nevertheless, Defendant contends that even if it is found that the Agreement was adhesive, it is still enforceable. According to Defendant, the courts have repeatedly enforced arbitration agreements that were executed as a condition of employment. In support, Defendant cites to Serpa v. Cal. Sur. Investigations, Inc. (2013) 215 Cal.App.4th 695, and Da Loc Nguyen v. Applied Med. Res. Corp. (2016) 4 Cal.App.5th 232.

Here, the format of the Agreement is problematic. The full title of the single-page document is “Comprehensive Agreement” with the subtitle “Employment At-Will and Arbitration.” [Herrick Decl., Exh. A.] The first numbered paragraph is a single sentence stating: “It is hereby agreed by and between [the employee] and [Defendant] that the employment and compensation of Employee can be terminated by the [Defendant] of the Employee at any time, with or without cause and/or with or without notice, at the option of the [Defendant] or the Employee.” [Ibid.]

The second numbered paragraph—i.e., the arbitration provision—begins: “I also acknowledge that the [Defendant] promotes a voluntary system of alternative dispute resolution which involves binding arbitration to resolve all disputes which may arise out of the employment context.” [Ibid.] The paragraph goes on to state that the employee “voluntarily” agrees that any employment claims, disputes, or controversies “shall be submitted to and determined exclusively by binding arbitration ….” [Ibid.] After these two paragraphs, the employee is asked to enter his or her acknowledgment. [Ibid.]

The third enumerated paragraph on the page states that “[i]t is further agreed and understood” that any contrary agreement must be in writing and entered into by the President of the company. [Herrick Decl., Exh. A.] It also states that oral representations made before or after an employee is hired “do not alter the Agreement.” [Ibid.] The fourth and last paragraph is in bold font and states that “[t]his is the entire agreement … regarding the length of employment and reasons for termination of employment, and this agreement supersedes any and all prior agreements regarding these issues.” [Ibid.] Notably, this sentence does not mention the arbitration provision in Paragraph 2. At the bottom of the page, the employee is asked to place his or her electronic signature. [Ibid.]

The Agreement overall, as stated in OTO, is “a paragon of prolixity." (OTO, supra, 8 Cal.5th at p. 128.) The substance of the Agreement is written in extremely small font, and its single paragraph consists of 22 lines contained in less than one-quarter of the page. The OTO Court described this type of format as “visually impenetrable,” and found it “challenge[s] the limits of legibility.” (Ibid.)

The substance of the Agreement is also opaque. The single paragraph is complex and filled with legal jargon and references to statutes. Indeed, the second sentence spans nine lines of text, contains five rather lengthy parentheticals, and refers to the California Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964, the National Labor Relations Act, the California Workers’ Compensation Act, the Federal Arbitration Act, the California Arbitration Act, and other unspecified “state or federal laws or regulations.” It also references Code of Civil Procedure section 1280 et seq. and section 1283.05. [Herrick Decl., Exh. A.] Regarding this type of arbitration agreement, the OTO Court found: “A layperson trying to navigate this block text, printed in tiny fount, would not have an easy journey. [¶] … [¶] The document itself and the manner of its presentation did not promote voluntary or informed agreement to its terms.” (OTO, supra, 8 Cal.5th at p. 129.)

The paragraph concludes with the following sentence, capitalized and in bold font: “I UNDERSTAND BY VOLUNTARILY AGREEING TO THIS BINDING ARBITRATION PROVISION, BOTH I AND THE COMPANY GIVE UP OUR RIGHTS TO TRIAL BY JURY.” [Herrick Decl., Exh. A.] 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 as set forth hereinabove, it cannot be said that the Agreement survives a procedural unconscionability analysis.

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.)

Here, the Agreement appears to be substantively unconscionable. Although the Agreement provides that arbitration will be conducted by a neutral arbitrator and that the parties may conduct discovery, it does not state under which rules and procedures the arbitration will be conducted. In addition, although the Agreement states that “[r]esolution of the dispute shall be based solely upon the law governing the claims and defenses pleaded,” it is not entirely clear if the arbitration has the full authority to award all relief and remedies otherwise available in court. Lastly, the Agreement is entirely silent on the issue of payment of arbitration fees and costs. Therefore, it is not known if an employee will be required to pay said fees and costs if his or her dispute is compelled to arbitration. As such, the Agreement does not comply with Armendariz, supra.

It is also noted that the Agreement is partially silent regarding its scope. Ostensibly, the Agreement requires employees to submit all of their employment-related claims, disputes, and controversies to arbitration, but it says nothing about the types of claims Defendant might have against an employee. Moreover, unlike the provision in Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1248-1249, the Agreement here does not make it clear that the parties mutually agree to arbitration of all employment-related claims. Indeed, the second sentence of Paragraph 2 states: “Because of the mutual benefits (…) which private binding arbitration can provide both the Company and myself, I voluntarily agree that any claim, dispute, and/or controversy … arising from, [or] related to …my … employment by … the [Defendant] … shall be submitted to … binding arbitration.” [Herrick Decl., Exh. A.] Nothing in this language states that Defendant also agrees to submit its claims or disputes against an employee to arbitration. Therefore, it is unclear whether there is an implicit exemption from arbitration for claims for relief that are more likely to be asserted by Defendant.

“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.” (Armendariz, supra, 24 Cal.4th at p. 114.) “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.)

Here, the Agreement has elements of both procedural and substantive unconscionability such that it is rendered unenforceable. Although Defendant contends any provisions deemed unconscionable should be severed, the broad nature of the procedural and substantive unconscionability precludes such a remedy. Indeed, the Agreement is so “permeated” with procedural and substantive unconscionability that it cannot be saved. (Armendariz, supra, 24 Cal.4th at pp. 122-125.) As a result,

Plaintiff presents a judicial estoppel argument in opposing this motion. However, this issue need not be reached in light of the findings regarding the unconscionability of the Agreement.

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.