Judge: Michael Shultz, Case: 21CMCV00268, Date: 2022-07-26 Tentative Ruling
Case Number: 21CMCV00268 Hearing Date: July 26, 2022 Dept: A
21CMCV00268
Heidrich v. Mainfreight, Inc., et al.
Tuesday, July 26, 2022
[TENTATIVE] ORDER
I.
BACKGROUND
The First Amended Complaint alleges
that Defendants hired Plaintiff in January 2007 as a sales manager and
constructively terminated him on January 18, 2021. Plaintiff alleges eight causes of action for tort
claims and employment-related claims in violation of the Fair Employment &
Housing Act (“FEHA”).
II.
MOTION TO COMPEL ARBITRATION
A. Motion
filed June 29, 2022
Defendants argue that Plaintiff
signed an employment agreement with Defendants’ predecessor, Target Logistic
Services, Inc. (“Target”). The agreement
included a provision requiring arbitration of all disputes arising from
Plaintiff’s employment agreement. Plaintiff refused to stipulate to submit this
matter to binding arbitration despite Plaintiff’s deposition testimony
acknowledging the provision’s enforceability.
Defendants contend that the arbitration provision is enforceable under
California law and the Federal Arbitration Act (“FAA”)
B. Opposition
filed July 15, 2022
Plaintiff argues that Defendants
waived their right to compel arbitration by engaging in litigation in this
forum, including propounding and receiving substantive responses to discovery
requests directed to the merits of Plaintiff’s claims. This action does not
fall within the limited scope of the disputes subject to binding arbitration.
Plaintiff contends that the
arbitration provision is not enforceable because it is both procedurally and
substantively unconscionable. It is a contract of adhesion. Plaintiff was required to sign it as a
condition of employment. The provision does not disclose the applicable rules
for arbitration. It is also one sided and unfair.
C.
Reply filed July 19, 2022
Defendants ask the court to reject
Plaintiff’s late-filed opposition. Plaintiff has not met his burden of
establishing that the agreement is not enforceable. Defendants did not waive
their right to discovery since Defendants have not litigated the merits of the
case. Only Mainfreight Inc.
(“Mainfreight”) engaged in discovery; Defendant, Steven Beaumont (“Beaumont”) did
not. Mainfreight did not unreasonably delay seeking arbitration. The broad
scope of the arbitration provision includes the disputes alleged in the
complaint and is not unconscionable.
III.
LEGAL STANDARDS
The court can order a matter to
arbitration if it determines that an agreement to arbitrate exists unless the
right to compel arbitration has been waived or grounds exist for the revocation
of the agreement. Code Civ. Proc., § 1281.2. The petitioning party’s burden is
to establish that a valid arbitration agreement exists by a preponderance of
evidence while responding party’s burden is to establish a defense to
enforcement. Molecular Analytical Systems v. Ciphergen Biosystems, Inc.
(2010) 186 Cal. App. 4th 696, 705.
IV.
DISCUSSION
A.
The court considers Plaintiff’s late-filed
opposition over Defendants’ objection.
Plaintiff filed his opposition on July 15,
2022, although it was due on July 13, 2022 (nine court days before the hearing)
because Plaintiff’s counsel mistakenly calendared the opposition’s due date for
nine calendar days instead of court days. Code Civ. Proc., § 1005; Declaration
of Shelley Mack, ¶ 14. For purposes of
determining whether a party’s neglect excuses the late filing of a document
under Code of Civil Procedure section 473(b), courts have determined that “calendar
errors by an attorney or a member of his staff are, under appropriate
circumstances, excusable.” Flores v. Board of Supervisors (1970) 13 Cal.
App. 3d 480, 483. Additionally, absent any showing of prejudice resulting from
the late filing, the court will grant relief under section 473(b). Mink v.
Superior Court (1992) 2 Cal.App.4th 1338, 1343. Defendants were able to
file a timely reply brief, which the court considered, and have failed to show
prejudice.
B.
The
arbitration provision at issue expressly states that the contract will be
construed according to California law.
The court determines the issue of
enforceability unless there is “clear and unmistakable evidence” that the
parties intended to delegate the issue to the arbitrator." Ajamian v.
CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 781. The arbitration provision
does not delegate this issue to the arbitrator. Declaration of Rio Schwarting,
Ex. B, .pdf page 58.
Defendants argue that the FAA
governs the enforceability of the arbitration clause since the employment
agreement involves interstate commerce. Defendants, however, have not addressed
the effect of the choice-of-law provision in the employment contract. Id.
at .pdf page 49. Ordinarily, contractual arbitration provisions involving
interstate commerce are preempted by the FAA. Pinnacle Museum Tower Assn. v. Pinnacle
Market Development (US), LLC (2012) 55 Cal.4th 223, 235 ["To ensure
that arbitration agreements are enforced according to their terms, ‘the FAA
pre-empts state laws which ‘require a judicial forum for the resolution of
claims which the contracting parties agreed to resolve by arbitration.’"].
However, parties are free to “specify by contract the rules under which that
arbitration will be conducted. Where ... the parties have agreed to abide by
state rules of arbitration, enforcing those rules according to the terms of the
agreement is fully consistent with the goals of the FAA, even if the result is
that the arbitration is stayed where the [FAA] would otherwise permit it to go
forward.” Mount Diablo Medical Center v. Health Net of California, Inc.
(2002) 101 Cal.App.4th 711, 718.
The arbitration
provision states the following:
“9.6 Jurisdiction & Arbitration. The Employee
acknowledges and agrees that this Agreement is governed by and construed in
accordance with the laws of the State of California. Any dispute or claim
arising out of this agreement or any provision hereof shall be brought in and
subject to binding arbitration. The parties agree the matter will only be
brought to arbitration in the State of California, County of Los Angeles before
a single arbitrator subject to the guidelines and rules of the American
Arbitration Association. The sole arbitrator shall be selected by Company from
the list of arbitrators provided by the American Arbitration Association.”
Schwarting declaration, Ex. B, .pdf page 58, ¶ 9.6.
Accordingly, contrary
to Defendants’ argument, California law applies to construe the agreement
consistent with the parties’ express intention.
C. Plaintiff
has demonstrated that Defendants waived their right to arbitrate
The court has discretion to deny the
motion if the petitioning party waived the right to arbitration. Code Civ.
Proc., § 1281.2(a). Waiver of the right to arbitrate “will not be lightly
inferred,” and the party asserting waiver, here the Plaintiff, bears a heavy
burden of proof “with any doubts ‘to be resolved in favor of arbitration.
Fleming Distribution Company v. Younan (2020) 49 Cal.App.5th 73, 80.
The court considers a number of
factors to determine whether a party waived the right to arbitrate including: "whether
the party's actions are inconsistent with the right to arbitrate; 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; whether a party delayed for a long period before
seeking a stay; whether important intervening steps [e.g., taking advantage of
judicial discovery procedures not available in arbitration] had taken place;
and whether the delay affected, misled, or prejudiced the opposing party.” Id.
at 81. To invoke the right to arbitrate, a party must “timely raise the defense
and take affirmative steps to implement the process, and (2) participate in
conduct consistent with the intent to arbitrate the dispute. Both actions must
be taken to secure for the participants the benefits of arbitration.” Fleming
at 81.
The court’s file reflects that Mainfreight,
and Beaumont filed their answers to the First Amended Complaint on January 7, 2022,
and April 27, 2022, respectively. Neither party raised binding arbitration as
an affirmative defense. On June 27, 2022, the parties stipulated to allow
Defendants to file their First Amended Answers. Two days later, Defendants
filed this motion to compel arbitration. Defendants filed their First Amended
Answers on July 15, 2022, asserting arbitration as a first affirmative defense.
Under California law “the failure to plead arbitration as an affirmative
defense is an act inconsistent with the later assertion of a right to
arbitrate." Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th
553, 558.
Additionally, on March 28, 2022,
Defendants filed their Case Management Statement requesting a jury trial.
Defendants did not raise the issue of mandatory arbitration at that time. Id.,
¶ 10, Ex. F. Defendants did not check the box applicable to binding private
arbitration. Id. Defendants did not indicate that a motion to compel
arbitration was forthcoming. Id. This failure, in addition to the
failure to assert binding arbitration in Defendants’ initial answers are acts
inconsistent with the right to arbitrate.
Defendants filed amended answers by
stipulation on July 15, 2022, to include the affirmative defense for mandatory
arbitration, however, Defendants do not persuasively explain the six-month
delay or the four-month delay in asserting the defense. In Guess, the
court determined that the three-month delay from the time defendant answered to
the time it moved to compel arbitration constituted unreasonable delay, waiving
the right to arbitration. Guess at 558.
Moreover, Mainfreight’s decision to
propound discovery to which Plaintiff responded manifests an intent
inconsistent with the right to arbitrate. Mainfreight contends that its
propounded discovery was not “substantial” enough to constitute a waiver. Reply
4:20-22. The court disagrees. Before asserting the right to arbitration,
Mainfreight propounded two sets of form interrogatories, special interrogatories,
and a document request on March 14, 2022. Mack Declaration, ¶ 7. Plaintiff
responded on April 26, 2022. Id. On April 18, 2022, Defendants served Plaintiff
with a notice of deposition which was conducted for a full day on May 5, 2022.
Id. ¶ 8. As Defendants also acknowledge,
engaging in discovery not available in arbitration is sufficient ground for waiver
of the right to arbitrate. Guess at 556-58.
The arbitration provision states
that the American Arbitration Association’s (“AAA”) guidelines and rules apply
to the conduct of the proceeding. Defendants’ Ex. B, .pdf page 58, ¶ 9.6. The AAA rules state that the “arbitrator shall
have the authority to order such discovery, by way of deposition,
interrogatory, document production, or otherwise, as the arbitrator considers
necessary to a full and fair exploration of the issues in dispute, consistent
with the expedited nature of the arbitration.” Schwarting Declaration, Ex. E, ¶
9. In other words, discovery is permitted at the arbitrator’s discretion and
order; the state’s Discovery Act, does not expressly apply.
It is true that Plaintiff also
propounded discovery on Defendants. Defendants
are not obligated to respond until August 15, 2022, after this motion is heard.
Mack Declaration ¶ 9. Therefore, if the parties are ordered to arbitrate,
Plaintiff would not have the same right to a broad scope of discovery methods permitted
by the Discovery Act. Rather, Plaintiff’s right to discovery will be limited
and constrained by the arbitrator’s determination of necessity. As the Guess
court observed, "[s]imply put, '[t]he courtroom may not be used as a
convenient vestibule to the arbitration hall so as to allow a party to create
his own unique structure combining litigation and arbitration.'" Guess
at 558.
Plaintiff contends that he need not
show prejudice resulting from Defendants’ litigation conduct to support a
finding of waiver, citing the U.S. Supreme Court’s decision in Morgan v.
Sundance, Inc., (2022) 142 S.Ct. 1708, 1714. However, the court was
interpreting the requirements of the FAA, which do not apply to Plaintiff’s
employment contract given the express choice-of-law provisions in the contract
invoking California law. Rather, California law requires a finding of prejudice
resulting from Defendants’ litigation conduct. Fleming, supra, 49
Cal.App.5th at 80. ["whether important intervening steps [e.g.,
taking advantage of judicial discovery procedures not available in arbitration]
had taken place; and whether the delay affected, misled, or prejudiced the
opposing party.”].
Plaintiff has shown prejudice
resulting from Defendants’ litigation conduct. Defendants’ delayed asserting their right to
arbitrate. Neither Defendant, expressly invoked the right to arbitrate in their
Case Management Conference Statements. Defendants
obtained Plaintiff’s responses to written discovery without order and deposed Plaintiff,
without order. In addition, the parties participated
in mediation, which is not required by the parties’ contract. In short, the evidence supports a finding
that Defendants acted in a manner inconsistent with the right to arbitrate.
Defense counsel admits that he
suggested mediation at the commencement of the litigation. Declaration of
Thomas Ingrassia ¶ 2. Without elaborating, Mr. Ingrassia declares that only
“preliminary” discovery was conducted to prepare for mediation. Id. at ¶
3. The mediation took place on June 14, 2022 and took a full day. Mack
Declaration, ¶ 11. By this time, Defendants had the benefit of Plaintiff’s
discovery responses served in April and Plaintiff’s deposition testimony
obtained in May. This infers that Plaintiff’s theories and strategy were
disclosed, if not through discovery responses, then during mediation if the
mediation was to be meaningful. The
disclosure of defenses and strategies “is a prejudice which accrues in such
circumstances.” Davis v. Continental Airlines, Inc. (1997) 59
Cal.App.4th 205, 215. Accordingly, Plaintiff has satisfied his burden of
establishing that Defendants have engaged in conduct inconsistent with the
right to arbitrate that has resulted in prejudice to Plaintiff.
D. Plaintiff
has established that the arbitration provision is unconscionable.
The court considers two elements to
establish unconscionability. Procedural unconscionability involves a contract
of adhesion where the employee lacks the ability to negotiate and lacks
meaningful choice or where the unconscionable provision is hidden within a
“prolix printed form.” Samaniego v. Empire Today LLC (2012) 205
Cal.App.4th 1138, 1144. Substantive unconscionability involves a contract that
is one-sided or overly harsh. While both elements are required to be present,
they do not have to be present in the same degree. Rather, "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." Armendariz v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114.
The First Amended Complaint involves
the vindication of statutory rights under the Fair Employment and Housing Act which
protects employees against discrimination and retaliation by an employer. Such
claims are arbitrable if the arbitration agreement meets minimum requirements "including
neutrality of the arbitrator, the provision of adequate discovery, a written
decision that will permit a limited form of judicial review, and limitations on
the costs of arbitration." Armendariz at 91; Fitz v. NCR Corp.
(2004) 118 Cal.App.4th 702, 712–713 ["Arbitration agreements in the
employer-employee context must provide for: (1) neutral arbitrators, (2) more
than minimal discovery, (3) a written award, (4) all types of relief that would
otherwise be available in court, and (5) no additional
costs for the employee beyond what the employee would incur if he or she were
bringing the claim in court."].
Plaintiff declares that the
employment agreement was drafted by Target, with no input from him. Declaration of Brian Heidrich, ¶ 3. He was not
able to negotiate the terms of employment. Id. Defendants speculate that Plaintiff must have
had input into contract terms because the contract provides for the employer’s
reimbursement for the loss of
contribution to a prior employer funded 401K program. Reply 7:15-20. The
employer’s agreement to reimburse lost contributions does not negate the
adhesive nature of the contract as Plaintiff declares. There is no evidence to
dispute Plaintiff’s contention that the arbitration provision was a condition
of employment.
Additionally, Defendant’s failure to
include the AAA’s rules and guidelines is evidence of procedural
unconscionability. Defendant’s Reply brief does not establish that the AAA
rules were attached to the employment agreement. Reply, 8:22-24. The arbitration provision itself does not
reference any attachment to the contract. Schwarting Declaration, Ex. B, .pdf
page 58. Defendants contend
that the failure alone to attach AAA rules does not establish procedural
unconscionability unless there was some element in the AAA rules of which the
employee was not aware. Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th
1237, 1246. As noted above, AAA’s rules delegate to the arbitrator the power to
determine if discovery is necessary. Therefore, there is no assurance that
Plaintiff will have “adequate” or “more than minimal discovery”, from which
Defendants have already benefited.
In Sparks v. Vista Del March
Child and Family Service (2012) 207 Cal.App.4th 1511 (abrogated
on grounds not relevant here), the court stated that "[a]s the American
Arbitration Association rules specified by the clause were not provided to
plaintiff, and according to defendant those rules gave the arbitrator the
discretion to deny any discovery, the provision for discovery is insufficient.
Accordingly, the clause, as both procedurally and substantially as
unconscionable, is unenforceable. " Id. at 1523.
As noted above, in FEHA related
claims, the agreement must provide that the employee will not bear additional
costs beyond what the employee would incur if he or she were bringing the claim
in court. While the agreement makes numerous references to the “Costs of
Arbitration” section, the AAA guidelines do not address costs of arbitration. Even
if it did, there is no evidence that Plaintiff was provided with those
guidelines at the time he signed his employment contract. While Defendants now
contend that they are willing to pay administrative costs charged by AAA, the
issue remains that there is no evidence of Plaintiff’s awareness of costs
attendant to binding arbitration at the time he signed the employment contract.
See Schwarting declaration, ¶9, Ex. E, .pdf page 112, ¶ 45 “Expenses.”
While substantive unconscionability
is already established by the failure to provide Plaintiff with the AAA rules
and guidelines, specifically with respect to limited discovery, the agreement
also does not provide for a neutral arbitrator. Instead, “[t]he sole arbitrator
shall be selected by Company from the list of arbitrators provided by the
American Arbitration Association.” Schwarting Declaration, Ex. B, .pdf page 58,
¶ 9.6. Defendants concede the
impropriety of this provision by declaring that they will not seek to enforce
that provision but will defer to AAA guidelines. Declaration of Schwarting, ¶
8.
However, The AAA guidelines are
equally “one-sided” with respect to the appointment of a neutral arbitrator.
The AAA guidelines state that absent an agreed-upon method for appointment, the
AAA shall provide a roster “of its own choosing,” from which the parties are
“encouraged” to agree. Schwarting Declaration, Ex. B, .pdf page 102, subpart
c. Accordingly, Plaintiff has
established that the arbitration provision is substantively unconscionable in
that it does not provide for a neutral arbitrator.
V.
CONCLUSION
Plaintiff has established that the
arbitration provision as set forth in the employment agreement is unenforceable
under California law. Accordingly, Defendants’ Motion to Compel Arbitration is
DENIED.