Judge Randolph M. Hammock, Case 22STCV08111 2022-08-31 Tentative Ruling

MOVING PARTY: Defendants Larder Baking Company, L.P.; Suzanne Goin; Caroline Styne

This is an employment dispute. Defendant Larder Baking Company, L.P. employed Plaintiff Nathan Dakdouk as a Master Baker. As part of his compensation incentive, Plaintiff was to receive a management fee of 33% of the Company’s profits. Plaintiff alleges that Defendants failed to pay the agreed management fee, and when Plaintiff pushed the issue, Defendants fired him. Plaintiff brings causes of action against Defendant Larder Baking Company and its executives Suzanne Goin and Caroline Styne for (1) Retaliation in violation of Labor Code §§ 1102.5, et seq., (2) wrongful termination, (3) fraudulent misrepresentation, (4) breach of contract, (5) violation of Labor Code §§ 232.5, et seq., and (6) waiting time penalties.

Defendants now move for an order compelling Plaintiff to arbitrate the dispute pursuant to CCP § 1281 et seq. Plaintiff opposed. This matter initially came for hearing on August 25, 2022. Because both parties filed supplemental responses the day immediately before the hearing, the court continued the matter to this date. The court has read and considered the supplemental responses, and now rules as follows.

The day immediately prior to the first hearing on this motion, Defendant filed a “Supplemental and Further Reply Brief.” Defendant attempted to introduce new evidence that the Plaintiff not only had the opportunity to consult an attorney before signing his Executive Employment Agreement, but that he had, in fact, done just that.

Plaintiff responded the same day with an objection to the Supplemental Reply. Because Plaintiff contends that Defendant’s Supplemental Reply raised the possibility that there exists more than one agreement to arbitrate, Plaintiff has requested an evidentiary hearing on this issue.

First, this court agrees that Defendant cannot raise new arguments on reply. (See Save the Agoura Cornell Knoll v. City of Agoura Hills (2020) 46 Cal. App. 5th 665, 679 [noting courts will generally not consider new evidence or arguments raised in a reply brief].) Thus, Plaintiff’s objection is well-taken.

Second, this court stands by its Tentative Ruling. It will not consider the new evidence presented in Defendant’s Supplemental and Further Reply Brief. However, if that evidence were considered, it would certainly make the order granting arbitration even more compelling.

Finally, this court declines to hold an evidentiary hearing.[1] Plaintiff has inherent knowledge of the arbitration agreement(s) he did or did not sign. If there was a possibility that more than one agreement existed, Plaintiff could have and should have presented that argument in his Opposition. He waived that argument by not doing so.

To summarize, the supplemental responses of 08/24/22 change nothing in this court’s initial Tentative Ruling.

“[T]he petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence . . . .” (Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1284). “In determining whether an arbitration agreement applies to a specific dispute, the court may examine only the agreement itself and the complaint filed by the party refusing arbitration [citation]. The court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.” (Weeks v. Crow (1980) 113 Cal.App.3d 350, 353). “Doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration. The court should order them to arbitrate unless it is clear that the arbitration clause cannot be interpreted to cover the dispute.” (California Correctional Peace Officers Ass'n v. State (2006) 142 Cal.App.4th 198, 205).

“[A] party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense. [Citation.] In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court's discretion, to reach a final determination.” (Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1284).

“If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies. . . .” (CCP § 1281.4.)

California has a strong public policy in favor of arbitration as an expeditious and cost-effective way of resolving disputes. “Even so, parties can only be compelled to arbitrate when they have agreed to do so.” (Avila v. S. California Specialty Care, Inc. (2018) 20 Cal. App. 5th 835, 843.) “The party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement.” (Id.) An arbitration agreement is a contractual agreement. “General contract law principles include that ‘[t]he basic goal of contract interpretation is to give effect to the parties’ mutual intent at the time of contracting. [Citations.] ... The words of a contract are to be understood in their ordinary and popular sense.” [Citations.] (Garcia v. Expert Staffing W., 73 Cal. App. 5th 408, 412–13.)

In this case, Plaintiff signed an Executive Employment Agreement (“the Agreement”) with Defendants. That Agreement contained an arbitration provision, which provided:

Any dispute, controversy or Claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, including whether the Claims asserted are arbitrable, will be referred to and finally determined by arbitration in accordance with the Judicial Arbitration and Mediation Service ("JAMS") Streamlined Arbitration Rules and Procedures. The tribunal will consist of one (1) arbitrator. The place of arbitration will be Los Angeles County, California, United States of America. The language to be used in the arbitral proceedings will be English. Judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The arbitrator may, in the award, allocate all or part of the costs of the arbitration, including the fees of the arbitrator and the reasonable attorneys' fees of the prevailing Party.

Defendants argue this “broad” provision encompasses all claims here. But Plaintiff argues the language “arising out of or relating to this Agreement” must be narrowly drawn to include only Plaintiff’s breach of contract claim. Put differently, it is Plaintiff’s position that the other five causes of action do not “arise out of or relate to” the Agreement, and thus, are not subject to arbitration.

“[T]he decision as to whether a contractual arbitration clause covers a particular dispute rests substantially on whether the clause in question is ‘broad’ or ‘narrow.’ A ‘broad’ clause includes those using language such as ‘any claim arising from or related to this agreement’ or ‘arising in connection with the [a]greement.’ ‘It has long been the rule in California that a broadly worded arbitration clause ... may extend to tort claims that may arise under or from the contractual relationship.’ ‘There is no requirement that the cause of action arising out of a contractual dispute must be itself contractual. At most, the requirement is that the dispute must arise out of contract.’” (Rice v. Downs (2016) 248 Cal. App. 4th 175, 181 [internal citations omitted].)

Here, the court agrees with Defendants that the arbitration provision is broad, as it covers “[a]ny dispute, controversy or Claim arising out of or relating to this Agreement.” (Styne Decl., Exh. A, ¶ 18.3 [emphasis added.) (See, e.g., Rice v. Downs (2016) 248 Cal.App.4th 175, 187, 203 Cal.Rptr.3d 555 [“The parties did not simply agree to arbitrate ‘any controversy,’ effectively meaning every controversy between them. ‘Any controversy’ is necessarily modified by ‘arising out of this Agreement.’ ”]; Larkin v. Williams, Woolley, Cogswell, Nakazawa & Russell (1999) 76 Cal.App.4th 227, 229–230, 90 Cal.Rptr.2d 195 [arbitration clause covering “ ‘[a]ny controversy or claim arising out of or relating to any provision of this [partnership] [a]greement or the breach thereof’ ” covered dispute as to partnership dissolution]; Dream Theater Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 553, fn. 1, 21 Cal.Rptr.3d 322 [“any claim arising out of or relating to ... is ‘very broad’ ”].

Regarding the latter portion of the provision, this court also agrees with Defendants that the claims here “arise from or relate to” the Executive Employment Agreement. The Agreement itself is broad: it spans 13 pages, and covers everything from Plaintiff’s duties, Defendant’s hiring and termination policies, Plaintiff’s vacation terms, and the confidentiality of the bakery’s recipes. The causes of action are rooted in this Agreement.

Plaintiff’s First Cause of Action for Retaliation in Violation of Labor Code Section 1102.5 et seq., alleges that Defendants terminated him after he “engaged in statutorily protected activity when he complained of, opposed, blew-the-whistle and reported: (a) failures to pay wages due and owing to Mr. Dakdouk; (b) Defendants’ unethical and/or illegal behavior discussed above; (c) Defendants’ illegal and fraudulent use of company monies, including those provided through the PPP and SBA loans; (d) requiring Mr. Dakdouk to personally guaranty loans to Larder; (e) being denied access to the company’s financial records and his own pay records, to determine if Defendants’ representations concerning the availability of his earned fees was true; and (f) Defendants’ unethical and/or illegal business practices discussed above.” (Compl. 34.) Similarly, Plaintiff’s Second Cause of Action for Wrongful Termination in Violation of Public Policy and Fifth Cause of Action for Wrongful Termination in Violation of Labor Code Section 232.5 et seq. are based on the alleged wrongful termination in response to Plaintiff’s complaints of wrongdoings and financial improprieties. (Id. 42, 76.) These causes of action relate to the Agreement.

Plaintiff’s Third Cause of Action for Fraudulent Misrepresentation is based on Defendants allegedly diverting money owed to Plaintiff under the Executive Employment Agreement, and hiding or concealing the Company’s financial statements despite Plaintiff’s repeated requests for the same. (Id 50.) Likewise, Plaintiff’s Fourth Cause of Action for Breach of Contract is based on Defendants’ alleged failure to pay Plaintiff the agreed-upon management fee as “as set forth in the [Executive Employment Agreement].” (Compl. 68.) These causes of action also relate to the Agreement.

Finally, Plaintiff’s Sixth Cause of Action for Waiting Time Penalties is based on alleged money owed to Plaintiff at the time of his termination. (Compl. 80.) Once again, the money owed to Plaintiff was set by the Executive Employment Agreement and relates to the same.

Plaintiff argues that the Labor Code claims are not included in the scope of arbitration because they are based on the “violation of an independent duty or right originating outside of the agreement.” (Opp. 7: 11-13.) But this court cannot agree that Plaintiff has demonstrated that the Labor Code claims invoke some “independent right.” Rather, it appears the claims must be considered related to Plaintiff’s employment terms and conditions as delineated in the Executive Employment Agreement. Indeed, that Agreement is what created the terms of Plaintiff’s employment in the first place.

Thus, when considered in light of the strong public policy in favor of arbitration, this court finds that all claims here “arise from or relate to” the Executive Employment Agreement. For that reason, each cause of action in the Complaint is subject to binding arbitration.

Plaintiff next argues that even if the agreement covers of all of his claims, it should be disregarded based on principles of unconscionability. Unconscionability 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. (Sanchez v. Valencia Holding Company, LLC (2015) 61 Cal.4th 899, 910.) Under California law, an arbitration agreement must be in some measure both procedurally and substantively unconscionable in order for the agreement to be unenforceable. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114; De La Torre v. CashCall, Inc. (2018) 5 Cal.5th 966, 982.) “But they need not be present in the same degree. . . . [T]he 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, supra, 24 Cal.4th at p. 114.)

Plaintiff argues the agreement is procedurally unconscionable because it was a contract of adhesion. “The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” [Citation]. (Id. at 113).

Plaintiff attests that he signed the Executive Employment Agreement in Defendant’s attorney’s office on February 14, 2019. (Dakdouk Decl. 42) He states the Agreement “contained legal language that [he] did not understand,” that Defendants did not give him the time to review the Agreement, that he felt rushed, and that it was presented on a “take it or leave it” basis. (Id. 4, 6.)

Plaintiff relies on the California Supreme Court case of OTO, L.L.C. v. Kho (2019) 8 Cal. 5th 111, 118, a case which “involve[d] an unusually high degree of procedural unconscionability.” In OTO, the Court found the circumstances in which a car dealership service technician was presented with an arbitration agreement demonstrated significant oppression: The agreement was presented in the workspace, along with other employment-related documents; neither its contents nor its significance was explained; because the company used a piece-rate compensation system, any time the employee spent reviewing the agreement would have reduced his pay; the company selected a low-level employee, a ‘porter,’ to present the Agreement, creating the impression that no request for an explanation was expected and any such request would be unavailing; and it had the porter wait for the documents, creating the expectation that the employee should sign them immediately, without examination or consultation with counsel. (Id. at 127-28.)

The circumstances are significantly different here than in OTO. The employee in OTO was a vehicle service technician, whereas Plaintiff was an executive of the company and received a high salary, including a 33% share of the Company’s profits. He was not provided the Agreement in his workplace, nor was it provided to him by a low-level employee such as the porter in OTO. Rather, Plaintiff went to the office of Larder Baking’s attorney to review and sign the Agreement. There is nothing to suggest Plaintiff could not have brought his own attorney to review the Agreement. Thus, these circumstances do not resemble the high degree of procedural unconscionability in OTO.

Accordingly, the totality of the circumstances, particularly the “take it or leave it” nature of the agreement, are sufficient to establish “some degree of procedural unconscionability.” (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 915). However, it does not exceed that found in the vast majority of agreements to arbitrate between employers and employees. This only means the substantive terms of the agreement must be scrutinized to ensure they are not manifestly unfair or one-sided. (Id.)

In Armendariz, the California Supreme Court outlined five elements that must be present in an arbitration agreement in order to avoid substantive unconscionability. (24 Cal.4th at p. 102.) Armendariz factor 1 requires that the agreement provide for a “neutral arbitrator[].” (Id.) Armendariz factor 2 and 3 requires that the arbitration agreement “provide for more than minimal discovery” and that the arbitrator issue a written opinion. (Id.) Armendariz factor 4 requires that the agreement provide for all the types of relief that would otherwise be available in court. (Id.) Finally, Armendariz factor 5 provides that the agreement must not “require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.” (Id.)

Plaintiff argues the Agreement is substantively unconscionable because “nowhere does the agreement indicate where those procedural rules may be found or even how Mr. Dakdouk could initiate his clams,” and “[lacks clarity] as to how Mr. Dakdouk could initiate his claims.” Moreover, the “Provision’s lack of clarity as to what claims are covered and how Mr. Dakdouk locate or understand the rules surrounding the Arbitration process supports a finding of substantive unconscionability.” Indeed, the arbitration agreement here is mainly is silent on most Armendariz issues. However, the Court in Armendariz expressly held that its elements are interpreted into an arbitration agreement. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 106-07.) Because the agreement is silent on the issues, Plaintiff has the benefit of Amendariz on his side to fill the gaps.

Plaintiff attempts to analogize the facts here to those in OTO, supra, where the Court also found a high degree of substantive unconscionability. The OTO court noted that “[s]ubstantive terms that, in the abstract, might not support an unconscionability finding take on greater weight when imposed by a procedure that is demonstrably oppressive.” (OTO, L.L.C. v. Kho (2019) 8 Cal. 5th 111, 130.) However, it is important to note that since the Court was dealing with wage claims, it directed its focus to comparing the proposed arbitration proceeding to a Berman proceeding, which was “specifically designed to give claimants a ‘speedy, informal, and affordable method’” to resolve wage claims. (Id. at 132.) It was in this context that the court explained that the substantive terms, as compared to those in a Berman proceeding, were substantively unconscionable.

Noting the unique context, the Court cautioned that in a case dealing with “wrongful demotion and discharge,” “it may well be that an arbitration process closely resembling civil litigation can be as advantageous for the employee as for the employer.” (Id. at 695.) The Court concluded by noting that “an unconscionability analysis must be sensitive to context,” an analysis which “includes both the commercial setting and purpose of the arbitration contract and any procedural unconscionability in its formation.” Taken together with a procedural unconscionability showing that was “exceptionally strong,” the Court found the context also supported substantive unconscionability. (Id. at 136.)

As explained earlier, the “context” of the agreement here does not resemble OTO. This is not the situation in OTO where Plaintiff is “surrender[ing] the full panoply of Berman procedures and assistance” in exchange for “formal and highly structured arbitration process that closely resembled civil litigation.” (Id. at 136.) Just the opposite. Plaintiff is waiving the civil litigation process in exchange for arbitration that will be less formal, but in many substantive ways mirror, the civil litigation process.

In addition, Plaintiff was a high-level member of the company and received a high salary—including a 33% share of the Company’s profits. He was not provided the Agreement in his workplace, nor was it provided to him by a low-level employee such as the porter in OTO. Rather, Plaintiff went to the office of Larder Baking’s attorney to review and sign the Agreement. There is nothing to suggest that Plaintiff could not have brought his own attorney to the office if he wanted to. Thus, considering the context of the situation here, and in light of the slight procedural unconscionability, discussed above, the court finds little substantive unconscionability.

Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept49@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.

[1] Plaintiff contends it is “mandatory” that this court hold an evidentiary hearing under the holding of Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394. Not so. Rosenthal did not involve purportedly conflicting arbitration agreements. Rather, the case merely discussed the role of the trial court in finding facts relevant to the enforcement of an arbitration agreement. Indeed, the Court expressly rejected the argument that the trial court needed to hold an evidentiary hearing. (Id. at 414 [“[t]here is simply no authority for the proposition that a trial court necessarily abuses its discretion, in a motion proceeding, by resolving evidentiary conflicts without hearing live testimony].) Plaintiff’s counsel would be well advised to eliminate that argument from their standard opposition to motions to compel arbitration, or at the very least, not cite that case for the proposition of law in which they have incorrectly asserted.