Judge: Richard Y. Lee, Case: 30-2022-01262032, Date: 2022-10-13 Tentative Ruling
Defendants Irvine Management Company and The Irvine Company, LLC (“Defendants”) move to compel Plaintiffs Tiffany Haynes and Joshua Gill (“Plaintiffs”) to arbitrate their claims pursuant to the arbitration agreements contained in the parties’ lease agreements and to stay this action pending resolution of the arbitration.
Plaintiffs’ Evidentiary Objections
Objections to Declaration of Nicolas Arriola
Objection Nos. 1-2 – overruled.
Authority
A party to an arbitration agreement may seek a court order compelling the parties to arbitrate a dispute covered by the agreement. (Code Civ. Proc., § 1281.2.) “The trial court may resolve motions to compel arbitration in summary proceedings, in which ‘[t]he petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and 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.’” (Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 683.)
Both the Federal Arbitration Act (“FAA”) and the California Arbitration Act (“CAA”) require the existence of a valid Arbitration Agreement, before arbitration can be compelled. (9 U.S.C. § 2; Code Civ. Proc., § 1281.2.)
Arbitration Provision
The arbitration provision contained in both subject leases is included in a document entitled Addendum for Arbitration of Disputes and Class Action Waiver. (Declaration of Nicolas Arriola (“Arriola Decl.”), Exs. A, B.) The provision reads, in pertinent part:
“Any dispute, claim or controversy arising out of or relating to this Lease or your tenancy with Landlord, including the breach, termination, enforcement, interpretation or validity thereof, and including the determination of the scope or applicability of this provision to arbitrate (‘Claim’ or ‘Claims’) shall be determined by binding arbitration in the County in which the subject Premises is located, before a neutral arbitrator. Except for the exclusions listed below, arbitration shall be the exclusive and binding remedy for any Claims between the Parties and shall be used instead of any court action or jury trial, which are hereby expressly waived. The Lease and this arbitration and class action waiver Addendum shall be governed by, and all questions and disputes regarding arbitrability shall be determined in accordance with, the Federal Arbitration Act, 9 U.S.C. Sections 1-16, notwithstanding any other choice of law provision.”
Applicability of the FAA
The FAA governs arbitration in written contracts involving interstate commerce. (9 U.S.C. § 1). The party asserting FAA preemption has the burden to present evidence establishing a contract affecting interstate commerce. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 238.) “‘[T]he phrase “‘involving commerce’” in the FAA is the functional equivalent of the term “‘affecting commerce,’” which is a term of art that ordinarily signals the broadest permissible exercise of Congress’s commerce clause power.’” (Ibid.) “The FAA’s basic coverage provision, section 2, makes the FAA applicable to contracts ‘evidencing a transaction involving commerce.’ ” (Muller v. Roy Miller Freight Lines, LLC (2019) 34 Cal.App.5th 1056, 1062). “Courts broadly construe section 2 to ‘provide for the enforcement of arbitration agreements within the full reach of the Commerce Clause.’ ” (Ibid.).
Defendants cite Russell v. United States (1985) 471 U.S. 858, wherein the United States Supreme Court found that “[t]he rental of real estate” is “unquestionably” an activity that affects commerce. (Id., at p. 862). The Court stated that “[w]e need not rely on the connection between the market for residential units and ‘the interstate movement of people,’ to recognize that the local rental of an apartment unit is merely an element of a much broader commercial market in rental properties.” (Ibid.) The Court further noted that the congressional power to regulate “the class of activities that constitute the rental market for real estate includes the power to regulate individual activity within that class.” (Ibid.)
Defendants offer the Declaration of Nicolas Arriola, a Community Manager employed by Irvine Management Company, who declares that many of the residents who lease apartment homes at the apartment building where Plaintiffs resided travel from out-of-state to do so. (Arriola Decl., ¶ 2.) He further states that Defendants’ “marketing efforts for apartments include newspapers publications such as The Wall Street Journal as well as nationwide internet advertising through social media websites and internet search engines like Google.” (Id., ¶ 3.)
Plaintiffs cite to Williams v. 3620 W. 102nd Street, Inc. (2020) 53 Cal.App.5th 1087 and argue that Russell is distinguishable because it did not involve the FAA or a residential lease agreement between the parties. Plaintiffs also submit their own declarations which state that they were already living in California when they entered into the lease agreements. (Declarations of Joshua Gill and Tiffany Haynes, ¶ 4.)
In Williams, the owners conceded that the FAA did not apply to the arbitration agreements at issue. (Id., at p. 1091.) Thus, for purposes of determining whether the FAA controls here, Williams is inapplicable.
The holding in Russell makes clear that the leasing of apartment rental properties is an element of the broader commercial market in rental properties, which is activity that affects commerce and falls within the scope of the congressional power to regulate interstate commerce. The fact that Plaintiffs themselves did not move interstate to rent the subject properties is not dispositive. (See Russell, 471 U.S. at p. 862; see also Scott v. Yoho (2016) 248 Cal.App.4th 392, 400-401 [“ ‘the words “involving commerce[]” . . . cover more than “ ‘ “only persons or activities within the flow of interstate commerce.” ’ ”.) This is because individual cases need not affect interstate commerce “ ‘if in the aggregate the economic activity in question would represent “a general practice . . . subject to federal control.” ’ ” (Scott, 248 Cal.App.4th at p. 401.) Defendants have shown that this dispute involves the rental of real estate to Plaintiffs. Thus, the FAA applies.
Defendants also cite to Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, which held that the arbitration agreement there was governed by the FAA due to the arbitration agreement’s express invocation thereof. The agreement stated: “Enforcement of this agreement to arbitrate shall be governed by the Federal Arbitration Act.” (Id., at p. 346). Citing authorities which have found parties can incorporate the CAA into their agreements, the court concluded as follows: “If, as the courts in Mount Diablo and Valencia v. Smyth held, contracting parties’ explicit reference to ‘enforcement’ under California law required the trial court to consider any motions to compel arbitration under the CAA, it follows that the instant parties’ reference to ‘enforcement’ under the FAA required the court to consider the Jaman Parties’ motion to compel arbitration under the FAA.” (Id., at p. 348). The Vitrola court further held that the presence of interstate commerce is not the only manner under which the FAA may apply and parties may invoke the FAA voluntarily. (Id., at p. 355.)
Here, the arbitration agreements expressly invoke the FAA and state that the leases and the arbitration and class action waiver addendums shall be governed by the FAA, as well as all questions and disputes regarding arbitrability. (Arriola Decl., Exs. A, B.) The Court finds that the FAA applies on this separate ground as well.
Enforceability
To determine if a valid arbitration agreement exists, courts look to state law principles of contract formation. (See Cione v. Foresters Defendant Services, Inc. (1997) 58 Cal.App.4th 625, 634.) The essential elements of a contract are 1) capacity to contract; 2) consent; 3) a lawful object; and 4) a sufficient cause or consideration. (Civ. Code, § 1550.)
Defendants contend the arbitration agreement is enforceable because Plaintiffs’ Complaint concedes they entered into the lease agreements, the arbitration agreement was signed and initialed in two places which demonstrates Plaintiffs’ acknowledgment and consent, and the arbitration agreement is supported by sufficient consideration.
Plaintiffs do not dispute that they entered into the lease agreements with Defendants, that they consented to the arbitration provision by signing and initialing the addendums, that the agreements are supported by sufficient consideration, or that their claims fall within the scope of the arbitration provision.
The Court finds the arbitration agreements to be valid and enforceable.
Preemption
The only remaining issue is whether Civil Code section 1953(a)(4) applies to invalidate the arbitration provision, or whether section 1953 is preempted by the FAA. Defendants argue the FAA preempts section 1953, while Plaintiffs contend that section 1953(a)(4) is not preempted because it has no specific legislative intent regarding arbitration.
“Under section 1953(a)(4), any lease provision in which a lessee agrees to modify or waive ‘procedural rights in litigation in any action involving his rights and obligations as a tenant’ is void as contrary to public policy.” (Williams, supra, 53 Cal.App.5th at p. 1091.) “Inherent in an arbitration agreement is a waiver of trial by jury . . . .” (Jaramillo v. JH Real Estate Partners, Inc. (2003) 111 Cal.App.4th 394, 401.) Thus, “the most reasonable interpretation of section 1953, subdivision (a)(4), is that it establishes the general rule that a tenant of residential premises cannot validly agree, in a residential lease agreement, to binding arbitration to resolve disputes regarding his or her rights and obligations as a tenant.” (Id., at p. 404, emphasis in original.)
“Section 2 of the FAA provides that arbitration provisions shall be enforced, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ ” (Smith v. PacifiCare Behavioral Health of California, Inc. (2001) 93 Cal.App.4th 139, 151, citing 9 U.S.C. § 2.) “Thus, a state court may, without violating section 2, refuse to enforce an arbitration clause on the basis of ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’ ” (Ibid., citing Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 687.) “Critically, however, a state court may not defeat an arbitration clause by applying state laws ‘applicable only to arbitration provisions.’ ” (Ibid.) State contract defenses applicable only to arbitration clauses or applied in a way to disfavor arbitration clauses or interfere with the fundamental attributes of arbitration are preempted by federal policy of the FAA, and will not be given effect when the FAA applies. (McGill v. Citibank, N.A. (2017) 2 Cal.5th 945, 962, 964.) Moreover, as noted by Defendants, “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 341.)
Section 1953, as interpreted by the California Jaramillo court, renders all arbitration agreements within residential leases invalid with regard to disputes relating to a tenant’s rights or obligations. Such application undisputedly disfavors arbitration clauses and stands as an obstacle to the accomplishment of the purpose of the FAA, which is to ensure that private arbitration agreements are enforced pursuant to their terms. (AT&T Mobility, 563 U.S. at p. 344.) It would also prohibit outright the arbitration of any claims by tenants related to that tenant’s rights or obligations, where the arbitration agreement is included in the residential lease agreement. Plaintiffs’ argument that section 1953 is not preempted because it does not expressly relate to arbitration agreements misses the fact that a statute may be preempted when it is applied in a way to disfavor arbitration clauses. Section 1953 as applied under California law does just that. Under these circumstances, section 1953 must be displaced by the FAA.
In light of the above, the Court GRANTS the Motion.
The Court ORDERS this matter STAYED pending resolution of the arbitration of the claims raised herein. (9 U.S.C. § 3; Code Civ. Proc., § 1281.4.)
The Court sets an ADR review hearing for April 20, 2023 at 1:30 p.m.
Defendants to give notice.