Judge Ronald F. Frank, Case Number: 23TRCV01898, Date: 2023-12-13 Tentative Ruling

Judge: Ronald F. Frank, Case: 23TRCV01898, Date: 2023-12-13 Tentative Ruling

Case Number: 23TRCV01898 Hearing Date: December 13, 2023 Dept: 8

Tentative Ruling

HEARING DATE: December 13, 2023¿

CASE NUMBER: 23TRCV01898

CASE NAME: Cynthia Moultrie v. Savvy Beauty Academy LLC, et al.

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MOVING PARTY: Defendant, Savvy Beauty Academy, LLC and Terry Yee

RESPONDING PARTY: Plaintiff, Cynthia Moultrie

TRIAL DATE: Not Set.

MOTION:¿ (1) Motion to Compel Arbitration

Tentative Rulings: (1) ARGUE. The Court will entertain oral argument as to the divergence of the instructor agreement from the operating agreement, as bearing on the causes of action alleged in this action and whether the employment relationship causes of action were intended by the parties to be arbitrated or not.

I. BACKGROUND¿

A. Factual¿

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On June 13, 2023, Plaintiff, Cynthia Moultrie (“Plaintiff”) filed a Complaint against Defendants, Savvy Beauty Academy LLC, Terry Yee, DOES 1 through 10, and DOES 21 through 30. The Complaint alleges causes of action for: (1) Disability Based Discrimination in Violation of Government Code § 12940 (a); (2) Failure to Provide A Reasonable Accommodation in Violation of Government Code § 12940 (m); (3) Retaliation in Violation of Labor Code § 1102.5(b); (4) Retaliation in Violation of Government Code § 12940 (m)(2); (5) Wrongful Termination in Violation of Public Policy Against Discrimination and Retaliation; (6) Failure to Pay Overtime Wages in Violation of Labor Code §§ 204,1194 and Wage Order 2; (7) Failure to Pay Minimum Wages in Violation of Labor Code §§ 1194, 1197, and 1197.1; (8) Failure to Reimburse Required Business Expenses in Violation of Labor Code § 2802; (9) Failure to Pay Wages Promptly Upon Termination; (10) Failure to Provide Accurate and Itemized Wage Statements in Violation of Labor Code § 226; and (11) Unfair Business Practices in Violation of Bus. & Prof Code §§ 17200, Et Seq.

Defendants Savvy Beauty Academy LLC and Terry Yee now file a Motion to Compel Arbitration based on an agreement the parties made after discussion of becoming partners. Defendants contend that Plaintiff, a seasoned hairstylist, made the decision to go into business for herself. Defendants claim that Plaintiff came across Yee’s building and inquired about renting the space in order to build a beauty school. Defendants note that Plaintiff and Yee decided to become partners and open Savvy Beauty School Academy LLC. As part of their agreement, Defendants note that Yee offered to waive Plaintiff’s rent for the building until the school was opened and the business had cash flow. Defendants assert that once the school officially opened, the parties agreed that Plaintiff would pay $7,500 rent per month.

Defendants contend that the parties worked together to draft the final Operating Agreement, which had multiple iterations. Defendants note that after negotiating the various terms of the contract, the parties signed the Operating Agreement on or about September 27, 2019. Plaintiff’s Complaint also concedes she signed the operating agreement in September 2019. The terms of the operating agreement are as follows: (1) Yee would have 60% interest in the business, Plaintiff would have 25% interest in the business, and Helen Ausubel (Plaintiff’s Mother) would have 15% interest in the business. Defendants note that an arbitration agreement exists in the operating agreement and that the scope of the agreement to arbitrate covers the causes of action in this case.

B. Procedural

On September 19, 2023, Defendants filed a Motion to Compel Arbitration. On October 23, 2023, Plaintiff filed an opposition. Plaintiff filed another opposition on October 26, 2023. On December 6, 2023, Defendants filed a reply brief.

II. ANALYSIS ¿

A. Legal Standard

The Federal Arbitration Act (“FAA”) states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.)

California law states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

Pursuant to Code of Civil Procedure §1281.2, generally, on a petition to compel arbitration, the court must grant the petition unless it finds either (1) no written agreement to arbitrate exists; (2)¿the right to compel arbitration has been waived; (3) grounds exist for revocation of the agreement; or (4) litigation is pending that may render the arbitration unnecessary or create conflicting¿rulings on common issues.

When seeking to compel arbitration, the initial burden lies with the moving party to demonstrate the existence of a valid arbitration agreement by preponderance of evidence. (Ruiz v. Moss Bros. Auto Group (2014) 232 Cal.App.4th 836, 841-42; Gamboa v. Northeast Community Clinic (2021), 72 Cal.App.5th 158, 164-65.) It is sufficient for the moving party to produce a copy of the arbitration agreement or set forth the agreement’s provisions. (Gamboa, 72 Cal.App.5th at 165.) The burden then shifts to the opposing party to prove by a preponderance of evidence any defense to enforcement of the contract or the arbitration clause. (Ruiz, 232 Cal.App.4th at 842; Gamboa, 72 Cal.App.5th at 165.) Subsequently, the moving party must establish with the preponderance of admissible evidence a valid arbitration agreement between the parties. (Ibid.) The trial court then weighs all the evidence submitted and uses its discretion to make a final determination. (Ibid.) “California law, ‘like [federal law], reflects a strong policy favoring arbitration agreements and requires close judicial scrutiny of waiver claims.’” (Wagner Const. Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 31.)

If the court orders arbitration, then the court shall stay the action until arbitration is completed. (See Code Civ. Proc., § 1281.4.)

B. Discussion

Defendants note that the Operating Agreement, signed by plaintiff includes a mutual arbitration provision which states in part:

Upon the occurrence of any dispute or disagreement between the parties hereto arising out of or in connection with any term or provision of this Agreement, the subject matter hereof, or the interpretation or enforcement hereof (in each case, a ‘Dispute’), the parties shall submit the Dispute to final and binding arbitration in Los Angeles County, California, administrated by JAMS, or its successor, in accordance with the rules and procedures of JAMS then in effect. The parties agree that any and all Disputes that are submitted to arbitration in accordance with this Agreement shall be decided by one (1) neutral arbitrator who is a retired judge or attorney who is experienced in complex commercial transactions. If the parties are unable to agree on an arbitrator, JAMS shall designate the arbitrator. The parties will cooperate with JAMS and with one another in selecting the arbitrator and in scheduling the arbitration proceedings in accordance with applicable JAMS procedures. The Arbitration shall be conducted in accordance with the JAMS Comprehensive Rules. Any party may commence the arbitration process called for in this Agreement by filing a written demand for arbitration with JAMS, with a copy to the other party. Any award issued as a result of such arbitration shall be final and binding between the parties therefore and shall be enforceable by any court having jurisdiction over the party against whom enforcement is sought. The parties expressly acknowledge and understand that by entering into this Agreement, they each are waiving their respective rights to have any Dispute between the parties hereto adjudicated by a court or by a jury.

(Declaration of Terry Yee (“Yee Decl.”), ¶ 7, Exhibit 1.)

Defendants assert that Plaintiff’s Complaint concedes that she signed the Operating Agreement in September 2019 (Complaint, ¶ 4.) Defendants also assert that it was not presented on a take-it-or-leave-it basis, that both parties had the opportunity to seek independent legal counsel, and that both parties worked side-by-side to carefully craft and artfully formulate the detail nuances of the Operating Agreement.

Here, Plaintiff’s does not dispute that she signed the document. However, Plaintiff instead argues that the Arbitration Agreement found in the Operating Agreement, does not apply to her employment causes of action, as the employment claims do not arise from the arbitration provision, nor do her claims touch matters governed by the Operating Agreement. The Court notes that the allegations in which Plaintiff basis her employment discrimination causes of action on include the following: (1) From November 2018 to January 2022, Ms. Moultrie worked roughly 10 hours a day, 7 days per week, in order to get Savvy started. Throughout the process of setting up the school, Ms. Moultrie spent a substantial amount of her own money to get the business started, which included, but was not limited to, over $15,000 needed to obtain the business’s secondary education licenses, about $7,000 to have the school and curriculum approved by the Star Board of Cosmetology, and various other business-related expenses, including interior design, website, bills, and required licensing that Mr. Yee refused to pay for: (Complaint, ¶ 16.) She also alleges she invested a substantial amount of time drafting and creating curriculum and policies for the school between November 2019 and around March 2020, noting Defendant subsequently used her curriculum for their day, evening, and online classes once the school opened. (Complaint, ¶ 17.)

The Court notes that of each of these allegations arise out of Plaintiff’s role as the Operations Manager. Article IV: Management of the Operating Agreement identifies Plaintiff as the “Operations Manager” noting that the operations manager shall run the day-to-day business and affairs of the Company, provided, that except as otherwise specifically set forth in this Agreement or required under the Act.” The list of Operations Manager duties included, amongst others, supervise and direct salon staff.

The Court also notes that the allegations stated in Plaintiff’s Complaint also indicate that, even if Defendant made her feel, or allegedly stated that she was more of an employee than a co-owner, she is suing as the Operations Manager and Co-Owner of the company. For example, Plaintiff alleges that Yee refused to reimburse her for the costs of getting the business started despite promising her the same. (Complaint, ¶ 18.) Article IV, ¶ 4.10 of the Operating Agreement indicates that: “The Managers shall be reimbursed for their expenses incurred on behalf of the Company, provided , however, that the Operations Manager shall only be reimbursed if she acted within the scope of her authority…” Next, Plaintiff alleges after she complained to Yee about various safety issues, she was retaliated against by Yee demanding she surrender an additional 5% of the business to him, further diluting her interest in the business. (Complaint, ¶¶ 19-20.) The percentage indicates Plaintiff’s ownership in the business, as outlined in the Operating Agreement. Finally, Plaintiff contends that when she contracted COVID, she was terminated – noting that when she contracted COVID-19, she was forced to take a two-week medical leave, Yee accused her of lying, and subsequently emailed her a letter indicating she was to be removed from “daily operations” in the business. A designation that was placed upon her by the Operating Agreement in her description as Operations Manager.

Despite Plaintiff’s allegations that she signed a separate instructor agreement documenting her employment relationship with Savvy that did not contain an arbitration agreement, this Court finds that several of the causes of action in Plaintiff’s Complaint concern a number of the very “dispute[s]” and/or “disagreements between the parties hereto arising out of or in connection with any term or provision of the Agreement,” and are thus, subject to the Arbitration Clause found in the Operating Agreement. On the other hand, the scope of the arbitration agreement contains none of the usual language of employment arbitration provisions, i.e., as including claims arising from the employment relationship or claimed employment relationship between the parties. The Court will entertain oral argument as to the divergence of the instructor agreement from the operating agreement, as bearing on the causes of action alleged in this action and whether the employment relationship causes of action were intended by the parties to be arbitrated or not.

Unconscionability

Plaintiff next argues that the Operating Agreement is unenforceable because it is procedurally ad substantively unconscionable. “The procedural element of unconscionability focuses on whether the contract is one of adhesion. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113; Mercuro v. Superior Court, supra, 96 Cal.App.4th at p. 174.) Procedural unconscionability focuses on whether there is “oppression” arising from an inequality of bargaining power or “surprise” arising from buried terms in a complex printed form. (Armendariz, supra, 24 Cal.4th at p. 114; (2002) 96 Cal.App.4th 167, 174 (Mercuro)) The substantive element addresses the existence of overly harsh or one-sided terms. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 [130 Cal.Rptr.2d 892, 63 P.3d 979]; Armendariz, supra, 24 Cal.4th at p. 114.) An agreement to arbitrate is unenforceable only if both the procedural and substantive elements are satisfied. (Armendariz, supra, 24 Cal.4th at p. 113; Mercuro, supra, 96 Cal.App.4th at p. 174.) However, Armendariz held, “[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, at p. 114; see also Kinney v. United HealthCare Services, Inc. (1999), 70 Cal.App.4th 1322, 1329.).” McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 87.)

Procedural Unconscionability

Plaintiffs argue that the Operating Agreement is unenforceable because it is an adhesion contract and procedurally unconscionable. Plaintiff notes that she entered into an original Operating Agreement, as found in Exhibit A of her declaration, but that Yee presented the Amended Operating Agreement to her on a “Take-it-or-leave-it” Basis and Oppressed her in an attempt to get the amended operation agreement signed. The Court notes that a contract of adhesion typically denotes a standardized contract imposed and drafted by the party of superior bargaining strength which relegates to the subscribing party only the opportunity to adhere to the contract or reject it. (Armendariz, supra, 24 Cal.4th at 113.)¿ The adhesive nature of a contract is one factor that the courts may consider in determining the degree of procedural unconscionability.¿ (Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 84 fn.4.)¿¿ Further, procedural unconscionability “focuses on two factors: ‘oppression’ and ‘surprise.’ ‘Oppression’ arises from an inequality of bargaining power which results in no real negotiation and ‘an absence of meaningful choice.’ ‘Surprise’ involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.”¿ (Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 484.)

Plaintiff contends that Yee’s attorneys drafted the Agreement, without input from Plaintiff, and presented it to her on a “take-it-or-leave-it” basis. (Moultrie Decl., ¶ 6.) Plaintiff also contends that when she suggested changes to the Agreement, Yee refused to incorporate them into the Agreement, stating that he would consider her changes only after she signed the Agreement (Moultrie Decl., ¶ 7.) Plaintiff also indicates she felt enormous financial pressure to sign the Agreement. Plaintiff notes she was unsophisticated in business matters, unlike Yee who is an experienced businessperson with an advisory attorney. Defendant also notes in his reply brief that Plaintiff’s allegation that she felt pressure to sign the contract is mitigated by the fact that there was no time limit imposed on her signing the agreement, and that Yee texted her nearly five months after presenting her with the Amended Operating Agreement and requested her participation in finalizing the document.

Plaintiff also contends that she was misled about Snell & Wilmer, LLP’s role in the drafting agreement. Plaintiff contends that she believed the Defendant’s attorneys were acting in her best interest in preparing the agreement. The Court is confused by Plaintiff’s final argument – did Snell & Wilmer LLP indicate they were attorneys for the jointly owned business? Defendant’s reply brief indicates, as does the Amended Operating Agreement, that: “This Agreement was prepared by Snell & Wilmer LP as Legal counsel to Terry Yee. Snell & Wilmer LLP has not acted as legal counsel to any other individual member, unit holder, manager, or any other party in connection with the preparation of this agreement. (Yee Decl., ¶ 7, Exhibit 1.)

Next, Plaintiff suggests that she was surprised with the Arbitration Provision because it is buried in the dense 30-page agreement, and no one ever called her attention to the arbitration agreement. However, the Court finds that the arbitration agreement contains clear and conspicuous language, and is found in the same font size as the rest of the agreement. Finally, the Court notes that contracting parties who include an arbitration provision are not required to attach the rules of the third-party arbitration company, however, this is usually when the arbitration provision attaches a link to the rules. Here, the Arbitration Agreement does not attach the rules nor does it provide a link.

The Court finds that there is a small amount of procedural unconscionability here as Yee is the more sophisticated party, and the JAMS rules were not provided nor linked to the arbitration provision. However, this is not enough to find the arbitration agreement as a whole unconscionable.

Substantive Unconscionability

Next, Plaintiff argues that the Arbitration Provision was substantively unconscionable because she argues that there are unconscionable discovery limitations, and unconscionably attorney fee shifting clauses. An arbitration agreement is generally enforceable, if it (1) provides for neutral arbitrators, (2) provides for more than minimal discovery, (3) requires a written award, (4) provides for all of the types of relief that would otherwise be available in court, and (5) does not require the parties to pay unreasonable costs and fees as a condition of access to an arbitration forum. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 102.)

Plaintiff argues that the JAMS comprehensive rules severely limit Plaintiff’s ability to conduct sufficient discovery in this matter. However, as noted by Defendant Yee, Rule 17 of JAMS Comprehensive Arbitration Rules provides for comprehensive discovery, including informal exchange, ESI, deposition, additional depositions, and expert testimony. An agreement is substantively unconscionable if it imposes terms that are “overly harsh,” “unduly oppressive,” “unreasonably favorable,” or “so one-sided as to ‘shock the conscience.’”¿ (Sanchez v. Valencia Holding Co., LLC¿(2015) 61 Cal.4th 899, 910-911¿(Sanchez).)¿ “All of¿these formulations point to the central idea that unconscionability doctrine is concerned not with ‘a simple old-fashioned bad bargain’ [citation], but with terms that are ‘unreasonably favorable to the more powerful party.’ [Citation.]”¿ (Id. at p. 911.)¿ “These include ‘terms that impair the integrity of the bargaining process or otherwise contravene the public interest or public policy; terms (usually of an adhesion or boilerplate nature) that attempt to alter in an impermissible manner fundamental duties otherwise imposed by the law, fine-print terms, or provisions that seek to negate the reasonable expectations of the¿nondrafting¿party, or unreasonably and unexpectedly harsh terms having to do with price or other central aspects of the transaction.’ ”¿ (Id. at p. 911.) What Plaintiff fails to acknowledge is that these discovery limitations apply equally to both sides. Yee also will be deprived of discovery in the same way she will be, but it will be required to exchange specific documents and, on application to the arbitrator, both sides may be required to exchange other information such as exchanging expert reports.

Lastly, Plaintiff argues that there is an unconscionably attorney fee shifting clause. The arbitration provision states: “The prevailing party in any legal proceeding will be entitled to recover as an element of such party’s cost of arbitration, suit or proceeding, and not as damages, reasonable attorneys’ fees to be fixed by the arbitrator or by the court.” However, under Armendariz, the standard only requires that Plaintiffs are not required to pay unreasonable costs and fees as a condition of access to an arbitration forum. Here, attorneys’ fees are not an unreasonable cost that is unique to arbitration. So long as the costs are not unique to arbitration, California Courts have not found these to be unconscionable.