Judge: Stuart M. Rice, Case: 23STCV09448, Date: 2023-12-04 Tentative Ruling


Case Number: 23STCV09448    Hearing Date: December 4, 2023    Dept: 1

Moving Party:             Defendant AAMCOM, LLC

Responding Party:      Plaintiff Steven Czarnecki

Ruling:                        Motion denied.

 

This is a wage-and-hour proposed class action.  Plaintiff Steven Czarnecki (Plaintiff) alleges that he and others were employed by defendant AAMCOM, LLC (Defendant), during which employment Defendant committed various violations of labor law.  Defendant moves to compel Plaintiff to submit his claims to binding arbitration pursuant to an agreement Plaintiff purportedly signed.

 

Legal Standards

Code of Civil Procedure section 1281.2 states, in relevant part:¿ 

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such 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….¿ 

“California law reflects a strong public policy in favor of arbitration as a relatively quick and inexpensive method for resolving disputes. To further that policy, section 1281.2 requires a trial court to enforce a written arbitration agreement unless one of three limited exceptions applies. Those statutory exceptions arise where (1) a party waives the right to arbitration; (2) grounds exist for revoking the arbitration agreement; and (3) pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues.” (Acquire II, Ltd. v. Colton Real Estate Group¿(2013) 213 Cal.App.4th 959, 967, citations omitted.)¿ 

“There is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate.” (Engineers & Architects Assn. v. Community Development Dept.¿(1994) 30 Cal.App.4th 644, 653.) Nevertheless, the strong public policy promoting private arbitration of civil disputes gives rise to a presumption in favor of arbitrability and compels the Court to construe liberally the terms of the arbitration agreement. (Vianna v. Doctors’ Management Co.¿(1994) 27 Cal.App.4th 1186, 1189).¿ ¿¿ 

“The 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. 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.)¿¿ The movant may bear this initial burden “by attaching a copy of the arbitration agreement purportedly bearing the opposing party's signature.” (Iyere v. Wise Auto Group (2023) 87 Cal.App.5th 747, 755 (Iyere); Espejo v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1060.)  “At this step, a movant need not ‘follow the normal procedures of document authentication’ and need only ‘allege the existence of an agreement and support the allegation as provided in [Rules of Court, Rule 3.1330].’”  (Iyere, supra, 87 Cal.App.5th at 755; Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 219 (Condee).) 

“The party opposing arbitration has the burden of demonstrating that an arbitration clause cannot be interpreted to require arbitration of the dispute. Nonetheless, this policy does not override ordinary principles of contract interpretation. The contractual terms themselves must be carefully examined before the parties to the contract can be ordered to arbitration: Although [t]he law favors contracts for arbitration of disputes between parties, there is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate.” (Rice v. Downs¿(2016) 247 Cal.App.4th 1213, 1223, citations and quotations omitted.)¿¿¿ 

“A party seeking to enforce an arbitration agreement has the burden of showing FAA preemption.”  (Lane v. Francis Capital Management, LLC (2014) 224 Cal.App.4th 676, 687; see also Nixon v. AmeriHome Mortgage Company, LLC (2021) 67 Cal.App.5th 934, 946 [“The party seeking to enforce the arbitration agreement also bears the burden of establishing the FAA applies and preempts otherwise governing provisions of state law or the parties’ agreement.”].)

 

Evidentiary Objections

 

Defendant’s Objections

 

Defendant’s objections 1-7 are overruled.  What Plaintiff was and was not told at the time he executed the Agreement is material to the unconscionability question.  Plaintiff has foundation to testify to what he experienced and was told.  Statements of Defendant’s employees are authorized admissions and not inadmissible hearsay.  Plaintiff is not providing secondary evidence of writings, nor is his testimony more prejudicial than probative.  

 

Defendant’s objection 8 is overruled.  Plaintiff’s state of mind and whether he would have signed the document if he had known what it was is relevant to this motion and is not inadmissible opinion.  Plaintiff has foundation to discuss his own state of mind.  It is not secondary evidence or  unduly prejudicial.

Discussion

 

Plaintiff does not dispute that the Agreement, if valid, encompasses all of Plaintiff’s claims in this lawsuit, or that the FAA applies to the Agreement.  Plaintiff instead contends that Defendant has not met its initial burden to show an enforceable agreement, and that the Agreement is unconscionable. 

 

I.                   Initial Burden/Lack of Consideration

 

Plaintiff contends that the Agreement is unenforceable for lack of consideration because the agreement is between him and a third party, Oasis Outsourcing (Oasis).  (See Bonner Decl., Ex. A.)  Because Defendant is not a party to the Agreement, it did not promise to arbitrate and offered no consideration for Plaintiff’s promise to arbitrate.  However, “[u]nder California law, a nonsignatory can be compelled to arbitrate under two sets of circumstances: (1) where the nonsignatory is a third party beneficiary of the contract containing the arbitration agreement; and 2) where ‘a preexisting relationship existed between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to also be bound to arbitrate his or her claim.’”  (Crowley Maritime Corp. v. Boston Old Colony Ins. Co. (2008) 158 Cal.App.4th 1061, 1069-1070 (Crowley).)  Both of these appear to be the case here.  Defendant is an express third-party beneficiary under the Agreement using the label “Worksite Employer[,]” which is “[t]he company for which I [i.e. Plaintiff] perform services[.]”  (See Bonner Decl., Ex. A, ¶ 1.)  The Agreement provides that any dispute with Defendant, Oasis, or any other person with whom Plaintiff has an employment relationship, which arises out of out of Plaintiff’s employment, will be resolved by arbitration.  (Id., ¶ 3.)  Plaintiff agreed that Defendant, his Worksite Employer, would receive the benefit and burden of the Agreement. 

 

Moreover, the Agreement provides that Oasis had been engaged by Defendant to provide services related to Plaintiff’s employment, such as paying Plaintiff’s wages and possibly also providing other benefits.  (Bonner Decl., Ex. A, ¶ 1.)  Even if Defendant were not an express third-party beneficiary, the agency relationship between Oasis and Defendant would render it equitable to bind Defendant to the Agreement even if it disputed the Agreement’s application.  (See Crowley, supra, 158 Cal.App.4th at 1069-1070.) 

 

II.                Unconscionability

 

Unconscionability is a valid defense to a petition to compel arbitration. (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1143 (Sonic-Calabasas A).) State law governs the unconscionability defense. (Doctor’s Assocs., Inc. v. Casarotto (1996) 517 US 681, 687.) The core concern of the unconscionability doctrine is the “absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (Sonic-Calabasas A, Inc., 57 Cal.4th at 1145.) The unconscionability doctrine ensures that contracts—particularly contracts of adhesion—do not impose terms that have been variously described as overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided. (Id.)

 

The prevailing view is that procedural and substantive unconscionability must both be present for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 (Armendariz).) But they need not be present to the same degree; the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa. (Id.)  However, when there is no other indication of oppression other than the adhesive aspect of an agreement, the degree of procedural unconscionability is low. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.)

 

a.      Procedural Unconscionability

 

“A procedural unconscionability analysis ‘begins with an inquiry into whether the contract is one of adhesion.’ [Citation.]  An adhesive contract is standardized, generally on a preprinted form, and offered by the party with superior bargaining power ‘on a take-it-or-leave-it basis.’”  (OTO, LLC v. Kho (2019) 8 Cal.5th 111, 126 (OTO).)  “Arbitration contracts imposed as a condition of employment are typically adhesive[.] The pertinent question, then, is whether circumstances of the contract's formation created such oppression or surprise that closer scrutiny of its overall fairness is required.”  (Ibid.)  “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.” (Ibid.)

 

It is undisputed that the Agreement was a contract of adhesion.  (See Torres Decl., ¶ 13; Czarnecki Decl., ¶ 2.)  This supplies some procedural unconscionability.  However, when there is no other indication of oppression other than the adhesive aspect of an agreement, the degree of procedural unconscionability is low. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.)

 

Plaintiff further contends that the Agreement is “inconspicuously buried in a document titled ‘Employee Acknowledgments.’”  An examination of the Agreement indicates that it is in small type, approximately eight point (rather than the common standard twelve point font which defendant inaccurately claims), is not titled “Arbitration Agreement” or something similar, and does not contain bold text or any other indication that might indicate to a less-than-careful reader that they are signing an arbitration agreement.  The clauses of the Agreement that bind Plaintiff to arbitration do not begin until the third paragraph.  This is not sufficient to void the Agreement entirely for lack of consent, because “[g]enerally, it is not reasonable to fail to read a contract; this is true even if the plaintiff relied on the defendant's assertion that it was not necessary to read the contract. [Citation.] Reasonable diligence requires a party to read a contract before signing it.”  (Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 959.)  However, it does supply some further procedural unconscionability.  The fact that the Agreement is a separate document is of less significance when all the documents are presented electronically, and a document may be signed with a single mouse click.  (See Torres Decl., ¶ 12.)  The form and format of the Agreement therefore supplies further procedural unconscionability.

 

Finally, Plaintiff points out that the Agreement does not specify what rules will apply to the arbitration.  That is so.  (See Bonner Decl., Ex. A.)  Although the failure to attach the pertinent rules supplies no procedural unconscionability where the rules are not part of the unconscionability challenge (see, e.g., Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1246), here there are no pertinent rules at all.  Even if Plaintiff had read the Agreement closely enough to recognize its nature as an arbitration agreement, he would have no way of knowing what procedure he was agreeing to by accepting it.  The fact that the Agreement references the Federal Rules of Evidence is insufficient.  Knowing what evidence might or might not be admissible tells a litigant nothing about how to initiate an arbitration claim, how discovery may be had, or how proceedings will otherwise proceed.  This omission supplies still further procedural unconscionability.

 

Between the adhesive nature of the Agreement, the inconspicuous appearance and small print of its format, and the lack of any reference to any procedural rules, Plaintiff has established significant procedural unconscionability.   

b.      Substantive Unconscionability

Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create an overly harsh or one-sided result. (Armendariz, supra, 24 Cal.4th at 114.)  Where provisions of the arbitration contract are unconscionable, courts may sever or restrict the operation of those provisions.  (Id. at 124.)  Where the “central purpose of the contract is tainted with illegality,” then severance is not appropriate and the contract should be voided.  (Ibid.)  Where “multiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage [,]” voiding the contract rather than severing the unconscionable provisions is appropriate.  (Ibid.) “Although procedural unconscionability alone does not invalidate a contract, its existence requires courts to closely scrutinize the substantive terms ‘to ensure they are not manifestly unfair or one-sided.’”  (OTO, supra, 8 Cal.5th at 130.)

 

Plaintiff contends that the Agreement is substantively unconscionable because it contains an unlawful pre-dispute jury trial waiver, and it is not bilateral in that it binds Plaintiff but not Defendant.  The latter contention is summarily rejected for the reasons discussed above.  As an express third-party beneficiary and the principal of a signatory agent, Defendant is bound by the Agreement as though it were a signatory.  (See Crowley, supra, 158 Cal.App.4th at 1069-1070.) 

 

The former contention has merit.  Article 1, Section 16 of the California Constitution provides that “[t]rial by jury is an inviolate right and shall be secured to all” and that [i]n a civil cause a jury may be waived by the consent of the parties expressed as prescribed by statute.”  The right to jury trial “is basic and should be zealously guarded by the courts[,]” and “[i]n case of doubt, the issue should be resolved in favor of the right to a trial by jury.”  (Domestic Linen Supply Co., Inc. v. L J T Flowers, Inc. (2020) 58 Cal.App.5th 180, 185.)  Pre-dispute, parties may waive jury trial for claims which they agree to arbitrate, as an agreement to arbitrate claims is inherently and necessarily a waiver of jury trial for those claims.  (See Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 714 [“When parties agree to submit their disputes to arbitration they select a forum that is alternative to, and independent of, the judicial—a forum in which, as they well know, disputes are not resolved by juries.”])  However, a pre-dispute agreement to waive jury trial for claims other than claims which will be arbitrated is unlawful, even if contained in an arbitration agreement.  (Dougherty v. Roseville Heritage Partners (2020) 47 Cal.App.5th 93, 107, citing Grafton Partners v. Superior Court (2005) 36 Cal.4th 994, 961.) 

 

The Agreement states that “if for any reason a matter is not arbitrated, I AGREE THAT THE MATTER WILL BE HEARD BY A JUDGE AND WAIVE TRIAL BY JURY[.]” (Bonner Decl., Ex. A, ¶ 3.)  This is a pre-dispute waiver of jury trial for claims other than those which will be arbitrated and is unlawful under Dougherty. 

 

Although not raised by either party, the Court also notes that the Agreement contains no rules or reference to rules, and therefore no explanation of how to initiate arbitration.  As discussed by the CA Supreme Court in the often cited OTO case, this is a substantively unconscionable defect in the employment context because employees who do not know how to initiate arbitration may incur unnecessary delay and expense by bringing suit only to encounter a motion to compel, or “may be so confused by the agreement that they are deterred from bringing their wage claims at all.”  (OTO, supra, 8 Cal.5th at 131.)  This is of particular concern in wage cases such as this one, because wage claimants would otherwise have access to the Berman process at the California Labor Commission, where they may receive free assistance directly from a Labor Commissioner.  (Ibid.) 

 

Although it has been held that reference to the California Arbitration Act is sufficient to inform an employee how to initiate arbitration (see Alvarez v. Altamed Health Services Corp. (2021) 60 Cal.App.5th 572, 590; Fuentes v. Empire Nissan, Inc. (2023) 90 Cal.App.5th 919, 934), the instant Agreement contains no such reference.  Because the Agreement requires Plaintiff to give up his Berman rights while not telling him how to begin to exercise his arbitral rights, it is substantively unconscionable.  (OTO, supra, 8 Cal.5th at 136-137.) 

 

c.       Unconscionability Summary

 

The Agreement was executed under significantly procedurally unconscionable conditions: not only was it a contract of adhesion, but it is not immediately recognizable as an arbitration agreement (referencing arbitration only in the third paragraph), is printed in small font, and has a misleadingly vague title.  It contains no reference whatsoever to what rules would govern the arbitration.  Substantively, it contains two significant infirmities: a pre-dispute jury trial waiver which would apply regardless of arbitration, forbidden by the Dougherty case, and a lack of any provision stating how to initiate arbitration, forbidden by the OTO case.  (See Dougherty, supra, 47 Cal.App.5th at 107; OTO, supra, 8 Cal.5th at 136-137.)  Even if the Court were to sever the jury trial waiver, the Court cannot add provisions explaining how to initiate arbitration.  (See Armendariz, supra, 24 Cal.4th at 125 [courts cannot reform a contract by augmentation, i.e. adding terms, to make it lawful.])  On balance, the Agreement is tainted by illegality, and the Court will not enforce it.  (See Id. at 124.)

 

Conclusion

 

For the foregoing reasons, the motion is denied.  Plaintiff to give notice.