Judge: William D. Claster, Case: 20-01170736, Date: 2022-08-19 Tentative Ruling
Defendants Njoord Inc. and James Reeve's Motion to Compel Arbitration and Motion to Dismiss PAGA Claims and Stay Proceedings ROA #83
Defendants Njoord Incorporated (“Newport Power”) and James Reeve’s motion to compel arbitration is CONTINUED to a date to be determined at the hearing in order to permit the further briefing described below. Upon receipt of the requested briefing, the Court will determine whether a second hearing is necessary. To be clear, the parties are ordered to appear at the August 19, 2022 hearing (either in person or via Zoom) to discuss the issues set forth below.
The Court notes the existence of a related class action, Salcido v. NJOORD, No. 22-1258984. It appears Plaintiff Frederick Salcido erroneously filed his opposition documents in the class action instead of this case. Because no prejudice will result if the Court considers the misfiled documents, the Court will exercise its discretion to consider them.
EVIDENTIARY MATTERS
Defendants’ objections to the LaCour Declaration are OVERRULED.
As to the Salcido Declaration, the Court SUSTAINS Objection No. 4 on legal conclusion grounds as to the phrase “Had I known how one-sided, unfair, and illegal it was I never would have signed it.” The Court also SUSTAINS Objection No. 5 on legal conclusion grounds as to the phrases “Despite how unfair and illegal I now know it to be” and “and how I would be illegally disadvantaged by signing it.” The remaining objections to the Salcido Declaration are OVERRULED. In particular, the Court notes that Defendants’ objections about Plaintiff’s testimony being self-contradictory go to weight, not admissibility.
ANALYSIS
I. Unconscionability
There is no dispute that Plaintiff signed the arbitration agreement, which is attached to the Duran Declaration as Ex. A. Rather, his argument focuses entirely on unconscionability.
“‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’ (Citation.) But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ (Citation.)” (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 114.)
A. Procedural Unconscionability
1. Contract of Adhesion
As the California Supreme Court recently explained, “A procedural unconscionability analysis ‘begins with an inquiry into whether the contract is one of adhesion.’ 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, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126.) If a contract is adhesive, “[t]he pertinent question . . . is whether circumstances of the contract’s formation created such oppression or surprise that closer scrutiny of its overall fairness is required. ‘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.)
The agreement at issue here, like most standard employment contracts, is one of adhesion. Plaintiff testifies he had no opportunity to negotiate its terms. (Salcido Decl., ¶ 4.) Defendants offer no evidence tending to suggest that its terms were negotiable, and the agreement itself says Newport Power “is pleased to offer you employment on the following terms,” with no mention of negotiability. (Duran Decl., Ex. A, at p. 1. Whether the agreement’s terms were negotiable is a separate question from whether Plaintiff was free not to sign it.) The Court will therefore analyze oppression and surprise.
2. Oppression
Plaintiff testifies that he was “presented with the Arbitration Agreement on June 8, 2020” and “was forced to sign the agreement if I wanted to maintain my employment.” (Salcido Decl., ¶ 5.) Karen Duran, who oversees Newport Power’s human resources functions, testifies that Newport Power offered “voluntary arbitration agreements” to employees. (Duran Decl., ¶ 3.) Defendants also point out in opposition that while paragraph 5 of Salcido’s declaration says the agreement was a condition of continued employment, he elsewhere refers to it as a document presented at the beginning of his employment. Defendants urge the Court to disregard all of Salcido’s testimony as not credible. To the contrary, the Court finds Duran’s testimony on the nature of the agreement less credible than Plaintiff’s.
The agreement’s text shows it was a condition of Plaintiff’s employment. The overall agreement, which includes the arbitration agreement, is entitled an “Employment Agreement.” It begins, “Newport Power (the Company) is pleased to offer you employment on the following terms.” (Duran Decl., Ex. A, at p. 1.) Nothing in the remainder of the Employment Agreement says those terms (including the arbitration agreement) are negotiable. The arbitration agreement itself goes on to provide that Plaintiff agrees to arbitration “[i]n consideration of my employment with the Company.” (Id., at p. 2.) This indicates acceptance of the Employment Agreement (and the arbitration agreement) was a condition of employment, whether beginning or continued, and not a voluntary program as Duran claims. As OTO recognizes, the pressure exerted on a standard employee to accept an adhesive arbitration agreement as a condition of employment is “particularly acute,” which indicates oppression. (OTO, supra, 8 Cal.5th at p. 127.)
In addition, as in OTO, Defendants never explained the meaning of the agreement to Plaintiff, nor did they even describe what an arbitration agreement is. (Salcido Decl., ¶¶ 6-7; compare OTO, supra, 8 Cal.5th at p. 127 [“Neither its contents nor its significance was explained.”].) This also indicates oppression.
3. Surprise
Although not raised by Plaintiff, the Court has serious concerns about the arbitration agreement’s repeated reference to unspecified “Rules.” For reference, the arbitration agreement provides, in full, as follows (all-capitals omitted; emphasis on “the Rules” added):
6. Arbitration
a. Arbitration. In consideration of my employment with the Company, its promise to arbitrate all employment-related disputes, any my receipt of the compensation, pay raises and other benefits paid to me by the company, at present and in the future, I agree that any and all controversies, claims, or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from my employment with the Company or the termination of my employment with the Company shall be subject to binding arbitration in in [sic] the state of CA [sic]. Disputes which I agree to arbitrate include any statutory claims under state or federal law, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Sarbanes-Oxley Act, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act, claims of harassment, discrimination and wrongful termination and any statutory claims. I further understand that this agreement to arbitrate also applies to any disputes that the Company may have with me.
b. Procedure. I agree that any arbitration will be administered by the American Arbitration Association (‘AAA’) and that a neutral arbitrator will be selected in a manner consistent with AAA’s National Rules for the Resolution of Employment Disputes. I agree that the arbitrator shall have the power to decide any motions brought by any party to the arbitration, including motions for summary judgment and/or adjudication, motions to dismiss and demurrers, and motions for class certification, prior to any arbitration hearing. I also agree that the arbitrator shall have the power to award any remedies available under applicable law, and that the arbitrator shall award attorneys’ fees and costs to the prevailing party except as prohibited by law. I understand that the Company will pay for any administrative or hearing fees charged by the arbitrator or AAA except that I shall pay the first $125.00 of any filing fees associated with any arbitration I initiate. I agree that the arbitrator shall administer and conduct any arbitration in a manner consistent with the Rules and that to the extent that the AAA’s National Rules for the Resolution of Employment Disputes conflict with the Rules, the Rules shall take precedence. I agree that the decision of the arbitrator shall be in writing. I agree that any arbitration under this agreement shall be conducted in the state of CA [sic].
c. Remedy. Except as provided by the Rules and this agreement, arbitration shall be the sole, exclusive and final remedy for any dispute between you and the Company. Accordingly, except as provided for by the Rules and this agreement, neither I nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law. Nothing in this agreement or in this provision is intended to waive the provisional relief remedies available under the Rules.
d. Administrative Relief. I understand that this agreement does not prohibit me from pursuing an administrative claim with a local, state or federal administrative body. This agreement does, however, preclude me from pursuing court action regarding any such claim.
So, under the arbitration agreement:
Plaintiffs often argue that a defendant’s failure to provide a copy of the governing arbitration rules alongside the arbitration agreement is a surprise that indicates procedural unconscionability. For example, an employee might argue that failure to attach the AAA’s employment dispute rules is a surprise, and thus a reason to avoid the agreement. This argument usually fails because “the failure to attach the AAA rules, standing alone, is insufficient grounds to support a finding of procedural unconscionability.” (Peng v. First Republic Bank (2013) 219 Cal.App.4th 1462, 1472.) Rather, the party claiming unconscionability must point to something in the missing rules—a surprise—that would “prevent fair and full arbitration.” (Ibid.)
Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702 provides one example of surprise. In that case, the employer’s arbitration policy provided, “Except as modified by [the] policy, arbitration hearings [were to] be conducted in accordance with the…rules [of the American Arbitration Association (AAA)].” (Id., at p. 708 [alterations in original].) The policy limited discovery to two depositions, with no other discovery permitted unless the arbitrator found “a compelling need to allow it.” (Id., at p. 709.) This was different from the AAA’s default discovery rules, which allowed the arbitrator to order whatever discovery he felt necessary, rather than two depositions with additional discovery permitted only for “compelling need.” (Id., at p. 720.) Because the AAA rules weren’t attached to the arbitration policy, there was no way for the employee to know the policy’s discovery terms were a substantial departure from the default. As the Court of Appeal put it, the employee had “to go to another source in order to learn the full ramifications of the arbitration agreement,” i.e., that the employer had “deliberately replaced the AAA’s discovery provision with a more restrictive one.” (Id., at p. 722.) The arbitration policy was thus procedurally unconscionable.
To similar effect is Harper v. Ultimo (2003) 113 Cal.App.4th 1402. In that case, homeowners retained a contractor to do work on their home. The contract contained an arbitration agreement stating that all disputes would be settled “in accordance with the Uniform Rules for Better Business Bureau Arbitration.” The BBB’s rules were not attached to the contract. (Id., at p. 1405.) The contractor allegedly damaged the home. The homeowners located a copy of the BBB rules, only to find that damages were limited solely to refund/cost of repair, and even then, were capped at $2,500. The homeowners were precluded from seeking tort damages or punitive damages even though they believed the contractor had defrauded them. (Ibid.) By not attaching the BBB rules to the contract, the contractor “artfully hid[]” the “inability to receive full relief.” (Id., at p. 1406.) Instead, “[t]he customer is forced to go to another source to find out the full import of what he or she is about to sign—and must go to that effort prior to signing.” (Ibid. [emphasis original].) As a result, the contract was procedurally unconscionable.
The procedural unconscionability here appears to be worse than in Fitz and Harper. In those cases, it was theoretically possible to figure out what rules applied and that they might not meet usual expectations (about discovery, remedies, etc.). Here, it is not. The arbitration agreement says the AAA employment rules control except to the extent they contradict “the Rules,” in which case “the Rules” control. Disputes must be arbitrated, unless “the Rules” say otherwise. Provisional remedies are allowed as permitted by “the Rules.” What are “the Rules”? “The Rules” are never defined, even though they ultimately govern the entire arbitration process. It is difficult to imagine something more surprising.
How does the employee know what rules govern the arbitration? How does the arbitrator know what rules govern his work? Full and fair arbitration cannot take place unless everyone knows what rules apply. Furthermore, how can the Court decide whether this case has to be arbitrated at all when “the Rules” apparently exempt some disputes from arbitration? The failure to define “the Rules” appear to cause serious procedural unconscionability issues. However, because Plaintiff did not raise this issue in his opposition, the Court will request supplemental briefing before reaching a conclusion.
B. Substantive Unconscionability
Plaintiff contends two features of the arbitration agreement are substantively unconscionable. The Court believes a third may be at issue.
1. Third-Party Discovery
Armendariz stresses that “adequate discovery is indispensable for the vindication of FEHA claims.” (Armendariz, supra, 24 Cal.4th at p. 104.) Plaintiff argues that in FEHA cases, third-party discovery is particularly critical, because non-party witnesses often provide key circumstantial evidence of discriminatory intent. (Opp. at p. 7.) Defendants do not appear to dispute this in their papers. Plaintiff then contends that the arbitrator in this case cannot compel discovery from third parties, leaving him unable to access indispensable discovery.
Plaintiff relies on Aixtron, Inc. v. Veeco Instruments Inc. (2020) 52 Cal.App.5th 360. Aixtron holds that the Federal Arbitration Act does not grant arbitrators the power to compel discovery from third parties. (Id., at pp. 393-95.) It also holds that while the California Arbitration Act grants arbitrators that power, it only does so in limited circumstances. First, an arbitrator may order third-party discovery in any personal injury or wrongful death case. Second, an arbitrator may order third-party discovery “if the parties by their agreement so provide.” (Id., at pp. 395-96 [discussing CCP §§ 1283.05, 1283.1].)
This isn’t a personal injury or wrongful death case, so third-party discovery can be compelled only if the parties’ arbitration agreement provides for it. Per Aixtron, it is sufficient for the agreement to simply permit discovery “pursuant to the California Discovery Act” or “pursuant to CCP § 1283.05.” (Id., at p. 396.) The agreement here says no such thing. The applicable AAA rules (which Defendants attach to their reply) say no such thing. “The Rules” could so provide, but they’re never defined or identified. As a result, under Aixtron, the parties’ agreement may fail to give the arbitrator the power to compel discovery from third parties. Given the importance of discovery in the FEHA context as discussed in Armendariz, the arbitration agreement may well be substantively unconscionable on this point.
In reply, Defendants say they are willing to stipulate to the arbitrator’s power to compel third-party discovery. But per Aixtron, what matters is whether the arbitration agreement itself provides for compelled third-party discovery. Furthermore, Defendants essentially ask the Court to rewrite the parties’ arbitration agreement to fix an unconscionable term. Unlike severance of unconscionable terms, the Court lacks the power to rewrite the agreement. (See Armendariz, supra, 24 Cal.4th at p. 125 [court may sever or restrict unconscionable terms in arbitration agreement, not “reform the agreement to make it lawful”].)
Were this all, the Court would likely conclude the agreement is substantively unconscionable. But Armendariz suggests another possibility: “We further infer that when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim.” (Id., at p. 106.) Aixtron is not a statutory case, but both Armendariz and this case involve statutory claims. Under Armendariz and similar cases, it could be that the arbitration agreement here contains an implicit agreement to discovery “necessary to vindicate that claim,” such as compelled third-party discovery. Because no party has addressed that issue, the Court will seek further briefing.
2. “Notwithstanding” Sentence
Plaintiff argues the following sentence in the “Remedy” section of the arbitration agreement improperly restricts the arbitrator’s remedial powers: “Notwithstanding, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law.” He contends this sentence requires the arbitrator to elevate Newport Power’s policies over competing remedial statutes should the two conflict. In reply, Defendants disagree without offering their own construction of the sentence.
The Court has found only one case discussing a substantially identical sentence, Davis v. Gazillion, Inc. (N.D.Cal. 2010) 2010 WL 2740002. (The sentence in Davis tacks on a few words at the end: “… not otherwise required by law which the company has not adopted.”) The court there wrote:
It is entirely unclear what this sentence is intended to mean. It could be seen simply as a limit on the arbitrator's authority to mandate general company policy, or it could be read as a limit on what the arbitrator may order in this particular case. The former interpretation might well be benign, but the latter would be problematic. Accordingly, because the sentence is ambiguous and could be seen by an arbitrator as imposing unilateral limitations on his or her power that favor Gazillion, it will be stricken. (Id., at *2.)
Like the court in Davis, this Court cannot understand the “Notwithstanding” sentence. It could be benign, or it could be unconscionable, depending on how it’s interpreted. Because this sentence is reasonably susceptible to being read as a restriction of remedies in Defendants’ favor, the Court finds it is substantively unconscionable.
3. Fee-Shifting
The agreement provides “that the arbitrator shall award attorneys’ fees and costs to the prevailing party except as prohibited by law.” Plaintiff brings, among other things, a common law tort claim for wrongful discharge in violation of public policy. The Court is aware of nothing that would permit a prevailing defendant to recover its fees on a common law tort claim. “[W]hen an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.” (Armendariz, supra, 24 Cal.4th at pp. 110-111 [emphasis original].)
As set forth above, the arbitration agreement is properly considered a mandatory condition of employment. Because arbitration is a mandatory condition of employment, and because Plaintiff wouldn’t be required to pay Defendants’ attorneys’ fees for the tortious wrongful termination claim in court, the fee-shifting clause is likely unconscionable. However, because this issue was not raised by Plaintiff, the Court will permit further briefing.
II. Severance, Restriction, etc.
When an arbitration agreement contains unconscionable terms, the usual course is to sever or restrict those terms to avoid unconscionability. However, if the agreement is “permeated by the unconscionability,” a court “may refuse to enforce the contract as a whole.” (Armendariz, supra, 24 Cal.4th at p. 122.)
Because the Court seeks further briefing on whether various terms of the contract are unconscionable, it will also seek further briefing on whether any potentially unconscionable terms are severable, or whether the agreement is so permeated with unconscionability that the Court should not enforce it. The Court is also interested in whether potential unconscionability can be cured with severance or restriction, or whether the cure would require the Court to reform the contract (e.g., by inserting a definition for “the Rules”).
III. Further Proceedings
A. Additional Briefing
The Court seeks further briefing from the parties on the topics identified above. (For clarity, the Court does not seek further briefing on whether the arbitration agreement is adhesive and was presented to Plaintiff as a condition of employment.) The parties are ordered to file supplemental briefs of no more than 10 pages addressing these issues. The briefs are to be filed by the date set by the Court at the hearing. Replies to the cross-briefs will not be permitted. Upon reviewing the cross-briefs, the Court will decide whether a further hearing is necessary.
C. Class Action Issues
The existence of the companion class action complicates matters. In the class action, Plaintiff has brought the same individual wage-and-hour claims he pursues here (as he must in order to pursue class relief), and while he doesn’t have a separate PAGA cause of action, he seeks PAGA penalties on the class’s behalf. (Class Action Complaint ¶4(k)) Defendant apparently has decided not to seek arbitration of both cases. It appears that Defendant’s answer in the class action (ROA 32 therein) does not raise the affirmative defense that another matter is pending on the same causes of action. As a result, were the Court to order arbitration in this PAGA case, it appears this case would be arbitrated, while the same wage-and-hour claims would be litigated in court at the same time in the class action. The parties should be prepared to discuss how to handle this conflict, e.g., by consolidation, etc. (Having two separate cases has already caused confusion. Plaintiff erroneously filed his opposition to this motion in the class action.)
In addition, the Court notes that the parties’ arbitration agreement lacks a class waiver. While silence on class issues in an arbitration agreement isn’t enough to permit class arbitration (see Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) 559 U.S. 662), the arbitration agreement here expressly gives the arbitrator the “power to decide . . . motions for class certification.” (Duran Decl., Ex. A, at pp. 2-3.) This strongly suggests that if arbitration is ordered here, the substantive wage-and-hour claims will proceed on a class basis before the arbitrator regardless of what happens with the PAGA claim under Viking River Cruises. The parties should also be prepared to discuss this issue at the hearing.