94 F. Supp. 3d 1078
C.D. Cal.2015Background
- CarMax petitioned under 9 U.S.C. § 4 to compel arbitration and stay parallel California state-court employment suit filed by Rosella Hernandez alleging multiple statutory and tort claims (including FEHA, Ralph Act, assault/battery, wrongful termination).
- Hernandez signed a Dispute Resolution Agreement (DRA) and CarMax’s Dispute Resolution Rules & Procedures (DRRP) when she applied; CarMax later modified the DRRP (most recently 2011) pursuant to a modification clause in the DRRP.
- CarMax sought federal jurisdiction under diversity (28 U.S.C. § 1332); Hernandez moved to dismiss for lack of subject-matter jurisdiction.
- Hernandez argued the FAA did not apply to her employment agreement, and alternatively that the arbitration agreement (as embodied in the DRRP) was unconscionable and thus unenforceable.
- The court considered whether to apply the 2001 or the 2011 DRRP, evaluated whether the 2011 DRRP met the Cole/Armendariz requirements for arbitration of statutory employment claims, and assessed procedural and substantive unconscionability; it also addressed severability of any offending clause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Subject-matter jurisdiction (diversity) over §4 petition | Hernandez: court lacks jurisdiction because a non-diverse defendant (Hanna) is named in the parallel state suit and Vaden’s “look-through” requires considering underlying action | CarMax: diversity is determined by the parties before the federal court (CarMax v. Hernandez) so diversity exists | Court denied dismissal; followed Najd—look to citizenship of parties to the §4 petition, not non‑party state defendants; diversity exists. |
| Applicability of FAA to the employment agreement | Hernandez: her management-assistant duties did not substantially affect interstate commerce so FAA does not apply | CarMax: it is a national employer; management assistants support interstate sales and correspond with out‑of‑state offices—FAA applies | Court held FAA applies because CarMax’s national operations and Hernandez’s duties connected to interstate commerce. |
| Which DRRP governs (2001 vs 2011) | Hernandez: unconscionability should be judged as of the time she signed (2001 DRRP) | CarMax: modification clause was validly invoked; the 2011 DRRP governs claims filed after modifications | Court held the 2011 DRRP applies because CarMax followed its modification procedure; unconscionability is judged against the operative (2011) DRRP. |
| Enforceability / unconscionability and severance | Hernandez: DRRP is procedurally and substantively unconscionable (adhesion, no rules provided, shortened limitations, costs, confidentiality, settlement restriction) | CarMax: 2011 DRRP satisfies Cole/Armendariz factors (neutral arbitrator, adequate discovery, written award, full remedies, employer bears fees); objections rely on outdated 2001 terms; any minor defects severable | Court found modest procedural unconscionability (adhesive) but Cole factors satisfied; most substantive objections failed because 2011 DRRP remedied prior problems; a narrow settlement‑approval provision was substantively unconscionable and severed; otherwise arbitration compelled and state action stayed. |
Key Cases Cited
- Vaden v. Discover Bank, 556 U.S. 49 (2009) (approves limited “look-through” for federal-question §4 petitions)
- Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (§4 petitions require independent federal jurisdiction; diversity may support §4 relief)
- Circuit City Stores, Inc. v. Najd, 294 F.3d 1104 (9th Cir. 2002) (in §4 petition, diversity is determined by parties before the district court; citizenship of non‑parties in parallel state suit is irrelevant)
- Armendariz v. Foundation Health Psychcare Servs., 24 Cal.4th 83 (2000) (California standards for mandatory employment arbitration: procedural/substantive unconscionability and minimum protections for statutory claims)
- St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283 (1938) (amount in controversy measured by underlying claims and plaintiff’s good-faith demand)