Mills v. Facility Solutions GroupMills v. Facility Solutions Group
On appeal, FSG contends claim and issue preclusion required the trial court in this action to enforce the arbitration agreement. However, Judge Murphy‘s order granting FSG‘s motion to compel arbitration is not final, so claim and issue preclusion do not apply.
FSG also argues the arbitration agreement is not unconscionable, or in the alternative, the trial court abused its discretion in not severing any unconscionable terms. Neither
FACTUAL AND PROCEDURAL BACKGROUND
A. Mills‘s Employment and the Arbitration Agreement
Mills was employed by FSG as an apprentice electrician from October 2, 2018 to August 27, 2019. FSG required new employees to access, review, and electronically sign documents, including an arbitration agreement. Mills reviewed FSG‘s onboarding documents using a cellphone application. On October 5, 2018 Mills electronically signed a two-page, single-spaced arbitration agreement in small print titled “Employee Arbitration Agreement” (arbitration agreement).
Under the arbitration agreement, Mills and FSG agreed “to submit any and all such disputes” that arise “during or after employment with FSG” to binding arbitration. Further, the Federal Arbitration Act (FAA;
The arbitration agreement provided for limited discovery, including the right to take depositions and designate expert witnesses. Parties could obtain additional discovery pursuant to an order by the arbitrator “upon a showing of substantial need.” The agreement required a party to make a written demand for arbitration within the applicable statute of limitations, and specified that the limitations period would not be stayed by the filing of a lawsuit. The agreement provided further that Mills agreed to pursue his claims against FSG “solely on an individual basis, and [to] waive any and all rights to proceed as a member of a group or class against FSG.” The agreement required Mills to pay a $250 filing fee, with FSG to bear the remaining administrative fees and arbitrator compensation. However, any fees for postponement of the arbitration must be paid by the party causing the postponement. The agreement provided further for an award of attorneys’ fees to the prevailing party, to be determined pursuant to the definition of a prevailing party under the Civil Rights Attorney‘s Fees Awards Act of 1976 (
B. The FEHA Action (Mills I)
On November 23, 2020 Mills filed a complaint in Mills I, in which he alleged causes of action under FEHA for disability discrimination; failure to engage in the interactive process; failure to provide reasonable accommodations; retaliation; failure to prevent discrimination and retaliation; wrongful termination in violation of public policy; and failure to provide personnel and payroll records. On February 8, 2021 Judge Murphy granted FSG‘s motion to compel arbitration, finding Mills “established a low degree of procedural unconscionability” because the arbitration agreement was a contract of adhesion. Further, some of the provisions of the arbitration agreement were substantively unconscionable, but they could be severed from the agreement. Judge Murphy reasoned the waiver of representative claims was not relevant to his analysis because Mills was “not pursuing a PAGA claim in this action.”
C. This Action Alleging Class and PAGA Claims
On November 20, 2020 Mills filed a class action on behalf of himself and other former and current employees against FSG alleging violations of the Labor Code for (1) failure to pay minimum wages; (2) failure to pay overtime wages; (3) unlawful deduction of wages; (4) failure to pay vested vacation wages; (5) failure to provide meal periods; (6) failure to reimburse business expenses; (7) failure to timely pay wages; (8) failure to maintain payroll records and provide accurate itemized wage
D. FSG‘s Motion To Compel Arbitration
On April 16, 2021 FSG moved to compel arbitration of Mills‘s class and PAGA claims. FSG contended Mills consented to the arbitration agreement; Mills‘s individual claims were subject to the arbitration agreement; the class claims must be dismissed because of the class action waiver; and the arbitration agreement satisfied the requirements set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz). As to the PAGA waiver, FSG argued the court should “sever the unenforceable part of the class waiver ‘of a group‘” and stay the claim until completion of the arbitration. FSG also argued claim preclusion barred relitigation of the enforceability of the arbitration agreement.
In opposition, Mills argued Judge Murphy‘s order granting FSG‘s motion to compel arbitration in Mills I did not bar him from litigating the arbitration agreement‘s enforceability in this action. Further, the arbitration agreement was procedurally and substantively unconscionable, and the agreement‘s unconscionable terms could not be remedied through reformation or severance. Mills also objected to a stay of the PAGA claim if the trial court compelled arbitration of his individual claims.
Following argument from the attorneys, on May 14, 2021 the trial court (Judge Hogue) denied FSG‘s motion to compel arbitration. The court took judicial notice of the order compelling
The court found severance of these provisions was not feasible, explaining, “[T]his [arbitration agreement] has too many provisions that are troublesome for the court to grant arbitration, notwithstanding, of course, the strong policy in favor of it. I mean, this is not one I can sever, slice, and dice. . . . [J]ust for example, the postponement fees—there‘s nothing like that in court. . . . And those [arbitration] companies regularly have huge postponement fees because they‘re trying to book the arbitrator‘s time, and it‘s a problem for them if, suddenly, somebody has to move a hearing date and they have an open calendar that, otherwise, should have been filled. So they impose straight-up fees for postponement. The court does not impose any fees for postponement. Sure, I can impose sanctions if somebody abuses the discovery process, but . . . I‘d hate to tell you how many continuances the court grants on a daily basis, and it‘s free. And . . . I think the substantial need requirement for discovery—that‘s very different than the Code of Civil Procedure. . . . [T]here‘s just
FSG timely appealed.
DISCUSSION
A. Claim and Issue Preclusion Do Not Apply
“Claim preclusion prevents relitigation of entire causes of action. [Citations.] Claim preclusion applies only when ‘a second suit involves (1) the same cause of action (2) between the same parties [or their privies] (3) after a final judgment on the merits in the first suit.‘” (Samara v. Matar (2018) 5 Cal.5th 322, 326-327; accord, Grande v. Eisenhower Medical Center (2022) 13 Cal.5th 313, 323.) “Issue preclusion, by contrast, prevents ‘relitigation of previously decided issues,’ rather than causes of action as a whole. [Citation.] It applies only ‘(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party.‘” (Samara, at p. 327; accord, Grande, at p. 323.) “Whether claim or issue preclusion applies in a particular case is a question of law.” (Parkford Owners for a Better Community v. Windeshausen (2022) 81 Cal.App.5th 216, 225 (Parkford); accord, Ayala v. Dawson (2017) 13 Cal.App.5th 1319, 1325.)
FSG contends both claim preclusion and issue preclusion bar Mills from relitigating the enforceability of the arbitration agreement. FSG argues Judge Murphy‘s order compelling arbitration in Mills I adjudicated Mills‘s right to bring his employment claims in state court; Mills I and this action involve the same parties; and the order in Mills I was a final adjudication
“A judgment or adjudication is on the merits if the substance of the claim or issue is tried and determined.” (Parkford, supra, 81 Cal.App.5th at p. 227 [neither claim nor issue preclusion applied where appeal in first action was dismissed as moot]; Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 77 [trial court‘s ruling based on laches was not a judgment on the merits].) “‘A prior adjudication of an issue in another action may be deemed “sufficiently firm” to be accorded preclusive effect based on the following factors: (1) whether the decision was not avowedly tentative; (2) whether the parties were fully heard; (3) whether the court supported its decision with a reasoned opinion; and (4) whether the decision was subject to an appeal.‘” (South Sutter, LLC v. LJ Sutter Partners, L.P. (2011) 193 Cal.App.4th 634, 663; accord, Border Business Park, Inc. v. City of San Diego (2006) 142 Cal.App.4th 1538, 1565.)
Judge Murphy‘s order granting FSG‘s motion to compel arbitration is not a final adjudication on the merits because an order compelling arbitration “‘is not appealable, but is reviewable on appeal from a subsequent judgment on the award.‘” (Nixon v. AmeriHome Mortgage Co., LLC (2021) 67 Cal.App.5th 934, 943; accord, Ashburn v. AIG Financial Advisors, Inc. (2015) 234 Cal.App.4th 79, 94; see
“An agreement to submit disputes to arbitration ‘is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.’ (
“A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. [Citation.] Under this standard, the unconscionability doctrine ‘“has both a procedural and a substantive element.“‘” (OTO, supra, 8 Cal.5th at p. 125; accord, Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 910 (Sanchez).) “‘The
“Both procedural and substantive unconscionability must be shown for the defense to be established, but ‘they need not be present in the same degree.’ [Citation.] Instead, they are evaluated on ‘“a sliding scale.“’ [Citation.] ‘[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to’ conclude that the term is unenforceable. [Citation.] Conversely, the more deceptive or coercive the bargaining tactics employed, the less substantive unfairness is required.” (OTO, supra, 8 Cal.5th at pp. 125-126; accord, Sanchez, supra, 61 Cal.4th at p. 910.) “‘The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.‘” (OTO, at p. 126; accord, Sanchez, at p. 912.)
“The burden of proving unconscionability rests upon the party asserting it.” (OTO, supra, 8 Cal.5th at p. 126; accord, Sanchez, supra, 61 Cal.4th at p. 911.) “‘Where, as here, the evidence is not in conflict, we review the trial court‘s denial of arbitration de novo.‘” (OTO, at p. 126; accord, Pinnacle, supra, 55 Cal.4th at p. 236.)
“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, supra, 8 Cal.5th at p. 126; accord, Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1245.) If the “circumstances of the contract‘s formation created . . . oppression or surprise . . . closer scrutiny of its overall fairness is required.” (OTO, at p. 126; Baltazar, at pp. 1245-1246.) “‘“‘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.‘“‘” (OTO, at p. 126; accord, De La Torre v. CashCall, Inc. (2018) 5 Cal.5th 966, 983.) “‘The circumstances relevant to establishing oppression include, but are not limited to (1) the amount of time the party is given to consider the proposed contract; (2) the amount and type of pressure exerted on the party to sign the proposed contract; (3) the length of the proposed contract and the length and complexity of the challenged provision; (4) the education and experience of the party; and (5) whether the party‘s review of the proposed contract was aided by an attorney.‘” (OTO, at pp. 126-127; accord, Nunez v. Cycad Management LLC (2022) 77 Cal.App.5th 276, 284.) “[S]urprise” occurs where the arbitration agreement is “written in an extremely small font” with “‘visually impenetrable‘” paragraphs “filled with statutory references and legal jargon.” (OTO, at p. 128.)
It is undisputed the arbitration agreement is an adhesive contract because it was imposed as a condition of employment. (OTO, supra, 8 Cal.5th at p. 126 [“Arbitration contracts imposed
As the Armendariz court explained, based on “the basic principle of nonwaivability of statutory civil rights in the workplace,” there are “five minimum requirements for the lawful arbitration of such rights pursuant to a mandatory employment arbitration agreement. Such an arbitration agreement is lawful 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 employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum. Thus, an employee who is made to use arbitration as a condition of employment “effectively may vindicate [his or her] statutory cause of action in the arbitral forum.“‘” (Armendariz, supra, 24 Cal.4th at p. 102, italics omitted.) We agree with Mills that, as the trial court found, the arbitration agreement has multiple provisions that fail to meet this standard, rendering the agreement unconscionable.4
1. The arbitration agreement improperly required Mills to pay a filing fee and costs of postponement
An employer-mandated arbitration agreement “is lawful if it . . . does not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.” (Armendariz, supra, 24 Cal.4th at p. 102; accord, Boghos v. Certain Underwriters at Lloyd‘s of London (2005) 36 Cal.4th 495, 506.) Further, the employer is obligated “to pay all types of costs that are unique to arbitration.” (Armendarez, at p. 113; accord, Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1076 (Little).)
Mills contends the arbitration agreement improperly required him to pay an arbitration filing fee and the costs of postponement of the arbitral proceedings if Mills requested the postponement. These contentions have merit.
Section 5 of the arbitration agreement provides, “There will be both administrative fees and arbitrator compensation incurred for any arbitration hearing. When I file and serve a demand, the filing fee, included in the administrative fees, for the arbitration hearing will be paid $250.00 by me and the remainder by FSG. Arbitrator compensation and administrative fees are not subject to re-allocation in the award, but any fees for postponements shall be paid by the party causing the postponement.”
As to the $250 filing fee, FSG argues a similar filing fee is required to bring a superior court lawsuit. But under sections
The postponement costs are unique to arbitration in that the superior court limits the fees a party must pay for requesting a continuance (now $20 or $60), and only requires the payment of a fee for the filing of a pleading requesting or noticing the continuance. (See
In its reply brief, FSG argues that requiring a party to pay the costs of postponement of the proceeding is not unique to arbitration because courts have the authority to sanction a party for discovery abuses under
2. The arbitration agreement unreasonably required Mills to pay the costs of an appeal and potential second hearing
The arbitration agreement allows either party to appeal the arbitration award to a panel of three arbitrators, with the appellant paying the costs of the arbitrators and the parties sharing the cost of a second hearing. Specifically, the arbitration agreement provides in subdivision 7.c, “The fees and expenses of the appellate arbitrators shall be shared if both an appeal and a cross-appeal are served. If only an appeal is served, the fees and expenses of the appellate arbitrators shall be paid by the appellant party (or parties).” The agreement provides further in subdivision 7.h that in the event of a remand following an appeal,
As the Supreme Court explained in Sanchez, supra, 61 Cal.4th at page 920 in the context of a consumer arbitration, “[T]he arbitration agreement did not have to provide for an appeal. But having done so, the agreement may not structure the appeal process so that it unreasonably favors one party, just as the agreement may not authorize only one party and not the other to take an appeal.” The appeal provisions in the arbitration agreement would deter an employee from appealing an arbitration award (or filing a cross-appeal) by requiring the employee to pay the fees and expenses of three arbitrators, the most expensive form of an appeal, and upon a successful result, the employee would need to share the costs of a second hearing. Further, even upon a successful appeal by the employer, the employee would be required to share the costs of the second hearing.
FSG argues the arbitration agreement‘s appeal provisions are bilateral in that they affect FSG and Mills equally. But FSG would have greater resources to pay the appellate and remand costs, thus encouraging an appeal by FSG but discouraging one by Mills. (See Alvarez v. Altamed Health Services Corp., supra, 60 Cal.App.5th at p. 593 [trial court could have reasonably found “appellate arbitral review provision benefits the employer in employee-employer arbitrations because the employer could unilaterally add costs and time to the arbitration proceeding by seeking this review and thereby maximize the employer‘s status
Here, if Mills were to prevail in the arbitration, FSG could unilaterally add costs and delay by appealing the arbitration award, potentially forcing Mills to pay the costs of a second hearing (although FSG would have to pay the costs of its appeal). If Mills were to lose in the arbitration, he would unlikely appeal the arbitration award because he must pay the fees and expenses of three arbitrators, and if successful on appeal, he must share the costs of a second hearing. As Mills averred in his declaration, he could not afford to pay the fees and costs that would be charged by three arbitrators, which he asserts typically range for each arbitrator from $3,200 to $10,000 per day. These provisions are substantively unconscionable because in practice they unreasonably favor FSG.
3. The arbitration agreement‘s attorneys’ fees provisions are substantively unconscionable
“[A]n arbitration agreement may not limit statutorily imposed remedies such as punitive damages and attorney fees.” (Armendariz, supra, 24 Cal.4th at p. 103.) Further, an arbitration agreement “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.” (Id. at pp. 110-111; accord, Patterson v. Superior Court (2021) 70 Cal.App.5th 473, 488 (Patterson).) We agree with Mills that
Section 6.b of the arbitration agreement provides the arbitrator “shall assess attorney‘s fees against a party upon a showing that such party‘s claim, defense, or position is frivolous, or unreasonable, or factually groundless.” This provision is inconsistent with section 218.5, subdivision (a), which provides as to a lawsuit for the nonpayment of wages that the prevailing party may recover its attorneys’ fees and costs, but “if the prevailing party in the court action is not an employee, attorney‘s fees and costs shall be awarded pursuant to this section only if the court finds that the employee brought the court action in bad faith.” (See Dane Elec Corp., USA v. Bodokh (2019) 35 Cal.App.5th 761, 773 [explaining as to section 218.5, subdivision (a), that “[c]ourts have uniformly recognized that such unilateral fee-shifting statutes ‘reflect a considered legislative judgment that prevailing defendants should not receive fees‘“]; USS-Posco Industries v. Case (2016) 244 Cal.App.4th 197, 216 [2014 amendment to section 218.5 changed the law from a “‘two way’ fee shifting statute that awarded fees to the winner, whether employee or employer,” to a provision that only awards fees to the employer where the employee brought the action in bad faith].) Moreover, as discussed, section 1194, subdivision (a) (minimum wage claims) and section 2802, subdivisions (b) and (c) (reimbursement of
Section 6.b is therefore substantively unconscionable because it forces Mills to pay FSG‘s attorneys’ fees and costs in situations where Mills‘s claims are found to be “factually groundless” but not brought in bad faith, contrary to section 218.5, subdivision (a), which would otherwise apply in the trial court, and contrary to the prevailing employee provisions in sections 1194 and 2802. (See Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 800 [arbitration provision requiring employee to pay attorneys’ fees to prevailing defendants was unconscionable because it “imposes on [the employee] the obligation to pay [the employer‘s] attorney fees where she would have no such obligation under at least one of her California statutory claims“]; Wherry v. Award, Inc. (2011) 192 Cal.App.4th 1242, 1249 [arbitration provision entitling prevailing party to attorneys’ fees “without any limitation for a frivolous action or
FSG contends that notwithstanding section 6.b, the arbitrator was required to award attorneys’ fees consistent with sections 218.5, 1194, and 2802 because section 3.b of the arbitration agreement (under “General Provisions“) provided that “[t]he hearing arbitrator shall apply the substantive law (and the laws of remedies, if applicable), in the state in which the claim arose, or federal law, or both, depending on the claims asserted.” We agree with the reasoning of Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 251 (Carbajal), which rejected a similar argument. The arbitration agreement in Carbajal required the parties to bear their own attorneys’ fees, although the employee would have been entitled to recover her attorneys’ fees in court as a prevailing party on many of her statutory wage claims.8 (Id. at p. 250.) The Carbajal court concluded the attorneys’ fees provision was substantively unconscionable despite the provision in the arbitration agreement authorizing the arbitrators “to award all types of relief that would otherwise be available to the parties in a court proceeding under State or Federal law.‘” (Id. at p. 251.) The court reasoned, “The arbitration provision‘s plain language requires the parties to be responsible for their own attorney fees without any exceptions. Nothing in the provision‘s language suggests the parties intended to limit or qualify this provision by also granting the arbitrators broad authority to award all types of relief authorized by law. ‘[W]hen there are conflicting clauses the more specific clause controls the more general.‘” (Ibid.) Here too, the specific attorneys’ fees provision allowing FSG to recover its attorneys’ fees and costs as the prevailing party regardless of whether Mills brought his claims in bad faith (or awarding any fees and costs to FSG on Mills‘s claims under sections 1194 and 2802) would control over the more general choice of law provision in the agreement.
FSG‘s reliance on Rule 39(d) of the AAA rules is similarly misplaced. Rule 39(d) provides, “The arbitrator may grant any remedy or relief that would have been available to the parties had the matter been heard in court including awards of attorney‘s fees and costs, in accordance with applicable law.”
Section 6.c of the arbitration agreement‘s attorneys’ fees provision is likewise substantively unconscionable because it imposed on Mills the attorneys’ fees and costs incurred by FSG in moving to compel arbitration notwithstanding the requirement under section 218.5, subdivision (a), that a prevailing employer show bad faith, and the one-way fee-shifting provisions of sections 1194 and 2802, which award attorneys’ fees and costs only to prevailing employees. Section 6.c provides that if any party brings a claim outside of the arbitration process, “the responding party shall be entitled to dismissal of such action, and the recovery of all costs and attorney‘s fees and losses related to such action.” In Patterson, supra, 70 Cal.App.5th at page 489, we found unenforceable under Armendariz a similar fee-shifting clause, which required the party opposing arbitration to pay the attorneys’ fees, costs, and expenses of the party that successfully moved to compel arbitration. We explained that “[p]ermitting [the employer] to recover its attorney fees for a successful motion to compel arbitration in a pending FEHA lawsuit without a showing the plaintiff‘s insistence on a judicial forum to determine his or her claims was objectively groundless . . . denies the plaintiff the rights guaranteed by [FEHA] with a corresponding chill on access to the courts for any employee or former employee who has an arguably meritorious argument that the . . . arbitration agreement is unenforceable.” (Patterson, at p. 489;
4. The arbitration agreement does not provide for adequate discovery
Although parties may “agree to something less than the full panoply of discovery,” employees “are at least entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) . . . .” (Armendariz, supra, 24 Cal.4th at pp. 105-106; accord, De Leon, supra, 72 Cal.App.5th at p. 487.) As the Armendariz court explained with respect to FEHA claims, “We agree that adequate discovery is indispensable for the vindication of FEHA claims.” (Amendariz, at p. 104.) “In striking the appropriate balance between the desired simplicity of limited discovery and an employee‘s statutory rights, courts assess the amount of default discovery
The arbitration agreement allows each party to take depositions, designate expert witnesses, and subpoena witnesses, but it does not expressly allow for document requests, requests for admission, or interrogatories. Instead, “[a]dditional discovery may be had only where the hearing arbitrator so orders, upon a showing of substantial need.” We agree with Mills the discovery provision is substantively unconscionable.
Ontiveros, supra, 164 Cal.App.4th at pages 511 to 514 is on point. There, the Court of Appeal found substantively unconscionable an employment arbitration agreement that allowed each party to take only one deposition in addition to expert depositions and document requests, with the right to additional discovery by order of the arbitrator “‘upon a showing of substantial need.‘” (Id. at pp. 511, 514.) The court explained, after noting the employee‘s attorney stated at least 15 to 20 depositions would be necessary given the complexity of the case, “[T]he permitted amount of discovery is so low while the burden for showing a need for more discovery is so high that plaintiff‘s ability to prove her claims would be unlawfully thwarted by the discovery provision in the agreement.” (Id. at p. 513; see Davis, supra, 53 Cal.App.5th at p. 914 [“‘Seemingly neutral limitations
FSG contends the arbitration agreement provides for adequate discovery because Rule 9 of the AAA rules supplements the agreement‘s discovery provision by providing, “The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration.” FSG relies on our decision in Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1476, which concluded the AAA discovery rule provided adequate discovery because it expressly authorized the arbitrator to order depositions and written discovery “‘as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration.‘” However, in Roman, discovery was governed only by the AAA discovery provision incorporated into the arbitration agreement. Here, the arbitration agreement contains a specific provision limiting discovery, which would govern the parties’ dispute.
FSG‘s arbitration agreement is more analogous to the one in Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 718-719 (Fitz). There, the arbitration agreement incorporated the AAA rules but limited discovery to the taking of two depositions and depositions of expert witnesses expected to testify, with no additional
We conclude the arbitration agreement‘s discovery provision is substantively unconscionable because it does not provide for sufficient discovery for Mills to arbitrate his statutory claims. (Armendariz, supra, 24 Cal.4th at p. 106; see Nunez v. Cycad Management LLC, supra, 77 Cal.App.5th at p. 285 [provision limiting “discovery to ‘three depositions and an
5. The arbitration agreement improperly bars tolling of the statute of limitations
Section 1 of the arbitration agreement provides that a party asserting one or more claims must make a written demand for arbitration within the applicable statute of limitations. However, section 1 provides further, “Neither filing nor serving a lawsuit stops the applicable statute of limitations from continuing to run.” (Boldface omitted.) The arbitration agreement‘s tolling bar directly conflicts with
The appellate courts have found arbitration provisions shortening the limitations period for causes of action alleging violations of the Labor Code are substantively unconscionable. (See, e.g., De Leon, supra, 72 Cal.App.5th at p. 487 [arbitration provision shortening limitations period for wage-and-hour claims to one year was unconscionable]; Pinela v. Neiman Marcus Group, Inc., supra, 238 Cal.App.4th at p. 256 [same]; Samaniego v. Empire Today LLC (2012) 205 Cal.App.4th 1138, 1147 [arbitration provision shortening limitations period for wage-and-hour claims to six months was unconscionable].) FSG‘s argument that Mills was not harmed by the tolling bar because the statute of limitations on his claims has not yet run is not persuasive because the enforceability of the arbitration agreement is measured as of the date the parties entered into the agreement. (See
FSG acknowledges there is a conflict between the tolling bar in the arbitration agreement and
6. The waiver of Mills‘s representative PAGA claim is invalid under California law
Section 9 of the arbitration agreement provides under the heading, “No Class Actions,” “I agree that I will pursue any claim or cause of action against FSG solely on an individual basis, and waive any and all rights to proceed as a member of a group or class against FSG.” (Boldface omitted.) It is undisputed that California‘s prohibition on class action waivers is preempted by the FAA. (See AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 351; Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 359-360 (Iskanian), overruled in part by Viking River Cruises, Inc. v. Moriana (2022) 595 U.S. ___ [142 S.Ct. 1906] (Viking River).) FSG contends California‘s bar against waivers of the right to bring representative PAGA actions is likewise preempted under the FAA. It is not.
PAGA authorizes “‘an “aggrieved employee” [to] bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations. (
FSG contends in its reply brief that the United States Supreme Court‘s recent decision in Viking River, supra, 142 S.Ct. 1906 overruled Iskanian, requiring dismissal of Mills‘s representative PAGA claim. FSG fundamentally misreads the scope of Viking River. Iskanian‘s holding that waivers of PAGA claims are unenforceable as against public policy remains good law following Viking River.
In Viking River, the United States Supreme Court granted certiorari to decide whether Iskanian‘s holding invalidating PAGA waivers as a matter of public policy was preempted by the FAA. In deciding this question, the court distinguished between “‘individual‘” PAGA claims, “which are premised on Labor Code violations actually sustained by the plaintiff,” and “‘representative‘” PAGA claims “arising out of events involving other employees.” (Viking River, supra, 142 S.Ct. at pp. 1916-1917.) The court held the FAA preempted Iskanian‘s “indivisibility rule,” which precluded division of a PAGA action into individual and representative PAGA claims, because it effectively prevented the parties from agreeing to arbitrate an employee‘s individual claims based on violations suffered by the
The Viking River court explained, “We hold that the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. This holding compels reversal in this case. The agreement between [Viking and its employee Angie Moriana] purported to waive ‘representative’ PAGA claims. Under Iskanian, this provision was invalid if construed as a wholesale waiver of PAGA claims. And under our holding, that aspect of Iskanian is not preempted by the FAA, so the agreement remains invalid insofar as it is interpreted in that manner. But the severability clause in the agreement provides that if the waiver provision is invalid in some respect, any ‘portion’ of the waiver that remains valid must still be ‘enforced in arbitration.’ Based on this clause, Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana‘s individual PAGA claim.” (Viking River, supra, 142 S.Ct. at pp. 1924-1925.)
Applying Viking River to this case, Mills‘s individual PAGA claim was arbitrable because it did not fall within the arbitration agreement‘s waiver of the employee‘s right “to proceed as a member of a group or class against FSG.” However, the arbitration agreement‘s waiver of Mills‘s representative PAGA claim remains unenforceable under Iskanian as against public policy. The trial court did not err in finding the representative
FSG in its reply brief argues that under Viking River, even assuming the waiver of Mills‘s representative PAGA claim was invalid, the claim should be dismissed for lack of standing. FSG is correct that the majority opinion in Viking River concludes in dicta that although PAGA waivers are unenforceable under California law, the employee on remand would no longer have standing to assert those claims because his or her individual PAGA claim would be subject to arbitration. (Viking River, supra, 142 S.Ct. at p. 1925.) As the court explained, “Under PAGA‘s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action. See [
Although this reading of California law would require dismissal of Mills‘s representative PAGA claim for lack of standing, as Justice Sonia Sotomayor suggested in her concurrence, whether an employee has standing to bring a representative PAGA claim in state court once the employee‘s individual PAGA claim is sent to arbitration is a question for the California courts to resolve. Justice Sotomayor observed, “[I]f this Court‘s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.” (Viking River, supra, 142 S.Ct. at p. 1925 [conc. opn. of Sotomayor, J.].) We need not decide whether Mills would have had standing to pursue his representative PAGA claim in the trial court had his individual PAGA claim been ordered to arbitration because the only question before us is whether the arbitration agreement‘s waiver of Mills‘s representative PAGA claim was valid. Under Viking River and Iskanian, it was not.12
The Armendariz court elaborated, “If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate.” (Armendariz, supra, 24 Cal.4th at p. 124.) “The overarching inquiry is whether ‘“the interests of justice . . . would be furthered“’ by severance. [Citation.] Moreover, courts must have the capacity to cure the unlawful contract through severance or restriction of the offending clause, which . . . is not invariably the
In Armendariz, there were two unlawful provisions in the arbitration agreement—a limitation on an employee‘s recoverable damages and a unilateral arbitration clause requiring an employee to arbitrate wrongful termination claims, but not requiring an employer to arbitrate its claims against the employee. (Armendariz, supra, 24 Cal.4th at pp. 124-125.) The Supreme Court held in light of “the multiple unlawful provisions, the trial court did not abuse its discretion in concluding that the arbitration agreement is permeated by an unlawful purpose.” (Id. at p. 124.) The court explained that where an arbitration agreement has more than one unlawful provision, “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.” (Ibid.) Further, the lack of mutuality in the agreement could not be remedied by merely severing a provision, but rather, the court would need to reform the agreement by augmenting it with additional terms. (Id. at pp. 124-125.) Where “a court is unable to cure this unconscionability through severance or restriction and is not permitted to cure it through reformation and augmentation, it must void the entire agreement.” (Id. at p. 125; see De Leon, supra, 72 Cal.App.5th at pp. 492-493 [declining to sever unlawful statute of limitations and discovery provisions of arbitration agreement, explaining if “‘“‘the court would have to, in effect, reform the contract, not through severance or restriction, but by augmenting it with additional terms,‘” the court must void
By contrast, in Little, supra, 29 Cal.4th at page 1075, the Supreme Court concluded severance of an unconscionable term in an employment agreement was appropriate where there was only one unlawful provision, and “the offending provision [could] be severed and the rest of the arbitration agreement left intact.” The provision at issue authorized a party to appeal only awards exceeding $50,000. (Id. at p. 1073.) As the court explained, the $50,000 threshold “inordinately benefits defendants” because the employer would be more likely to appeal a substantial award, but an employee would be more likely to appeal an award of no damages. (Ibid.)
FSG contends that even if there are six unlawful provisions in the arbitration agreement, this did not support voiding the agreement because the unlawful provisions could be severed from those that are valid.13 However, not all of the unlawful
FSG is correct that some of the offending provisions could have been severed. For example, the trial court could have severed the sentence in paragraph 1 barring tolling of the statute of limitations. Similarly, as to the $250 filing fee, the court could have removed the reference to payment by the employee of a filing fee or the bar to reallocation of the fee. The provision requiring a party to pay for the costs of a postponement it caused also could be severed. Likewise, the waiver of PAGA representative claims could be deleted.
However, multiple other provisions would need to be rewritten. The discovery provision would need to be substantially revised to allow for written discovery. The court could not simply delete the requirement that a party show substantial need for additional discovery, nor could it reform the contract to specify allowable amounts of written discovery to save the agreement.14 The attorneys’ fees provision would likewise
FSG argues, citing to the Ninth Circuit‘s decision in Poublon v. C.H. Robinson Company (9th Cir. 2017) 846 F.3d 1251, 1273, that California does not have a “per se” rule that an arbitration agreement is permeated with unconscionability if more than one provision in an arbitration agreement is unconscionable. We agree with that proposition, but in denying the motion, the trial court did not cite to a “per se” rule of unconscionability. Instead, the court properly recounted the numerous specific provisions that would need to be severed (or reformed) to make the agreement enforceable. Moreover, where, as here, an arbitration agreement has numerous unconscionable provisions, those provisions taint the agreement with illegality such that even if each unlawful provision could be surgically removed from the agreement, the one-sided agreement is not
Although California law favors arbitration as an efficient means of resolving disputes, the courts have an obligation “‘to ensure that private arbitration systems resolve disputes not only with speed and economy but also with fairness.‘” (Armendariz, supra, 24 Cal.4th at p. 115.) Given the unfairness that permeates FSG‘s one-sided arbitration agreement, the trial court did not abuse its discretion in declining to sever the substantively unconscionable terms.
DISPOSITION
The order denying the motion to compel arbitration is affirmed. Mills shall recover his costs on appeal.
FEUER, J.
We concur:
PERLUSS, P. J.
SEGAL, J.