Font Failure Dooms Arb Clause, for Now

Domestic Linen Supply Co. v. L.J.T. Flowers, Inc., No. B292863 (D2d6 Dec. 4, 2020)

The arbitration clause in the parties’ contract in this case was set out in paragraph 15 of the text of the contract. It appeared in ordinary type on the back of the document, while the parties’ signatures were on the front. Under the California Supreme Court’s opinion in Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899, 914 (2015), that might be evidence of some procedural unconscionability, but it’s not per se fatal. Indeed, a per se rule like that would probably be preempted by the FAA. See Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 684, 687–688 (1996) (FAA preempted state statute requiring arbitration clause to be in underlined capital letters on the first page of a contract).  

The Court of Appeal here, however, doesn’t do an unconscionability analysis. In a brief analysis short on citations to authority, it finds, instead, that the appearance of the clause in boilerplate on the backside of the contact supports the trial court’s finding that the defendant, who signed the contract, never actually agreed to arbitrate. There’s no discussion of substantive unconscionability at all. And in getting there, the court further suggests that the constitutional right to jury trial means that any doubts should be resolved against waiver, i.e., against arbitration. That, of course, is contrary to the settled rule that ambiguities in an arbitration agreement are to be construed in favor of arbitration.

The Court further affirms a contractual attorney’s fee award in favor of defendant. Although there are cases that say a party that defeats a motion to compel isn’t entitled to a separate prevailing party fee award divorced from the underlying merits, the Court says this case is different because the trial court was dealing with a freestanding petition to compel. Arbitration, in such cases, is the whole show. Since the case was done once the petition was denied, there was no underlying merits case to prevail in. In those circumstances, the party who prevails on the petition is the winner, entitled to fees under a prevailing party fee contract.

Affirmed.

I’m not exactly enthusiastic about the current trends towards forcing everyone into arbitration based on pre-dispute agreements. Were arbitration truly mutually advantageous, parties would agree to it even after a dispute arises. But the first part of this opinion is pretty far over the line. I would not be surprised to see a petition granted. Or perhaps more likely, a grant and transfer.

That Won't Fly

Davis v. Kozak, No. 156234A (D1d3, Aug. 19, 2020) 

The Court of Appeal finds that an arbitration agreement in an employment was unconscionable when it: (1) limited default discovery to only two depositions—no documents, interrogatories, etc.—subject to a showing to the arbitrator of “sufficient cause” to get more; (2) carved out the employer’s claims under a confidentiality and invention agreement from the scope of arbitrability.

Affirmed.

Your Arb Clause Does Not Need to Be in ALLCAPS

Conyer v. Hula Media Servs., LLC, No. B026738 (D2d8 Aug. 26, 2020)

Employee signed an acknowledgement of an employee handbook that contained an arbitration clause. The acknowledgment didn’t specifically call out the arbitration provision—there was no requirement of separate initialing or something like that. Plaintiff now says he’s not bound to the agreement. But that’s wrong. In Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899, 914 (2015) the California Supreme Court held that there is no obligation to highlight an arbitration clause in a contract and that if someone doesn’t bother to read a contract before signing it, it is their problem.

Of course, the context of the signing does go to procedural unconscionability. The fact that a clause is buried in a take it or leave it employee handbook gives rise to at least mild procedural unconscionability. And here, two parts of the agreement were substantively unconscionable—it required an employee to pay its pro rata share of the arbitrator’s fees, and it permits a prevailing employer to recover its attorneys’ fees. Both of those violate Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 112 (2000). The Court of Appeal, however, finds that these terms are severable. So remands for the trial court to sever the unconscionable terms and to otherwise compel the case to arbitration.

Reversed.

Arbitration Appeal Smorgasbord

Kec. v. Superior Court, No. G058119 (D4d3 Jul. 9, 2020)

Martinez v. BaronHR, Inc., No B296858 (D2d4 Jul 8, 2020)

Lonky v. Patel, No. B295314 (D2d2 Jul. 2, 2020)

Collie v. The Icee Co., No. E071654 (D4d2 Jul. 20, 2020)

Dougherty v. Roseville Heritage Partners, No. C087224 (D3 Mar. 30, 2020)

Lange v. Monster Energy Co., No. B294091 (D2d Mar. 12, 2020)

Dennison v. Rosland Capital LLC, No. B 295350 (D2d8 Apr. 1, 2020)

Torrecillas v. Fitness Int’l LLC, No. B296194 (D2d8 Jul. 21, 2020)


Here’s a whole raft of arbitration cases. Some came out right before or as the pandemic shutdown began and I didn’t manage to get to them. Along with a few new ones.

In Kec, the arb agreement contained a class/representative action waiver that specifically said it’s not severable and that the whole arb agreement is void if any part of it is invalid. And since the clause factually encompassed plaintiff’s PAGA claim, which can’t be compelled to arbitration, the whole thing goes down.

Writ granted.

In Martinez, an employment agreement had an arb clause. It included bolded language that the parties were waiving the right to jury trial. Next to that was a spot for the parties to initial. But they didn’t initial. They did, however, sign the agreement. The Court of Appeal holds the failure to initial doesn’t matter. By signing the agreement, Employee agreed to the whole thing notwithstanding the failure to initial. 

Reversed.

In Lonky an arbitrator spread out her rulings over three interim and one final award. The final award reconsidered a statute of limitations issue in one of the interim awards, which led to an increased award of damages. The final award also awarded costs and fees. Defendant argued that the reconsideration was improper because Code of Civil Procedure § 1284 puts a 30-day limit on an arbitrator’s ability to correct an award. 

But an interim award is not an “award” as that term is used in the Arbitration Act. Awards are basically like judgments—final resolutions of the controversy between the parties. There’s nothing wrong with conducting an arbitration in phases. But still it generally only produces one award. Nor was plaintiff judicially estopped for referring to one of the interim awards as an award at some earlier point in the litigation. 

Reversed.

In Collie, plaintiff brought a single cause of action under PAGA. PAGA claims are not arbitrable. And contrary to Defendant’s arguments, nothing about Epic Systems Corp. v. Lewis, --- U.S. ---, 138 S. Ct. 1612 (2018), says otherwise. Epic rejected the proposition that class action waivers are illegal under the National Labor Relations Act as an impingement on employee collective action. That has nothing to do with the reason PAGA claims aren’t arbitrable, which is that a PAGA plaintiff is suing in the place of state, which has not consented to arbitration. 

Affirmed.

And then Dougherty, Langhe, and Dennison, all held that arbitration provisions were unconscionable, while Torrecillas, held one was not. The stricken provisions all had some combination of strict limits on discovery, limits on punitive damages, limits on the right to recover statutory attorneys fees, waivers of injunction bonds, stipulations to irreparable injury, and waivers of jury for non-arbitrable claims. The provisions in Torrecillas didn’t have any of that stuff. 

Three affirmances and one reversal.

How to Lose Your Appeal

Davis v. TWC Dealer Grp., Inc., No. A155030 (D1d2 Oct. 30, 2019)

So I have to cop that I only got around to writing up the Supreme Court’s decision in Kho because I read this case. It involves the essentially same Toyota arbitration agreement that the Supreme Court invalidated in Kho this past August. The same firm that represented the Toyota dealership in Kho represents a Toyota dealership here. Kho was decided a few weeks after the last brief was filed in this case. But nobody gave any notice of supplemental authority. 

The Court of Appeal flagged Kho in a pre-argument notice and asked the Dealership to explain why the parts of the agreement the Court in Kho found so oppressive were replaced with ellipses in the Dealership’s briefs. It also requested an explanation for why the Dealership never apprised the Court of the Kho decision, citing “Batt v. City and County of San Francisco (2007) 155 Cal.App.4th 65, 82, fn. 9,” which deals with attorneys’ duty of candor. (The Court later explains that the duty has been made express by the recent restyling of the Rules of Professional Conduct, which now, in Rule 3.3, require attorneys to “disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel[.]”) 

The Dealership’s law firm (called out by name in the opinion) sent an associate to the argument—his name wasn’t even on the briefs. He had no explanation for the ellipses—he didn’t write the brief and hadn’t spoken to the attorney who did. He didn’t read the footnote in Batt. The arguing claimed only that the Dealer didn’t give notice Kho as supplemental authority because it was “different.”

This all, quite understandably, makes the Court of Appeal very mad. Especially when framed in the context of the somewhat hyperbolic arguments the Dealership made in its brief. Arguments like a claim—unsupported by citation—that arbitration clauses “identical in all material terms to arbitration provisions that have been routinely enforced by appellate courts, including the state Supreme Court.” 

The Court, describing the Dealership’s arguments as “wrong on all counts,” “easily affirm[s]” the trial court’s denial of the motion to compel arbitration. The opinion concludes by noting that “It is hard to imagine legal authority more ‘directly adverse to the position of’ [the Dealership] than Kho—hard to imagine a more obvious violation of Rule 3.3.” 

Easily Affirmed.

Sliding Scales and Points of Comparison

OTO, LLC v. Kho, No. S244630 (Cal. Aug. 29, 2019)

A little late on this one. As I noted in my write up of the Court of Appeal decision in this case, the result—upholding an arbitration clause in an employment contract in the face of an unconscionability challenge—felt a little sideways with a Supreme Court decision generally referred to as Sonic II. So I was hardly surprised by the grant of review.

These are all wage-and-hour cases where an employee is entitled to an administrative remedy called a Berman hearing, which is “designed to give claimants a ‘speedy, informal, and affordable method’ for resolving wage disputes.” Sonic II suggested, but did not decide, that the waiver of a Berman hearing in a wage and hour case would be substantively unconscionable unless the arbitration procedure itself incorporated procedural elements of a Berman hearing.

The agreement in this case foresees an arbitration that would be very much like a state court trial. Indeed, it provides for full discovery and adopts a number of law and motion and trial procedures that are not required in an arbitration. But it does not incorporate the elements that make a Berman hearing easy for an employee to litigate. As the Court explains in an opinion by Justice Corrigan, in isolation, a trial-like arbitration isn’t substantively unconscionable. But an analysis of substantive unconscionability needs to look to the parties’ options but for the arbitration as a point of comparison. Here, that’s not a court trial, it’s a Berman hearing.

The agreement here was a “paragon of prolixity”—“only slightly more than a page long but written in an extremely small font.” (The parties fight over whether it was 7 or 8.5 point.) It made numerous opaque and sometimes ambiguous references to legal jargon such that a lay person would have difficulty in deciphering key terms.” It was offered on a take it or leave it basis, the employee was given only a few minutes to sign, and he wasn’t even provided a copy. Given the overwhelming procedural unconscionability entailed, the Court—using a “sliding scale”—finds that although giving up the Berman procedures is close call on substantive unconscionability, it is enough to make the agreement unenforceable. 

Court of Appeal reversed.

Justice Chin dissents, at length. He dissented in Sonic II too. Among other things, he generally believes that the standard set up by the Court is discriminatory against arbitration and thus preempted by the FAA under the logic of U.S. Supreme Court cases like AT&T v. Concepcion. He also takes issue with the sliding scale approach, as applied here. Although a high degree of substantive unconscionability might require only a small amount of procedural unconscionability, he says the scale shouldn’t slide the other way. And Justice Chin also doesn’t agree that the contract is quite so procedurally unconscionable as the majority does.

That Just Might Be Unconscionable

Salgado v. Carrows Rests., Inc., No. B285756 (D2d6 Mar. 25, 2019)

Appeal of the denial of a motion to compel arbitration. The Court here reverses, finding that the case is within the scope of the clause. But there’s a hitch. Plaintiff was represented by counsel (and indeed had filed the case) when she was confronted by her Employer, who demanded that she sign the agreement. Employer was not there. So if Employer knew Plaintiff was represented at the time the agreement was signed, but nonetheless went around the attorney, the contract might be unconscionable. The Court remands to the trial court to figure that out.

Reversed and remanded.

Too Much Might as Well Be None

Baxter v. Genworth N. Am. Corp., No. A144744 (D1d3 Oct. 26, 2017)

This case turns on the enforceability of an arbitration clause in an employment agreement. It is really pro-employer. It bars the employee from even contacting other employees as part of an informal investigation. But it also severely curtails formal discovery, document discovery in particular. It imposes a four-step procedure to attempt to remediate any dispute that has the practical effect of eating up a bunch of the limitations period to file a complaint with the DFEH and making it impossible for the employee to get any relief through the administrative system. So unsurprisingly the court affirms the trial court’s finding that the arbitration agreement isn’t enforceable because it is unconscionable. 

Affirmed.

Don't Call It a Berman

Otto, LLC v. Kho, No. A147564 (D1d1 Aug. 21, 2017)

In Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013)—aka Sonic II—the California Supreme Court held that an arbitration agreement is unconscionable if it deprives an employee of the procedural advantages provided in the Labor Code wage claim procedures known as Berman hearings. The Berman procedures permit an employee to litigate claims for back wages in an informal administrative proceeding, with limited pleading, no formal rules of evidence, no discovery, fee shifting, and where the hearing officer has the power to assist the parties in cross examinations and to explain concepts and issues that the (often unrepresented) parties do not understand. If the employee is successful, the Labor Commissioner is tasked with enforcing the award and can defend it on appeal.

No Arb for Trailer Park

Penilla v. Westmont Corp., No. B262097 (D2d4 Sept. 9, 2016)

The court here finds an arbitration provision in a mobile home park rental agreement to be unconscionable. Procedurally unconscionable in that it did not disclose the expensive fees that a claimant would be expected to shoulder and because it was not provided in Spanish or explained to renters who couldn’t read English. And substantively unconscionable because it imposed steep fees to deter the residents from asserting claims and unreasonably shortened the statute of limitations. So the trial court correctly denied the park owner’s motion to compel. 

Affirmed.

Indiana?

Magno v. The College Network, Inc., No. D068687 (D4d1 July 8, 2016)

The trial court in this case brought by nursing students against a for-profit college found an arbitration clause to be unconscionable. The Court of Appeal affirms. The evidence surrounding the signing of the contract supported some procedural unconscionability. The contract was adhesive and boilerplate, the plaintiffs young and impressionable, and the signing process hurried. And it was substantively unconscionable because its forum selection clause required Plaintiffs—nursing students in San Diego—to go to Indiana to arbitrate their claims. Moreover, the school got the first pick of the arbitrator and it shortened the statute of limitations. All told, the trial court did not err in finding the contract to be unconscionable. Nor—given the multiple unconscionable provisions—did the trial court err in declining to sever them.

Affirmed.

Court for Me, but Arb for You, Means Court for Everyone.

Carbajal v. CWSP, Inc., No G050438 (D4d3 Feb. 26, 2016)

The Court of Appeal here affirms a trial court’s denial of a motion to compel arbitration based on a finding that the arbitration provision was unconscionable. The clause was contained in an adhesive employment contract, which made it mildly procedurally unconscionable. That was made worse by the fact that it called for the use of “the rules of AAA,” without identifying which of the 100+ sets of AAA rules were to apply. Nor did it include or provide a means of accessing the applicable rules. 

But what really kills the deal is the one-sidedness of the substance. It let only the employer go to court to get injunctive relief, and specifically waived any bond requirement in doing so. And it waived the employee’s right to get statutory fees on her Labor Code claims. Balancing the procedural and substantive unconscionability, the trial court did not err in declining to enforce the provision. Nor did it abuse its discretion in declining to sever the problematic terms for the rest of the agreement. Given the number of substantively unconscionable terms, it was reasonable for the trial court to find the unconsionability to be too pervasive to merit severance.

Affirmed.

Where the Heck Is Wn.?

Brinkley v. Monterrey Fin. Servs., Inc., No. D066059 (D4d1 Nov. 19, 2015)

This is a really long opinion that largely affirms an order dismissing Plaintiff’s class claims and ordering her to arbitrate individually. Under Washington State law. Nothing too much to see here, although it is interesting that the unconscionsablity standard in Washington state requires either procedural or substantive unconscionability, not both like in California. That results in a provision in the agreement about arbitration costs being unenforceable. But the court finds the provision to be severable and not to preclude arbitration altogether. And because the agreement specifically delegated to the arbitrator to determine whether class treatment was appropriate, the trial court erred by dismissing the class claims. Instead, it should have just sent the whole shebang to arbitration for the arbitrator to sort out.

Affirmed in part, reversed in part.

There are a trove of citations to Washington State authorities in this opinion, which all abbreviate the state “Wn.” I have never seen the Evergreen State referred to as Wn. And I used to live in Seattle. The Postal Service says WA, the Bluebook says Wa., and AP and a few other older styles say Wash. Since only one state starts with W-A, while two start with W and end with N, Wn. seems like a particularly poor choice for an abbreviation. Which is probably why nobody else ever thought to use Wn. to mean Washington State. Except Bernie Witkin and his unwieldy little yellow book.

If Arbitration Fails, Try Arm Wrestling

Performance Team Freight Systems v. Aleman, No. B259146 (D2d2 Nov. 2. 2015)

Interesting how cases seem to come in clusters. We just talked about this. And here too, not very long ago. Interstate truckers’ employment contracts are excluded from the scope of the Federal Arbitration Act. As the recent Garcia case shows, given the difference of opinion between the California Supreme Court and the federal Supreme Court about the overall justness of aggressively compelling consumers and employees to arbitration, that can have some pretty interesting effects. But it doesn’t matter here because the exception applies only to employment contracts and not to agreements between trucking companies and their independent contractors. Plaintiff has the burden of providing the exception. Since here, his evidence did not show he was an employee, he could not show that the exception applies.

Nor were the claims outside the scope of the arbitration clause or the agreement itself unconscionable. In a rare analysis, the court finds that the plaintiff established that the agreement was substantively unconscionable but not procedurally so. (It’s almost always the other way around.) Plaintiff apparently failed to put in the typical declaration stating stating he was offered the contract only on a “take it or leave it” basis. Or that—as his appellate brief contends—the contract was only offered in English and he spoke only Spanish. While those things seem easy to prove, plaintiff still must actually prove them, with evidence.

So off to arbitration he goes.

Reversed.

Why doesn’t Hollywood make stuff like this anymore?

Sonic III

Sanchez v. Valencia Holding Co., No. S199119 (Cal. Aug. 3, 2015)

This case is kind of a do-over of the second half of Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2013) on the law of unconscionability as it applies to arbitration agreements. Justice Liu, joined by most of the court, thinks there are various articulable standards for substantive unconscionability, all of which more or less mean some kind of unilateralism or unfairness that goes well beyond just striking a bad deal. Justice Chin (no longer joined by Justice Baxter, who has since retired) thinks the court should settle on a “shocks the conscience” standard, which he believes to impose a higher burden than other formulations.

This time, however, the court gets to the merits. Everyone agrees that under whatever standards they might apply, the provisions at issue—various limits and exceptions to a contractual right to a de novo appeal to a three-arbitrator panel—aren’t unfair enough to render the agreement substantively unconscionable.

Reversed.

Court Can Reconsider Arbitration Order

Pinela v. Nieman Marcus Grp., Inc., No A137520 (D1d4 Jun. 29, 2015).

This is a long and complicated decision addressing the enforceability of Nieman Marcus employee’s arbitration agreement. A bunch of overlapping choice of law and enforceability issues are at issue. But it basically all boils down to the fact that the agreement’s election of Texas law to govern the merits of any dispute arising from the employment relationship (not just contract disputes) made it unconscionable. The election would deprive plaintiff of her unwaivable statutory wage and hour claims under California law. You can’t do that in California.

In getting there, the court makes an interesting point: the line of cases addressing the limited “vestigial” jurisdiction that trial courts retain after compelling arbitration does not apply to the court’s sua sponte power to reconsider the arbitration ruling itself. Here, the court initially compelled most of the case to arbitration, but following developments in the case law—including a published court of appeal case interpreting the exact same agreement—changed its mind. There’s nothing wrong with that.

Affirmed.

Arb Agreement in Employee Handbook Prevails

Serafin v. Balco Props. Ltd., No. A141358 (D1d4 Mar. 16, 2015)

After an employee lost on the merits in an arbitration, she challenges the enforceability of an arbitration agreement contained in her employer’s employee handbook.  The court here affirms.

A Class Action Is Community Property

Lennar Homes of Cal. v. Stella Stephens, E057280 (D4d2 Dec. 18, 2014)

Defendants in this case are a husband and wife who bought a house from the plaintiff, Lennar Homes. The husband was the named plaintiff in an unsuccessful federal class action alleging illegality in the transaction. Lennar sued both husband and wife for express contractual indemnification for the costs incurred in defending the class action, based on an indemnity clause in the purchase agreement.  Defendants brought an anti-SLAPP motion, which the trial court granted. Lennar appealed.

The court applies the familiar two-part analysis. First, it finds that the trial court correctly found that the suit arose from protected activity. That was conceded as to husband—since he is, in effect, being sued for filing a lawsuit—but not as to wife. Lennar asserts that because wife was not a party to the federal case, its claim her does not arise from her protected activity. The court doesn’t buy it. In a case where husband is asserting rights that are tied up with the family’s community property, the petitioning entailed is as much hers as it is his, notwithstanding the name on the caption. Moreover, Lennar couldn’t show a likely success on the merits because the indemnification provision was, in fact, unconscionable and thus could not be enforced.

Affirmed

Armendariz Survives Concepcion

Sabia v. Orange Cnty. Metro Realty, Inc., No. B243141 (D2d8 May 18, 2014)

In this putative class action, the trial court granted an order compelling arbitration on an individual basis because the arbitration agreement contained a class action waiver. The court here reverses. It first finds that, although orders granting motions to compel arbitration are generally not appealable, under the “death knell” doctrine, it could hear the appeal in this case. The nature of plaintiffs’ claims were such that there was no way they could practically be arbitrated on an individual basis. So the order compelling arbitration was, for all practical purposes, a dismissal of the case.

The court proceeds to reverse because the arbitration clause at issue applied only to claims brought by plaintiffs. It did not require arbitration of defendants’ claims. That made it unconscionable under Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83 (2000), which generally prohibits non-bilateral arbitration agreements. The court goes on to explain that the Armendariz rule survives AT&T v. Concepcion’s ruling that California’s judicially made rule deeming class action waivers unconscionable was preempted by the FAA because it discriminated against arbitration. According to the court, the Armendariz rule does not discriminate against arbitration. Indeed, it just prevents a more powerful party from cynically foisting arbitration on the weaker party, while reserving a judicial forum for itself. One-sided arbitration clauses—particularly when contained in contracts of adhesion—reflect the very mistrust of arbitration that the U.S. Supremes have repeatedly repudiated.

Reversed.

**Note: Review granted September 21, 2014.

An Open Question No Longer

Malone v. Superior Court, No. B253891 (D2d3 June 17, 2014)

The court declines to issue a writ ordering the trial court to vacate an order compelling arbitration where the arbitration clause delegates questions as to the enforceability of the arbitration clause to the arbitrator. Although it isn’t cited, the opinion is more or less a retread of last month’s Tiri v. Lucky Chances decision out of the first district.