California Mediation and Arbitration

Unconscionability: Second District, Div. 8 Holds That Illegible Contract Is Fair, And Therefore Not Unconscionable

Majority Of Panel Holds That Substantive Unconscionability Was Missing. Justice Stratton Dissents. 

        Writing for the majority, Justice John Shepard Wiley Jr. explains that the above contract is enforceable, requiring the plaintiff employee to arbitrate her dispute. Though the document is manifestly illegible, Justice Wiley concludes that the contract is fair. Therefore, there is no "substantive unconscionability." And as we know, California law requires both procedural and substantive unconscionability for a contract to be unenforceable on the basis of unconscionability. Fuentes v. Empire Nissan, Inc., B314490 (2/8   4/21/23) (Wiley, Harutunian; Stratton, dissenting). 

        Justice Maria E. Stratton dissents.  She writes, " '[W]atering down' unconscionability analysis is not what I have in mind. Acknowledging the obvious is my intention. Holding a signatory to an illegible contract that is also as prolix as this one strains the concepts of mutuality, fairness and common sense. If an employee literally cannot read the contract, how is that substantively fair?"

        COMMENT: Perhaps a simpler approach than "unconscionability," which requires satisfying two prongs, is a contract formation approach. Was there ever a meeting of the minds? Was there consent to the terms of the contract, when the contract was illegible and prolix? Justice Arthur Gilbert has written, "An arbitration clause in a contract is invalid because the clause is as inconspicuous as a frog in a thicket of water lilies." Domestic Linen Supply, Inc. v. L J T Flowers, Inc., 58 Cal.App.5th 180 (2020). Here, the job seeker wouldn't see the frog or the water lilies, just a typographic mess. Thus, in addition to the two-prong unconscionability analysis, arbitration clauses can also be analyzed under a contract formation analysis.

        Suppose the prospective employee had said she wanted to come back the next day when she could read what was actually written. And the employer had replied that if she wanted to go to work, she should sign. So she signed. Then the court could have said she signed because she wanted to start work. But since that was simply evidence of additional "procedural unconscionability," everything was copacetic. Or is it?

        This case stretches to the breaking point the legal fiction that agreements to arbitrate are always a matter of consent.

Same Outcome In A Tandem Case: Mohammad Basith v. Lithia Motors, Inc., B316098 (2/8  4/21/23) (Wiley, Harutunian; Stratton, dissenting).

        In Basith, a tandem case involving a contract substantially similar to the one in the Fuentes case, the Second District, Div. 8, reaches the same conclusion that the arbitration provision is valid and enforceable. It's another split decision, with Wiley and Harutunian in the majority, and Stratton again dissenting.

        Here, we get bit of policy to justify the outcome: "Our holding is that, unless we are to imperil the vast online world of take-it-or-leave-it contracts, substantive unconscionability must retain meaningful independent content. For that reason, the contracts here and in Fuentes are valid and enforceable, despite their procedural unconscionability."

        COMMENT: While it is true that the contracts are substantially the same, there is a factual difference between Basith and Fuentes. "We note at the outset that this case poses no issue of small or unreadable font. It is a striking coincidence that, not only do we encounter substantially similar form contracts in two simultaneous and otherwise unrelated cases, but also that font size should be a dominating issue in one case—Fuentes—and entirely absent as an issue in Basith’s case. The difference stems from the media: in Fuentes, the contract was printed only on paper, and was printed in a largely unreadable way, whereas Basith’s main contract was online."

        Nevertheless, Justice Wiley explains that a complaint about prolix legalese and a complaint about font size are just examples of procedural unconscionability, not substantive unconscionability. In short, the court majority does not recognize a situation in which the employer drafts a contract and thus knows its terms, and an employee is unable to read the illegible contract, as being one-sided and substantively unfair. This appears to be dictum in Basith, but it helps to further explain the majority's thinking in Fuentes, where font size and prolixity were issues, not to mention the poor condition of the tiny font.

 

 

Delegation, Unconscionability: First District Div. 2 Affirms Order Denying Petition To Compel Arbitration

On-Line Gaming Was The Context For The Case.

        The world of on-line gaming presents challenges to companies wishing to bind players to arbitration. As our next case illustrates, gamers are likely to be treated as unsophisticated consumers with unequal bargaining power. Pavel Gostev v. Skillz Platform, Inc., A164407 (1/2  2/28/23) (Miller, Stewart, Richman).

        Gostev, a gamer, alleged that Skillz Platform, Inc.'s game amounted to gambling and that it engaged in predator practices. By establishing an account, tapping next, and clicking on a hyperlink to Terms of Service, Gostev allegedly agreed that disputes would be delegated to an arbitrator to decide. Skillz moved to compel arbitration, and Gostev argued that the agreement failed to delegate decisions to an arbitrator by clear and unmistakeable evidence, and that the arbitration agreement was unconscionable. The trial court agreed with Gostev, and the Court of Appeal affirmed.

        The problem with the delegation argument was that language that delegated decisions concerning disputes about Terms, Services, and Product was not clear enough. It could mean that the threshold dispute was delegated to the arbitrator to decide, or it could mean that only substantive disputes about the Terms, Services, and Product were delegated. The agreement also referenced the rules of the AAA which have sometimes been applied successfully to make a delegation argument. But the Court of Appeal explained that here, where the consumer was likely to be in a position of unequal bargaining power and sophistication, it would not accept reference to AAA rules as good enough to establish effective delegation.

        The agreement was a take-it-or leave-it agreement, and hence, there was some degree of procedural unconscionability. Also the agreement was one-sided to substantively favor the company: plaintiff's monetary damages were limited to $50, arbitration was to be held in San Francisco, though the consumer was located in Washington, there was a one-year limitations period for bringing a claim, and a split of arbitration fees and costs limited consumer rights under the California Consumer Legal Remedies Act. Given the procedural and substantive unconscionability, the court agreed the arbitration agreement was unenforceable.

PAGA, Issue Preclusion: Arbitrator's Ruling In Favor Of Corporation Did Not Preclude Employees From Suing Manager For Wage And PAGA Claims

Trial Court's Denial Of Right To Amend Was Error.

        The Rocha brothers, Thomas and Jimmy, sued their former employer U-Haul Co. of California, and their manager Sandusky, alleging Sandusky had harassed them at work. The matter was arbitrated and the brothers lost their claim against U-Haul. However, before the matter went to arbitration, the trial judge denied the brothers' effort to amend their claims to add PAGA claims against U-Haul and to add wage and hour and PAGA claims against Sandusky. The brothers appealed confirmation of the arbitrator's award in favor of U-Haul, arguing that the arbitration agreement was unconscionable, and that they should have been allowed to amend their complaint. Thomas Rocha et al. v. U-Haul Co. of California, et al., B322599 (2/1  2/2/23) (Rothschild, Bendix, Benke) (partially published).

        After a discussion of unconscionability (unpublished), and concluding that the agreement was not unconscionable, the court moved on to the trial judge's refusal to allow amendment of the complaint. Split decision on appeal: the court's refusal to amend and add a PAGA claim against U-Haul was affirmed, because the arbitrator had found no labor violations by U-Haul, and that precluded a PAGA claim against the employer by virtue of issue preclusion.  But the Court of Appeal saw no reason to deny the brothers' request to add wage claims against Sandusky for work the brothers allegedly did for Sandusky personally outside their work for U-Haul, and thus no reason to deny the request to add a PAGA claim against Sandusky personally. So that part of the order denying the request to amend was reversed.

Unable To Apply "Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act" Retroactively, Fourth Dist. Div. 3 Nevertheless Finds Arbitration Provisions Unconscionable

Panel Is Very Critical Of Confidentiality Provisions In Sexual Harassment Dispute With Arbitration Provision.

        Some California Appellate panels and justices make it a practice to neatly summarize the opinion in the first paragraph. I like that practice. Our next case, in which the Court of Appeal issued a peremptory writ of mandate issue directing the trial court to vacate its order compelling arbitration and enter a new order denying the motion to compel arbitration, made excellent use of that practice in a 36-page slip opinion. Cassandra Murrey v. Orange County Superior Court; General Electric Company et al (real parties in interest), G061329 (4/3  1/30/23) (O'Leary, Bedsworth, Marks). So let's let the panel, in an opinion penned by Justice O'Leary, speak:

        "In March 2022, President Joseph R. Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the Act) (9 U.S.C. §§ 401, 402), representing the first major amendment of the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) since its inception nearly 100 years ago. This legislation, having bipartisan support, voids predispute arbitration clauses in cases, such as the one before us now, involving sexual harassment allegations. We regret that this new legislation does not apply retroactively to Casandra Murrey’s complaint filed in March 2021. Nevertheless, we will consider Murrey’s writ petition because the highly secretive and one-sided provisions of her arbitration agreement make it both procedurally and substantively unconscionable. The agreement is factually distinguishable from existing case authority upholding employment adhesion contracts and exemplifies why the legislature drafted House Bill No. 4445. We conclude the trial court erred by enforcing an unconscionably void arbitration agreement."

        This case is particularly interesting for its critical analysis about confidentiality language in arbitration agreements in sexual harassment disputes. In this case, "Murrey was forced to agree she would not 'publish or disseminate' the arbitration award." Justice O'Leary wrote, " GE’s confidentiality provision serves no purpose other than to benefit GE. Future employees cannot take advantage of findings in past arbitrations or prove a pattern of discrimination and/or retaliation." Here, the confidentiality provision weighed heavily in finding the arbitration agreement "substantively unconscionable." Ordinarily confidentiality agreements are upheld, but it is clear that the court viewed such requirements to be  onerous in the circumstances of a sexual harassment dispute. 

        We note California Code of Civil Procedure § 1001 prohibits a provision within a settlement agreement that prevents or restricts the disclosure of factual information related to a claim filed in a civil action or a complaint filed in an administrative action. The Murrey case does not involve a settlement agreement.

Existence Of Agreement, Unconscionability: First District, Div. 4 Concludes Arbitration Agreement Was Signed, Not Unconscionable, And Reverses

Proof Of Handwritten Signature May Be Easier Than Proof Of Electronic Signature.

        The trial court found that the employer failed to prove employees had signed an arbitration agreement, that the agreement was unconscionable, and the court rejected the employer's efforts to compel arbitration. The Court of Appeal reversed. Leroye Iyere et al. v. Wise Auto Group, A163967 (1/4  1/19/23) (Pollak, Brown, Goldman).

        In the trial court, the employees provided declarations that they had been given many documents to hurriedly sign, that they had not read them, and that if they had read them, they would not have signed them, knowing that they were giving up rights by agreeing to arbitrate. But they did not squarely deny that handwritten signatures of their names were their signatures. While the trial court refused under those circumstances to find that the employees had signed, Justice Pollak explained: "It is hornbook law that failing to read an agreement before signing it does not prevent formation of a contract."

        The panel disagrees with Gamboa v. Northeast Community Clinic, 72 Cal.App.5th 158. (2021), which cited cases rejecting proof of electronic signatures under similar circumstances in order  to reject proof of a handwritten signature. Justice Pollak explains:  "Authenticating an electronic signature if challenged can be quite daunting. . . If a party confronted with his or her handwritten signature on an arbitration agreement is unable to allege that the signature is inauthentic or forged, the fact that that person does not recall signing the agreement neither creates a factual dispute as to the signature’s authenticity nor affords an independent basis to find that a contract was not formed." 

        The employees argued that the arbitration provision, which was governed by the Federal Arbitration Act, was unconscionable, because California Labor Code § 925 provides that an employer cannot require an employee who resides and works in California, as a condition of employment, to agree to adjudicate a claim arising in California outside of California. But the FAA does not displace state substantive law, which can be asserted in arbitration, so this argument failed.

            The employees also argued that the contract, which allowed the party against whom a claim was made to choose between two arbitration providers, and that this would benefit the employer as the party against whom a claim was more likely to be made. But the panel believed this would not provide a significant advantage to the employer, as both dispute resolution providers were well recognized and respected dispute resolution providers.

Employment, Uncionscionability, Delegation: Fourth Dist. Div. 3 Agrees With Trial Court That Arbitration Agreement Is Unconscionable

Ambiguous And Unconscionable.

        The threshold question in Bernell Gregory Beco v. Fast Auto Loans, Inc., G059382 (4/3  12/14/22) (Moore, Bedsworth, Sanchez) was whether the court or the arbitrator should determine the issue of arbitrability. The arbitration agreement included a delegation provision stating that covered: "any dispute concerning the arbitrability of any such controversy or claims." The Court of Appeal held that the provision was ambiguous at best, because "arbitrability" here could refer to deciding to the arbitrability of a substantive claim, rather than to who should decide the issue of arbitrability. Therefore, the delegation of the question "who should decide" was not "clear and unmistakable," the standard for finding a valid delegation of decision-making authority to the arbitrator. Nor did incorporation by reference of AAA rules concerning arbitrability help here, because the the court concluded that Mr. Beco, an employee of a payday lender¹ who earned $13.50 per hours, was not a legally sophisticated person who should be charged with knowledge of the incorporated rules.

        The court's analysis that the arbitration provisions were procedurally and substantively "unconscionable" is unremarkable. Well, perhaps the following is worth remarking: the court found that a three-month period allotted to the employee to provide notice of a claim was "particularly onerous."

¹A US government website defines "payday loan" as follows: "While there is no set definition of a payday loan, it is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday. Depending on your state law, payday loans may be available through storefront payday lenders or online."

Unconscionability, PAGA, 1281.2, FAA: CCA 2nd Dist. Div. 6 Holds Iskanian Survives, Sort Of

Court Of Appeals Affirms Denial Of Motion To Compel Arbitration.

 

It's alive, it's alive !

        We harbor the suspicion that Navas v. Fresh Venture Foods, LLC, B31288A (2/6  11/21/22) (Gilbert, Yegan, Perren), was published so that the Court of Appeal could tell us that while Viking River Cruises v. Moriana overrules Iskanian, to the extent that Iskanian does not allow PAGA claims to be split between individual and representantive claims, "Nevertheless, Iskanian still survives."

        Navas, Lopez, and Ramos sued their employer FVF for various wage and hour violations, including a PAGA claim. The trial court denied FVF's motion to compel arbitration. It held that the employer had not proved that Lopez and Ramos had signed the agreement. As to Navas, the court ruled his agreement was unconscionable. The employer appealed.,

        The Court of Appeal agreed that there was a lack of sufficient evidence to establish that Lopez and Ramos signed the employment agreement. The Court also agreed that Navas' agreement was unconscionable.

        The comments about PAGA are most interesting. The Court explains that in Viking River Cruises, "the United States Supreme Court held '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.'" In Viking, the trial court refused to allow arbitration of the individual claim because it could not be split from the representative claim. Under Viking, the employer and employee can agree to arbitrate an individual PAGA claim.

        In Navas, however, the Court of Appeal concludes that though an individual PAGA claim can be arbitrated by agreement, here, the employer failed to observe standards required for a purported waiver of a PAGA claim by the employee. The employer failed to explain the employee waiver to a Spanish-speaking employee and to obtain the employee's consent to waiver of the right to bring a PAGA claim in court. So here the employee will be able to bring individual and representative PAGA claims in court.

        COMMENT: The trial court also stayed the arbitration pending litigation, relying on CCP §1281.2. There is no provision in the Federal Arbitration Act like 1281.2, so defendant argued that the stay was preempted by the FAA, which required the arbitration to go forward. However, the Court of Appeal explains that while the agreement incorporated FAA law, it also incorporated California civil procedure, and California procedure had not been preempted by a reference to FAA law.

Unconscionability, Severance, PAGA, Claim Preclusion: Second District Div 7 Holds Arbitration Agreement, Permeated With Substantive Unconscionability, Is Unenforceable

Trial Judge No. 1 Found The Arbitration Agreement Enforceable, No. 2 Found It Enforceable, And Court Of Appeal Agreed With No. 2.

        Chris Mills sued his former employer for disability discrimination and related employment claims. Employer FSG successfully enforced an arbitration agreement, the trial judge holding unconscionable provisions in the agreement were severable. An appeal followed, but that appeal is not the subject of this post. Mills also filed a class action lawsuit for labor law violations, including PAGA claims, and FSG again moved to compel arbitration, but in front of a different trial judge. Despite the fact that the arbitration provision under consideration was the same in both lawsuits, the second judge found the arbitration provision to be permeated by unconscionability, and refused to enforce it. The second judge's order is the subject of FSG's appeal. Chris Mills v. Facility Solutions Group, Inc., B313943 (2/7  11/1/22) (Feuer, Perluss, Segal).

        Of course, FSG argued claim or issue preclusion required trial judge No. 2 to accept the ruling of trial judge No. 1, who found the arbitration agreement to be enforceable. But there had been no final adjudication on the merits, because an order granting a motion to compel arbitration is not appealable, and review of the order must await appeal of the judgment confirming an arbitration award. [Note: our sidebar category is collateral estoppel/res judicata, admittedly no longer the favored terms of art, having been replaced by claim and issue preclusion.]

        The agreement, being a condition of employment, was adhesive and had aspects of procedural unconscionability. The arbitration agreement was also substantively unconscionable because it unfairly allocated costs and attorney fees to the employee, limited discovery, improperly barred tolling of the statute of limitations, and included an invalid waiver of representative PAGA claims.

        The last point, regarding invalid waiver of representative PAGA claims, is interesting in light of the SCOTUS ruling in Moriana v. Viking River Cruises, holding that California law invalidating contractual waivers of the right to assert representative claims under PAGA is preempted by the FAA, insofar as PAGA precludes division of actions into individual and representative claims. Because the court in Mills, however, did not require Mills to arbitrate, there was no need to divide his individual and representative claims: both could be litigated. Justice Feuer sides with Justice Sotomayor's concurring opinion in Moriana that even if the employee is required to arbitrate individual claims, under California law, the employee still has standing to bring a representative action. However, Justice Feuer does not need to decide the issue of standing, since Mills was not required to arbitrate.

        COMMENT: While acknowledging that there is no per se rule that severance can never be used if there is more than one item of substantive unconscionability, Justice Feuer explains why, as a matter of policy, the court should not sever and rewrite the contract here: "[U]pholding this type of agreement with multiple unconscionable terms would create an incentive for an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, the court would simply modify the agreement to include the bilateral terms the employer should have included in the first place."

Arbitration, Enforceability: No Agreement Where Company Was Unable To Establish Automatic Sending Of Electronic Receipt

Existence Of Agreement Was Not An Issue To Delegate To Arbitrator.   

              Fiona Trinity sued Life Insurance Company of North America and individuals (LINA parties) for employment-related claims. The LINA Parties moved unsuccessfully to compel arbitration in the trial court, and the Court of Appeal affirmed. The LINA parties could not establish the existence of an agreement to arbitrate, and even if they could, the agreement would have been unconscionable. Trinity v. Life Insurance Company of America et al., B312302 (2/7  5/23/22) (Perluss, Segal, Feuer).

        The defendant's PMK had testified as to the contract procedure, explaining that  once the employee had  clicked on a link indicating he or she had read an online employee handbook, which included an arbitration agreement, they would receive an email confirming their assent to the terms of the handbook. The problem was that the employer could not produce the automatically generated receipt and did not know how to retrieve it, and the employee did not remember reading or agreeing to the handbook. 

        While issues of arbitrability were delegated to the arbitrator here, whether there is an agreement to arbitrate in the first place is an issue for the judge to decide. The issue of arbitrability cannot be delegated under the terms of a nonexistent agreement.

        COMMENT: In the 21st century, there is still at least one advantage to the use of a paper document with an inked signature. Electronic signing is permissible, but then one must carefully follow procedure and have a good storage and retrieval system for electronic data.

Arbitration, Delegation, Unconscionability: CCA 4/3 Affirms Order Denying Motion To Compel Arbitration Because Of Flawed Delegation And Unconscionability

Substantive Unconscionability To Trip Over.

        This is a tragic case involving the death of a recently graduated UCLA engineering student in the throes of an acute psychotic episode. He was briefly in a care facility where the precariousness of his condition was recognized. Allegedly he required constant supervision, which was not provided, and he killed himself. When the young man's parents sued,  the facility moved to compel arbitration. The trial court denied the request, and the Court of Appeal affirmed. Brandon Nelson, et al. v. Dual Diagnosis Treatment Center, No. G059565 (4/3  4/19/22) (Goethals, O'Leary, Moore).

        Defendants argued that a broad arbitration clause had delegated the issue of arbitrability to the arbitrator. The court disagreed, finding the language of delegation less than "clear and unmistakable." (Note: because the presumption is that this threshold issue will be decided by a judge, the "clear and unmistakable" standard must be overcome to undo the presumption.)  Furthermore, there was contradictory language in the contract leaving areas of review to a court, and this undermined the argument that delegation of issues to the arbitrator was effective.

        On the issue of procedural unconscionability, the Court of  Appeal concluded, "the adhesive nature of the alleged contract, failing to provide Brandon with the AAA arbitrability terms on which Sovereign now relies while providing contrary terms in the emollment [?] agreement it drafted, and Brandon's impaired mental state all combine to result in a high level of procedural unonscionability." The court noted that during intake, Brandon could not focus and concentrate for more than 10 to 20 seconds at a time. Indeed, the court wondered, "how a 26-year-old man in the throes of an acute psychotic episode could be legally competent but, due to our dispositional analysis, we need not resolve that issue here."

        As to substantive unconscionability, the court observed: "Here, the contract imposed on Brandon not just a damages cap, but required a unilateral release of almost any conceivable claim he could assert against Sovereign."

        Best Line: The best line in the opinion was borrowed from the late Justice David G. Sills, who often had the best line: sometimes "substantive unconscionability was 'so present that it [was] almost impossible to keep from tripping' over it."