Filed 5/20/20 Valdez v. Lithia Motors, Inc. CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

RUDY VALDEZ,

Plaintiff and Respondent,

v.

LITHIA MOTORS, INC.,

Defendant and Appellant.

B295175

(Los Angeles County

Super. Ct. No. BC718208)

APPEAL from orders of the Superior Court of the County of Los Angeles, Barbara A. Meiers, Judge. Reversed and remanded with instructions.

Walsworth WFBM, Kellie Christianson, for Defendant and Appellant.

Callanan, Rogers & Dzida, Robert Hampton Rogers and Joseph S. Dzida, for Plaintiff and Respondent.

I. INTRODUCTION
II.

Defendant Lithia Motors, Inc. appeals from the trial court’s order denying its motion to compel arbitration of the claims asserted in plaintiff Rudy Valdez’s wrongful termination complaint. According to defendant, the trial court erred by finding the arbitration clause in plaintiff’s compensation agreement unconscionable because, among other things, there were no one-sided provisions in that clause making it substantively unconscionable. We agree and therefore reverse the orders denying the motion to compel arbitration and reconsideration with instructions to enter a new order granting the motion.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. Compensation Agreement

In connection with his employment as a service advisor at a Volkswagen dealership, plaintiff entered into a service advisor compensation plan (compensation agreement) with defendant on January 2, 2018. Among other provisions, the compensation agreement included an arbitration clause that provided: “10. In addition, by placing my [s]ignature below, [defendant and I] understand and voluntarily agree that any claims/disputes that I may have regarding the terms of my own [c]ompensation [p]rogram, my employment, termination from employment (including claims of discrimination and/or harassment) or any other association I have with [defendant] that either of us might have against one another will be resolved exclusively in accordance with binding arbitration. The arbitration proceedings shall be governed by the Federal Arbitration Act [(FAA) ], and carried out in conformity with the procedures of the California Arbitration Act [(CAA) ]. I desire to take advantage of the benefits of arbitration and, being that this is a mutual agreement to arbitrate, understand that [defendant] and I give up the right to a trial by jury and instead will have our claims resolved by a retired California [s]uperior [c]ourt [j]udge.”

The arbitration clause was the last paragraph of the three-page compensation agreement, under a general heading entitled “ACKNOWLEDGMENTS,” and was one of ten enumerated paragraphs in that last section of the agreement. The clause was set forth in the same size font and style as all of the other enumerated paragraphs in the agreement and was not introduced by its own subheading or otherwise distinguished from those other paragraphs. Although the arbitration clause was just above the employee’s signature line, the clause did not require the separate signature or initials of the employee signifying that the employee had read and understood that particular clause of the agreement.

According to plaintiff, during his employment with defendant he “had a mental disability . . . which required treatment and time off as [a] reasonable accommodation.” Plaintiff “communicated [his] condition and need for accommodation to [d]efendant.” Defendant, however, refused to provide plaintiff with the requested accommodation and instead terminated his employment on July 13, 2018.

B. Complaint and Motion to Compel Arbitration

On August 16, 2018, plaintiff filed his complaint against defendant asserting three causes of action for: (1) failure to accommodate a disability and/or engage in the interactive process in violation of FEHA; (2) wrongful termination in retaliation for engaging in a protected activity in violation of FEHA; and (3) recovery of wages and penalties under the Labor Code.

On September 26, 2018, defendant filed a motion to compel arbitration. Defendant argued that the arbitration clause in plaintiff’s compensation agreement required him to arbitrate all of the claims asserted in the complaint under sections 1281 and 1281.2 and 9 U.S.C. section 4. According to defendant, the arbitration clause met all of the requirements for enforcement under California law, was not unconscionable, and was subject to enforcement under both the CAA and the FAA. In support of the motion, defendant attached a copy of the compensation agreement, but did not include a declaration or other evidence. As noted, the attached copy had poor resolution and extremely fine print, making it difficult to read.

Plaintiff opposed the motion, arguing that the copy of the arbitration clause attached to the motion was difficult to read due to “the original tiny font” and the “VERY fine print” which was “obscured and hidden at the end of a blurry form agreement [that had been] copied multiple times . . . .” He further contended that the arbitration clause was unenforceable because it was both procedurally and substantively unconscionable. In addition, plaintiff maintained that the clause was unenforceable because it did not comply with all five of the “minimum requirements” for a lawful agreement to arbitrate nonwaivable statutory rights set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 102 (Armendariz). Specifically, plaintiff argued that the clause did not provide for adequate discovery in the arbitration, did not provide for the attorney fee and cost recoveries available in the trial court under FEHA, and did not provide that the employee would not be responsible for any of the additional costs of arbitration, beyond those for which he or she would be liable in the trial court.

In support of his opposition, plaintiff submitted his declaration in which he explained that, although he signed the compensation agreement, he did not discuss or negotiate the terms with defendant, and in particular, he did not discuss or negotiate the arbitration clause. Instead, the blank lines on the first page of plaintiff’s form compensation agreement had already been filled in and completed prior to its presentation to him for signature. Plaintiff was not even aware that the agreement contained an arbitration clause until after he was terminated.

In its reply, defendant argued that the arbitration clause was not substantively unconscionable. Defendant also argued that because plaintiff admitted to signing the compensation agreement, he was presumed to have read and understood it and, in any event, such adhesion contracts were generally enforceable against employees. Defendant further maintained that the clause satisfied the minimum requirements for arbitration of nonwaivable statutory rights required by Armendariz and asserted that the United States Supreme Court decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (Concepcion) “abrogated” the decision in Armendariz by holding that the FAA preempted state law and policy as to the enforcement of arbitration provisions.

C. Ruling on Motion

On November 14, 2018, the trial court held a hearing on defendant’s motion to compel arbitration. At the outset of the hearing, the court observed that if the copy of the compensation agreement that was attached to defendant’s motion to compel accurately reflected the size of the font in the original compensation agreement, defendant would lose its motion to compel arbitration.

The trial court then asked defense counsel whether she had reduced the size of the original compensation agreement before submitting the copy to the court. Counsel responded that the copy of the agreement had been “microfiched and stored” and represented to the court that the font size of the original was “larger.” After further colloquy with counsel, the court stated, “[I]f this print [size] was the size [in] the original agreement, I would not grant the motion. But [defendant’s counsel], as an officer of the [c]ourt, is representing . . . that this is not the size that [the print] was when [the agreement was] presented to [plaintiff]. [Plaintiff has] not argued that contention. So I [am] assuming I can accept [defense counsel’s] representation. [¶] That being the case, I really don’t see why this case should not go to arbitration. But I will hear from [plaintiff].”

After hearing further argument from counsel, the trial court ruled as follows: “Defendant’s motion to compel arbitration is denied without prejudice. . . . [¶] Defendant having presented to the [c]ourt a document in such tiny type[-face] that it is virtually unreadable and if presented to an employee in this form would be unconscionable. [¶] So if [defendant] want[s] to come back with a motion for reconsideration documenting that this is not the way in which [the compensation agreement] was presented [to plaintiff], and giving the [c]ourt something that [it] can read, then the [c]ourt will reconsider.” That same day, the court issued a minute order noting that the motion was denied without prejudice and reflecting the substance of the court’s oral pronouncement of its ruling.

D. Motion for Reconsideration

One week after the denial of its motion, defendant filed a motion for reconsideration. The motion was supported by the declaration of defendant’s counsel and the declarations of two of defendant’s employees. The declarations collectively explained that Exhibits 1 and 2 were copies of the compensation agreement. Exhibit 1 was a copy of the compensation agreement that plaintiff signed on January 2, 2018. Exhibit 2 was an accurate representation of what Exhibit 1 looked like at the time it was signed by plaintiff, but Exhibit 1 had since “been signed and transmitted via more than one facsimile transmission, which resulted in a reduction of the typeface, as well as darkening and loss of legibility of the document.”

Based on the supporting declarations, defendant argued that its motion to compel arbitration should be reconsidered and granted because the new evidence demonstrated that plaintiff’s compensation agreement was presented to him in a typeface that was clear and legible.

Plaintiff opposed the motion, arguing that the print of defendant’s new exhibit was just as “[t]iny [a]nd [u]nreadable” as the original exhibit. Plaintiff further argued that even with the new exhibit, the arbitration clause in plaintiff’s compensation agreement was both procedurally and substantively unconscionable for the same reasons as stated in the original opposition. The opposition was supported by plaintiff’s declaration which essentially repeated the substance of his original opposition declaration.

In reply, defendant asserted that, based on Exhibit 2, the “difference in legibility” between the original exhibit submitted to the trial court and the new exhibit was “significant.” Defendant also reiterated its procedural and substantive unconscionability arguments and its assertion that Concepcion, supra, 563 U.S. 333 abrogated the requirements of Armendariz, supra, 24 Cal.4th 83.

E. Ruling on Reconsideration Motion

At the January 17, 2019, hearing on the reconsideration motion, the trial court informed the parties that although the newly submitted copy of the compensation agreement was “now more readable[,] . . . the print is still so small as to discourage the effort to read [the agreement].” After hearing briefly from defendant’s counsel, the court denied the motion, finding that the arbitration clause was unconscionable. The court also concluded that there were no new grounds and no new evidence shown to have been unavailable at the time of the original hearing. That same day the court issued a minute order reflecting its oral pronouncement denying reconsideration. Plaintiff timely filed a notice of appeal from the order denying the motion to compel arbitration, as well as the subsequent order denying reconsideration.

III. DISCUSSION

Defendant contends that the trial court erred by concluding that the arbitration clause was unenforceable due to unconscionability. According to defendant, the trial court’s finding of procedural unconscionability, based on illegibility alone, was “arbitrary and speculative.” And, defendant maintains that even if the clause was procedurally unconscionable, it was not substantively unconscionable because the clause was not manifestly unfair or one-sided.

A. Unconscionability of Arbitration Agreements

“A petition to compel arbitration should be granted if the court determines that an agreement to arbitrate the controversy exists. ([] § 1281.2.) Fundamental to this inquiry is whether the parties have agreed to arbitrate their dispute. (See American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. 228, 233 . . . [it is an ‘overarching principle that arbitration is a matter of contract’].)” (Cortez v. Doty Bros. Equipment Company (2017) 15 Cal.App.5th 1, 11.)

“‘“[G]enerally applicable contract defenses, such as . . . unconscionability, may be applied to invalidate arbitration agreements without contravening” the FAA’ or California law. [Citations.] . . . [But] the doctrine’s application to arbitration agreements must rely on the same principles that govern all contracts. [Citation.] The degree of unfairness required for unconscionability must be as rigorous and demanding for arbitration clauses as for any other contract clause. [Citation.] [¶] . . . 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.”’ [Citation.] ‘The procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power. [Citations.] Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided.’ [Citation.]” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125 (Kho).)

“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. [Citations.] A contract’s substantive fairness ‘must be considered in light of any procedural unconscionability’ in its making. [Citation.] ‘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.’ [Citation.]” (Kho, supra, 8 Cal.5th at p. 125–126.)

“The burden of proving unconscionability rests upon the party asserting it. [Citations.] ‘Where . . . the evidence is not in conflict, we review the trial court’s denial of arbitration de novo.’ [Citation.]” (Kho, supra, 8 Cal.5th at p. 126.) Here, the evidence submitted on the motion to compel arbitration and the reconsideration motion was undisputed on the issues of procedural and substantive unconscionability. We will therefore review those issues de novo.

1. Procedural Unconscionability

“A procedural unconscionability analysis ‘begins with an inquiry into whether the contract is one of adhesion.’ [Citation.] 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.’ [Citations.] Arbitration contracts imposed as a condition of employment are typically adhesive [citations] . . . . The pertinent question, then, is whether circumstances of the contract’s formation created such oppression or surprise that closer scrutiny of its overall fairness is required.” (Kho, supra, 8 Cal.5th at p. 126.)

The evidence before the trial court on the motions shows that the compensation agreement was a standardized, preprinted form and that the only blank spaces to be filled in by the parties concerned the amount of plaintiff’s compensation and the formula by which it was to be calculated. All other terms were boilerplate. As plaintiff testified, the agreement was presented to him for signature with the blank spaces regarding compensation filled in by hand. Prior to execution of the agreement, there was no negotiation or discussion of any of its terms, including the clause requiring him to submit employment-related disputes to arbitration, i.e., the agreement was presented to him on a “take-it-or leave-it basis” by the party with superior bargaining power. Because the arbitration clause was imposed under these circumstances, as a condition of employment, it was clearly a contract of adhesion.

Moreover, as the trial court noted, each of the substantive terms of the agreement, including the arbitration clause, were in small font, making a thorough reading of the agreement challenging for the average employee. In addition, the arbitration clause was placed at the end of a three-page agreement in the same small font as all of the other enumerated paragraphs that preceded it; and it was not otherwise identified by its own subheading and it did not include a separate line for the signature or initials of the employee specifically acknowledging his or her assent to it. Based on the format of the agreement and the manner of its presentation, we conclude that it was procedurally unconscionable.

We do not agree, however, that the degree of procedural unconscionability here was as high as that found by the court in Kho, supra, 8 Cal.5th 111. In that case, the court focused on the arbitration clause itself, concluding that it was “a paragon of prolixity, only slightly more than a page long but written in an extremely small font. The single dense paragraph covering arbitration requires 51 lines. [T]he text is ‘visually impenetrable’ and ‘challenge[s] the limits of legibility.’” (Id. at p. 128.) The court also emphasized that “[t]he substance of the agreement is similarly opaque. The sentences are complex, filled with statutory references and legal jargon.” (Ibid.)

Based on those facts, the court in Kho, supra, 8 Cal.5th 111 determined that the trial court’s findings of both oppression and surprise were well supported by the record and made it “virtually impossible to conclude that [the employee] knew he was giving up his Berman rights [to an expedited administrative review of his claim for unpaid wages] and voluntarily agreeing to arbitration [of those claims] instead.” (Id. at p. 129.) The court therefore held that “given the substantial procedural unconscionability here, even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable.” (Id. at p. 130.)

Although the arbitration clause at issue here is written in small font, unlike the agreement in Kho, supra, 8 Cal.5th 111, it is relatively short—three sentences—and is not prolix or filled with statutory references and legal jargon, other than the two general references to the FAA and the CAA. Therefore, although a layperson, such as plaintiff, may have had difficulty in deciphering its ultimate legal import, the clause at least made clear that the employee’s right to have employment disputes decided in court by a jury was being relinquished in favor of binding arbitration. We therefore conclude that the degree of procedural unconscionability here is not as high as that present in the agreement in Kho.

2. Substantive Unconscionability

“Substantive unconscionability examines the fairness of a contract’s terms. This analysis ‘ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as “‘“overly harsh”’” [citation], ‘“unduly oppressive”’ [citation], ‘“so one-sided as to “shock the conscience”’” [citations], or “unfairly one-sided” [Citation.] All of these formulations point to the central idea that the unconscionability doctrine is concerned not with “a simple old-fashioned bad bargain” [citation], but with terms that are “unreasonably favorable to the more powerful party.”’ [Citation.] Unconscionable terms ‘“impair the integrity of the bargaining process or otherwise contravene the public interest or public policy”’ or attempt to impermissibly alter fundamental legal duties. [Citation.] They may include fine-print terms, unreasonably or unexpectedly harsh terms regarding price or other central aspects of the transaction, and terms that undermine the nondrafting party’s reasonable expectations. [Citations.] These examples are illustrative, not exhaustive. [¶] Substantive terms that, in the abstract, might not support an unconscionability finding take on greater weight when imposed by a procedure that is demonstrably oppressive.” (Kho, supra, 8 Cal.5th at p. 129–130.)

As noted, the arbitration clause here is relatively short and describes the parties’ respective arbitration obligations in general, but mutual, terms. None of those general obligations is manifestly one-sided or unfair. The first sentence of the clause makes clear that both parties are giving up their respective rights to have employment-related disputes, including discrimination and harassment claims, determined in court. In addition, both parties agree instead to have any such disputes resolved through an arbitration process governed by policies of the FAA and conducted under the procedures of the CAA and each party agrees to be bound by the result of that process. Although no specification is provided to the employee concerning those two statutory schemes, plaintiff does not contend that the incorporation of those policies and procedures necessarily favors the employer over the employee to any appreciable degree. Finally, the last sentence of the clause specifically references the parties’ mutual agreement to give up the right to jury trial in favor of a determination by a retired judge. That provision provides for a neutral decision-maker and cannot be fairly characterized as one-sided or patently unfair to the employee. Given the general but reciprocal terms by which the parties’ arbitration obligations are expressed, we conclude that the clause at issue is not so substantively unconscionable as to mandate nonenforcement.

Plaintiff argues that the arbitration clause is substantively unconscionable because it “does not deal with access,” i.e., it does not inform an employee how to file a demand for arbitration, nor does it explain to the employee how to find and engage the services of a retired judge. In addition, plaintiff contends that the silence of the agreement on affordability issues, such as the availability of statutory attorney fee remedies and the employee’s liability for additional costs unique to arbitration, renders it one-sided and fundamentally unfair to the employee.

The court in Kho, supra, 8 Cal.5th 111 also pointed to issues of accessibility and affordability in concluding that the arbitration clause there was substantively unconscionable, but it did so expressly with reference to the context of the rights and remedies available in that case, which required the employee to waive his right to the expedited Berman administrative procedure. “It is important to stress that the waiver of Berman procedures does not, in itself, render an arbitration agreement unconscionable. However, a substantive unconscionability analysis is sensitive to ‘the context of the rights and remedies that otherwise would have been available to the parties.’ [Citation.] We must examine both the features of dispute resolution adopted as well as the features eliminated. [Citation.]” (Id. at p. 130.)

Here, plaintiff makes no effort to compare the dispute resolution procedure described in the arbitration clause to any alternative administrative or other procedure that he would be waiving in favor of arbitration. Unlike the Berman procedure at issue in Kho, supra, 8 Cal.5th 111, the arbitration procedure described in plaintiff’s agreement is presented as an alternative, not to any administrative forum, but rather in exchange for the waiver of the employee’s jury trial rights. Plaintiff has not demonstrated that required arbitration is less accessible or affordable than a civil action filed in the Superior Court. To the contrary, the strong policies favoring arbitration in California are based, in part, on the presumption that private arbitrations are more expeditious and less costly than civil litigation in the trial courts: “California law strongly favors arbitration. Through the comprehensive provisions of the [CAA] ([] § 1280 et seq.), ‘the Legislature has expressed a “strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.”’ (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 . . . .) As with the FAA (9 U.S.C. § 1 et seq.), California law establishes ‘a presumption in favor of arbitrability.’ (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971 . . . .)” (Kho, supra, 8 Cal.5th at p. 125.)

Moreover, the silence of the agreement on the availability in arbitration of FEHA-mandated attorney fee and cost recoveries and on the employee’s responsibility for burdensome costs unique to arbitration does not render it substantively unconscionable. In Little v. Auto Steigler, Inc. (2003) 29 Cal.4th 1064, the Supreme Court confirmed that agreements to arbitrate claims for wrongful termination in violation of public policy should be implicitly construed to include the substantive remedies available for such claims under California law, including punitive damages, and that section 1284.2’s default provision concerning cost sharing does not compel a contrary conclusion. (Little v. Auto Steigler, Inc., supra, 29 Cal.4th at pp. 1080–1081.) For similar reasons, the court also concluded that a trial court compelling arbitration of nonwaivable statutory rights should require the employer to pay “‘all types of costs that are unique to arbitration.’” (Id. at p. 1085.)

Thus, the statutory attorney fee and cost remedies available under FEHA, like the punitive damage remedy available for wrongful termination, would be read into plaintiff’s agreement by implication. Similarly, any unique costs incurred as a result of the required arbitration here would be the responsibility of the employer, not the employee, regardless of the silence of the arbitration clause on that issue. (See Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 719 [in cases where employer requires employee to arbitrate statutory claims, the agreement must be interpreted to require employer to pay any unusual costs of arbitration, such as arbitrator’s fees].)

B. Clear and Unmistakable Waiver

Plaintiff contends that even if the arbitration clause is not substantively unconscionable, it is nevertheless unenforceable because it fails to pass muster under the so-called “‘clear and unmistakable’” waiver test. According to plaintiff, when an arbitration clause purports to cover a dispute involving an employee’s nonwaivable statutory rights, the language of the clause must clearly and unmistakably waive the employee’s right to a judicial forum for the vindication of those rights.

Plaintiff supports this assertion by citations to Vasserman v. Henry Mayo Newhall Memorial Hospital (2017) 8 Cal.App.5th 236, Volpei v. County of Ventura (2013) 221 Cal.App.4th 391, and Vasquez v. Superior Court (2000) 80 Cal.App.4th 430, each of which held that when a union seeks in a collective bargaining agreement (CBA) to waive its members’ rights to a judicial forum for the resolution of disputes involving members’ individual statutory rights, it must do so explicitly, i.e., in clear and unmistakable language. Here, plaintiff entered into the compensation agreement individually; there is no allegation that his right to a judicial forum was bargained away by a union on his behalf as part of a CBA. Thus, the clear and unmistakable test cannot be relied upon as a basis to defeat the presumption of arbitrability that otherwise applies to plaintiff’s arbitration clause under both state and federal law dealing with individual arbitration agreements.

IV. DISPOSITION

The orders denying the motions to compel arbitration and for reconsideration are reversed and the matter is remanded with instructions to enter a new order compelling arbitration and staying the action pending completion of the arbitration. Defendant is entitled to recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

KIM, J.

We concur:

BAKER, Acting P. J.

MOOR, J.