Case Name:   Justin Scheiber vs. Shoe Palace Corporation.

Case No.:       1-13-CV-254589

 

This is a putative wage and hour class action by plaintiff Justin Scheiber (“Plaintiff”) on behalf of himself and other individuals employed by defendant Shoe Palace Corporation (“Defendant”) as non-exempt retail store employees.  Plaintiff alleges that as a result of Defendant’s policy of requiring employees to wait and be “checked” or “patted down” by a supervisor/manager before being fully released from work at the end of each shift or upon leaving the store for meal breaks, Plaintiff and the putative class were denied full compensation, full 30 minute meal breaks, and were not provided with accurate wage statements.[1]  Plaintiff further alleges that wage statements provided to him and the putative class failed to identify the name and address of the legal entity that is the employer and/or the last four digits of an employee’s social security number, as required by law.[2]

 

The putative class is defined as “all current and former non-exempt retail store employees of DEFENDANTS who worked in California during the period from October 14, 2009 to the present, including the following sub-classes: [¶] (a) All past and current California non-exempt retail store employees of Defendants who received an itemized wage statement at any time between October 14, 2012 through the present.”[3]

 

The operative Complaint, filed October 15, 2013, asserts six causes of action for: (1) failure to pay minimum wages; (2) failure to pay overtime wages; (3) failure to provide meal breaks; (4) violation of California Labor Code section 226; (5) unfair business practices (violation of California Business & Professions Code section 17200 et seq.); and (6) violation of California Labor Code section 2698 et seq. (the “Private Attorney General Act” or “PAGA”).

 

1. I.                Discussion

 

Defendant now moves to dismiss, or in the alternative, stay proceedings and compel arbitration.  Defendant argues that Plaintiff is bound to arbitrate the claims at issue by Defendant’s Employee Dispute Resolution Plan (“EDR”), implemented on July 1, 2013.[4]  Defendant submits an Acknowledgement and Agreement form signed by Plaintiff and confirming that he had the opportunity to review the EDR and agreed to submit any employment-related disputes to individual binding arbitration.[5]  Defendant argues the EDR explicitly applies to wage and hour claims and prohibits class or representative arbitration of covered disputes.

 

In opposition, Plaintiff argues: (1) the EDR is optional, not mandatory; (2) the EDR is illusory because Defendant can amend or terminate it any time; (3) the Federal Arbitration Act (“FAA”) is not applicable because Defendant is a California corporation and Plaintiff only worked in California, and therefore the EDR does not involve interstate commerce; (4) even under the FAA, state law must be applied to determine whether an arbitration agreement is enforceable, and (a) the EDR is procedurally unconscionable because it is a contract of adhesion by a party with superior bargaining power given on a take-it-or-leave-it basis; and (b) the EDR is substantively unconscionable because many of its terms are one-sided in favor of Defendant; (5) the Labor Code class claims are not arbitrable as a matter of law because Plaintiff’s allegations do not involve interstate commerce; (6) Plaintiff’s PAGA claim is not arbitrable as a matter of law because it is not an individual claim but a representative action brought on behalf of the state; and (7) under Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, changes to an arbitration agreement cannot apply to existing claims, and thus, any claims that arose prior to the EDR’s effective date cannot be compelled to arbitration.

 

1. A.    Legal Standards – Motion to Compel Arbitration

 

“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.”  (Cal.Code Civ. Proc., § 1281.)

 

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] (a) The right to compel arbitration has been waived by the petitioner; or [¶] (b) Grounds exist for the revocation of the agreement.”  (Cal. Code Civ. Proc., §  1281.2, subds. (a), (b).)

“[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable.  Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.  If the party opposing the petition raises a defense to enforcement … that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense. [Citation.]”  (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.)

 

1. B.    Agreement to Arbitrate

 

Defendant demonstrates that an agreement to arbitrate exists.  Defendant provides a copy of the EDR.  On its title page, the EDR states that it is “the exclusive means of resolving employment-related disputes.  All persons who apply for employment, accept employment, continue working for, or accept any promotions, pay increase, bonuses, or any other benefits of employment from Shoe Palace Corporation agree to resolve all such disputes through the binding arbitration process described herein instead of through the court system.”  In the section entitled “Summary Explanation of the Shoe Palace Corporation Employee Dispute Resolution Plan,” the EDR states that “[i]nstead of juries, courts or administrative bodies, the EDR Plan uses arbitration, provided through Judicial Arbitration and Meditation Services (‘JAMS’) to resolve workplace disputes that have not been resolved internally.”[6]  “If you cannot resolve a dispute covered by the EDR Plan through any of the foregoing internal means, you may utilize the external processes of arbitration provided by the EDR Plan.”[7]  “If the dispute is covered by the EDR Plan and is not resolved internally, you may request arbitration.”[8]

 

In the main portion of the EDR, it defines a covered “dispute” as “a past, present or future legal claim between persons bound by the EDR Plan which relates to, arises from, concerns, or involves in any way: … 2. The employment of an Employee, including the application for and the initiation, terms, conditions, or termination of such employment; [¶]  3. Any other matter arising from or concerning the employment relationship between the Employee and the Company including, by way of example and without limitation: [¶] • Compensation, bonus, and wage and hour claims under federal, state or local statutes, ordinances, regulations, orders or common law, including the Fair Labor Standards Act[.]”[9]  Here, all of Plaintiff’s causes of action relate to wages and work conditions arising out of his employment with Defendant.  Thus, the action falls within the EDR’s definition of “dispute.”

 

The EDR goes on to state that it “is the exclusive, final and binding means by which Disputes can be resolved.  The only method by which a Party can seek relief in a court of law is in accordance with the provisions of the Act.  Except as provided herein, the Parties shall have no right to litigate a Dispute in any other forum.  Consequently, the institution of a proceeding under this EDR Plan shall be a condition precedent to the initiation of any legal action by an Employee against the Company and any such legal action shall be limited to those actions available under the Act.”[10]  “The Parties to the EDR Plan waive any right they may otherwise have to pursue, file, participate in, or be represented in Disputes brought in any court on a class basis, consolidated basis or as a collective action or representative action.  This waiver applies to any Disputes that are covered by the EDR Plan to the fullest extent such waiver is permitted by law.”[11]  “All Disputes subject to the EDR Plan must be arbitrated as individual claims.  The EDR Plan specifically prohibits, to the fullest extent permitted by law, the arbitration of any Dispute on a class basis, consolidated basis, or as a collective action or representative action, and the arbitrator shall have no authority or jurisdiction to enter an award or otherwise provide relief on a class, consolidated, collective or representative basis.”[12]  Thus, by agreeing to the EDR, Plaintiff expressly waives his right to pursue a class or representative action or arbitration.

 

1.                                                     i.     The EDR is not Optional

 

In arguing the EDR is optional, Plaintiff points to language in the Summary portion of the EDR stating: “If the dispute is covered by the EDR Plan and is not resolved internally, you may request arbitration.”[13]  Plaintiff argues the word “may” suggests the EDR is optional, and any ambiguity should be interpreted in favor of the non-drafting party.  Plaintiff submits his declaration in which he states, “it was my understanding that arbitration was an option I could choose if a dispute arose regarding my employment, and that arbitration was not mandatory.”[14]  However, reading the EDR as a whole (see Cal. Civ. Code, § 1641 [effect given to every part of contract]), there is no real doubt that arbitration is intended to be the exclusive means to resolve covered disputes, with certain enumerated exceptions not applicable here (e.g., claims for workers’ compensation and unemployment, charges of discrimination with civil rights agencies, claims under the National Labor Relations Act).  The phrase “you may request arbitration” is more reasonably read as suggesting arbitration for employees who are not satisfied with attempts at internal resolution.[15]

 

1.                                                   ii.     The EDR’s Modification/Termination Provision is Not Per Se Illusory

 

Plaintiff argues the EDR is illusory because it gives Defendant the right to modify the EDR’s terms at any time.  “An agreement to arbitrate is illusory if … the employer can unilaterally modify the handbook.  [Citation.]”  (Sparks v. Vista Del Mar Child & Family Services (2012) 207 Cal.App.4th 1511, 1523.)  However, “[t]he implied covenant of good faith prevents one contracting party from ‘unfairly frustrating the other party’s right to receive the benefits of the agreement actually made.’ [Citations.]  Thus, it has long been the rule that a provision in an agreement permitting one party to modify contract terms does not, standing alone, render a contract illusory because the party with that authority may not change the agreement in such a manner as to frustrate the purpose of the contract. [Citations.]”  (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 706.)  “ ‘ “[W]here the contract specifies performance the fact that one party reserves the power to vary it is not fatal if the exercise of the power is subject to prescribed or implied limitations such as the duty to exercise it in good faith and in accordance with fair dealings.” ’ [Citations.]”  (24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, 1214.)

 

Here, the EDR’s “Amendment and Termination” provision states:

 

The EDR Plan may be amended or terminated at any time.  However, no amendment or termination shall apply to a Dispute of which the Company had actual notice, through the filing with JAMS of a Request for Arbitration, on the date of amendment or termination.  No amendment or termination shall be effective unless approved in writing by a Vice-President or higher official of the Company and until thirty (30) days after written notice of such amendment or termination is provided to Employee as defined in Section 2.F. above.[16]

 

Thus, Defendant’s power to modify the EDR is subject to express limitations in which amendments would not apply to disputes that are actively being arbitrated.  Furthermore, amendments/terminations must also be approved by a high-ranking officer, and employees must be given 30 days’ notice.  Additionally, the law implies a duty upon Defendant to exercise its ability to amend or terminate the EDR in good faith so as not to frustrate the purpose of the contract.  These express and implied limitations suffice to preclude a finding that the EDR is an illusory contract due to Defendant’s unilateral ability to amend/terminate it.

 

1.                                                  iii.     Avery Does Not Control

 

Plaintiff cites Avery, supra, for the position that changes to an arbitration agreement may not be applied to existing claims.  In Avery, the appellate court held that “an employer may not make unilateral changes to an arbitration agreement that apply retroactively to ‘accrued or known’ claims because doing so would unreasonably interfere with the employee’s expectations regarding how the agreement applied to those claims.  [Citation.]”  (Avery, supra, 218 Cal.App.4th at p. 61.)  Plaintiff argues that because he did not sign the EDR until August 29, 2013, but his employment began in March 2013 and his class allegations include claims that arose prior to the EDR coming into effect, any claims that arose prior to the EDR’s effective date cannot be compelled to arbitration.

 

However, Avery deals with unilateral changes to an existing arbitration agreement that apply retroactively to all accrued or known claims.  Here, the record suggests the EDR was a new agreement that was first implemented by Defendant in July 2013,[17] not a unilateral change to an existing arbitration agreement that is being applied retroactively and interfering with Plaintiff’s expectations regarding how the prior agreement applies to his accrued or known claims.

 

By its terms, the EDR makes clear that covered disputes include “past” claims,[18] and Plaintiff’s acknowledgment form evidences consent to the EDR’s terms.

 

1. C.    The FAA Applies

 

Plaintiff argues the FAA is not applicable because Defendant is a California corporation and Plaintiff only worked in California.

 

“An individual arbitration agreement also does not apply to an action to enforce statutes governing collection of unpaid wages, which ‘may be maintained without regard to the existence of any private agreement to arbitrate. …’ ([Cal. Lab. Code] § 229.)  The intent is to assure a judicial forum where there exists a dispute as to wages, notwithstanding the strong public policy favoring arbitration. [Citations.]  An exception to the general rule occurs when there is federal preemption by the FAA, as applied to contracts evidencing interstate commerce. [Citation.]”  (Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1208.)

 

“A written provision in . . . a contract evidencing a transaction involving [interstate] commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’  (9 U.S.C.A. § 2.)    The phrase “evidencing a transaction” means the transaction must turn out, in fact, to involve interstate commerce, and the phrase “involving commerce” is functionally equivalent to “affecting commerce” and invokes Congress’s full powers of commerce.  (See Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 272-274.)

 

The record shows that Defendant’s corporate headquarters is in San Jose, California, but it has operations in California, Nevada, Arizona, Texas and New Mexico.[19]  Defendant submits that it purchases its merchandise and supplies from vendors located throughout the United States, and retail stores often receive shipments directly from manufacturers in other states.[20]  Regarding the Gilroy outlet where Plaintiff was employed, Defendant submits that the location is unique in that it is right off a major interstate and is a tourist destination.[21]  Thus, the EDR between Plaintiff and Defendant is a contract between a business that engages in interstate commerce and an individual who was employed in a location that engaged in interstate commerce.  Plaintiff’s employment facilitated Defendant’s transactions involving interstate commerce, and the EDR concerns disputes over wages and working conditions at this place of employment.  Under these circumstances, the Court finds that Plaintiff’s employment-related contract with Defendant is a sufficient transaction involving or affecting interstate commerce such that the FAA applies.

 

1. D.    Unconscionability

 

“[A]fter [AT&T v. Concepcion (2011) 131 S.Ct. 1740], unconscionability remains a valid defense to a petition to compel arbitration. . . . Although courts may not rewrite agreements and impose terms to which neither party has agreed, it has long been the proper role of courts enforcing the common law to ensure that the terms of a bargain are not unreasonably harsh, oppressive, or one-sided.  [Citations.]”  (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1142-1143.)  “What is new is that Concepcion clarifies the limits the FAA places on state unconscionability rules as they pertain to arbitration agreements.  It is well established that such rules must not facially discriminate against arbitration and must be enforced evenhandedly.  Concepcion goes further to make clear that such rules, even when facially nondiscriminatory, must not disfavor arbitration as applied by imposing procedural requirements that ‘interfere[] with fundamental attributes of arbitration,’ especially its ‘ “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” [Citation.]’ . . . .  Importantly, state-law rules that do not ‘interfere[] with fundamental attributes of arbitration’ [citation] do not implicate Concepcion’s limits on state unconscionability rules.”  (Sonic-Calabasas, supra, 57 Cal.4th at p. 1143.)

 

“ ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.’  [Citation.]  But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’  [Citations.]  In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”  (Armendariz v. Foundation Health Psychcare Services (2000) 24 Cal.4th 83, 114.)

 

“ ‘[T]he party opposing arbitration … ha[s] the burden of proving that the arbitration provision [is] unconscionable. [Citation.]’”  (Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1123.)

 

1.                                                     i.     Procedural Unconscionability

 

“Procedural unconscionability” concerns the manner in which the contract was negotiated and the parties’ circumstances at that time.  It focuses on the factors of oppression or surprise.  (See Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App. 4th 1322, 1329.)

 

Regarding oppression, “ ‘[w]hen the weaker party is presented the clause and told to “take it or leave it” without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.’  [Citations.]”  (McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 91.)  Here, because the EDR arises in the context of Plaintiff’s employment, there is an inherent disparity in bargaining power between Plaintiff and Defendant.  In his declaration, Plaintiff submits that he “was not told that the terms of the EDR plan could be negotiated.  Rather, I was told that I was required to sign the EDR plan in order to continue to be employed.”[22]  To dispute this, Defendant submits the Supplemental Declaration of David Tannous, Director of Retail Operations for Defendant, who states that in August 2013, he introduced the EDR to Defendant’s employees at the Gilroy outlet location, including Plaintiff, he held meetings with employees, went through the EDR page by page, and explained that it was a new policy being implemented by Defendant and that they should take time to read and understand it.[23]  Tannous further states there were no questions, and no one, including Plaintiff ever asked if any of the provisions of the EDR could be negotiated.[24]  Tannous further states that he never forced Plaintiff to sign the EDR under threat of termination or tell him that the terms were non-negotiable.[25]

 

Notably, Tannous does not state that the EDR’s terms were, in fact, negotiable, only that he never said they were non-negotiable, and Plaintiff never asked if they were negotiable.  The absence of questions at the August 2013 meeting is not reasonably construed as a lack of desire to negotiate the EDR’s terms.  The Acknowledgement and Agreement specifically states that the employee agrees to be bound by the EDR “as a condition of my continued employment.”[26]  The record is sufficient to conclude that some degree of procedural unconscionability is present.

 

“The second component of procedural unconscionability encompasses an aspect of surprise, with the terms to which the party supposedly agreed being hidden in a prolix printed form drafted by the party seeking to enforce them.”  (Kinney, supra, 70 Cal.App.4th at pp. 1329-1330.)  Although Plaintiff states in his declaration that he was “suddenly inform[ed]…of the existence of an arbitration policy” and told to sign it,[27] Tannous disputes the manner in which the EDR was introduced and explained to the employees at Plaintiff’s store location.[28]  Furthermore, the EDR and its provisions regarding arbitration and class waiver were not hidden in prolix printed forms.  The Acknowledgement and Agreement signed by Plaintiff makes very clear that he is waiving his right to have covered disputes resolved in a court case or jury trial.[29]

 

The Court finds that while there was no surprise, there is a moderate degree of procedural unconscionablity given that Plaintiff was in a weaker bargaining position and had to accept the EDR as a condition of continued employment without an opportunity for meaningful negotiation.

 

1.                                                   ii.     Substantive Unconscionability

 

Substantive unconscionability focuses on the terms of the agreement and whether those terms are “overly harsh” or “one-sided” as to “shock the conscience.”  (See Armendariz, supra, 24 Cal.4th at p. 114; Pardee Construction Co. v. Superior Court (2002) 100 Cal.App.4th 1081, 1090.)  In assessing substantive unconscionability, the “paramount consideration” is mutuality of the obligation to arbitrate.  (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1287.)

 

California law requires a “modicum of bilaterality” in an arbitration agreement.  “Given the disadvantages that may exist for plaintiffs arbitrating disputes, it is unfairly one-sided for an employer with superior bargaining power to impose arbitration on the employee as plaintiff but not to accept such limitations when it seeks to prosecute a claim against the employee, without at least some reasonable justification for such one-sidedness based on ‘business realities.’  As has been recognized ‘ “unconscionability turns not only on a ‘one-sided’ result, but also on an absence of ‘justification’ for it.” ’ [Citation.]  If the arbitration system established by the employer is indeed fair, then the employer as well as the employee should be willing to submit claims to arbitration.  Without reasonable justification for this lack of mutuality, arbitration appears less as a forum for neutral dispute resolution and more as a means of maximizing employer advantage.  Arbitration was not intended for this purpose.  [Citation.]”  (Armendariz, supra, 24 Cal.4th at pp. 117-118.)

 

Here, Plaintiff points to four provisions in the EDR which he claims are unconscionable: (1) only employees are required to resolve covered disputes with his/her manager or supervisor, while employers are not; (2) the EDR specifically excludes claims for trade secret violations and breach of non-competition agreements, which only favors employers; (3) the class/collective/representative action waiver is a direct benefit to employers and a detriment to employees; and (4) the EDR requires employees to pay $300 to Defendant as a processing fee before arbitration can be commenced.

 

Most of these points are not well-taken.  Regarding the first point, there is no explicit requirement in the EDR that an employee resolve a dispute internally before seeking arbitration.  Plaintiff cites to an introductory page of the EDR which states: “If you have a dispute, you should first talk to your manager or supervisor.”[30]  However, this is reasonably read as a mere suggestion for informal dispute resolution.  Plaintiff points to no such requirement in the actual body of the EDR.  Rather, in order to initiate arbitration proceedings, the EDR simply requires employees to file a written Request for Arbitration with JAMS (along with a $300.00 processing fee) within 90 days of the event giving rise to the dispute.[31]

 

Plaintiff’s second point has some merit.  Most trade secret and non-competition claims will be brought only by an employer.  Thus, the exclusion of these claims from the scope of arbitration gives only Defendant the benefit of the ability to sue in court.

 

Plaintiff’s third point that the EDR’s class action waiver is a one-sided benefit to employers and is therefore substantively unconscionable is no longer viable after Concepcion.  Under Concepcion, to allow for classwide arbitration despite a contractual waiver would frustrate the FAA’s purpose that arbitration agreements be enforced according to their terms so as to facilitate streamlined and expeditious proceedings.  (However, see discussion below regarding PAGA claims.)

 

Finally, the $300 processing fee is not so unreasonable as to be substantively unconscionable.  “ ‘[W]hen an employer imposes mandatory arbitration as a condition of employment, the arbitration agreement or arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if her or she were free to bring the action in court.’ [Citations.]”  (McManus, supra, 109 Cal.App.4th at p. 93, original italics.)  Here, the one-time $300 processing fee is less than the filing fees for an action in court.  Plaintiff characterizes this as a payment “to Defendant” but in actuality, the EDR requires the payment to be submitted along with the Request for Arbitration to JAMS.[32]  Furthermore, beyond this one-time fee, Defendant “will pay all other administrative costs, including the costs of the arbitrator.”[33]  Although employees are responsible for their attorney’s fees, this is a type expense that they would incur in a court action.

 

1. E.    Labor Code and PAGA Claims

 

In Discover Bank v. Superior Court (2005) 36 Cal.4th 148, the California Supreme Court held that when a class action waiver “is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’  [Civ. Code, § 1668.]  Under these circumstances, such waivers are unconscionable under California law and should not be enforced.”  (Discover Bank, supra, 36 Cal.4th at pp. 162-163.)

 

In Concepcion, supra, the U.S. Supreme Court invalidated the Discover Bank rule on the grounds that it was an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA to ensure that private arbitration agreements are enforced according to their terms so as to facilitate streamlined proceedings.  (Concepcion, supra, 131 S.Ct. at p. 1752.)  Concepcion found that the Discover Bank rule “interferes with arbitration” because “it allows any party to a consumer contract to demand it ex post.  The rule is limited to adhesion contracts, [citation], but the times in which consumer contracts were anything other than adhesive are long past.  [Citations.]  The rule also requires that damages be predictably small, and that the consumer allege a scheme to cheat consumers.  [Citation.]  The former requirement, however, is toothless and malleable…, and the latter has no limiting effect, as all that is required is an allegation.”  (Concepcion, supra, 131 S.Ct. at p. 1750.)  However, Concepcion noted that the FAA’s “saving clause preserves generally applicable contract defenses” such as unconscionability.  (Id. at p. 1747.)

 

In Gentry v. Superior Court (2007) 42 Cal.4th 443, the California Supreme Court held that class action waivers in an employment contract could operate as exculpatory clauses against public policy as set forth in California Civil Code section 1668 and interfere with employees’ ability to vindicate their unwaivable statutory rights to overtime pay.  “[W]hen it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class action waiver, the trial court must consider the factors discussed above: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.  If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class action waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.”  (Gentry, supra, 42 Cal.4th at pp. 463-464.)

 

In Brown v. Ralphs Grocery (2011) 197 Cal.App.4th 489, which involved a class and representative action under the PAGA, the appellate court held that a PAGA claim was fundamentally a law enforcement action designed to protect the public, and thus, it did not frustrate the purposes of the FAA.

 

Recently in Iskanian v. CLS Transportation Los Angeles, LLC, 2014 Cal. LEXIS 4318, the California Supreme Court held that “[u]nder the logic of Conception, the FAA preempts Gentry’s rule against employment class waivers.”  (Iskanian, supra, at *14.)  As discussed above, Defendant sufficiently demonstrates that the FAA applies to the contract at issue.

 

However, the Iskanian court held that under Civil Code sections 1668 and 3513, an employee’s right to bring a PAGA claim is unwaivable, that an employment agreement which compels the waiver of representative claims under the PAGA is contrary to public policy and unenforceable as a matter of law, and that a state-law rule against PAGA waivers does not frustrate the FAA’s objectives.  (See Iskanian, supra, at *55-56.)  Noting that a representative PAGA action is fundamentally a law enforcement action designed to protect the public and not to benefit private parties, the California Supreme Court held that “[r]epresentative actions under the PAGA, unlike class action suits for damages, do not displace the bilateral arbitration of private disputes between employers and employees over their respective rights and obligations toward each other.  Instead, they directly enforce the state’s interest in penalizing and deterring employers who violate California’s labor laws.”  (Iskanian, supra, at *62, original italics.)

 

Accordingly, Plaintiff’s right to bring a PAGA claim is unwaivable, and the EDR’s waiver of representative claims in court or arbitration is not enforceable.

 

Thus, the record as a whole demonstrates a moderate degree of procedural unconscionability, minimal substantive unconscionability with regard to trade secrets/non-competition claims that are not at issue here, and a PAGA waiver that has very recently been held to be unenforceable.  In the Court’s view, with the exception of the PAGA waiver, the EDR does not lack a “modicum of bilaterality” so as to be enforceable.  The remaining question, then, is whether the PAGA waiver is severable.

 

1. F.     Severability

 

“The basic principles of severability that emerge from Civil Code section 1599 and the case law of illegal contracts appear fully applicable to the doctrine of unconscionability.  Courts are to look to the various purposes of the contract.  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.)

 

Regarding severability, the EDR states:  “The invalidity or unenforceability of any provision herein shall not affect the application of any other provision. . . . [I]n the event a court of competent jurisdiction determines that the Parties’ waiver of their right to file, participate in, or be represented in class actions, consolidated actions, collective actions, or representative actions brought in court…is unenforceable, then that waiver shall be severed, and the Parties may pursue, participate in, or be represented in class actions, consolidated actions, collective actions, or representative actions in court as though such waiver did not exist and notwithstanding that the claims, if brought on an individual basis, would otherwise be subject to the EDR Plan.  Under no circumstances may the EDR Plan be construed or reformed to permit class actions, consolidated actions, collective actions, or representative actions to proceed under the EDR Plan.”[34]

 

Under the EDR’s severability provision, Plaintiff’s PAGA claim would remain in court, while Plaintiff’s individual claims would proceed to arbitration.  However, it is very likely that arbitration of Plaintiff’s individual claims for overtime wages, minimum wages, and meal and rest break violations will be duplicative of the litigation of his PAGA claim, which seeks recovery of all applicable civil penalties for Defendant’s violation of Labor Code sections 226 subdivision (a) [accurated itemized wage statements], 226.7 [meal and rest periods], 510 [definition of “day’s work”], 1194 [recovery of unpaid balance of minimum wage or overtime compensation], and 1197 [minimum wage requirement].[35]  The parallel proceedings would likely involve the same issues and evidence regarding Defendant’s pat down policy.

 

Iskanian left open for remand various questions on how to deal with a case where individual damages claims must be arbitrated, but PAGA waivers are found to be unenforceable.  “This raises a number of questions: (1) Will the parties agree on a single forum for resolving the PAGA claim and other claims? (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to Code of Civil Procedure section 1281.2?  [Citation.]”  (Iskanian, supra, at *72.)  Code of Civil Procedure section 1281.2 provides in relevant part: “If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies.”

 

Under this provision, the Court exercises its discretion to stay the arbitration of Plaintiff’s individual claims pending litigation of the PAGA claim.  Accordingly, Defendant’s alternative motion to compel arbitration is GRANTED IN PART as to Plaintiffs’ individual claims, but arbitration is immediately stayed pending litigation of Plaintiff’s PAGA claim.

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