Opinion
B324634
05-01-2024
MARTIN PIKE et al., Plaintiffs and Respondents, v. TRUE BULLION, LLC, et al., Defendants and Appellants.
Lewis Brisbois Bisgaard &Smith, Corinne C. Bertsche, Lann G. McIntyre, and Steven Gatley for Defendants and Appellants. Vardapour Law Group and Patrick Vardapour for Plaintiffs and Respondents.
NOT TO BE PUBLISHED
APPEAL from orders of the Superior Court of Los Angeles County Nos. 21VECV00816, 21VECV00817, Valerie Salkin, Judge. Affirmed.
Lewis Brisbois Bisgaard &Smith, Corinne C. Bertsche, Lann G. McIntyre, and Steven Gatley for Defendants and Appellants.
Vardapour Law Group and Patrick Vardapour for Plaintiffs and Respondents.
EDMON, P. J.
Defendants True Bullion LLC doing business as Gold Silver International Exchange (GSIE), Subculture Services LLC (Subculture), Anthony Allen Anderson, and Agnes Viacrucis appeal from the trial court's orders denying motions to compel arbitration based on three arbitration agreements purportedly signed by plaintiffs Ethan Michael and Martin Pike. Defendants contend the court erred in concluding two of the arbitration agreements are unconscionable and that the third arbitration agreement was not properly authenticated. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
I. Plaintiffs' Lawsuits
GSIE markets, sells, and distributes coins and precious metals. GSIE hired Michael in December 2018, and Pike in May 2019 as precious metals specialists. During plaintiffs' employment, in 2019, GSIE entered into a staffing agreement with Express Services, Inc. In the motions to compel arbitration at issue on appeal, defendants asserted that through the staffing agreement, plaintiffs became employed by Express Services to perform work for GSIE. In March 2021, plaintiffs' employment was terminated.
In June 2021, Michael and Pike each filed complaints against GSIE, Subculture, Anderson, and Viacrucis, alleging 12 employment-related causes of action. Plaintiffs claimed in part that defendants misclassified them as independent contractors when they were in fact employees, withheld wages and promised sales commissions, failed to provide accurate wage statements, and failed to give plaintiffs rest periods.
Subculture, an affiliated company of GSIE, provides marketing for GSIE's products and generates leads for its salespeople. Anderson is GSIE's owner and sole controlling member. Viacrucis is GSIE's chief accounting officer.
II. Motions to Compel Arbitration: the ICA and the NDA
In November 2021, defendants filed motions to compel Michael and Pike to arbitrate their claims. In support of the motion, defendants submitted copies of two agreements with Michael's and Pike's electronic signatures: (1) the GSIE independent contractor agreement (the ICA) and (2) the non-disclosure/non-circumvention/non-competition agreement (the NDA). The nine-page ICA and the four-page NDA contain many of the same terms, including the following.
• An arbitration clause that provides: "The Parties agree that unless specifically provided to the contrary in this Agreement, any Grievance shall be resolved exclusively by binding Arbitration."
• A prevailing party clause stating that in the event of arbitration or lawsuit, the prevailing party would be awarded their attorney fees and costs.
• An extraordinary relief provision which permits GSIE to seek temporary injunctive relief in court if plaintiffs violate the agreements, including situations where plaintiffs poach customers from GSIE.
Unique to the ICA are two paragraphs that address modifications to the agreement. ICA paragraph 7 provides that if a term of the ICA "controverts the express, or in the opinion of GSIE's counsel, the intended provision of any applicable regulatory authority or court decision, then said term shall be governed by said regulatory provision or decision and the subject term of this Agreement shall be deemed automatically amended or deleted as the case pertains." ICA paragraph 11 states that GSIE had the sole authority to modify the agreement by written notice to plaintiffs.
In support of the motion, defendants filed a declaration by Anderson, who oversees GSIE's hiring, manages sales personnel, and negotiates agreements with new salespeople. Anderson attested that Michael's and Pike's NDA and ICA were electronically executed several days after each plaintiff was hired.
Opposition. In response, plaintiffs denied signing the ICA and NDA, and asserted those agreements are unconscionable and thus unenforceable. Plaintiffs argued there was substantive unconscionability because "the contracts here burden plaintiffs with all fees and costs if they lose, even ones employees losing civil suits should not incur/pay such as the employer's attorney fees and costs and the arbitrator's fees." Plaintiffs asserted the agreements lack mutuality because they provide GSIE a right to file a lawsuit for violations of the agreement but force plaintiffs to arbitrate. Plaintiffs contended, "The contracts also deprive plaintiffs of statutory rights for a hearing before the Labor Commissioner and bar private attorney general claims."
As to procedural unconscionability, plaintiffs stated in their respective declarations that "[d]uring our relationship, defendants required me to sign contracts on the spot, without the opportunity to negotiate or modify them, without the aid of an attorney, and on a take-it-or-leave-it basis."
Reply. In reply, defendants argued in part that plaintiffs' signatures on the ICA and NDA were authentic and offered evidence of how plaintiffs signed each agreement. As to substantive unconscionability, defendants asserted the attorney fees shifting provision is valid because plaintiffs were independent contractors and the arbitrator could choose not to apply that provision. Defendants contended the agreements are mutual because "the obligation to arbitrate is broad and mutual" and the "ability to seek injunctive relief to stop detrimental conduct does not render an arbitration agreement either not mutual or unconscionable." Defendants also argued that there is no procedural unconscionability because each plaintiff "received the Arbitration Agreement by email, received no pressure to sign the agreement immediately, and was even told to return it when he can."
We do not discuss in detail the evidence showing the authenticity of plaintiffs' signatures on the ICA and NDA because we base our affirmance on the unconscionability of those agreements.
Defendants' evidence showed that the DocuSign emails to plaintiffs included a message from Anderson stating, "Please DocuSign our boilerplate agreements as soon as you get a chance. Let me know if you have any questions. All The Best, AAA." In addition, the emails generated by DocuSign stated, "Questions about the Document? If you need to modify the document or have questions about the details in the document, please reach out to the sender by emailing them directly."
III. Supplemental Briefing: the Express Agreement
While the motions were pending, defendants subpoenaed an additional arbitration agreement from Express Services (the staffing agency GSIE contracted with in 2019). In January 2022, defendants obtained that third arbitration agreement from Express Services. At a March 2022 hearing, defense counsel represented to the court that defendants intended to file "a supplemental brief based on third party arbitration agreements" between plaintiffs and Express Services. The court ordered defense counsel to immediately provide that arbitration agreement to plaintiffs. The court limited the supplemental briefs to one five-page brief per party with no reply from defendants.
Defendants' Supplemental Brief. In April 2022, defendants filed a supplemental brief in each plaintiff's case, arguing plaintiffs were also bound to arbitrate their claims based on a third arbitration agreement between plaintiffs and staffing agency Express Services. In support, defendants submitted defense counsel Graeme Sharpe's declaration, which attached copies of a purported arbitration agreement between plaintiffs and Express Services (the Express agreement), and a staffing agreement between GSIE and Express Services. Sharpe attested that Express Services produced the documents in January 2022, pursuant to subpoena. The Express agreement required plaintiffs to submit "all legal disputes and claims" pertaining to their "employment or other relationship" against Express Services and its "alleged joint or co-employers" and their "directors, officers, employees, and agents" to final and binding arbitration.
Plaintiff's Supplemental Opposition. In May 2022, plaintiffs filed their opposition to defendants' supplemental memorandum. In addition to filing formal objections to defense counsel's declaration and the attached Express agreement, plaintiffs' briefs echoed the objections and argued that the court should not consider the Express agreement because defendants failed to authenticate it and plaintiffs' signatures with admissible evidence. Plaintiffs asserted, "Defendants failed to offer any admissible evidence showing Plaintiff signed any Express agreements or was ever an Express employee." Pointing out counsel's lack of firsthand knowledge of the agreements, plaintiffs stated, "Defense counsel is not the proper person to authenticate an alleged agreement between Express and Plaintiff, or a 'Staffing Agreement' between Express and" GSIE.
Defendants' Supplemental Declarations. Although defendants submitted supplemental declarations, they did not provide any evidence authenticating the signatures or agreement.
IV. Denial of the Motions to Compel Arbitration
In July and August 2022, the court heard argument. On August 18, 2022, the court denied defendants' motion to compel arbitration based on all three agreements. The trial court found that defendants failed to authenticate the Express agreement. The trial court stated, "[w]hereas the Court determined that there was circumstantial evidence to support a finding that [plaintiffs] executed the IC[A] and the NDA with GSI[E], there is no such circumstantial evidence to indicate that [plaintiffs] executed the Express Services Agreement with Express Services." The court pointed out there was no evidence presented about how plaintiffs placed their electronic signature on the document. The court highlighted that defense counsel, who attested to the Express agreement's authenticity, was not qualified to attest to the signatures on the document as he lacked any personal knowledge about the topic.
The court found that defendants authenticated plaintiffs' signatures on the ICA and NDA agreements, but that those agreements are unconscionable and thus unenforceable. The court concluded the ICA and NDA are procedurally unconscionable because they are contracts of adhesion sent to plaintiffs to sign "without any real opportunity for discussion or negotiation," and the agreements do not provide the rules for arbitration. The court stated the agreements have a high degree of substantive unconscionability because the ICA and NDA (1) require plaintiffs to pay defendants' attorney fees if defendants prevailed; (2) deprive plaintiffs of their right to be heard before the Labor Commissioner in an administrative hearing because the agreements identified arbitration as the exclusive remedy for "any Grievance"; and (3) allow defendants to seek injunctive relief, but require plaintiffs to file all claims in arbitration.
Finally, the court concluded paragraph 7 of the ICA does not automatically amend the ICA to remove or modify the unconscionable provisions. The court explained that "paragraph 7 of the IC[A] on material amendments allows Defendants the unilateral right to 'cure' the agreement at the advice (and express consent) of their legal counsel without allowing [plaintiffs] any similar opportunity to assert [their] own identification of contract provisions which controvert a regulatory authority or court decision. The only difference is that those provisions identified by [plaintiffs] as offending any law might tend to cut against Defendants' interests. [¶] Thus, paragraph 7 in the IC[A] is yet another instance of the IC[A] breaking mutuality, as it would provide no way for [plaintiffs] to register any of the types of concern that [GSIE]'s law firms would be at liberty to register unchecked. Further, [GSIE]'s lawyers are entitled by the so-called 'cure provision' to reform the contract automatically, i.e., without needing to give notice to [plaintiffs] that [the] contract terms had changed. This is further evidence of substantive unconscionability."
DISCUSSION
Defendants assert: (1) the court erred in finding they failed to authenticate the Express agreement, (2) the ICA and NDA are not unconscionable, and (3) if the ICA and NDA have unconscionable terms, the court should have exercised its discretion to sever those terms.
I. General Principles
Under the California Arbitration Act (Code Civ. Proc., §§ 1280-1294.2, the CAA), "when 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." (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413 (Rosenthal); §§ 1281.2, 1290.2.) "In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court's discretion, to reach a final determination." (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.)
II. Defendants Failed to Authenticate the Express Agreement
The trial court found the Express agreement inadmissible because defendants failed to authenticate it. We review a trial court's decision to exclude evidence for abuse of discretion. (Pannu v. Land Rover North America, Inc. (2011) 191 Cal.App.4th 1298, 1317.)
Defendants argue that by producing the Express agreement, they satisfied their initial burden of establishing the existence of the arbitration agreement, thereby shifting the burden to plaintiffs to produce evidence that they did not sign the Express agreement. Defendants assert that plaintiffs' objections to the authenticity of the Express agreement and the signatures, without declarations from plaintiffs stating that they did not sign such agreements, "were insufficient to shift the burden back to defendants to authenticate plaintiffs' signatures on the agreement 219." For support, defendants cite cases discussing the typical burden shifting in a motion to compel arbitration. (See, e.g., Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 543-544 (Bannister); Rosenthal, supra, 14 Cal.4th at p. 413; Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 219 (Condee).)
We agree motions to compel arbitration operate within a burden-shifting framework. "The arbitration proponent must first recite verbatim, or provide a copy of, the alleged agreement. (Cal. Rules of Court, rule 3.1330; Condee, supra, 88 Cal.App.4th [at p.] 219.) A movant can bear this initial burden 'by attaching a copy of the arbitration agreement purportedly bearing the opposing party's signature.' (Espejo [v. Southern California Permanente Medical Group (2016)] 246 Cal.App.4th [1047,] 1060.) At this step, a movant need not 'follow the normal procedures of document authentication' and need only 'allege the existence of an agreement and support the allegation as provided in [California Rules of Court,] rule [3.1330].' (Condee, supra, at pp. 218-219.)" (lyere v. Wise Auto Group (2023) 87 Cal.App.5th 747, 755; see Cal. Rules of Court, rule 3.1330 ["provisions must be stated verbatim or a copy must be physically or electronically attached to the petition and incorporated by reference"].)
"Once the petitioners ha[ve] alleged that the agreement exists, the burden shift[s] to respondents to prove the falsity of the purported agreement." (Condee, supra, 88 Cal.App.4th at p. 219.) Respondents challenging the authenticity of an agreement typically do this by producing testimony or declarations stating, "that the party never saw or does not remember seeing the agreement, or that the party never signed or does not remember signing the agreement." (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165 (Gamboa).) However, at least one Court of Appeal has found that a respondent's objections to the authenticity of the agreement were a proper basis for excluding the arbitration agreement. (Id. at p. 168.) In Gamboa, the Court of Appeal affirmed the exclusion of the defendant employer's proffered arbitration agreement following plaintiff's authenticity objection, concluding "[i]n essence, the Clinic's proffered evidence was inadmissible because it lacked foundational facts." (Id. at p. 169, citing Evid. Code, § 403, subd. (a)(1)-(3).)
In Gamboa, the defendant-employer moved to compel arbitration based on an employment agreement attached to a declaration by the employer's director of human resources. (Id. at p. 163.) The human resources director "said as part of Gamboa's employment agreement, Gamboa had signed an arbitration agreement, which was in effect while she worked for the Clinic.... The arbitration agreement appeared to be signed by a representative of the Clinic and an employee." (Ibid.) In response, plaintiff filed evidentiary objections to the human resources director's declaration and the attached arbitration agreement; plaintiff also attested that she did not remember the agreement. (Ibid.) The trial court sustained plaintiff's objections and found that the employer failed to show a contract was formed. (Id. at p. 164.)
In response to the respondent's challenge, the petitioner can produce evidence to prove the authenticity of the agreement. "Where, . . . the respondent challenges the validity of the signature, . . . the petitioner must 'establish by a preponderance of the evidence that the signature was authentic.'" (Bannister, supra, 64 Cal.App.5th at pp. 543-544; Rosenthal, supra, 14 Cal.4th at p. 413.)
Here, defendants contend that plaintiffs' authenticity objections were insufficient to shift the burden back to defendants to show the Express agreement and plaintiffs' signatures were authentic. However, we need not decide whether plaintiffs' objections were sufficient to shift the burden because defendants presented the Express agreement not in a typical motion to compel arbitration, but as part of a supplemental brief filed with permission of the trial court months after the motion to compel briefing was complete. The trial court limited the parties to one five-page brief each and prohibited a reply from defendants. Defendants' belated introduction of the Express agreement and the court's directive that defendants not file a reply rendered the burden shifting framework inapplicable under these circumstances.
Limited to a single brief, defendants should have provided evidence to establish authenticity of the agreement in that brief and related declarations. But they failed to do so. As the trial court explained, "[d]efendants merely present a document drafted by a third party, on which is printed the third party's name and [each plaintiff]'s name in a font that is evocative of a handwritten signature, with the declaration of Defendants' attorney attesting to its authenticity. Because Mr. Sharpe's familiarity with the Express Services Agreement is by all indications limited to his work on this case, he is not a qualified witness to attest to the significance of signatures entered on the document years before his involvement began."
We agree that the declarant-defense counsel Sharpe- lacked the requisite personal knowledge about the Express agreement to lay foundation for the existence of the agreement between Express Services and plaintiffs. (See Evid. Code, § 403, subd. (a)(1)-(3) ["The proponent of the proffered evidence has the burden of producing evidence as to the existence of the preliminary fact, and the proffered evidence is inadmissible unless the court finds that there is evidence sufficient to sustain a finding of the existence of the preliminary fact," including relevance, personal knowledge, or authentication of a writing].) Sharpe provided no facts showing he had firsthand knowledge of the Express agreement or any information demonstrating that plaintiffs actually signed the agreement. (See Civ. Code, § 1633.9, subd. (a) [how to attribute electronic record to person].) The trial court thus did not abuse its discretion in excluding the Express agreement.
Even in the supplemental declarations, filed after plaintiffs' objections, defendants had an opportunity to prove the agreements and signatures were genuine, but failed to do so. This was because defendants did not have possession of such evidence. At the two hearings in July and August 2022, where the parties argued the motions to compel arbitration, defense counsel explained that although defendants had copies of the arbitration agreements, they lacked any evidence showing the electronic signatures could only be attributable to plaintiffs. In sum, defendants were incapable of laying the necessary foundation to introduce the Express agreement.
III. The ICA and NDA Were Unconscionable
Defendants argue the trial court erred in finding the ICA and NDA unconscionable and thus unenforceable. As with any other contract, arbitration agreements are invalid if unconscionable. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 98 (Armendariz).)" 'Unconscionability consists of both procedural and substantive elements. 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. [Citations.] A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be 'so one-sided as to "shock the conscience." '" (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 246 (Pinnacle).)
"The party resisting arbitration bears the burden of proving unconscionability. [Citations.] Both procedural unconscionability and substantive unconscionability must be shown, but 'they need not be present in the same degree' and are evaluated on' "a sliding scale."' [Citation.] '[T]he 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.'" (Pinnacle, supra, 55 Cal.4th at p. 247.)
"[U]unconscionability is a question of law we review de novo. [Citation.] To the extent the trial court's determination on the issue turned on the resolution of contested facts, we would review the court's factual determinations for substantial evidence." (Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 82 (Carmona).)
Because the ICA and NDA were signed by plaintiffs under the same circumstances and contain many of the same contractual terms, we analyze them together.
a. Procedural Unconscionability
Procedural unconscionability requires oppression or surprise. (Pinnacle, supra, 55 Cal.4th at p. 247 .)" 'Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.'" (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1317.) "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.'" (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126 (OTO).) Alone, the adhesive nature of a contract establishes a modest level of procedural unconscionability. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.)
When the contract is adhesive, "[t]he 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." (OTO, supra, 8 Cal.5th 111, 126.) Courts have found additional oppression where the adhesive contract fails to include a copy of or identify the arbitration rules. (See Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138, 1146 (Samaniego); Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 245 (Carbajal).) Surprise can also contribute to procedural unconscionability where the arbitration clause is hidden within the contract. (See Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1252-1253 [procedural unconscionability high when arbitration provision was buried in 24-page, singlespaced document and, where "petitioners were required to place their initials in boxes adjacent to six other paragraphs, [but] no box [for initials] appeared next to the arbitration provision"].)
Here, the ICA and NDA are not only contracts of adhesion, but fail to identify rules of arbitration and hide the arbitration clause in the prolix of the agreements. We address each of these aspects of the contracts in turn.
Contracts of Adhesion. The circumstances under which plaintiffs electronically signed the agreements show they are adhesive. GSIE sent the ICA and NDA to plaintiffs within three to five days of being hired by GSIE. The ICA and NDA were delivered via a single DocuSign envelope, and plaintiffs could not sign one without signing both. As defendant Anderson stated, the agreements were "boilerplate." There does not appear to have been any genuine opportunity to negotiate the terms of the agreements. (See Armendariz, supra, 24 Cal.4th at p. 115 ["few employees are in a position to refuse a job because of an arbitration requirement"].) Each plaintiff attested, "During our relationship, defendants required me to sign contracts on the spot, without the opportunity to negotiate or modify them, without the aid of an attorney, and on a take-it-or-leave-it basis." Defendants argue that the contracts were not adhesive because a message from defendant Anderson was included in the DocuSign email stating: "Please DocuSign our boilerplate agreements as soon as you get a chance. Let me know if you have any questions. All The Best, AAA." Yet, "[l]et me know if you have any questions" is not an invitation to negotiate the terms of what Anderson in the same breath described as "boilerplate," i.e., "[f]ixed or standardized contractual language that the proposing party often views as relatively nonnegotiable." (Black's Law Dictionary (11th ed. 2019) <https://1.next.westlaw.com> [as of May 1, 2024], archived at <https://perma.cc/737L-AXUS>.)
For additional support, defendants point to what appears to be standardized text from DocuSign appended to the bottom of DocuSign's email to plaintiffs. That text states, "Questions about the Document? If you need to modify the document or have questions about the details in the document, please reach out to the sender by emailing them directly." The sender of the DocuSign emails was Danielle Anderson (not defendant Anthony Anderson); there is no evidence that Danielle Anderson had any authority to negotiate or change the terms of the "boilerplate" agreements. At best, this text warned plaintiffs that they could not unilaterally edit or change the DocuSign agreements; changes only could be made by GSIE. This text did not invite plaintiffs to negotiate with GSIE. The ICA and NDA are clearly" 'standardized contract[s], which, imposed and drafted by the party of superior bargaining strength, relegate[ ] to the subscribing party only the opportunity to adhere to the contract or reject it.'" (Armendariz, supra, 24 Cal.4th 83, 113.) The adhesive nature of the agreements establishes modest procedural unconscionability through oppression.
Failure to Identify Arbitration Rules. Oppression occurs in adhesive contracts where the contract fails to include a copy of the arbitration rules. (See Samaniego, supra, 205 Cal.App.4th at p. 1146; Carlson v. Home Team Pest Defense, Inc. (2015) 239 Cal.App.4th 619, 631-633; Carmona, supra, 226 Cal.App.4th at pp. 84-85; Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 485-486.) This is "because the employee 'is forced to go to another source to find out the full import of what he or she is about to sign-and must go to that effort prior to signing.'" (Carmona, at p. 84.)
However, "the level of oppression is increased when, . . . the employer not only fails to provide a copy of the governing rules, but also fails to clearly identify which rules will govern so the employee could locate and review them." (Carbajal, supra, 245 Cal.App.4th at p. 245.) In Carbajal, at page 233, the Court of Appeal found that an adhesive agreement's procedural unconscionability rose to the level of moderate because "although the arbitration provision required the parties to arbitrate their disputes under the American Arbitration Association's (AAA) rules, the provision did not identify which of AAA's many different rules would apply." The employer did not provide the employee "a copy of the rules it thought would govern, tell her where she could find a copy of the rules, offer to explain the arbitration provision, or give her an opportunity to review any rules." (Id. at p. 244.)
Like in Carbajal, the ICA's and NDA's oppression is amplified by the agreements' failure to indicate what rules of arbitration control. GSIE's contracts leave plaintiffs completely in the dark as to the procedure they would encounter in arbitration.
Citing Armendariz, defendants argue that where the arbitration agreement is silent about the rules, it may be implied that the agreement calls for a neutral arbitrator, provides for more than minimal discovery, requires a written award, provides for all types of relief available in court, and does not require employees to pay either unreasonable costs or any arbitrator fees or expenses. Defendants rely on language from Armendariz that states: "when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim." (Armendariz, supra, 24 Cal.4th at p. 106.)
Defendants take this quote out of context. The Armendariz court made this statement when discussing whether the plaintiffs would be afforded sufficient discovery in arbitration proceedings involving their Fair Employment and Housing Act (FEHA) claims. The court held that by explicitly incorporating the CAA in the arbitration agreement, the parties impliedly agreed to discovery procedures pursuant to the CAA. (Armendariz, supra, 24 Cal.4th at p. 106.)
The present case is distinguishable from Armendariz. The ICA and NDA do not incorporate or reference the CAA or any other set of arbitration rules. The agreements are oppressive because they subject plaintiffs to an unknown arbitral procedure. (See, e.g., Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1407 [finding oppression where the arbitration clause "pegs both the scope and procedure of the arbitration to rules which might change"].)
Formatting. Finally, there are indicia of surprise based on the formatting of the ICA and NDA. GSIE buries the single-sentence arbitration provision in the middle of the nine-page ICA and four-page NDA. The heading and text of the arbitration clause are treated just like all the other headings and text of the agreements. The arbitration provision is not highlighted or bolded. The agreement does not require the employee to initial the arbitration clause. There is no special introduction or formatting to bring attention to the arbitration clause. (Cf. Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1471 [finding limited procedural unfairness in contract of adhesion where the arbitration provision was contained "underneath the heading 'Please Read Carefully, Initial Each Paragraph and Sign Below'" in a paragraph that the employee had to initial].) The arbitration provision is buried in the prolix of the agreements. As the agreements do not bring any special attention to the arbitration clause via formatting, we conclude this aspect of the agreements adds to the procedural unconscionability.
Based on the adhesive nature of the ICA and NDA, the lack of any reference to arbitration rules, and the formatting of the arbitration clauses in the agreements, we conclude the ICA and NDA have a moderate level of procedural unconscionability.
b. Substantive Unconscionability
"While procedural unconscionability 'addresses the circumstances of contract negotiation and formation, focusing on oppression and surprise due to unequal bargaining power,' substantive unconscionability 'pertains to the fairness of the agreement's actual terms.'" (Lange v. Monster Energy Co. (2020) 46 Cal.App.5th 436, 447.) The court's inquiry into whether a contract is substantively unconscionable "focus[es] on . . .' "overly harsh"' or' "one-sided"' results." (Armendariz, supra, 24 Cal.4th at p. 114.) "[T]he paramount consideration in assessing [substantive] conscionability is mutuality." (Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 657.)
Here, several one-sided terms in the ICA and NDA evidence substantive unconscionability: (1) the prevailing party clause, (2) the extraordinary relief provision, and (3) the waiver of administrative remedies. In addition, the ICA has two paragraphs discussing one-sided modifications and amendments to the agreement.
Prevailing Party Clause. Both agreements have an attorney fees clause that states: "In the event that any party hereto commences an action or arbitration to enforce any of the provisions hereof, the prevailing party in such action shall be entitled to an award of its attorneys' fees and all costs and expenses incurred in connection therewith." Plaintiffs argue this provision is unconscionable because it causes the unsuccessful employee-plaintiff to pay defendants' attorney fees and costs, which the plaintiff would not otherwise be responsible for paying. We agree.
Plaintiffs brought claims for nonpayment of wages and failure to provide accurate, itemized wage statements. (Lab. Code, §§ 221, 224, 226.6, 226.8, 226.) Under Labor Code section 218.5, a prevailing employee can recover costs and fees from the defendant-employer for nonpayment of wages, but a prevailing employer can recover costs and attorney fees only when the employee brings the action in bad faith. A prevailing plaintiff is also entitled to an award of costs and reasonable attorney fees when the employer fails to furnish the employee with an accurate statement of wages, yet prevailing employers cannot obtain attorney fees defending such a claim. (Lab. Code, § 226. subds. (e)(1), (f), (h).)
The ICA and NDA effectively force plaintiffs to forfeit their Labor Code one-way attorney-fee-shifting rights when their case is brought in good faith because the agreements do not condition the award of fees and costs to defendants on bad faith by plaintiffs. The Court of Appeal addressed the unconscionability of a similar provision in Trivedi v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 394 (Trivedi), disapproved on other grounds in Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1241, 1246-1247 (Baltazar). The arbitration contract in Trivedi contained a fee provision that "allow[ed] for the recovery of attorney fees and costs by the prevailing party in an arbitration." (Trivedi, at p. 394.) The plaintiff there brought an action for discrimination in violation of FEHA, which provides" 'a prevailing defendant may recover attorney fees only when the plaintiff's action was frivolous, unreasonable, without foundation, or brought in bad faith.'" (Ibid.) The Trivedi court concluded the prevailing party provision was substantively unconscionable because it did not limit the defendant's right to recover fees from the plaintiff in accordance with FEHA. (Id. at p. 395.)
Just as in Trivedi, the fee shifting provision in the ICA and NDA "lessens [plaintiffs'] incentive to pursue claims deemed important to the public interest, and weakens the legal protection provided to plaintiffs who bring nonfrivolous actions from being assessed fees and costs." (Trivedi, supra, 189 Cal.App.4th at p. 395.) This provision impermissibly "require[s] the employee to bear [a] type of expense that the employee would not be required to bear if he or she were free to bring the action in court." (Armendariz, supra, 24 Cal.4th at pp. 110-111.)
Defendants assert that plaintiffs are independent contractors and thus these Labor Code provisions do not apply to them. Yet, plaintiffs alleged in their complaints that defendants mischaracterized them as independent contractors. Under California law, we presume an individual who provides services for another is an employee. (Lab. Code, § 3357 ["Any person rendering service for another, other than as an independent contractor, or unless expressly excluded herein, is presumed to be an employee"]; Robinson v. George (1940) 16 Cal.2d 238, 243; Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, 955-956, 957.) As plaintiffs have not been proven to be independent contractors, and because "in deciding whether the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the potential merits of the underlying claims" (AT&T Technologies v. Communications Workers of America (1986) 475 U.S. 643, 649), we consider plaintiffs to be employees for the purpose of analyzing the contracts at this juncture.
Defendants also argue that "[b]y providing that the substantive and procedural law of the State of California shall apply, the parties expressed their intent that the attorney fee provisions not apply to an unwaivable statutory right not to be held liable for defendants' fees and costs should those Labor Code sections apply." Yet, we cannot assume simply because California law applies, California law would automatically restore to plaintiffs the rights defendants forced them to sign away as a condition of their employment. Simply including a choice of law provision does not render the agreement conscionable.
Extraordinary Relief Provision. Paragraph 9 of the ICA and paragraph 6 of the NDA, both titled, "Extraordinary Relief," state: "Independent Contractor acknowledges that GSIE would suffer extremely costly and irreparable harm, loss and damage if any of the provisions of this Agreement are violated by Independent Contractor. The Independent Contractor agrees that GSIE shall be entitled to seek Extraordinary Relief to temporarily enjoin violations by Independent Contractor of this Agreement including but not limited to, its treating GSIE customers as its customers or the customers of another firm and GSIE may seek Extraordinary Relief in a federal or state court of competent jurisdiction within the state of California, as well as in Arbitration and if justice requires, in more than one of them, all without having to first comply with the requirements of [the arbitration clause]. The specifics of [this paragraph] shall not be deemed to preclude or narrow the judicial or arbitral powers regarding Extraordinary Relief." (Italics added.)
The quoted text comes directly from the ICA. The NDA has this identical language, but refers to the independent contractor as "Confidant" and displays the title "Extraordinary Relief" in all capitals. The contract does not define "extraordinary relief." Black's Law Dictionary defines extraordinary relief as "Judicial relief that exceeds what is typically or customarily granted but is warranted by the unique or extreme circumstances of a situation." (Black's Law Dict., supra, <https://1.next.westlaw.com> [as of May 1, 2024], archived at <https://perma.cc/737L-AXUS>.) The dictionary further states, "The types of extraordinary relief most frequently sought are injunctions and extraordinary writs." (Ibid.)
This clause provides GSIE the right to sue plaintiffs in court for preliminary injunctive relief for any violation of the contract but does not reciprocally provide plaintiffs that right. In Carbajal, supra, 245 Cal.App.4th at page 249, the Court of Appeal found a similar injunctive relief carve-out provision problematic. The court explained, "the Agreement is substantively unconscionable on its face because it requires [the plaintiff] to arbitrate 'any and all disputes' she has with [the employer], but it authorizes [the employer] to 'obtain an injunction from a court of competent jurisdiction' to restrain [plaintiff] from breaching the Agreement's nondisclosure and exclusive use provisions." (Ibid.)
Defendants argue that this provision is not unconscionable because both plaintiffs and GSIE have the right to seek extraordinary relief in court pursuant to Code of Civil Procedure section 1281.8. That statute states, "A party to an arbitration agreement may file in the court in the county in which an arbitration proceeding is pending, or if an arbitration proceeding has not commenced, in any proper court, an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief." (Code Civ. Proc., § 1281.8, subd. (b).)
Unlike the provisional relief permitted by Code of Civil Procedure section 1281.8, the ICA and NDA's extraordinary relief provision does not require GSIE to prove that the award it is entitled to would be ineffectual without the injunction. (Cf. Baltazar, supra, 62 Cal.4th at pp. 1241, 1246-1248 [arbitration clause not unconscionable where it was expressly mutual and specifically stated parties had access to relief under Code Civ. Proc., § 1281.8].) The extraordinary relief provision provides GSIE greater access to injunctive relief from the courts than it would have under Code of Civil Procedure section 1281.8.
Moreover, the extraordinary relief provision presumes that GSIE would be irreparably harmed by any violation of the ICA or NDA contracts by plaintiffs. A similar provision was found substantively unconscionable in Carmona, supra, 226 Cal.App.4th at page 89. The Carmona court explained, "the arbitration agreement lacks mutuality when it presumes harm to the [defendant] companies in their confidentiality claims. The enforceability clause states any disclosure or breach of the confidentiality subagreement 'will cause immediate, irreparable harm to [the car wash companies].' Irreparable harm is one of the factors courts consider when deciding whether to issue an injunction. [Citation.]' The agreement does not state a reciprocal presumption of harm favoring employees in their claims." (Ibid.) Likewise here, the extraordinary relief provision presumes irreparable harm in favor of providing defendants injunctive relief, without doing the same for plaintiffs.
As such, this extraordinary relief provision is facially onesided. (See Yeomans v. World Financial Group Insurance Agency, Inc. (N.D. Cal. 2020) 485 F.Supp.3d 1168, 1187-1188 [terms entitling only the employer the right to initiate litigation to seek extraordinary relief without first complying with arbitration provision were facially one-sided].) Since the extraordinary relief provision provides GSIE access to injunctive relief greater than that provided to the parties in Code of Civil Procedure section 1281.8 and establishes a presumption of irreparable harm in favor of providing defendants injunctive relief, we conclude that the provision is substantively unconscionable. (See Carbajal, supra, 245 Cal.App.4th at p. 250 [finding unconscionable an injunctive relief carve-out provision that permits employer to seek broader relief in court than that provided by Code Civ. Proc., § 1281.8].)
Waiver of Administrative Remedies. The arbitration clause in the ICA and NDA requires arbitration of "any Grievance." Plaintiffs assert this language deprives plaintiffs of their right to seek administrative relief for their wage claims. Pursuant to a part of the Labor Code referred to as the Berman statutes, "if an employer fails to pay wages in the amount, time, or manner required by contract or statute, the employee may seek administrative relief by filing a wage claim with the commissioner or, in the alternative, may seek judicial relief by filing an ordinary civil action for breach of contract and/or for the wages prescribed by statute." (Post v. Palo/Haklar & Associates (2000) 23 Cal.4th 942, 946.)
"The Berman statutes include various features designed to lower the costs and risks for employees in pursuing wage claims, including procedural informality, assistance of a translator, use of an expert adjudicator who is authorized to help the parties by questioning witnesses and explaining issues and terms, and provisions on fee shifting, mandatory undertaking, and assistance of the Labor Commissioner as counsel to help employees defend and enforce any award on appeal. Waiver of these protections does not necessarily render an arbitration agreement unenforceable, nor does it render an arbitration agreement unconscionable per se. But waiver of these protections in the context of an agreement that does not provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability. As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided." (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1146.) Our Supreme Court has explained, "in the context of a standard contract of adhesion setting forth conditions of employment, the unconscionability inquiry focuses on whether the arbitral scheme imposes costs and risks on a wage claimant that make the resolution of the wage dispute inaccessible and unaffordable, and thereby 'effectively blocks every forum for the redress of disputes, including arbitration itself.'" (Id. at pp. 1147-1148.)
Defendants assert "the arbitration agreements at issue did not deprive plaintiffs of an otherwise accessible and affordable arbitral forum. Instead, the agreements were silent as to whether or not plaintiffs could pursue a Berman hearing prior to arbitration, and did not specifically preclude this remedy or an equivalently accessible and affordable procedure." We disagree with this characterization of the agreement.
The ICA and NDA explicitly state all grievances are to be arbitrated. They make no exception for plaintiffs' wage claims to be brought in an administrative setting. In addition, the arbitral scheme exposes plaintiffs to liability for defendants' attorney fees even when plaintiffs' claims were brought in good faith, and subjects plaintiffs to completely unknown rules of arbitration. Arbitration here would possibly subject plaintiffs to exorbitant costs and unknown procedures. The arbitration provision thus does not provide any sort of forum comparable to an affordable Berman hearing for redress of wage claims. When viewed in this context, the limitation on plaintiffs' right to access relief under the Berman statutes is substantively unconscionable.
Plaintiffs also argue that the clause requiring arbitration of all grievances barred statutory Private Attorney General Act claims (Lab. Code, § 2698 et seq., PAGA). However, plaintiffs have not alleged any PAGA claims and nothing in the agreement prohibits plaintiffs from bringing a PAGA claim. Moreover, our Supreme Court has made it clear that individual Labor Code claims may be arbitrated and "an order compelling arbitration of individual claims does not strip the plaintiff of standing to litigate non-individual claims in court." (Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104, 1123.)
The ICA's Amendment Provisions. We also conclude that two paragraphs in the ICA, which do not appear in the NDA, are also unconscionable. Specifically, ICA paragraph 7 states: "Material Amendments. If any term of this Agreement controverts the express, or in the opinion of [GSIE]'s counsel, the intended provision of any applicable regulatory authority or court decision, then said term shall be governed by said regulatory provision or decision and the subject term of this Agreement shall be deemed automatically amended or deleted as the case pertains. Should such amendment or deletion materially affect the substance of this Agreement, then this Agreement shall be subject to immediate termination upon written notice to the other party."
As the trial court pointed out, paragraph 7 appears to provide GSIE unilateral discretion to alter the contract. The clause leaves contract amendments or deletions up to the opinion of GSIE's counsel without providing plaintiffs such discretion. Furthermore, this clause does not simply provide for deletion of an illegal term like a severance clause, but allows for unilateral amendment by GSIE without any renegotiation of the contract or notice to plaintiffs.
Likewise, paragraph 11 of the ICA provides, "Except as otherwise set forth in Paragraph 7 of this Agreement, no modifications of this Agreement shall be valid unless made in writing by a duly authorized officer of GSIE. GSIE may from time to time modify this Agreement by giving written notice to Independent Contractor of such modification. Unless Independent Contractor elects to terminate this Agreement within thirty (30) days of such written notice, Independent Contractor shall be deemed to have accepted all terms and conditions set forth therein." The ICA clearly lacks mutuality in this regard.
The ICA and NDA Are Unconscionable. We conclude that the ICA and NDA contain a high level of substantive unconscionability due to the lack of mutuality exhibited in the prevailing party clause, extraordinary relief provision, and waiver of administrative remedies. The ICA also exhibits significant additional substantive unconscionability in two paragraphs providing that GSIE has the exclusive power to amend the ICA.
As the contracts display moderate procedural unconscionability and high substantive unconscionability, we conclude the ICA and NDA are unconscionable and thus unenforceable.
Because the arbitration agreements are unenforceable, we do not address defendants' argument that the FAA preempts Labor Code section 229, which plaintiffs had asserted precluded arbitration of their unpaid wage claims.
IV. Defendants Forfeited the Issue of Severance; the Court Did Not Abuse Its Discretion in Declining to Amend the ICA
Finally, defendants argue the court erred in denying severance of the unconscionable terms. Defendants assert that the trial court failed to exercise its discretion to sever any unconscionable terms under Civil Code section 1670.5, subdivision (a), and instead "the court only analyzed severability based on the 'cure provision' contained in paragraph 7 of the IC[A]."
Civil Code section 1670.5, subdivision (a) states: "If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result."
Yet, defendants never briefed the issue of severance in the trial court. At the July 2022 hearing on the motion to compel arbitration, defense counsel argued that pursuant to paragraph 7 of the ICA, "to the extent that there is a belief that a provision is unconscionable, then [the ICA] should be just amended to make it not so. I think that's a fair - maybe it's not a severability provision, but I think it works in the same way where some severability language actually allows for the parties to cure it. And this is saying it should be automatically amended." Defense counsel further stated, "I do believe that paragraph 7 is a powerful but smart and reasonable vehicle to address shortcomings in the agreement."
Although defendants urged application of paragraph 7's amendment provision, defendants never argued the court should exercise its discretion pursuant to Civil Code section 1670.5 to sever unconscionable terms. As defendants "did not ask the trial court to exercise that discretion, [they] cannot now complain the court's decision was erroneous." (Samaniego, supra, 205 Cal.App.4th at p. 1149 [finding defendant employer forfeited claim that the court should have severed unconscionable terms in arbitration contract].) Defendants have thus forfeited their argument based on Civil Code section 1670.5.
To the extent defendants argue the court should have applied paragraph 7 to amend the ICA, we find no abuse of discretion. As explained above, that provision is unconscionable.
DISPOSITION
The orders are affirmed. Plaintiffs Ethan Michael and Martin Pike are awarded their costs on appeal.
We concur: EGERTON, J., ADAMS, J.