Lucas v. Gund, Inc.

• Decision Date: 15 September 2006
• Docket Number: No. CV 06-2880 ER.,CV 06-2880 ER.
• Parties: Terri LUCAS, an individual, Plaintiff, v. GUND, INC., a New Jersey Corporation, doing business registered in California, Russell Rossi an individual, Defendants.
• Court: U.S. District Court — Central District of California

450 F.Supp.2d 1125

Terri LUCAS, an individual, Plaintiff, v. GUND, INC., a New Jersey Corporation, doing business registered in California, Russell Rossi an individual, Defendants.

No. CV 06-2880 ER.

United States District Court, C.D. California, Western Division.

September 15, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Shannon M. Foley, Franscesca M. Walker, Business & Employment Law, Manhattan Beach, CA, for Plaintiff.

John K. Skousen, Lonnie D. Giamela, Fisher & Phillips LLP, Irvine, CA, for Defendants.

ORDER GRANTING DEFENDANT'S MOTION TO COMPEL ARBITRATION

RAFEEDIE, Senior District Judge.

This matter came before the Court on Defendant's Motion to Compel Arbitration on Monday, September 11, 2006 at 10:00 a.m. The Court has read and considered the parties' submissions and oral arguments and has reached the following conclusions:

The first step in determining what law governs the validity and effect of an arbitration provision is to determine whether the Federal Arbitration Act applies. The FAA applies to all contracts "evidencing a transaction involving commerce." 9 U.S.C. § 2. "Commerce" is defined as "commerce among the several States or with foreign nations." 9 U.S.C. § 1. This provision is to be interpreted broadly. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 112, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001) ("involving commerce" interpreted as "implementing Congress's intent `to exercise its commerce power to the full'").

Plaintiff, Ms. Lucas, contends that the FAA applies only to "employment contracts" and because this is a "non-compete agreement" the FAA shouldn't apply. This is a misstatement of the law. The FAA applies to all contracts involving commerce that contain an arbitration agreement, not just contracts for employment.¹ Ms. Lucas's argument is especially confusing because elsewhere in her brief she argues that the FAA does not apply to employment contracts because section 1 of the FAA exempts employment contracts from the Act.² This, however, is also a direct misstatement of the law. The Supreme Court specifically held in Circuit City v. Adams that section 1 only exempts employment contracts involving transportation workers. See Adams, 532 U.S. at 119, 121 S.Ct. 1302 ("section 1 exempts from the FAA only contracts of employment of transportation workers" (emphasis added)). Thus, the only issue as to whether the FAA applies is whether the contract between Ms. Lucas and Defendant Gund "involved commerce."³

Because Gund does business in all 50 states and in several foreign countries, and because Ms. Lucas was responsible for sales in five different states, her employment involved "commerce" within the meaning of the FAA, and thus the FAA applies.

Under the Federal Arbitration Act, a written agreement to arbitrate shall be enforced by federal courts. 9 U.S.C. § 1, et. seq. A district court shall stay further proceedings and order arbitration if it determines (1) that a valid agreement to arbitrate exists, and (2) that the agreement encompasses the dispute at issue. Chiron Corp. v. Ortho Diagnostic Sys., 207 F.3d 1126, 1130 (9th Cir.2000). According to the Supreme Court, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

I. Validity of the Agreement

Under the FAA, state contract law applies to determine whether an agreement to arbitrate is valid and enforceable. Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir.2003). However, courts may not invalidate arbitration agreements under state laws applicable only to arbitration provisions. Circuit City Stores, Inc. v. Adams (Adams III), 279 F.3d 889, 892 (9th Cir.2002). Only the general law of contracts is applied. Id. In this case, because Ms. Lucas resides in California and was employed in California, California's general law of contracts should govern the preliminary question of whether the agreement is enforceable. See Adams III, 279 F.3d at 892 ("Because [Appellant] was employed in California, we look to California contract law to determine whether the agreement is valid.").

Although the arbitration provision at issue is contained in an agreement entitled "Non-Compete Agreement," and covenants not to compete are generally not enforceable in California,⁴ an otherwise valid arbitration agreement is enforceable separate and apart from the rest of the contract. Buckeye Check Cashing v. Cardegna, ___ U.S. ___, ___, 126 S.Ct. 1204, 1209, 163 L.Ed.2d 1038 (2006). Thus, the sole issue to be considered here is whether the arbitration agreement itself is enforceable. If it is, the issue of the underlying contract's validity shall be considered by the arbitrator. Id.

Under California law, an agreement is enforceable unless it is both procedurally and substantively unconscionable. Armendariz v. Foundation Health Psychcare Svcs. Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000). Procedural and substantive unconscionability need not be present in equal amounts, however. Id. The two are evaluated on a "sliding scale," thus, the more evidence of procedural unconscionability there is, the less evidence of substantive unconscionability is needed to render the agreement unenforceable, and vice versa. Id.

A. Procedural Unconscionability

Ms. Lucas contends that the agreement to arbitrate in this case is unenforceable because she did not have the opportunity to negotiate the provision and instead was essentially told to sign it or risk losing her job.⁵ "Take it or leave it" agreements, also known as adhesion contracts that condition an employee's continued employment on the signing of the agreement are procedurally unconscionable. Fitz v. NCR Corp., 118 Cal.App.4th 702, 13 Cal.Rptr.3d 88, 95 (Ct.App.2004). To be unenforceable, however, the agreement as a whole must also be substantively unconscionable. Id.

The agreement provides that the dispute shall be resolved by final and binding arbitration "in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association." Ms. Lucas argues that because she was not handed any AAA rules when signing the agreement, and because the rules which she has now been provided are 2006 rules and not the 2003 rules that were in place when the agreement was signed, the agreement is unenforceable.

Agreements which incorporate the rules of a third-party organization without providing the employee with those rules at the time of signing can be procedurally unconscionable if the employee is not provided a copy of the rules upon signing the agreement. See, e.g., Fitz, 13 Cal.Rptr.3d at 101; Harper v. Ultimo, 113 Cal.App.4th 1402, 7 Cal.Rptr.3d 418, 422-23 (Ct.App. 2003). However, in those cases, the decisions seem to be based on the additional fact that the rules were not fair to the weaker party. For example, in Harper, the arbitration agreement between a merchant and a customer incorporated the rules of the Better Business Bureau. Harper, 7 Cal.Rptr.3d at 422. This was unfair because by not being given a copy of the BBB rules, the customer was not made aware that those rules severely limited his available remedies. Id. In Fitz, as in this case, the rules at issue were the AAA rules. Fitz, 13 Cal.Rptr.3d at 101. The employee in Fitz was also not given a copy of those rules upon signing the arbitration agreement. Id. However, in Fitz, the problem was not just that the employee was not given a copy of the AAA rules, but that the AAA rules conflicted with unfair provisions in the arbitration agreement. Id. The provisions included in the Fitz arbitration agreement unreasonably limited discovery, and the court pointed out that the employer "should not be relieved of the effect of an unlawful provision it inserted in the [arbitration agreement] due to the serendipity that the AAA rules provide otherwise." Id.

This case differs from both Harper and Fitz. In those cases, the problem wasn't just that the rules were not attached, but that it was done to hide the fact that the weaker party was giving up significant rights. Unlike the Better Business Bureau rules in Harper, which limited the remedies available, the AAA rules do not limit the remedies available to Ms. Lucas. The AAA rules state that "the arbitrator may grant any remedy or relief that would have been available to the parties had the matter been heard in court." AAA Employment Dispute Rule 39. Further, unlike in Fitz, where the arbitration agreement contained unfair provisions that conflicted with the AAA rules, the agreement in this case contains no conflicting provisions. It simply states that all disputes shall be resolved in accordance with the AAA rules governing employment disputes. Thus, while it may have been procedurally unfair to have Ms. Lucas sign an agreement referencing rules which were not attached at the time, it would only render the agreement unenforceable if those rules were substantively unconscionable.

As to which version of the AAA rules apply, the 2003 or 2006 versions, the AAA rules themselves state that "these rules, and any amendment of them, shall apply in the form in effect at the time the demand for arbitration or submission is received by the AAA." AAA Employment Dispute Rule 1 (emphasis added). When an agreement references other rules but does not specify which version of the rules should apply to the dispute, but the referenced rules themselves answer that question, those rules control. See Evans v. CenterStone Dev. Co., 134 Cal.App.4th 151, 35 Cal.Rptr.3d 745, 750 (Ct.App.2005) (finding that when an agreement provided certain rules should govern but did not specify which version of the rules, the rules' provision applying those in effect on the date of commencement of the arbitration should control).⁶

B. Substantive Unconscionability

Ms. Lucas first argues that because ...