Teimouri v. Macy's, Inc. CA4/1

Filed 5/14/13 Teimouri v. Macy’s, Inc. CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MEHRNOOSH TEIMOURI, D060696
Plaintiff and Respondent,
v. (Super. Ct. No.
37-2010-00093577-CU-OE-CTL)
MACY'S, INC. et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of San Diego County, Richard E.L.
Strauss, Judge. Reversed.
Law Offices of Julia Azrael, John Slade Curtis, Macy's, Inc., Law Department and
Michael C. Christman, David E. Martin and Catherine E. Sison, for Defendants and
Appellants.
Initiative Legal Group, Sue Jin Kim, Gene Williams, Raul Perez, Ryan H. Wu,
and Monica Balderrama, Capstone Law and Glenn A. Danas for Plaintiff and
Respondent.
I.
INTRODUCTION
Defendants Macy's, Inc. and Macy's West Stores, Inc. (jointly "Macy's") appeal
from an order of the trial court denying Macy's motion to compel arbitration of plaintiff
Mehrnoosh Teimouri's individual claims, to dismiss Teimouri's class and representative
claims, and to stay the action pending arbitration.
Macy's contends that the trial court erred in relying on Gentry v. Superior Court
(2007) 42 Cal.4th 443 (Gentry) to conclude that the class and collective action waiver in
the arbitration agreement is unenforceable. Macy's also argues that the trial court erred in
denying its motion to dismiss Teimouri's representative claims made pursuant to Labor
Code sections 2699 et seq., the Private Attorney General Act (PAGA), because the
Federal Arbitration Act (FAA, 9 U.S.C., § 1 et seq.) requires courts to enforce arbitration
agreements according to their terms, even where those agreements contain a
representative action waiver that would otherwise preclude a representative PAGA claim.
Teimouri defends the trial court's ruling and its analysis of the state of the law with
respect to class and collective actions waivers in an arbitration agreement. In addition to
defending the trial court's order on the grounds on which the trial court based its decision,
Teimouri argues that there are three independent grounds on which this court could
affirm the trial court's denial of the motion to compel: (1) Macy's has waived its right to
arbitrate these claims; (2) the arbitration agreement is unconscionable and therefore
unenforceable; and (3) the arbitration agreement violates the National Labor Relations
Act and therefore cannot be enforced.
2
After considering the parties' contentions and reviewing both federal and state
authorities pertaining to these rapidly evolving issues, we conclude that the arbitration
agreement between Teimouri and Macy's is enforceable as written. The class and
collective action waiver in that agreement precludes Teimouri from bringing any class or
representative claims in the arbitration, but Teimouri may pursue her individual claims,
including her individual PAGA claims, in an arbitral forum. We therefore reverse the
order of the trial court.
II.
FACTUAL AND PROCEDURAL BACKGROUND
A. Factual background
1. Macy's dispute resolution program
Macy's offers a dispute resolution program for employees called "Solutions
InSTORE" (InSTORE Program). The InSTORE Program involves four sequential steps:
(1) the "Open Door" step in which employees bring their concerns to a supervisor or local
management team member for informal resolution; (2) a written request for review to the
Office of the Senior Human Resources Management; (3) a request for reconsideration by
a panel of peers or by the Office of Solutions InSTORE; and (4) binding arbitration. All
employees "agree to be covered by Step 4—Arbitration by accepting or continuing
employment with the Company . . . ." However, employees have the option of
"exclud[ing] themselves from Arbitration by completing an election form" within 30 days
of the date on which the employee is hired by Macy's. A decision to opt out is
confidential, and local management is not informed of an employee's decision regarding
3
the opt-out. A decision at any level of the InSTORE Program is binding on Macy's; only
the employee has a right to appeal each decision to the next level.
The arbitration agreement that is part of the InSTORE Program covers "all
employment-related legal disputes, controversies or claims arising out of, or relating to,
employment or cessation of employment, whether arising under federal, state or local
decisional or statutory law," except as "otherwise limited" by the terms of the contract.
The arbitration agreement provides that it "shall apply to any and all such disputes,
controversies or claims whether asserted by the Associate against the Company . . . " or
"by the Company against the Associate." The agreement allows the arbitrator "to grant
any relief, including costs and attorney's fees, that a court could grant" if the arbitrator
finds "that a party has sustained its burden of persuasion in establishing a violation of
applicable law . . . ."
An employee who chooses to arbitrate a claim must pay a filing fee equal to one
day's base pay or $125, whichever is less. Under the agreement, if an employee consults
with an attorney, Macy's will reimburse legal fees of up to $2,500 during each
continuously rolling 12-month period, regardless of the outcome of the proceedings. If
the employee does not consult an attorney, Macy's will reimburse the employee for
incidental costs up to $500 during each rolling 12-month period. Also, if the employee
decides not to use the services of an attorney during the arbitration, Macy's agrees to
appear for arbitration without the assistance of counsel, as well.
The arbitration agreement provides for limited discovery, including a set of 20
interrogatories and up to three depositions for each party. All discovery must be
4
completed within 90 days of the selection of an arbitrator. The arbitrator has the
authority to permit additional discovery. The agreement provides that employees must
initiate an arbitration proceeding "in accordance with the time limits contained in the
applicable law's statute of limitations," but also provides for tolling of the applicable
statute of limitations during the time in which the employee is pursuing the first three
steps of the InSTORE Program.
The agreement allows Macy's to alter the Solutions InSTORE rules and
procedures, or to cancel the program in its entirety, upon 30 days' written notice to
employees.
Of particular importance in the present appeal is a provision of the arbitration
agreement that prohibits class or collective arbitration. That provision states:
"The Arbitrator shall not consolidate claims of different Associates
into one (1) proceeding. Nor shall the Arbitrator have the power to
hear an arbitration as a class or collective action. (A class or
collective action involves representative members of a large group,
who claim to share a common interest, seeking relief on behalf of the
group.)"
2. Teimouri's employment with Macy's
Teimouri was employed as a Macy's sales associate between April 28, 2008 and
July 16, 2009. On Teimouri's first day of work, Macy's provided Teimouri with various
hiring documents, including a "New Hire Brochure" (Brochure), which describes Macy's
InSTORE program. The Brochure provides an overview of the InSTORE program, and
includes a "Plan Document" that outlines the rules and procedures of the InSTORE
Program in detail. The Brochure explains that arbitration is an option, not a requirement,
5
and also explains that the employee may opt out of arbitration. The Brochure contains an
"Early Dispute Resolution Program Election Form" (Election Form), which states that an
employee must opt out of Step 4 of the InSTORE Program—i.e., the arbitration
provision—within 30 days of the employee's hire date if he or she does not want to agree
to submit employment-related disputes to binding arbitration.
Teimouri electronically confirmed that she received the Brochure, the Plan
Document, and the Election Form. There is no evidence that Teimouri returned an
Election Form indicating her desire to opt out of step 4 of the InSTORE program, i.e.,
arbitration.
B. Procedural background
Teimouri filed a putative class action against Macy's on June 4, 2010. In her
complaint, Teimouri asserted multiple violations of the Labor Code, including violations
of overtime pay requirements, meal and rest break requirements, and wage deduction
protections on behalf of herself and a class of similarly situated employees. Teimouri
also requested civil penalties for the Labor Code violations under Labor Code section
2699 et seq., on behalf herself and other similarly aggrieved employees, pursuant to the
PAGA, and asserted a claim for a violation of Business and Professions Code section
17200.
Teimouri filed a first amended complaint (FAC) on July 16, 2010, in which she
asserted the same claims as were contained in her original complaint.
Macy's filed an answer to the FAC on August 27, 2010. Macy's 24th and final
affirmative defense provided, "Upon information and belief, Plaintiff's First Amended
6
Complaint should be dismissed or stayed because Plaintiff Mehrnoosh Teimouri signed a
written arbitration agreement requiring her to submit any employment-related dispute to
final and binding arbitration." However, Macy's did not move to compel arbitration.
After Macy's answered, Macy's and Teimouri engaged in discovery. Macy's
propounded 21 form interrogatories and 17 special interrogatories to Teimouri, and also
sent her a deposition notice accompanied by 16 requests for production of documents.
Teimouri provided responses to the form and special interrogatories.
Teimouri propounded 986 discovery requests, including at least 305 requests for
production and 188 special interrogatories. In response to Teimouri's numerous
discovery requests, on October 28, 2010, Macy's moved for a protective order. 1
In addition to the discovery described above, the record on appeal discloses that
the parties engaged in a few other minor litigation activities. For example, the parties
stipulated to extend the May 26, 2011 class certification deadline and trial-related dates.
After the trial court rejected the parties' stipulation, Teimouri moved ex parte for an order
continuing the deadline for her to file her motion for class certification and to move
"trial-related dates pursuant to the stipulation reached by the parties."
On June 10, 2011, just over nine months after filing its answer to Teimouri's FAC,
Macy's moved to compel arbitration of Teimouri's individual claims and requested
1 According to Macy's, the trial court did not rule on Macy's request for a protective
order. The record on appeal does not disclose any ruling by the court on that request.
7
dismissal of Teimouri's representative2 claims, pursuant to the terms of the arbitration
agreement as outlined in step 4 of the InSTORE Program.3
On August 18, 2011, the trial court published its tentative ruling on Macy's motion
to compel arbitration, in which the court ruled in favor of Teimouri and against Macy's.
The court subsequently heard oral argument from the parties. On August 19, the court
affirmed its tentative ruling. In essence, the trial court concluded that the class and/or
collective action waiver was not enforceable as to Teimouri's non-PAGA class claims
under the authority of Gentry, supra, 42 Cal.4th 443, and that the class and/or collective
action waiver in the arbitration agreement was not enforceable as to Teimouri's PAGA
claims under the authority of Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489(Brown).
Macy's filed a timely notice of appeal from the trial court's order denying its
motion to compel arbitration.
2 It appears that Macy's used the term "representative" in its motion to refer to both
the PAGA and class claims in Teimouri's complaint, since it was requesting that the trial
court compel individual arbitration of all of Teimouri's claims. Specifically, Macy's
notice of motion states:
"[Macy's] will and hereby does move the Court for an order
dismissing Plaintiff Mehrnoosh Teimouri's ('Teimouri')
representative claims in this matter, compelling arbitration of
Teimouri's individual claims, and staying this action during the
arbitration."
3 Macy's filed its motion to compel arbitration 44 days after the United States
Supreme Court issued its decision in ATT Mobility LLC. v. Concepcion (2011) 563 U.S.
___ [131 S.Ct. 1740] (Concepcion). The parties dispute the effect of Concepcion on the
arbitration provision at issue in this case.
8
III.
DISCUSSION
Macy's appeals from the trial court's order denying its motion to compel individual
arbitration of Teimouri's claims. In the absence of material, conflicting extrinsic
evidence, we apply our independent judgment to determine whether an arbitration
agreement applies to a given controversy. (Amalgamated Transit Union Local 1277 v.
Los Angeles County Metropolitan Transportation Authority (2003) 107 Cal.App.4th 673,
685.) If the trial court's decision regarding the arbitrability of claims depended on its
resolution of disputed facts, we review those findings to determine whether there is
substantial evidence to support them. (Ibid.)
The party opposing arbitration has the burden of showing that an arbitration
provision is invalid or otherwise unenforceable. (Engalla v. Permanente Medical Group,
Inc. (1997) 15 Cal.4th 951, 972 ["The [party seeking to compel arbitration] bears the
burden of proving the existence of a valid arbitration agreement by the preponderance of
the evidence, and a party opposing the petition [to compel arbitration] bears the burden of
proving by a preponderance of the evidence any fact necessary to its defense"].)
The central dispute between Macy's and Teimouri is whether the arbitration
agreement—including its prohibition of class and representative claims—is enforceable
under the law. We independently review the applicable law to determine whether the
trial court's order denying Macy's motion to compel individual arbitration is correct.
9
A. Macy's motion to compel individual arbitration of Teimouri's claims should be
granted because the arbitration agreement is enforceable, as written, pursuant to
Concepcion
1. The FAA and California arbitration law
a. The FAA and federal arbitration law
The parties do not dispute that the arbitration agreement at issue in this case is
governed by the FAA. Congress enacted the FAA "in response to widespread judicial
hostility to arbitration agreements" (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p.
1745]) and to "ensure that private arbitration agreements are enforced according to their
terms." (Id. at p. 1750, fn. 6.) The FAA "incorporates a strong federal policy of
enforcing arbitration agreements, including agreements to arbitrate statutory rights."
(Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 96–97
(Armendariz).)
Section 2 of the FAA makes agreements to arbitrate "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. § 2.) This provision reflects a " 'liberal federal policy favoring
arbitration' [citation] . . . and the 'fundamental principle that arbitration is a matter of
contract' [citation] . . . ." (Concepcion, supra, 563 U.S. at p. ___ [131 S.Ct. at p. 1745].)
Pursuant to this policy, arbitration agreements are enforced according to their terms, in
the same manner as other contracts. (Ibid.) Not all arbitration agreements—or specific
provisions of those agreements—are necessarily enforceable, however. Title 9 United
States Code section 2's "saving clause" permits courts to invalidate agreements to
arbitrate based on " 'generally applicable contract defenses, such as fraud, duress, or
10
unconscionability' [citation]." (Concepcion, supra, at p. 1746]), but it does not allow
courts to invalidate agreements based on "defenses that apply only to arbitration or that
derive their meaning from the fact that an agreement to arbitrate is at issue." (Ibid.; see
also Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012)
55 Cal.4th 223, 235 (Pinnacle) ["the FAA precludes a court from construing an
arbitration agreement 'in a manner different from that in which it otherwise construes
nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an
agreement to arbitrate as a basis for a state-law holding that enforcement would be
unconscionable, for this would enable the court to effect what . . . the state legislature
cannot.' [Citation.]"].)
b. California law pertaining to class arbitrations and class action waivers
prior to Stolt-Nielsen and Concepcion
In Keating v. Superior Court (1982) 31 Cal.3d 584, 608-614 (Keating), the
California Supreme Court held that a court may order classwide arbitration in an
appropriate case. Unlike in this case, the arbitration agreement in Keating had no specific
provision either permitting or precluding classwide arbitration. Despite the arbitration
agreement's silence on the issue, the California Supreme Court held that a trial court has
the discretionary authority to order classwide arbitration where doing so would serve the
interests of justice. (Id. at pp. 613-614.) After Keating, class arbitration became a
"well[-]accepted" method for resolving disputes in California. (Discover Bank v.
Superior Court (2005) 36 Cal.4th 148, 152 (Discover Bank).)
11
Almost two decades later, the California Supreme Court considered various issues
pertaining to the enforceability of a mandatory employment arbitration agreement in a
wrongful termination case. (Armendariz, supra, 24 Cal.4th 83.) The Armendariz court
held that although state statutes do not prohibit mandatory employment arbitration
agreements, arbitration agreements that "encompass unwaivable statutory rights must be
subject to particular [judicial] scrutiny." (Id. at p. 100.) The Armendariz court set forth
five minimum requirements that an arbitration agreement must meet in order to ensure
that mandatory arbitration agreements are not used as a means of curtailing an employee's
unwaivable statutory rights: 1) the use of neutral arbitrators; 2) discovery; 3) a written
award; 4) availability of relief that would otherwise be available in court; and 5) no
additional costs for employees. (Id. at pp. 101-113.) The Armendariz court further held
that even if an arbitration agreement meets these requirements, a court may refuse to
enforce the agreement if the plaintiff demonstrates that the agreement is unconscionable.
(Id. at pp. 113-114.)
In Discover Bank, supra, 36 Cal.4th at page 158, the California Supreme Court
considered whether a class action waiver in a consumer adhesion contract was
unenforceable as contrary to public policy, and/or unconscionable. In that case, a credit
card holder filed a class action complaint alleging that Discover Bank had improperly
imposed a late fee on payments received after 1:00 p.m. on the payment due date. (Id. at
p. 154.) An arbitration agreement between the parties contained an express waiver of the
right to proceed by class action in arbitration. Unlike the claims in Armendariz, the
12
plaintiffs' claims were not based on unwaivable statutory rights. (Discover Bank, supra,
at pp. 153-154, 160.)
In considering whether the class arbitration waiver provision was enforceable, the
Discover Bank court applied the portion of Armendariz that addressed application of the
unconscionability doctrine to arbitration agreements. (Discover Bank, supra, 36 Cal.4th
at pp. 160-163.) Specifically, the court noted that class action waivers in consumer
adhesion contracts commonly involve both procedural and substantive aspects of
unconscionability under state law. (Id. at pp. 161-162.)
The California Supreme Court fashioned what became known as the "Discover
Bank rule," holding that class action waivers are unconscionable if the "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 . . . ." (Discover
Bank, supra, 36 Cal.4th at pp. 162–163.) The court concluded that under these
circumstances, a class action waiver is unconscionable and should not be enforced
because it "becomes in practice the exemption of the party 'from responsibility for [its]
own fraud, or willful injury to the person or property of another.' [Citation.]" (Id. at p.
163.) The Discover Bank court observed that that class arbitration would be "workable
and appropriate in some cases," and could be compelled when an otherwise valid
arbitration agreement contained an unconscionable class waiver provision. (Id. at p.
172.)
13
In establishing this rule of unenforceability of class action waivers, the Discover
Bank court rejected Discover Bank's argument that the FAA preempted the court's
holding, concluding that the unconscionability rule that it was applying did not single out
arbitration agreements. The court explained, " 'Under section 2 of the FAA, a state court
may refuse to enforce an arbitration agreement based on "generally applicable contract
defenses, such as fraud, duress, or unconscionability." ' [Citation.] In the present case,
the principle that class action waivers are, under certain circumstances, unconscionable as
unlawfully exculpatory is a principle of California law that does not specifically apply to
arbitration agreements, but to contracts generally." (Discover Bank, supra, 36 Cal.4th at
p. 165.)
Two years later, the California Supreme Court decided Gentry, supra, 42 Cal.4th
443. The plaintiff in Gentry had entered into an arbitration agreement with his employer
that contained a class action waiver provision. (Id. at pp. 455-456.) Despite the
existence of that agreement, the plaintiff brought a class action against his employer
alleging violations of various Labor Code provisions that contained unwaivable statutory
rights.
The Gentry opinion addressed two issues: (1) whether "class arbitration waivers in
employment arbitration agreements may be enforced to preclude class arbitrations by
employees whose statutory rights to overtime pay pursuant to Labor Code sections 500 et
seq. and 1194 allegedly have been violated" (Gentry, supra, 42 Cal.4th at p. 450, fn.
omitted), and (2) whether "a provision in an arbitration agreement that an employee can
opt out of the agreement within 30 days means that the agreement is not procedurally
14
unconscionable, thereby insulating it from employee claims that the arbitration agreement
is substantively unsconscionable or unlawfully exculpatory." (Id. at pp. 450-451.)4
With respect to the first issue, which is the significant one for purposes of this
appeal, the Gentry court concluded that "in some cases, the prohibition of classwide relief
would undermine the vindication of the employees' unwaivable statutory rights and
would pose a serious obstacle to the enforcement of the state's overtime laws," and for
these reasons, would be unenforceable. (Gentry, supra, 42 Cal.4th at p. 450.) The
Gentry court established the following four-factor test for courts to employ in
determining whether to decline to enforce a class action waiver in an arbitration
agreement in favor of allowing class arbitration:
"[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 arbitration waiver, the trial court must consider the factors
discussed above: [(1)] the modest size of the potential individual
recovery, [(2)] the potential for retaliation against members of the
class, [(3)] the fact that absent members of the class may be ill
informed about their rights, and [(4)] other real world obstacles to
the vindication of class members' rights to overtime pay through
individual arbitration. If [a court] 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
4 The Gentry court explained that in its view, the first issue involved the validity of
a class arbitration waiver "in terms of unwaivable statutory rights" (Gentry, supra, 42
Cal.4th at p. 467), while the second issue involved an analysis of the "unconscionability"
of the entire arbitration agreement, with particular consideration given to the 30-day opt
out provision and whether such a provision rendered the contract free from procedural
unconscionability. (Id. at p. 470.)
15
alleged to be affected by the employer's violations, it must invalidate
the class arbitration waiver to ensure that these employees can
'vindicate [their] unwaivable rights in an arbitration forum.'
[Citation.]" (Id. at p. 463.)
The Gentry court noted that it had granted review in the case "to clarify our
holding in Discover Bank." (Gentry, supra, 42 Cal.4th at p. 452.) The court stated,
"Discover Bank was an application of a more general principle: that although '[c]lass
action and arbitration waivers are not, in the abstract, exculpatory clauses' (Discover
Bank, supra, 36 Cal.4th at p. 161), such a waiver can be exculpatory in practical terms
because it can make it very difficult for those injured by unlawful conduct to pursue a
legal remedy." (Gentry, supra, at p. 457.) The Gentry court acknowledged that "class
action waivers in wage and hour cases and overtime cases would have, at least frequently
if not invariably, a similar exculpatory effect [as the provisions rendered unenforceable
under the Discover Bank rule] for several reasons, and would therefore undermine the
enforcement of the statutory right to overtime pay." (Ibid.) In reaching its ultimate
conclusion that the class action waiver in the arbitration agreement was not enforceable,
the court relied on Armendariz's reasoning that " 'arbitration cannot be misused to
accomplish a de facto waiver' " of unwaivable statutory rights. (Gentry, supra, at p.
457.)5
5 The Gentry court reiterated the conclusion of the Armendariz court that "for public
policy reasons we will not enforce provisions contained within arbitration agreements
that pose significant obstacles to the vindication of employees' statutory rights." (Gentry,
supra, 42 Cal.4th at p. 463, fn. 7.)
16
With respect to the employer's argument that the rule that the Gentry court
ultimately adopted would discriminate against arbitration clauses in violation of the FAA,
the Gentry court responded: "We considered at great length and rejected a similar
argument in Discover Bank. [Citation.] The principle that in the case of certain
unwaivable statutory rights, class action waivers are forbidden when class actions would
be the most effective practical means of vindicating those rights is an arbitration-neutral
rule: it applies to class waivers in arbitration and nonarbitration provisions alike.
[Citation.] 'The Armendariz requirements are . . . applications of general state law
contract principles regarding the unwaivability of public rights to the unique context of
arbitration, and accordingly are not preempted by the FAA.' [Citation.]" (Gentry, supra,
42 Cal.4th at p. 465.)
c. The United States Supreme Court's decisions in Stolt-Neilsen and
Concepcion
Three years after the Gentry decision, the United States Supreme Court decided
Stolt-Nielsen, which addressed "whether imposing class arbitration on parties whose
arbitration clauses are 'silent' on that issue is consistent with the Federal Arbitration Act
(FAA), 9 [United States Code, section] 1 et seq." (Stolt-Nielsen S.A. v. AnimalFeeds Int'l
Corp. (2010) 559 U.S. 662 [130 S.Ct. 1758, 1764] (Stolt-Nielsen).)
In Stolt-Nielsen, the parties had stipulated that the "arbitration clause was 'silent'
with respect to class arbitration." (Stolt-Nielsen, supra, 559 U.S. at p. ___ [130 S.Ct. at p.
1766].) In determining the effect of this silence on the authority of a panel of arbitrators
to impose class arbitration, the United States Supreme Court reiterated that "the central or
17
'primary' purpose of the FAA is to ensure that 'private agreements to arbitrate are
enforced according to their terms.' [Citation.]" (Id. p. ___ [130 S.Ct. at p. 1773].) Thus,
"[w]hether enforcing an agreement to arbitrate or construing an arbitration clause, courts
and arbitrators must 'give effect to the contractual rights and expectations of the parties'
[citation]" because, "[i]n this endeavor, 'as with any other contract, the parties' intentions
control.' [Citation.]" (Id. at pp. ___-___ [130 S.Ct. at pp. 1773-1774].) Based on
principles of contract interpretation and the purpose of the FAA to ensure that private
arbitration agreements are enforced according to their terms, the Stolt-Nielsen court
determined that "a party may not be compelled under the FAA to submit to class
arbitration unless there is a contractual basis for concluding that the party agreed to do
so." (Stolt-Nielsen, supra, 559 U.S. ___;[130 S.Ct. at p. at p 1775].)
The Stolt-Nielsen court explained that "[a]n implicit agreement to authorize class-
action arbitration . . . is not a term that the arbitrator may infer solely from the fact of the
parties' agreement to arbitrate" because the nature of class-action arbitration is so
significantly different from the nature of individual arbitration that "it cannot be
presumed the parties consented to it by simply agreeing to submit their disputes to an
arbitrator." (Stolt-Nielsen, supra, 559 U.S. at p. ___ [130 S.Ct. at p. 1775].) Thus, before
requiring a party to engage in class arbitration, the court must determine "whether the
parties agreed to authorize class arbitration." (Id. at p. ___ [130 S.Ct. at p. 1776].)
Where parties have "stipulated that there was 'no agreement' on this question," as the
18
parties had in Stolt-Nielsen, "the parties cannot be compelled to submit their dispute to
class arbitration." (Ibid.)6
In Concepcion, supra, 563 U.S. ___ [131 S.Ct. 1740], the United States Supreme
Court examined the validity of the Discover Bank rule, after a federal district court relied
on Discover Bank to conclude that an arbitration agreement was unconscionable because
AT&T had not demonstrated that bilateral arbitration could adequately substitute for the
deterrent effects of class actions in that case. The precise issue before the court in
Concepcion was whether the FAA prohibited a state rule, such as the one articulated by
the California Supreme Court in Discover Bank, that conditioned "the enforceability of
certain arbitration agreements on the availability of classwide arbitration procedures."
(Concepcion, supra, at p. ___ [131 S.Ct. at p. 1744].)
6 Stolt-Nielsen left open the question of what factors might allow a court or
arbitrator to find that the parties agreed to class arbitration where the agreement is
otherwise silent on the matter and there is not a stipulation that there was no agreement
on the issue of class arbitration. (Stolt-Nielsen, supra, 559 U.S. at p. ___, fn. 10 [130
S.Ct. at p. 1776, fn. 10] ["We have no occasion to decide what contractual basis may
support a finding that the parties agreed to authorize class-action arbitration"].) After
Stolt-Nielsen, some courts have recognized that an implied agreement may be sufficient
to support ordering class arbitration. (See Jock v. Sterling Jewelers, Inc. (2d Cir. 2011)
646 F.3d 113, 120–121; Vazquez v. ServiceMaster Global Holding, Inc. (N.D.Cal. June
29, 2011 No. C 09-05148 SI) 2011 U.S. Dist. Lexis 69753 at *9, fn. 1.)
Justice Ginsburg noted in her dissent in Stolt-Nielsen that the majority opinion
"apparently spares from its affirmative-authorization requirement contracts of adhesion
presented on a take-it-or-leave-it basis" because the majority opinion "observ[ed] that 'the
parties [here] are sophisticated business entities,' and 'that it is customary for the shipper
to choose the charter party that is used for a particular shipment . . . .' " (Stolt-Nielsen,
supra, 559 U.S. at p. ___ [130 S.Ct. at p. 1783] (dis. opn. of Ginsberg, J.).) However,
Concepcion indicates that a majority of the United States Supreme Court is of the view
that even unsophisticated parties subjected to adhesion contracts may be considered to
have agreed not to engage in class arbitration where an adhesion contract contains an
express class action waiver.
19
The Concepcion court identified two types of state rules that are preempted by the
FAA. The first type is relatively simple to recognize. "When state law prohibits outright
the arbitration of a particular type of claim, the analysis is straightforward: The
conflicting rule is displaced by the FAA." (Concepcion, supra, 563 U.S. at p. ___ [131
S.Ct. at p. 1747].) The second type of rule requires a more nuanced inquiry into its
validity. This type of rule exists when a general defense that would otherwise be
permitted by the FAA's section 2 saving clause (i.e., a defense such as unconscionability)
is "applied in a fashion that disfavors arbitration." (Concepcion, supra, at p ___ [131
S.Ct. at p. 1747].) Where this occurs, application of the defense might violate the rule
"that a court may not 'rely on the uniqueness of an agreement to arbitrate as a basis for a
state-law holding that enforcement would be unconscionable, for this would enable the
court to effect what . . . the state legislature cannot.' " (Ibid., quoting Perry v. Thomas
(1987) 482 U.S. 483, 493, fn. 9.)
With respect to the second type of rule, the Concepcion court held: "Although
[section] 2's saving clause preserves generally applicable contract defenses, nothing in it
suggests an intent to preserve state-law rules that stand as an obstacle to the
accomplishment of the FAA's objectives." (Concepcion, supra, 563 U.S. at p. ___ [131
S.Ct. at p. 1748], italics added.) The "overarching purpose of the FAA," the Concepcion
court explained, "is to ensure the enforcement of arbitration agreements according to
their terms so as to facilitate streamlined proceedings." (Ibid., italics added.) Because
"[r]equiring the availability of classwide arbitration interferes with fundamental attributes
20
of arbitration," a rule such as the one established in Discover Bank "creates a scheme
inconsistent with the FAA." (Concepcion, supra, at p. ___ [131 S.Ct. at p 1748].)
The Concepcion court rejected the notion that because the Discover Bank rule did
not require classwide arbitration, it did not interfere with arbitration. Rather, the court
determined that "class procedures" are incompatible with the benefits of arbitration, and,
thus, interfere with arbitration. (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at pp.
1752-1753].) The Concepcion court explained that among the reasons that a rule
imposing class arbitration in the absence of consent by the parties is inconsistent with the
FAA are (1) the "switch from bilateral to class arbitration sacrifices the principal
advantage of arbitration—it's informality—and makes the process slower, more costly,
and more likely to generate procedural morass than final judgment"; (2) class arbitration
"requires procedural formality" (id. at p. ___ [131 S.Ct. at p. 1751], italics omitted) to
protect third-parties' due process rights; and (3) class arbitration "greatly increases risks
to defendants," in part because arbitration is "poorly suited to the higher stakes of class
litigation." (Id. at p. ___ [131 S.Ct. at p. 1752].)
2. The continuing application of Gentry to invalidate class action waivers in
arbitration agreements is undermined by the holdings in Stolt-Nielsen and
Concepcion; the arbitration agreement, including the class waiver, must be
enforced as written
Teimouri and Macy's strenuously disagree as to the continuing viability of Gentry
in light of the decision in Concepcion. They are not alone. There continues to be a
difference of opinion among courts, both federal and state, as to whether the United
21
States Supreme Court's holding in Concepcion that the FAA preempts the Discover Bank
rule implicitly overruled Gentry.7
In considering this question ourselves, we can find no principled basis to
distinguish the rule established in Discover Bank and the rule established in Gentry with
respect to the availability of classwide arbitration in the face of an express agreement
precluding class arbitration. Neither Gentry nor Discover Bank created a categorical rule
imposing class arbitration in the face of a class action waiver. Rather, the rules set forth
7 A number of courts have concluded that Concepcion implicitly overrules Gentry.
(See Jasso v. Money Mart Express, Inc. (N.D. Cal. 2012) 879 F.Supp.2d 1038[concluding Concepcion effectively overrules Gentry rule]; Morvant v. P.F. Chang's
China Bistro, Inc. (N.D. Cal. 2012) 870 F. Supp. 2d 831, 840-841 [same]; Sanders v.
Swift Transp. Co. of Ariz., LLC (N.D. Cal. 2012) 843 F.Supp.2d 1033, 1037 [same];
Lewis v. UBS Financial Services, Inc. (N.D. Cal. 2011) 818 F.Supp.2d 1161, 1167
[same]; Valle v. Lowe's HIW, Inc. (N.D. Cal. Aug. 22, 2011, No. 11-1189 SC) 2011 U.S.
Dist. LEXIS 93639 at *15-17 [same]; Quevedo v. Macy's Inc. (C.D. Cal. 2011) 798
F.Supp.2d 1122, 1142 (Quevedo) [Gentry's reasoning is "longer tenable in light of"
Concepcion]; Murphy v. DirecTv, Inc. (C.D. Cal. Aug. 2, 2011, No. 2:07-cv-064565-
JHN-VBKx) 2011 U.S. Dist. LEXIS 87625 at *11 [Concepcion overrules Gentry]);
Morse v. ServiceMaster Global Holdings, Inc. (N.D. Cal. July 27, 2011, No. C 10-00628-
SI) 2011 U.S. Dist. LEXIS 82029 at *9, fn. 1 [Concepcion rejected reasoning and
precedent behind Gentry, even if not explicitly overruling it].)
Other courts have either assumed or concluded that Gentry remains binding
precedent despite Concepcion. (See Kinecta Alternative Financial Solutions, Inc. v.
Superior Court (2012) 205 Cal.App.4th 506, 516 [assuming, without deciding, that
Gentry was not overruled by Concepcion]; Brown, supra, 197 Cal.App.4th at p. 498
[although not deciding the issue, suggesting that Gentry remains binding law]; Truly
Nolen of America v. Superior Court (2012) 208 Cal.App.4th 487, 493 (Truly Nolen)
[despite language in Concepcion "strongly suggest[ing]" that Gentry's holding is
preempted by federal law, because Concepcion did not directly rule on Gentry, appellate
courts remain bound to apply it].)
On September 19, 2012, the California Supreme Court granted a petition for
review in Iskanian v. CLS Transportation Los Angeles, LLC (2012) 206 Cal.App.4th 949,
959 (rev. granted Sept. 19, 2012, No. S204032) (Iskanian), in which the appellate court
concluded that Concepcion "conclusively invalidates the Gentry test."
22
in both of those cases require courts to look to the modest size of individuals' potential
recovery, the inequality in the parties' knowledge and bargaining power in the contractual
relationship, and "other real world obstacles" to vindication of the individuals' rights.
(Compare Discover Bank, supra, 36 Cal.4th at p. 162, with Gentry, supra, 42 Cal.4th at
p. 463.) In abrogating the Discover Bank rule, the Concepcion court made it clear that it
rejected the California Supreme Court's reasoning that in some circumstances, state
policy reasons justify the use of class arbitration proceedings despite the parties' express
agreement that class proceedings would not be available. (Concepcion, supra, 563 U.S.
at pp. ___, ___ [131 S.Ct. at pp. 1748, 1753] [even if a particular procedure is desirable
to the state for a reason unrelated to the FAA, if the procedure is inconsistent with the
FAA, the state may not require it; class arbitration is a procedure that is inconsistent with
the FAA].)
The fact that Gentry addresses arbitration agreements in employment contracts and
provides a rule allowing courts to find class waivers unenforceable based on the rationale
that plaintiffs might not be able to effectively vindicate nonwaivable statutory rights if a
class proceeding were not available, while Discover Bank pertained to consumer
contracts and provided a rule allowing class action waivers to be found unenforceable on
unconscionability grounds, is not, in our view, a significant distinction for purposes of
applying Concepcion. Under Gentry, if a plaintiff is successful in meeting the four-part
test, the case is to be decided in class arbitration (unless the plaintiff could show that the
entire arbitration agreement was unconscionable, in which case the entire arbitration
agreement would be voided). Concepcion unequivocally rejected the notion that class
23
arbitration procedures may be imposed on a party who never agreed to them, and clearly
stated that nonconsensual class arbitration is inconsistent with the FAA. (Concepcion,
supra, 563 U.S. at pp. ___–___ [131 S.Ct. at pp. 1751–1752].) This broad rejection of a
court-imposed rule promoting class arbitration where the parties have agreed to waive
class proceedings applies with equal force to the Gentry rule as it did to the Discover
Bank rule.
To the extent that Gentry rests on the principle that a class waiver should not be
enforced where the amounts at issue and the expense of prosecuting the claims would
effectively preclude vindication of statutory rights, Concepcion essentially rejects the
argument that a state's public policy reasons for promoting class arbitration can provide a
basis for requiring class arbitration in the face of an express waiver of class arbitration by
the parties. The majority in Concepcion rejected the contention that a state's interest in
providing for class proceedings because they are "are necessary to prosecute small-dollar
claims that might otherwise slip through the legal system" is sufficient to justify the
existence of a state rule that thwarts the goals of the FAA. (Concepcion, supra, 563 U.S.
at p. ___ [131 S.Ct. at p. 1753].) After Concepcion, it is clear that a state's policy
concerns—even when codified as statutory rights—do not permit a state to "require a
procedure that is inconsistent with the FAA." (Ibid.)
The interpretation of FAA preemption announced in Concepcion directly and
conclusively undercuts Gentry's rationale, and we are bound by the United States
Supreme Court's rulings with respect to federal questions, such as preemption. (Elliot v.
Albright (1989) 209 Cal.App.3d 1028, 1034 [" 'Decisions of the United States Supreme
24
Court are binding not only on all of the lower federal courts [citation], but also on state
courts when a federal question is involved' [citation]," and thus a state court considering a
case involving a federal question, such as preemption, is bound by federal law].) Macy's
motion to compel individual arbitration raises the question whether the FAA preempts
application of California's Gentry rule. We therefore must apply United States Supreme
Court precedent that speaks to federal preemption of a state rule that may impose class
arbitration despite the existence of an express waiver of class arbitration in an arbitration
agreement governed by the FAA. Although Concepcion analyzed the viability of one
particular state rule—i.e., the Discover Bank rule—on a broader level, it interprets the
scope of the savings clause in section 2 of the FAA. "As we have said, a federal statute's
saving clause ' "cannot in reason be construed as [allowing] a common law right, the
continued existence of which would be absolutely inconsistent with the provisions of the
act. In other words, the act cannot be held to destroy itself." ' [Citations.]" (Concepcion,
supra, 563 U.S. at p. ___ [131 S.Ct. at p. 1748].) When a state rule exists to "require[e]
the availability of classwide arbitration," it "interferes with fundamental attributes of
arbitration and thus creates a scheme inconsistent with the FAA." (Ibid.)
We acknowledge that in Truly Nolen, supra, 208 Cal.App.4th 487, a panel of this
court elected to follow Gentry "until the California Supreme Court has the opportunity to
review the decision in light of the recent United States Supreme Court decisions in
Concepcion and Stolt-Nielsen," despite recognizing that Concepcion is inconsistent with
Gentry and questioning Gentry's continuing vitality. (See Truly Nolen, supra, at p. 507.)
25
The Truly Nolen court identified the problem with attempting to apply Gentry after
Concepcion as follows:
"Although Gentry and Discover Bank were founded on different
theoretical grounds because Discover Bank was based on an
unconscionability analysis and Gentry was based on the Armendariz
public policy rationale (see Arguelles-Romero v. Superior Court
(2010) 184 Cal.App.4th 825, 836–841), Concepcion's holding was
unrelated to the fact that Discover Bank was a particular application
of California's unconscionability analysis. Concepcion reaffirmed
the validity of a state's general unconscionability defenses as applied
to arbitration agreements, but found Discover Bank objectionable
mainly because it allowed courts to ignore and refuse to enforce the
clear terms of the parties' agreement, and instead employ a judicial
policy judgment that the class procedure would better promote the
vindication of the parties' rights in certain cases. This discredited
reasoning is the same rationale employed by the Gentry court. In
requiring courts to consider the four enumerated factors, the Gentry
court held that courts have the authority to invalidate class action
waivers in wage and hour cases because the waivers would
'frequently if not invariably' have an 'exculpatory effect' that is
'similar' to the consumer waivers considered in Discover Bank and
thus would potentially 'undermine the enforcement' of the
employee's statutory rights. [Citation.]
"Based on Concepcion's expansive language and its clear mandate
that arbitration agreements must be enforced according to their terms
despite a state's policy reasons to the contrary, and the United States
Supreme Court's recent holding that this principle extends to federal
statutory claims ([CompuCredit Corp. v. Greenwood (2012)] 565
U.S. ___ [132 S.Ct. 665]), we agree with those courts that have
questioned the continuing validity of the Gentry standard to
invalidate an express arbitration waiver contained in an employment
arbitration agreement governed by the FAA. This same conclusion
applies to employment arbitration agreements that do not contain an
express or implied agreement to permit class arbitration. Under the
reasoning of Concepcion and Stolt-Nielsen, absent a showing of
mutual consent, it is questionable whether courts can validly invoke
Gentry to require an objecting party to engage in classwide
arbitration." (Truly Nolen, supra, 208 Cal.App.4th at p. 506.)
26
The Truly Nolen court appears to have decided to "adhere to Gentry" because
Concepcion "did not directly address the precise issue presented in Gentry." (Truly
Nolen, supra, 208 Cal.App.4th at p. 507.)
However, in Truly Nolen, the court did not have to definitively resolve the
question that we must address in this case, i.e., whether Gentry survives Concepcion,
because the Truly Nolen court concluded that the plaintiff in that case had not presented
sufficient evidence of the Gentry factors to establish that class arbitration was required.
Essentially, the Truly Nolen court could presume that Gentry was still good law because
it was reversing the order of the trial court in any event. Given the fact that Truly Nolen
did not have to decide whether Gentry survives Concepcion, and given Truly Nolen's
clear indication that it viewed Gentry's continuing viability as questionable at best, we do
not view our conclusion here as wholly inconsistent with the holding in Truly Nolen.
Rather, after further consideration of the issue, and having the benefit of recent decisions
addressing the questions at hand, we conclude that we should give effect to the portion of
Truly Nolen that acknowledges the problems with Gentry's viability after Concepcion,
and expressly hold that Concepcion implicitly overrules Gentry.
We conclude that the United States Supreme Court's decision in Concepcion
entirely undermines the portion of Gentry holding that class action waivers in arbitration
agreements may not be enforced when they implicate unwaivable statutory rights.8 We
8 Gentry remains binding law only with respect to the portion of that opinion in
which the Gentry court considered the application of the general defense of
unconscionability to the arbitration agreement.
27
can see no principled way to construe Concepcion in a manner that would allow for the
class arbitration rule of Gentry to survive. Rather, to continue to give effect to Gentry
despite the broad language in Concepcion would require us to engage in tortured
reasoning to circumvent the clear mandate of Concepcion. Simply put, even if we were
to attempt to apply the law set forth in Gentry, and even if a court found that all of the
Gentry factors were present in a given case, the plaintiff's claims would either have to be
arbitrated on a classwide basis—an option that Concepcion and Stolt-Nielsen clearly
reject when the parties have not agreed to classwide arbitration, or the class claims
alleged in the complaint would have to remain under the jurisdiction of the court and be
litigated in that forum rather than arbitrated, effectively rendering the entire arbitration
agreement unenforceable as to certain claims—a result that interferes with the arbitration
of claims under the FAA. (See Pinnacle, supra, 55 Cal.4th at p. 235 ["To ensure that
arbitration agreements are enforced according to their terms, 'the FAA pre-empts state
laws which "require a judicial forum for the resolution of claims which the contracting
parties agreed to resolve by arbitration" ' [citation]"].)
Rather than continue to apply Gentry, we conclude that Concepcion controls and
requires that we apply the federal preemption principles enunciated in that decision. We
further conclude that pursuant to the rationale of Concepcion, we may not deem a class
arbitration provision in an arbitration agreement unenforceable based on a finding that a
class is a "significantly more effective practical means of vindicating the rights of the
affected employees" (Gentry, supra, 42 Cal.4th at p. 463). The fact that Concepcion did
not specifically address the rule announced in Gentry does not permit us to disregard
28
Concepcion's broad conclusion that the FAA prohibits state-law created barriers to
arbitration on the grounds articulated by the Gentry court. Ordering class arbitration
pursuant to such a rule, or ordering that class claims be litigated in court (which is what
the trial court here appears to have done), would plainly "stand as an obstacle to the
accomplishment of the FAA's objectives" (Concepcion, supra, 563 U.S. at p. ___ [131
S.Ct. at p. 1748]) where the parties have a valid arbitration agreement that includes a
class and collective action waiver.9
Accordingly, we hold that the class action waiver is enforceable under
Concepcion, and that Macy's motion to compel individual arbitration of Teimouri's
claims must be granted.
3. Teimouri's individual PAGA claims may be arbitrated
The trial court concluded that Teimouri does not have to arbitrate her PAGA
claims against Macy's because the collective action waiver in the arbitration agreement,
which by its terms covers representative actions, cannot be enforced as to PAGA claims.
9 The trial court denied the motion to compel arbitration of all of Teimouri's non-
PAGA claims based on its conclusion that the "class action waiver" in the arbitration
agreement is unenforceable. However, under Gentry, if the court determined that the
class action waiver was unenforceable, the court should have granted the motion to
compel arbitration on a classwide basis. (Gentry, supra, 42 Cal.4th at p. 466 [if trial
court "invalidates the [class action] waiver on policy grounds, then the parties may
proceed to class arbitration" unless the parties both waive arbitration and proceed to
litigate the claims].) Gentry does not provide the trial court with the option of retaining
the action in a judicial forum unless the court determines that the entire agreement is
unenforceable. Given that the trial court in this case did not make a finding that the
entire arbitration agreement was invalid on other grounds, such as unconscionability, the
trial court's order did not properly apply Gentry, in that it failed to send the matter to an
arbitral forum for class arbitration.
29
We conclude that the collective action waiver is enforceable, and that it precludes
Teimouri from arbitrating (or litigating) her representative PAGA claims, but permits her
to arbitrate her own individual PAGA claims.
Pursuant to PAGA, "an aggrieved employee" may bring a civil action "on behalf
of himself or herself and other current or former employees" to recover civil penalties for
Labor Code violations. (Lab. Code, § 2699, subd. (a).)10 An "aggrieved employee"
means "any person who was employed by the alleged violator and against whom one or
more of the alleged violations was committed." (Id., subd. (c).) The statute provides for
civil penalties of $100 "for each aggrieved employee per pay period for the initial
violation" and $200 "for each aggrieved employee per pay period for each subsequent
violation." (Id., subd. (f).) When an employee sues under PAGA, he or she acts "as the
proxy or agent of the state's labor law enforcement agencies" to "supplement enforcement
actions by public agencies, which lack adequate resources to bring all such actions
themselves." (Arias v. Superior Court (2009) 46 Cal.4th 969, 986 (Arias).) "The
purpose of the PAGA is not to recover damages or restitution, but to create a means of
'deputizing' citizens as private attorneys general to enforce the Labor Code.
10 Subdivision (a) of Labor Code section 2699 provides in full:
"Notwithstanding any other provision of law, any provision of this
code that provides for a civil penalty to be assessed and collected by
the Labor and Workforce Development Agency or any of its
departments, divisions, commissions, boards, agencies, or
employees, for a violation of this code, may, as an alternative, be
recovered through a civil action brought by an aggrieved employee
on behalf of himself or herself and other current or former
employees pursuant to the procedures specified in Section 2699.3."
30
[Citation.] . . . [T]he relief is in large part 'for the benefit of the general public rather than
the party bringing the action [citation] . . . .' " (Brown, supra, 197 Cal.App.4th at p. 501.)
With one exception, penalties recovered by aggrieved employees are to be distributed 75
percent to the Labor and Workforce Development Agency and 25 percent to the
aggrieved employees. (Lab. Code, § 2699, subd. (i).)
Several courts have recently construed PAGA as creating solely a "representative
claim," and not an individual claim that a plaintiff may bring on his or her own. (See
Machado v. M.A.T. & Sons Landscape, Inc. (E.D.Cal. July 23, 2009, No. 2.09-cv-00459-
JAM-JFM) 2009 U.S. Dist. Lexis 63414 at *6 (Machado); see also Reyes v. Macy's, Inc.
(2012) 202 Cal.App.4th 1119, 1123 [relying on Machado to state that "[a] plaintiff
asserting a PAGA claim may not bring the claim simply on his or her own behalf but
must bring it as a representative action and include ' "other current or former employees" '
[citation]"]; Casida v. Sears Holdings Corp. (E.D. Cal. Aug. 29, 2012, No. 1:11-cv-
01052-AWI-JLT) U.S. Dist. LEXIS 9302 at *9 [relying on Machado to conclude that a
PAGA claim must be brought as a representative suit]; Urbino v. Orkin Services of
California (C.D.Cal. 2011) 882 F.Supp.2d 1152, 1167 [relying on Brown, Arias, and
Machado to conclude that a PAGA claim is fundamentally a representative enforcement
action, meant to be brought on behalf of the plaintiff and other aggrieved employees];
Thomas v. Aetna Health of Cal., Inc. (E.D. Cal., June 2, 2011, No. 1:10-cv-01906-AWI-
SKO) 2011 U.S. Dist. LEXIS 59377 at *29-*31 (Thomas) [relying on Machado for
holding that PAGA claim must be a representative claim].) It appears that the federal
district court in Machado was the first court to address the issue directly, and that other
31
courts have followed Machado's lead without independent analysis of Machado's
interpretation of the statute.11 We believe that these courts have misconstrued the
statutory language in a manner that limits the intended scope of PAGA in a way that the
legislature did not intend, and, as a result, have unnecessarily eliminated the possibility of
one form of a PAGA claim.
Some basic principles of statutory analysis are well established. " '[W]e must look
first to the words of the statute, "because they generally provide the most reliable
indicator of legislative intent." [Citation.] If the statutory language is clear and
unambiguous our inquiry ends. "If there is no ambiguity in the language, we presume the
Legislature meant what it said and the plain meaning of the statute governs." [Citations.]
In reading statutes, we are mindful that words are to be given their plain and
commonsense meaning. [Citation.]' [Citation.] Thus, we 'avoid a construction that
would produce absurd consequences, which we presume the Legislature did not intend.
[Citations.]' [Citation.]" (Pineda v. Bank of America, N.A. (2010) 50 Cal.4th 1389,
1394.) We should also be mindful that in giving the words of a statute "their ordinary
and usual meaning" we should also "construe them in the context of the statute as a
whole." (American Liberty Bail Bonds, Inc. v. Garamendi (2006) 141 Cal.App.4th 1044,
1052.) Moreover, a statute is not to be read in isolation but rather must be construed with
11 In contrast to these cases, the court in Quevedo, supra, 798 F.Supp.2d at page
1141, concluded—without analyzing the statutory language—that a plaintiff may pursue
an individual PAGA claim. The court in Brown, supra, 197 Cal.App.4th at page 503,
footnote 8, criticized Quevedo for failing to note the existence of Machado and address
its conclusion that a PAGA claim can be brought only as a representative action.
32
related statutes and considered in the context of the statutory framework as a whole.
(Estate of Burden (2007) 146 Cal.App.4th 1021, 1028.)
The relevant language of Labor Code section 2699, subdivision (a) states: "[A]ny
provision of this code that provides for a civil penalty to be assessed and collected by the
Labor and Workforce Development Agency or [other enforcement entities or individuals]
for a violation of this code, may, as an alternative, be recovered through a civil action
brought by an aggrieved employee on behalf of himself or herself and other current or
former employees." (Italics added.) The question is whether the "and" between "himself
or herself" and "other current or former employees" requires that a plaintiff, in every
instance, bring a representative claim on behalf of other current or former employees,
such that a plaintiff may not bring a PAGA claim for civil penalties for violations that he
or she, alone, suffered.
As the Machado court noted, the "word 'and' commonly connotes conjunction and
is used 'as a function word to indicate connection or addition.' " (Machado, supra, 2009
U.S. Dist. Lexis 63414 at *6, quoting Merriam-Webster's Collegiate Dictionary (10th ed.
2002) p. 43.) Based on the dictionary definition of "and," the Machado court concluded
that in order to give effect "to the 'common acceptation' of the word 'and,' " the statute
should be interpreted as requiring that a PAGA claim be brought on behalf of other
employees, without consideration of "customary rules of statutory construction or
legislative history." (Machado, supra, at *6-*7.)
We agree that the word "and," which in this statute separates the terms "himself or
herself" from "other current or former employees," is a conjunctive term if viewed
33
literally. However, California courts have long acknowledged that in construing a
statute, the word "and" may be interpreted as "or" in order to carry out the legislative
intent. (See Newland v. Board of Governors (1977) 19 Cal.3d 705, 716; Bianco v.
Industrial Acc. Commission (1944) 24 Cal.2d 584, 587.) Under the interpretation
adopted by Machado, an employee who has suffered a violation of the Labor Code that
no other employee has also suffered would be unable to join a PAGA claim to his or her
other claims for relief. As with most questions of statutory construction, whether the
Legislature actually and consciously intended to exclude an employee with individual
claims of Labor Code violations from PAGA's coverage is not a question that can be
precisely confirmed or refuted. Nevertheless, an examination of the stated purpose of the
statute indicates that the Legislature did not intend to limit PAGA actions only to those
that are brought on behalf of both the plaintiff and other employees.
The evident purpose of the statute is to expand the protection of all employees
under the Labor Code, and to ensure sufficient enforcement of the Labor Code
protections despite the inadequate staffing at state labor law enforcement agencies.
(Stats. 2003, ch. 906, § 1; see also Arias, supra, 46 Cal.4th at p. 986 ["The act's declared
purpose is to supplement enforcement actions by public agencies, which lack adequate
resources to bring all such actions themselves"]; Thomas v. Aetna Health of Cal., Inc.,
supra, 2011 U.S. Dist. Lexis 59377 at *27 ["Two catalysts identified for enacting PAGA
involved a need for adequate financing of labor law enforcement to achieve maximum
compliance with state labor laws and to ensure a disincentive for employers to engage in
unlawful employment practices"].) Allowing an employer to avoid a penalty that would
34
otherwise be assessed for a violation of the Labor Code because that employer acted
unlawfully only as to a single employee would be contrary to the purpose of the statute.
The more reasonable interpretation of the statute, in our view, is that the "and"
should be read to also include "or," such that PAGA does not require that a plaintiff find
other employees who have suffered his same fate before being able bring a PAGA claim
for civil penalties for each Labor Code violation. It is difficult to conceive of a reason
why, in crafting PAGA, the legislature would create a broad representative cause of
action with the intention of protecting the rights of all employees, but at the same time
exclude from the scope of the statute a more narrow cause of action brought by an
individual employee on his own behalf. For this reason, we disagree with those cases
that have concluded that PAGA claims may be brought only as representative claims.
Rather, we conclude that a plaintiff may assert a PAGA claim on an individual basis.12
Because we conclude that a plaintiff may bring an individual PAGA claim, we are
unconvinced by Teimouri's argument that enforcing the collective action waiver would
effectively "extinguish[]" her PAGA claim.
We reject the reasoning of the court in Brown, supra, 197 Cal.App.4th 489, the
decision on which the trial court relied in denying Macy's motion to compel Teimouri to
arbitrate her PAGA claims on an individual, as opposed to representative, basis. In
12 See also Quevedo, supra, 798 F.Supp.2d at pages 1140-1142 [concluding without
analyzing the statutory language that a plaintiff may bring an individual PAGA claim and
may be required to arbitrate that claim individually where there is an arbitration
agreement with a representative action waiver], and Brown, supra, 197 Cal.App.4th at
page 509 (conc. and dis. opn. of Kreigler, J.) [suggesting that allowing individual
arbitration of a PAGA claim is not inconsistent with PAGA statute].
35
Brown, the court observed that in Concepcion, the United States Supreme Court had not
addressed the validity of a waiver of PAGA claims, and concluded that the rationale of
Concepcion was inapplicable in a case involving PAGA claims because a plaintiff who
brings a PAGA claim is bringing that claim " 'as the proxy or agent of the state's labor
law enforcement agencies.' [Citation.]" (Brown, supra, at p. 503, 502.)13 Ruling on an
arbitration agreement similar to the one at issue here, which governed all employment-
related disputes and expressly precluded arbitration of disputes " 'as a private attorney
general, or on bases involving claims or disputes brought in a representative capacity on
behalf of the general public . . . ' [citation]" (id. at p. 495), the Brown court held that
Concepcion did not govern waivers of the PAGA right to bring a representative action,
and that the FAA did not preempt California state law that rendered such waivers
unenforceable. (Id. at pp. 498-503.) Concluding that the PAGA waiver provision in the
13 A dissenting judge in Brown was of the view that under Concepcion, the PAGA
waiver in the arbitration agreement at issue was enforceable and that the plaintiff was
therefore precluded from pursuing a representative PAGA action, stating:
"Given the consistent line of Supreme Court cases mandating
enforcement of arbitration clauses under the FAA, even in the face
of California statutory or decisional law requiring court or
administrative action rather than arbitration, I cannot join the
majority's conclusion that the arbitration agreement's waiver of
representative PAGA actions is unenforceable. 'The point of
affording parties discretion in designing arbitration processes is to
allow for efficient, streamlined procedures tailored to the type of
dispute.' ([Concepcion], supra, 563 U.S. at p. ___ [131 S.Ct. at p.
1749].) Brown and Ralphs/Kroger agreed to the streamlined
procedures of arbitration of all covered employment claims without
resort to classwide or representative litigation. That agreement must
be enforced under the FAA." (Brown, supra, 197 Cal.App.4th at p.
508 (conc. and dis. opn. of Kriegler, J.).)
36
arbitration agreement was unenforceable, the Brown court reasoned, "[Concepcion] does
not purport to deal with the FAA's possible preemption of contractual efforts to eliminate
representative private attorney general actions to enforce the Labor Code." (Brown,
supra, at p. 500.) "If the FAA preempted state law as to the unenforceability of the
PAGA representative action waivers, the benefits of private attorney general actions to
enforce state labor laws would, in large part, be nullified." (Id. at p. 502.)
Teimouri argues that Brown "is binding California case law directly on point and
is not contradicted by any other California state authority," and that because neither the
California Supreme Court nor the United States Supreme Court granted review in Brown,
we should accept it as unqualified authority and follow its analysis. First, we reject the
contention that Brown constitutes binding precedent that we are obligated to follow.
(See, e.g., Henry v. Associated Indemnity Corp. (1990) 217 Cal.App.3d 1405, 1416
[decisions of one appellate court have no stare decisis effect, and are not binding upon
other appellate courts]; see also Agoston v. Pennsylvania (1950) 340 U.S. 844 [the denial
of a petition for writ of certiorari provides no expression of opinion on the merits of a
case].) Second, we disagree with the Brown court's analysis of the PAGA issue, and
therefore, decline to follow it. Rather, we find the reasoning of the court in Quevedo,
supra, 798 F.Supp.2d at pages 1140-1142, as to why a collective/representative action
waiver must be enforced after Concepcion—even with respect to a PAGA claim—to be
more persuasive, and apply its reasoning, instead.
As the Quevedo court determined, even where there is a collective action waiver, a
plaintiff's PAGA claim "is plainly arbitrable to the extent that he asserts it only on his
37
own behalf." (Quevedo, supra, 798 F.Supp.2d at p. 1141.)14 In Teimouri's PAGA
claims, she seeks civil penalties for a variety of violations of the Labor Code that she
alleges Macy's engaged in, including, inter alia, unpaid overtime, unpaid rest period
premiums, unlawful wage deductions, and wages not timely paid upon termination.
These alleged violations undoubtedly qualify as claims that come within the scope of the
arbitration agreement, and there is nothing in the arbitration agreement that would
preclude Teimouri from pursuing these claims in arbitration as individual claims for civil
penalties.
What prevents Teimouri from arbitrating her PAGA claims on behalf of other
employees is the collective action waiver, which provides that an arbitrator shall not have
"the power to hear an arbitration as a class or collective action." The agreement defines a
"collective action" as one that "involves representative members of a large group, who
claim to share a common interest, seeking relief on behalf of the group."
We recognize that PAGA serves to benefit the public, and that private attorney
general laws may be severely undercut by application of the FAA when arbitration
agreements include representative action waivers—a concern that the Brown court raised.
However, we believe that the United States Supreme Court's analysis in Concepcion
renders Brown's reasoning untenable. In Concepcion, the court held that under the FAA,
states cannot "condition[] the enforceability of . . . arbitration agreements on the
14 We acknowledge that the court in Quevedo, supra, 798 F.Supp.2d at page 1141
presumed that a plaintiff may bring an individual PAGA claim, without considering
whether such a claim is permissible under the statutory language. As we have already
explained, we believe that the Quevedo court's presumption is correct.
38
availability of classwide arbitration procedures" (Concepcion, supra, 563 U.S. at p. ___
[131 S.Ct. at p. 1744]), and concluded that the FAA preempted "state-law rules that stand
as an obstacle to the accomplishment of the FAA's objectives" of "promot[ing]
arbitration" and " 'ensur[ing] that private arbitration agreements are enforced according
to their terms.' [Citation.]" (Id. at pp. 1748, 1749, italics added.)
The Concepcion court concluded that requiring class arbitration when an
arbitration agreement precludes it is "inconsistent with the FAA" because class
arbitration "sacrifices the principal advantage of arbitration—its informality—and makes
the process slower, more costly, and more likely to generate procedural morass than final
judgment" (Concepcion, supra, 563 U.S. at p. ___ [131 S.Ct. at pp. 1751) and because
"class arbitration greatly increases risks to defendants" (id. at p. ___ [131 S.Ct. at p.
1752]), as "[t]he absence of multilayered review makes it more likely that errors will go
uncorrected." (Ibid.) The Concepcion court further explained that "[s]tates cannot
require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated
reasons." (Id. at p ___ [131 S.Ct. at p. 1753], italics added.) Because class arbitration is
inconsistent with the FAA, states cannot compel it, despite the existence of compelling
policy reasons for deciding certain claims on a classwide basis. (See ibid.)
The Concepcion court's reasons hold true as to an arbitration agreement that, by its
terms, prohibits the arbitration of representative actions. A state law rule that requires
that courts not enforce arbitration agreements as written in order to allow plaintiffs to
arbitrate representative PAGA claims on behalf of other employees would be inconsistent
with the FAA. Similarly, a state law rule rendering representative action waivers in
39
arbitration agreements unenforceable in order to allow plaintiffs to bring representative
PAGA claims in a judicial forum, thereby entirely avoiding the effects of the parties'
contract to arbitrate certain claims between them, would be inconsistent with the FAA.
Neither of these results is reasonable under the clear direction that the United States
Supreme Court provided in Concepcion.
We do not find compelling the Brown court's suggestion that the arbitration of a
representative PAGA claim brought in an action in which there is an arbitration
agreement that contains a collective action waiver "would not have the attributes of a
class action that the [Concepcion] case said conflicted with arbitration, such as class
certification, notices, and opt outs." (Brown, supra, 197 Cal.App.4th at p. 503.) Rather,
the arbitration of representative PAGA claims would retain many of the same
characteristics of class arbitration that the United States Supreme Court determined in
Concepcion are inconsistent with the FAA. Specifically, like a class claim, a claim
brought on a representative basis would make for a slower, more costly process.
Although a representative PAGA claim would not require all of the class certification
procedures, at a minimum, there would have to be discovery into how many employees
may have suffered violations and how many times such violations occurred. All of this
could prove costly and time-consuming. In addition, representative PAGA claims
"increase[] risks to defendants" by essentially aggregating the claims of many employees.
(See Concepcion, supra, 563 U.S. at p. ___ [131 S.Ct. at p. 1752].) Defendants would
run the risk that an erroneous decision on a PAGA claim on behalf of many employees
would "go uncorrected" given the "absence of multilayered review." (Ibid.) For the
40
same reasons that "[a]rbitration is poorly suited to the higher stakes of class litigation"
(ibid.), it is reasonable to conclude that arbitration is similarly ill-suited to the higher
stakes of a collective PAGA action. We therefore conclude that a rule permitting courts
to order representative PAGA claims to be arbitrated despite a collective action or
representative action waiver in an arbitration agreement would run afoul of the FAA and
the principles enunciated in Concepcion.
We acknowledge that not permitting Teimouri to litigate her representative PAGA
claims in a judicial forum and instead requiring that she arbitrate her individual PAGA
claims in an arbitral forum may have a negative effect on the public enforcement of labor
laws under PAGA. As the Brown court explained, the purpose of PAGA "is not to
recover damages or restitution, but to create a means of 'deputizing' citizens as private
attorneys general to enforce the Labor Code. [Citation.]" (Brown, supra, 197
Cal.App.4th at p. 501.) When PAGA claims are involved, "the relief is in large part 'for
the benefit of the general public rather than the party bringing the action' [citation]"
(ibid.), and therefore a representative action "has 'significant institutional advantages'
over a single claimant arbitration" (id. at p. 502). We agree with the Brown court's
observation that because "[t]he representative action is a means for public enforcement of
the labor laws . . . a single-claimant arbitration under the PAGA for individual penalties
will not result in the penalties contemplated under the PAGA to punish and deter
employer practices that violate the rights of numerous employees under the Labor Code."
(Ibid.) As the Brown court correctly noted, "Other employees would still have to assert
their claims in individual proceedings." (Ibid.)
41
However, Concepcion made it clear that the fact that enforcing a collective action
waiver in an arbitration agreement might undermine the intended breadth of the effect of
a state law such as PAGA is not a sufficient reason to invalidate a provision of an
arbitration agreement that is subject to the FAA. Federal law preempts state law in this
regard. (Concepcion, supra, 563 U.S. at p. ___ [131 S. Ct. 1747, 1750] [states cannot
require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated
reasons].) Although California may have valid reasons for allowing an individual
employee to seek to recover penalties for Labor Code violations suffered by other
employees, those reasons cannot trump enforcement of an arbitration agreement entered
into between the employee and his or her employer.15
For these reasons, we conclude that the arbitration agreement's provision
preventing Teimouri from arbitrating collective claims applies to her PAGA claim, and is
15 We also disagree with the Brown court's conclusion that permitting employees to
"bring individual claims for Labor Code violations in separate arbitrations does not serve
the purpose of the PAGA, even if an individual claim has collateral estoppel effects,"
such that "the benefits of private attorneys general actions to enforce state labor laws
would, in large part, be nullified" by permitting only individual PAGA claims to be
arbitrated. (Brown, supra, 197 Cal.App.4th at p. 502 (italics added).) Although
enforcing an arbitration agreement as written (including enforcing its representative
action waiver) might not serve the broadest law enforcement purposes of PAGA, it
clearly does not undermine PAGA and certainly serves some law enforcement purpose,
since there remains the possibility that an individual plaintiff will bring his or her claims
and thereby enforce the state's labor laws with respect to any violations that he or she has
suffered. Such an action would still provide a public benefit, albeit on a smaller scale
than what might otherwise be possible in a representative PAGA action. Further, there
would presumably still be a deterrent effect as the result of an individual claim, since the
employer could face the prospect of other employees bringing identical individual claims.
42
enforceable. If Teimouri wishes to pursue her PAGA claims, she may do so only on an
individual basis, in arbitration.
B. The other grounds that Teimouri raises
Teimouri asserts that the trial court's order denying Macy's motion to compel
individual arbitration may be affirmed on three independent bases: (1) that Macy's
waived its right to arbitration; (2) that the arbitration agreement is unconscionable; and
(3) that the class and representative waiver provisions violate the NLRB. We do not find
any of these arguments to be persuasive.
1. Macy's did not waive arbitration
Teimouri contends that this court can affirm the court's denial of the motion to
compel arbitration on the ground that Macy's has waived any rights that it has under the
arbitration agreement by failing to move for arbitration in a timely manner, and instead
litigating this case for more than nine months after the suit was filed. The trial court
found that Macy's did not waive its right to arbitrate, determining that "it was reasonable
for [Macy's] to conclude that it would have been futile for them to compel arbitration
prior to the holding in [Concepcion] . . . ."
Courts have concluded that " '[a] demand for arbitration must not be unreasonably
delayed. . . . [A] party who does not demand arbitration within a reasonable time is
deemed to have waived the right to arbitration. [Citations.]' [Citation.]" (Sobremonte v.
Superior Court (1998) 61 Cal.App.4th 980, 992.) The party seeking to compel
arbitration "ha[s] the responsibility to 'timely seek relief either to compel arbitration or
43
dispose of the lawsuit, before the parties and the court have wasted valuable resources on
ordinary litigation.' [Citation.]" (Id. at pp. 993–994.)
"Generally, the determination of waiver [of the right to arbitrate] is a question of
fact, and the trial court's finding, if supported by sufficient evidence, is binding on the
appellate court. [Citations.] 'When, however, the facts are undisputed and only one
inference may reasonably be drawn, the issue is one of law and the reviewing court is not
bound by the trial court's ruling.' [Citation.]" (St. Agnes Medical Center v. PacifiCare of
California (2003) 31 Cal.4th 1187, 1196 (St. Agnes).) The parties do not discuss which
standard of review should apply in this case. It appears that the essential underlying facts
concerning Macy's actions prior to filing its motion to compel are not in dispute.
However, under either standard of review, we conclude that the trial court did not err in
its determination that Macy's did not waive its right to arbitration.
Both the FAA and California law reflect a strong policy favoring agreements to
arbitrate. Both therefore require close judicial scrutiny of claims of waiver. (St. Agnes,
supra, 31 Cal.4th at p. 1195.) The party seeking to establish waiver bears a heavy burden
of proof, and any doubts regarding waiver should be resolved in favor of arbitration.
(Ibid.)
Under both state and federal law, no single test delineates the conduct that will
constitute a waiver of arbitration. Rather, there are a number of factors to which a court
may look to determine whether waiver has occurred. (See St. Agnes, supra, 31 Cal.4th at
p. 1195; see also Cox v. Ocean View Hotel Corp. (2008) 533 F.3d 1114, 1124 [quoting
the factors to consider in determining whether there has been waiver of arbitration
44
identified in St. Agnes].) " 'In determining waiver, a court can consider "(1) whether the
party's actions are inconsistent with the right to arbitrate; (2) whether 'the litigation
machinery has been substantially invoked' and the parties 'were well into preparation of a
lawsuit' before the party notified the opposing party of an intent to arbitrate; (3) whether a
party either requested arbitration enforcement close to the trial date or delayed for a long
period before seeking a stay; (4) whether a defendant seeking arbitration filed a
counterclaim without asking for a stay of the proceedings; (5) 'whether important
intervening steps [e.g., taking advantage of judicial discovery procedures not available in
arbitration] had taken place'; and (6) whether the delay 'affected, misled, or prejudiced'
the opposing party." ' [Citation.]" (St. Agnes, supra, at pp. 1195–1196.)16
a. Whether Macy's took actions inconsistent with the right to arbitrate
As Teimouri points out, Macy's defended this case for more than nine months
without moving to assert its rights under the arbitration agreement. Nonetheless, given
the state of the law during this period of time, we conclude, as the trial court did, that
Macy's actions were not necessarily inconsistent with the right to arbitrate and did not
evidence an intent by Macy's to waive its rights under the arbitration agreement.
A court may find that a party has not acted inconsistently with its right to arbitrate
when the party delayed seeking to enforce an arbitration agreement during a time when
that agreement would have been considered unenforceable under existing law. (See
Fisher v. A.G. Becker Paribas Inc. (9th Cir. 1986) 791 F.2d 691, 697 (Fisher); Letizia v.
16 We consider these factors in turn, although we note that many of the factors
overlap to some degree, and, in particular, factors 1, 2 and 3 substantially overlap.
45
Prudential Bache Securities, Inc. (9th Cir. 1986) 802 F.2d 1185, 1187 (Letizia).) In
Fisher, the defendant moved to compel arbitration more than three years after the filing
of the lawsuit, did not raise arbitration as an affirmative defense, filed pretrial motions,
and engaged in extensive discovery. (Fisher, supra, at p. 693.) The defendant ultimately
moved to compel arbitration only after the United States Supreme Court rejected the so-
called "intertwining doctrine," under which arbitration of all claims was to be denied
where it was " 'impractical if not impossible to separate out nonarbitrable from arbitrable
contract claims.' [Citation.]" (Id. at pp. 694-695.) The Fisher court reasoned that the
defendant in that case had "properly perceived that it was futile to file a motion to compel
arbitration until" the United States Supreme Court finally rejected the intertwining
doctrine. (Id. at p. 695.) Given that the state of the law at the time gave the defendant
reason to believe that the arbitration agreement would not have been enforced, the Fisher
court concluded that the defendant's delay of more than three years should not be
interpreted as an act that was "inconsistent[] with a known existing right to compel
arbitration." (Id. at p. 697.)17
At the time Teimouri filed this case in June 2010, and until the United States
Supreme Court announced its decision in Concepcion on April 27, 2011, California law
17 Letizia, supra, 802 F.2d at page 1186, also involved the "intertwining doctrine."
As in Fisher, the Letizia court concluded that the defendant had not acted inconsistently
with its right to arbitrate simply because it had not sought to arbitrate claims that it
reasonably believed the court would not send to arbitration under then-existing law, and
moved to compel arbitration only after the Supreme Court rejected the "intertwining
doctrine." (Letizia, supra, at pp. 1186-1187.) The Letizia court concluded that the
change in the law brought about by the Supreme Court's intervening decision justified the
delayed motion to compel arbitration.
46
rendered a great number of class action waivers in employment arbitration agreements
unenforceable. Gentry held that a class arbitration waiver was unenforceable where a
court concludes "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 [wage and hour] laws for the employees alleged
to be affected by the employer's violations . . . ." (Gentry, supra, 42 Cal.4th at p. 463.)
In such circumstances, according to Gentry, the class arbitration waiver should be
"severed and the rest of the arbitration agreement enforced." (Id. at p. 466.) This would
effectively impose classwide arbitration on a defendant, as opposed to the individual
arbitration contemplated by the parties' arbitration agreement.
In light of the holding in Gentry, it was reasonable for Macy's to have concluded
that the trial court would not enforce the class action waiver in its arbitration agreement.
Having reached that conclusion, Macy's chose not to immediately assert its rights under
that agreement.
Defending against individual claims in arbitration differs in significant ways from
defending against class and/or other representative or collective claims in arbitration. As
the United States Supreme Court noted in Concepcion, "class arbitration sacrifices the
principal advantage of arbitration—its informality—and makes the process slower, more
costly, and more likely to generate procedural morass than final judgment."
(Concepcion, supra, 563 U.S. at p. ___ [131 S. Ct. at p. 1751].) In addition, "class
arbitration greatly increases risks to defendants," as "[t]he absence of multilayered review
47
makes it more likely that errors will go uncorrected." (Id. at p. ___ [131 S. Ct. at p.
1752].) Given the disadvantages of class arbitration, Macy's decision to forego
attempting to enforce its arbitration agreement is understandable, since it reasonably
perceived that given the holding in Gentry, it would be required to arbitrate Teimouri's
claims on a classwide basis. Because Macy's reasonably believed that defending against
only Teimouri's individual claims in arbitration was not an option available to it under
existing California law, its failure to seek to enforce the arbitration agreement earlier in
the case does not necessarily reflect an intent to forego that option.
When the United States Supreme Court held in Concepcion that the FAA preempts
California's Discover Bank rule, the import of its holding for cases such as Teimouri's
was that class action waivers in arbitration agreements might be enforceable as written.
(See Concepcion, supra, 563 U.S. at p. ___ [131 S. Ct. at p. 1753].) After Concepcion
was decided, Macy's had reason to believe that the court would enforce its arbitration
agreement as written. Approximately a month and a half after Concepcion was decided,
Macy's filed a motion to compel arbitration. Because Macy's did not delay for an
unreasonable period after Concepcion overruled Discover Bank and thereby undermined
much of the reasoning of Gentry, its earlier failure to seek to enforce its arbitration
agreement did not reflect an intent to forego the right to seek arbitration.18
18 Other courts have similarly concluded that defendants did not act in a manner
inconsistent with their right to arbitrate by delaying moving for arbitration until after
Concepcion raised doubts about the continuing validity of Gentry. (See, e.g., Quevedo,
supra, 798 F.Supp.2d 1122 [involving employee claims and same arbitration agreement
as the arbitration agreement at issue in this case].)
48
Teimouri argues that this court should conclude that a "futility defense" must be
considered to weigh against a finding of waiver only if the motion to compel arbitration
would necessarily have been futile, and was not simply likely to be rendered futile by the
state of the law at the time the party delayed moving for arbitration. In other words,
according to Teimouri, California law requires that a defendant who delays seeking
arbitration have been absolutely precluded from enforcing the arbitration provision before
the defendant may rely on a change in the law to justify its delay in seeking to arbitrate
the case.
Teimouri suggests that Fisher, supra, 791 F.2d 691 stands for the proposition that
"[f]or the 'futility defense' to be effective, it must have been necessarily futile for the
petitioning party to compel arbitration before the change of law." Teimouri
misapprehends the holding in Fisher. Fisher is properly read as providing that the futility
doctrine may be available to a party to justify its delay even where the relevant case law
(i.e., the authority or authorities on which the party was relying in concluding that an
arbitration agreement would not be fully enforced as written) is not entirely clear or is
contradicted. At the time the plaintiffs initiated the lawsuit in Fisher, supra, at pages
694-695, the Ninth Circuit had indicated its approval of the "intertwining doctrine" only
in dicta, in a footnote in a single case.19 Although courts in other circuits had officially
19 The Fisher court acknowledged that the "intertwining doctrine" had not been
clearly adopted as the law in the Ninth Circuit at the time the plaintiffs in Fisher filed
their case: "We recognize that our approval of the intertwining doctrine was an 'even if'
comment that was not necessary to a resolution of the issues in that case." (Fisher, supra,
791 F.2d at p. 695.) The Fisher court did not find this uncertainty to provide a reason for
49
adopted the "intertwining doctrine," it was not clear that a court in the Ninth Circuit
would have prevented the enforcement of the arbitration agreement at issue in Fisher
based on the "intertwining doctrine." (Id. at pp. 695–696.)20 It was not until three years
into the Fisher lawsuit that the Ninth Circuit squarely held that the "intertwining
doctrine" was the law of that circuit. (Id. at p. 697.) The Fisher court did not conclude
that the defendant should have challenged the "intertwining doctrine" at an earlier point
in the litigation, even though the defendant could arguably have raised a good faith
challenge. Rather, the court held that the defendant had properly perceived that it was
futile to move to compel arbitration until the United States Supreme Court ultimately
rejected the intertwining doctrine. (Ibid.)
We also reject Teimouri's reliance on Roberts v. El Cajon Motors, Inc. (2011) 200
Cal.App.4th 832 (Roberts), and Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205
Cal.App.4th 436, 447 (Lewis), to suggest that Macy's contention that it would have been
futile for it to have sought to enforce the arbitration agreement is untenable. The Roberts
rejecting the defendant's contention that it would have been futile for it to compel
arbitration prior to the time the "intertwining doctrine" was finally rejected by the United
States Supreme Court. (Ibid. ["Nevertheless, the unmistakable import of our dicta in De
Lancie was that an agreement requiring arbitration was unenforceable if state claims and
securities law violations were intertwined"].)
20 In fact, some courts had rejected the "intertwining doctrine." (See e.g., Lee v.
Ply*Gem Industries, Inc. (D.C. Cir. 1979) 593 F.2d 1266, 1275, cert. denied 1979 441
U.S. 967 [in a proceeding involving antitrust and common law claims, the permeation
doctrine provided no authority for a ruling that arbitrable claims become subject to
adjudication in court merely because they are related to nonarbitrable claims]); Dickinson
v. Heinold Securities, Inc. (7th Cir. 1981) 661 F.2d 638, 644 [better solution in cases with
factually and legally related arbitrable and nonarbitrable claims was to stay the arbitration
proceeding pending resolution of the litigation].)
50
court affirmed the trial court's determination that the defendant had waived its right to
arbitrate the plaintiff's claims, in large part because the defendant had never even
mentioned the existence of the arbitration agreement, nor the possibility that it might seek
to enforce the arbitration agreement, until after it had engaged in a significant amount of
litigation and had allowed the plaintiff to propound class-wide discovery. The Roberts
court explained: "Indeed, if El Cajon either had promptly moved to compel arbitration at
or near the time it answered the complaint or informed Roberts at that time of its
intention to compel arbitration (such as in its answer to the complaint), Roberts likely
would not have propounded extensive written discovery involving the class action
allegations in her complaint. Of course, if Roberts had been given timely notice by El
Cajon of its intent to arbitrate and propounded the discovery in any event, it would have
been at her peril." (Roberts, supra, at p. 846, italics added.) In this case, unlike Roberts,
Macy's did inform Teimouri of the possibility that it would seek to compel arbitration,
having raised the arbitration agreement as a defense in its answer to her complaint.
The Roberts court rejected the defendant's contention that it had not moved to
compel arbitration in that case at an earlier time because it "was unsure of the state of the
law regarding the enforceability of the waiver of classwide claims in the arbitration
provision at issue here," and that its failure to do so should be excused for this reason.
(Roberts, supra, 200 Cal.App.4th at p. 846, fn. 10.) Although the defendant in Roberts
claimed that it was relying on Concepcion to support its position that it had been "unsure"
of the state of the law, and that this is the reason it had delayed in seeking arbitration, it
was significant to the Roberts court that "Concepcion was not decided until April 2011,
51
more than a year after El Cajon moved to compel arbitration." (Ibid.) It was thus clear
that something other than the holding in Concepcion had triggered the defendant's motion
to compel arbitration, and its claims that its delay was attributable to the fact that it was
not sure whether its arbitration provision would be enforced as written thus rang untrue.
In addition, during the delay, the defendant attempted to "cherry-pick" members of the
class by contacting them and offering to settle with them for $50 in return for a dismissal
of all claims in the lawsuit. (Id. at p. 846.) Given these facts, it is not surprising that the
Roberts court ultimately concluded that the defendant had acted inconsistently with an
intent to arbitrate. Roberts should not be read to preclude defendants in other cases from
taking the position that prior to the holding in Concepcion, they had a reasonably
justifiable belief that they would have been precluded from enforcing a class action
waiver in an arbitration agreement. Rather, a court considering whether a defendant was
reasonably justified in believing that individual arbitration would have been foreclosed
prior to Concepcion must consider all of the relevant circumstances, including the
underlying facts and their similarity to the facts of Gentry, as well as the circumstances of
the delay and the timing of the defendant's motion to compel individual arbitration in
light of Concepcion.
Despite Teimouri's reliance on Lewis, our reading of the Lewis opinion supports
our conclusion, as well. Teimouri contends that Lewis provides that a futility defense
must be rejected if a party's subjective belief that moving to compel arbitration prior to
Concepcion would have been futile can be shown to have been erroneous by reference to
cases in which courts have compelled arbitration under similar facts. (Lewis, supra, 205
52
Cal.App.4th at pp. 447-448.) Teimouri thus suggests that Lewis, together with Roberts,
forecloses an " 'erroneous-but-reasonable' belief defense that arbitration was futile pre-
Concepcion." We disagree. The rule that Lewis sets forth is that a defendant may not
rely on a "clearly erroneous interpretation of" the law in attempting to justify its delay in
seeking to enforce an arbitration provision. (Lewis, supra, at p. 447 ["We reject Fletcher
Jones's futility argument because it relies on a clearly erroneous interpretation of
Discover Bank as invalidating all arbitration agreements that include a class action
waiver"].) A "clearly erroneous" interpretation would obviously not constitute a
reasonable interpretation of the law.
Based on these authorities, we reject the standard that Teimouri urges, i.e., that a
defendant have been absolutely precluded from compelling arbitration in order to
successfully assert a futility defense. Rather, the appropriate standard, in our view, is
whether the party who delayed in seeking arbitration was reasonably justified in
believing that the arbitration agreement would not have been enforced under then-
existing law.
Teimouri offers two cases to support her contention that "a party could have
successfully enforced an arbitration agreement with a class action waiver prior to
Concepcion," suggesting that Macy's belief that the arbitration agreement in this case
would not have been enforced as written was clearly erroneous. She suggests that Walnut
Producers of California v. Diamond Foods, Inc. (2010) 187 Cal.App.4th 634 (Walnut
Producers), and Borrero v. Travelers Indemnity Co. (E.D. Cal. Oct. 15, 2010, No. Civ.
A-S-10-322-KJM) 2010 U.S. Dist. Lexis 114004 (Borrero), demonstrate that prior to
53
Concepcion, "California courts did in fact enforce arbitration agreements containing class
action waivers over the objections of a party invoking Gentry." Rather than providing
support for her position, these cases demonstrate the reasons for our conclusion that
Macy's belief that it would have been required to engage in class arbitration under the
circumstances of this case was not a clearly erroneous interpretation of the law, and was
instead a reasonable interpretation of the law.
"[I]n Walnut Producers, the Court of Appeal found an arbitration agreement
containing a class action waiver enforceable because the waiver did not act 'as an
exculpatory clause or unduly hinder[] plaintiffs from pursuing a legal remedy' due to the
value of each individual claim—approximately $43,000. [Citation.]" (Lewis, supra, 205
Cal.App.4th at p. 477.) Similarly, in Borrero, the plaintiff had not challenged the
defendant's calculation that her potential total individual recovery exceeded $100,000.
(Borrero, supra, 2010 U.S. Dist. Lexis at *7-*8.) Thus, in both of these cases, the first
Gentry factor, i.e., whether the size of the potential individual recovery is so modest as to
deter individual arbitration, weighed heavily in favor of enforcing the class action waiver.
There has been no suggestion in this case that Teimouri's individual claims might provide
for a potential recovery of anything close to this kind of award, making it far less likely
that a court would have concluded under Gentry that the arbitration agreement's class and
representative waiver should be enforced. Teimouri points to no other case in which,
after Discover Bank and Gentry but prior to Concepcion, a court compelled individual
arbitration under facts similar to the facts that exist in this case. It was thus more than
reasonable for Macy's to assume that prior to Concepcion, a trial court in California
54
would have concluded that class arbitration in this context was "likely to be a
significantly more effective practical means of vindicating the rights of the affected
employees than individual litigation or arbitration," and that "the disallowance of the
class action will likely lead to a less comprehensive enforcement of [wage and hour] laws
for the employees alleged to be affected by the employer's violations . . . ." (Gentry,
supra, 42 Cal.4th at p. 463.)
For these reasons, Macy's belief that California law regarding class action waivers
in arbitration agreements would operate to invalidate the class action waiver in the
arbitration agreement at issue in this case was not clearly erroneous, but instead, was
reasonably justified. Given the holding in Gentry, Macy's was justified in believing that
if it had moved to compel arbitration prior to the decision in Concepcion, it would have
been required to arbitrate Teimouri's class and representative claims, in addition to her
individual claims. Macy's failure to seek to enforce the arbitration provision under these
circumstances was therefore not inconsistent with the right to individually arbitrate
Teimouri's claims. We conclude that this factor does not weigh in favor of a
determination that Macy's waived its rights under the arbitration agreement.
b. Whether the litigation machinery has been substantially invoked
Between the initiation of the lawsuit by Teimouri and the motion to compel
individual arbitration, the parties engaged in very limited motion practice before the trial
court, and some discovery.
Significantly, when Macy's filed its answer to the FAC on August 27, 2010, it
specifically referred to the arbitration agreement that Teimouri had signed, and stated that
55
the FAC "should be dismissed or stayed" on that basis. After Macy's filed its answer, the
parties did engage in some discovery. Specifically, Macy's propounded 21 form
interrogatories and 17 special interrogatories, and also sent Teimouri a deposition notice,
accompanied by 16 requests for production of documents. Teimouri provided responses
to the form and special interrogatories. In addition, in response to Teimouri's 986
discovery requests, Macy's moved for a protective order. However, the record does not
reflect that the trial court ruled on the request for a protective order prior to addressing
Macy's motion to compel arbitration.
Other than this discovery, the record discloses that the parties engaged in a few
other minor litigation matters, including stipulating to extend the May 26, 2011 class
certification deadline and trial-related dates. However, neither party filed any dispositive
motions, and Teimouri had not filed a motion for class certification prior to Macy's filing
its motion to compel individual arbitration.
The litigation activity in which Macy's participated does not, in our view,
constitute a "substantial" invocation of the trial court's "litigation machinery." In
particular, given that Macy's reasonably believed that it would have been precluded from
enforcing its arbitration agreement as written prior to the decision in Concepcion, Macy's
fairly limited use of the judicial process to present a basic defense in this case during the
period before Concepcion was decided should not be considered to be a "substantial"
invocation of the litigation process. (Cf. Fisher, supra, 791 F.2d at p. 693 [no waiver
found despite three-and-a-half-year delay, during which "both parties filed pretrial
motions and engaged in extensive discovery," because defendant did not act
56
inconsistently with a right to arbitrate where it would have been futile to have sought
arbitration under state of law at the time].)
c. Whether Macy's delayed for a long period before seeking a stay
Macy's moved for arbitration just over a year after Teimouri filed the complaint,
and approximately nine months after Macy's filed its answer to the operative complaint.
This year-long delay does not support a finding of waiver, given that Macy's reasonably
believed that it had no right to enforce its arbitration agreement as written until
Concepcion was filed in April 2011. We conclude that the more relevant time period to
consider is the 44 days between the decision in Concepcion and the date Macy's moved to
compel arbitration. A delay of approximately a month and a half cannot be considered to
be an excessively long period, particularly in light of the open questions that still remain
as to the scope of Concepcion as it relates to California law in the context of arbitration.
It appears that once Macy's had a basis to conclude that it might be able to enforce the
terms of the arbitration agreement, it acted within a reasonable time in seeking to enforce
that agreement.
d. Whether Macy's filed a counterclaim without seeking a stay
Macy's has not filed a counterclaim against Teimouri. This factor thus weighs
against a determination that Macy's waived its right to arbitrate.
e. Whether important intervening steps have taken place
The fifth factor identified in St. Agnes requires the court to consider whether
"important intervening steps," such as the moving party taking advantage of judicial
discovery procedures that would not otherwise be available in arbitration, have taken
57
place. (St. Agnes, supra, 31 Cal.4th at pp. 1195–1196.) Although there has been some
discovery in this case, Macy's propounded only limited discovery, in the form of 38
interrogatories and 16 document requests in association with a notice for Teimouri to
appear at a deposition. Teimouri contends that the discovery that Macy's propounded
exceeds what Macy's "would have been entitled to propound in arbitration," since the
arbitration agreement allows for only 20 interrogatories. Teimouri maintains that
"Macy's was therefore able to obtain evidence not otherwise available upon a timely
demand to arbitrate." Our review of the arbitration agreement and the interrogatories that
Macy's propounded does not support Teimouri's claim.
First, although the arbitration agreement allows each party to propound 20
interrogatories as a matter of right, the agreement further provides that the arbitrator may
permit either or both parties to engage in "additional relevant discovery" upon the
"request of any party," "a showing of appropriate justification," and a finding by the
arbitrator that the additional discovery is not "overly burdensome, and will not unduly
delay the conclusion of the arbitration." Thus, it is not at all clear that Macy's would not
have been allowed to propound all 38 of its interrogatories in an arbitral forum.21 In
addition, at least some of the interrogatories that Macy's propounded sought information
pertaining to Teimouri's class or representative claims. Macy's may not have had to
21 Propounding 38 interrogatories seems reasonable in the context of the multiple
claims contained in Teimouri's complaint that alleged a variety of violations based on
different factual premises, and particularly in comparison with the 986 discovery requests
that Teimouri propounded in this action.
58
request all of the information that it sought in its 38 interrogatories if the parties had been
engaged in the arbitration of Teimouri's individual claims, only.
Even assuming that the discovery and limited motion practice that has taken place
in this litigation qualify as "important intervening steps," we would nevertheless conclude
that these steps do not support a finding of waiver, for the same reason that the delay in
Macy's motion to compel individual arbitration does not support a finding of waiver.
Macy's participated in the litigation and permitted these "important . . . steps" to take
place only because it reasonably believed that it had no meaningful alternative, given that
under California law at the time Teimouri brought her action, the class/representative
action waiver in the arbitration agreement was likely to have been found to be
unenforceable.
f. Whether the delay has prejudiced Teimouri
Mere participation in litigation and discovery without prejudice does not compel a
finding of waiver. (Sobremonte, supra, 61 Cal.App.4th at p. 995.) Under both California
and federal law, the prejudice factor is critical in waiver determinations. (St. Agnes,
supra, 31 Cal.4th at p. 1203.)
"[C]ourts will not find prejudice where the party opposing arbitration shows only
that it incurred court costs and legal expenses." (St. Agnes, supra, 31 Cal.4th at p. 1203.)
Rather, "[p]rejudice typically is found only where the petitioning party's conduct has
substantially undermined th[e] important public policy [in favor of arbitration as a speedy
and relatively inexpensive means of dispute resolution] or substantially impaired the
other side's ability to take advantage of the benefits and efficiencies of arbitration."
59
(Ibid.) For example, prejudice exists "where the petitioning party used the judicial
discovery processes to gain information about the other side's case that could not have
been gained in arbitration; . . . where a party unduly delayed and waited until the eve of
trial to seek arbitration; . . . or where the lengthy nature of the delays associated with the
petitioning party's attempts to litigate resulted in lost evidence." (Ibid.)
There has been no showing in this case of prejudice of the sort referred to in St.
Agnes. Although Macy's propounded some basic discovery requests, it does not appear
that Macy's unfairly gained information from Teimouri in this litigation that it could not
have gained in arbitration. Nor can Macy's delay in seeking arbitration be considered to
be "undue." Rather, Macy's delayed moving to compel arbitration for some months until
it became apparent that it might be able to enforce the arbitration agreement by its terms,
including the class arbitration waiver. Teimouri has not indicated that the delay has
resulted in any lost evidence.
Teimouri contends that if the trial court had granted Macy's motion to compel
individual arbitration, she "would have squandered a year in time, effort, and expenses,
and would have disclosed strategy regarding the case's underlying merit that she would
not have disclosed had the arbitration been timely demanded." The effort that Teimouri
expended and the legal expenses that she incurred do not suffice to establish prejudice.
(See St. Agnes, supra, 31 Cal.4th at p. 1203 ["Because merely participating in litigation,
by itself, does not result in a waiver, courts will not find prejudice where the party
opposing arbitration shows only that it incurred court costs and legal expenses"].)
Further, Teimouri fails to share what "strategy regarding the case's underlying merit" she
60
claims to have disclosed during this litigation that she would not have disclosed if Macy's
had sought individual arbitration of her claims at an earlier point in time, and we are
unable to discern what it is that Teimouri now wishes she had not shared with Macy's that
could undermine her approach to the arbitration of her individual claims.
Teimouri contends that "delay alone may constitute prejudice because the delay
itself may deprive the non-moving party of the benefits of arbitration, that is, an efficient
and cost-effective forum." Teimouri cites Roberts, supra, 200 Cal.App.4th at page 844,
footnote 9, in support of this claim. In that footnote, Roberts identifies the existence of
"some debate in our state" as to "whether delay alone is sufficient to establish 'prejudice'
and a resulting waiver of arbitration." (Ibid.) The Roberts court explained:
"In Burton v. Cruise [(2010)] 190 Cal.App.4th [939,] 947, the Court
of Appeal noted that an 'egregious delay may result in prejudice' and
concluded that to the extent there is a conflict between Sobremonte
v. Superior Court (1998) 61 Cal.App.4th 980, 996, which found the
bank waived arbitration when it allowed its customers to spend 10
months preparing their case for trial at considerable expense and
time, and Groom v. Health Net (2000) 82 Cal.App.4th 1189, which
reversed an order denying arbitration after the petitioning party
waited 11 months after the filing of the complaint to compel
arbitration and demurred four times to the original and amended
complaints, 'we believe that it is Groom [v. Health Net], not
Sobremonte [v. Superior Court], which should be left standing at the
altar.' (Burton, at p. 948.) The court in Burton v. Cruise concluded
that Groom v. Health Net 'erred in failing to recognize that a
petitioning party's conduct in stretching out the litigation process
itself may cause prejudice by depriving the other party of the
advantages of arbitration as an "expedient, efficient and cost-
effective method to resolve disputes," ' and that '[a]rbitration loses
much, if not all, of its value if undue time and money is lost in the
litigation process preceding a last-minute petition to compel.'
(Ibid.)" (Roberts, supra, 200 Cal.App.4th at p. 844, fn. 9.)
61
While we generally agree with the assessment provided in Burton, supra, 190
Cal.App.4th at page 947 and reaffirmed in Roberts, supra, 200 Cal.App.4th at page 844,
footnote 9, that sufficient and egregious delay in the litigation process may cause
prejudice to a non-moving party by depriving that party of the advantages of the
expediency and cost-effectiveness of arbitration, any prejudice to Teimouri resulting
from the delay in moving to compel arbitration in this case was attributable not simply to
a lack of diligence on Macy's part in seeking arbitration at an earlier point in the process,
but, rather, to the existence of a serious question concerning the enforceability of the
arbitration agreement, as written. In the cases cited by the Roberts court to support the
notion that delay, alone, may under some circumstances present sufficient prejudice to
the party opposing arbitration, there was no serious question regarding the enforceability
of the arbitration agreements. (See Burton, supra, at p. 947; Sobremonte, supra, 61
Cal.App.4th at p. 997.) The moving parties' delay in seeking arbitration in those cases
was thus deemed to have been unjustified, in part because the parties' delay suggested
that they were attempting to game the system, as opposed to making a reasonable
decision not to attempt to enforce an arbitration agreement that was likely to be held
unenforceable. (See, e.g., Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558
["Simply put, ' "[t]he courtroom may not be used as a convenient vestibule to the
arbitration hall so as to allow a party to create his own unique structure combining
litigation and arbitration." ' [Citation.]"].) This is not the situation in the present case,
and we will not infer that prejudice arose from the mere fact that there was a delay
62
between the filing of the action and Macy's motion to compel individual arbitration of
Teimouri's claims.
Generally, cases in which a party has been found to have waived its right to
arbitration have involved situations in which defendants have unduly delayed moving for
arbitration without reasonable justification. Macy's had a reasonable justification for not
moving to compel arbitration immediately upon the filing of the lawsuit, and, when that
justification no longer existed as a result of the decision in Concepcion, it moved for
individual arbitration with minimal delay. Under these circumstances, Macy's cannot be
said to have intentionally undermined the speedy and efficient nature of arbitration by its
actions. In addition, unlike the defendant in Roberts, supra, 200 Cal.App.4th at page
846, Macy's did raise the possibility that it would seek arbitration in its answer to
Teimouri's complaint, thereby putting Teimouri on notice that arbitration of her claims
was a possibility. For these reasons, we conclude that Teimouri has not met her "heavy
burden" to show that Macy's waived its rights under the arbitration agreement. We
therefore reject waiver of the right to arbitrate as a separate basis for affirming the trial
court's order denying Macy's motion to compel individual arbitration.
2. The arbitration agreement is generally enforceable and is not
unconscionable
Teimouri contends that the trial court could have denied Macy's motion to compel
arbitration on the alternative ground that the arbitration agreement is generally
unconscionable and therefore should not be enforced, and that this court can affirm the
trial court's ruling on this basis.
63
Under the FAA, "written arbitration agreements 'shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.' " (Doctor's Assocs., Inc. v. Casarotto (1996) 517 U.S. 681, 686, italics
omitted.) "[G]enerally applicable contract defenses, such as fraud, duress, or
unconscionability, may be applied to invalidate arbitration agreements . . . ." (Id. at p.
687.) Under generally applicable California law, "courts may refuse to enforce an
unconscionable arbitration agreement." (Ingle v. Circuit City Stores, Inc. (9th Cir. 2003)
328 F.3d 1165, 1170 (Ingle).) "Unconscionability refers to 'an absence of meaningful
choice on the part of one of the parties together with contract terms which are
unreasonably favorable to the other party.' [Citations.]" (Ibid.)
"Unconscionability has both procedural and substantive elements. [Citations.]
Although both must appear for a court to invalidate a contract or one of its individual
terms [citations], they need not be present in the same degree: '[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.'
[Citations.]" (Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1469.) The
procedural element focuses on the contracting parties' unequal bargaining power and on
the weaker party's lack of notice of hidden or oppressive terms; the substantive element
focuses on the actual presence of one-sided or oppressive terms. (Armendariz, supra, 24
Cal.4th at p. 114.)
64
a. Procedural unconscionability
"The procedural element [of unconscionability] addresses the circumstances of
contract negotiation and formation, focusing on oppression or surprise due to unequal
bargaining power." (Pinnacle, supra, 55 Cal.4th at p. 246.) " ' "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." ' [Citation.]"
(Id. at p. 247.)
"The procedural element of an unconscionable contract generally takes the form of
a contract of adhesion, ' "which, imposed and drafted by the party of superior bargaining
strength, relegates to the subscribing party only the opportunity to adhere to the contract
or reject it." ' [Citation.]" (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071.)
However, even in adhesion contracts, courts may enforce provisions that are conspicuous,
plain, and clear, and that do not "operate to defeat the reasonable expectations of the
parties." (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 710.) Thus,
courts consider the lack of negotiating and bargaining power, as well as the factor of
surprise.
As the California Supreme Court has explained, "there are degrees of procedural
unconscionability." (Gentry, supra, 42 Cal.4th at p. 469.)
"At one end of the spectrum are contracts that have been freely
negotiated by roughly equal parties, in which there is no procedural
unconscionability. Although certain terms in these contracts may be
construed strictly, courts will not find these contracts substantively
unconscionable, no matter how one-sided the terms appear to be.
[Citations.] Contracts of adhesion that involve surprise or other
sharp practices lie on the other end of the spectrum. [Citation.]
65
Ordinary contracts of adhesion, although they are indispensable facts
of modern life that are generally enforced [citation], contain a degree
of procedural unconscionability even without any notable surprises,
and 'bear within them the clear danger of oppression and
overreaching.' [Citation.]" (Ibid.)
In Quevedo, supra, 798 F.Supp.2d at pages 1136-1138, a federal district court
concluded that the same arbitration agreement at issue in this case—Macy's employment
arbitration agreement—is not " 'entirely free from procedural unconscionability.' " (Id. at
p. 1138, quoting Gentry, supra, 42 Cal.4th at p. 472.) We agree with the Quevedo court's
analysis and conclusion in this regard.
Specifically, the arbitration materials at issue here, like the agreement in Gentry,
contain a one-sided explanation of the benefits of arbitration without offering the
drawbacks and also make it clear that Macy's would prefer that its employees agree to
arbitration of their disputes.
With respect to the one-sided explanation of the benefits of arbitration, the
Solutions InSTORE brochure describes arbitration as "a lot like a court proceeding,
but . . . less formal, less time-consuming and less expensive." The brochure tells
employees that "[t]he same remedies are available to you as in a court of law" and
proceeds to explain that arbitration offers "several other advantages and benefits for you
[the employee]." Below that statement, the brochure has a chart in which arbitration is
compared to a "court of law." The chart states that "[a]n independent arbitrator from
outside the Company, specially qualified to hear employment related disputes" hears
claims in arbitration, while "[a] judge who may not specialize in employment law or [a]
jury who is completely unfamiliar with and has no specific training in employment law"
66
hears claims in a court. Further, the chart informs employees that the filing fee for
arbitration is no more than $125, while the filing fee in federal court is $350, and the
filing fee in state courts can be $150 or more. The chart indicates that employees who
arbitrate their claims "can receive up to $2,500 per rolling calendar year" for legal fees in
arbitration, while those who bring claims in court get no "legal financial benefit."
Finally, the chart explains that employees are not required to have an attorney in
arbitration, although they may have one, and states that "[t]he tone of an Arbitration
proceeding is much less formal than a court of law," and that "the legal system is much
more formal and complex, often requiring you to obtain legal representation to manage
through the system."
It is clear that these descriptions highlight the benefits of arbitration, while failing
to alert employees to the potential downsides of foregoing the rights available in a court,
such as having a jury decide claims, the ability to engage in more extensive discovery,
and the right to appeal. (Quevedo, supra, 798 F.Supp.2d at p. 1137.) In addition to
highlighting the benefits of arbitration, the language used to describe the arbitration
program makes it appear that Macy's is offering its employees an advantage by providing
them with the opportunity to arbitrate employment disputes. For example, the brochure
tells employees, "If you decide you want to be excluded from participating in and
receiving the benefits of Step 4 [arbitration], we need you to tell us in writing . . . ."
(Italics added.) The brochure then provides a warning of sorts to employees, stating that
if they opt out of arbitration within the 30-day time period, they will "no longer . . . be
eligible for the benefits available under the [sic] Step 4: Arbitration process." By
67
suggesting that an employee who opts out will no longer be "eligible" for some "benefit,"
the materials imply that the employee would be losing something desirable, without
informing the employee about the potential negative consequences of agreeing to
arbitrate. On the whole, Macy's portrayal of its arbitration program, like the portrayal of
the program at issue in Gentry, discloses only the advantages of arbitration without
informing employees about the potential disadvantages of arbitration.
As in Gentry, the Brochure and Plan Document that Macy's provided to newly
hired employees to describe the InSTORE Program has the additional effect of implicitly
pressuring new employees not to opt out, even if they might prefer to litigate their
potential future claims, by informing them that Macy's prefers the arbitration program. A
second comparison chart highlights the shorter "length[s] of time to final hearing," lower
"company cost[s]," and lower "employee cost[s]" of arbitration as compared to litigation.
The second chart states that "[a]rbitration can provide better access to justice for
individual employee claims that are not economical for an attorney to take to court" and
that "[a]rbitration is faster, cheaper and more satisfying for parties than traditional
litigation." These statements not only suggest to the employee that arbitration is
beneficial to the employee, but make clear to the employee that even if the employee
might be inclined to opt out of arbitration, Macy's would prefer that the employee agree
to arbitrate the employee's claims. In addition, like the description of arbitration in
Gentry, "[t]he fact that the arbitration agreement was structured so that arbitration was
the default dispute resolution procedure from which the employee had to opt out
underscored [the employer's] proarbitration stance." (Gentry, supra, 42 Cal.4th at p.
68
472.) "Given the inequality between employer and employee and the economic power
that the former wields over the latter [citation], it is likely that . . . employees felt at least
some pressure not to opt out of the arbitration agreement." (Ibid.)
Both the Macy's agreement and the materials used to inform new employees about
the arbitration program and their ability to opt out of the program lack material
information about the disadvantages of the arbitration program and are likely to place
some pressure on employees not to opt out, even if those employees might otherwise be
inclined to opt out, making the arbitration materials in this case similar to the agreement
and materials that the Gentry court concluded were not entirely free of procedural
unconscionability. (Gentry, supra, 42 Cal.4th at p. 472.)
Teimouri also contends that the arbitration agreement is procedurally
unconscionable because it was" buried" in a packet of hiring paperwork and because no
one from Macy's explained the arbitration agreement to Teimouri, including the fact that
she would be forfeiting certain substantive rights, such as the rights to a jury trial and to
collective action. Teimouri cites to Ontiveros v. DHL Express (USA), Inc. (2008) 164
Cal.App.4th 494 (Ontiveros), in support of her contention that these factors rendered the
arbitration agreement procedurally unconscionable. However, Ontiveros does not
support Teimouri's argument and in fact, demonstrates why the presentation of the
arbitration agreement in this case was not procedurally unconscionable on these grounds.
In Ontiveros, supra, at page 508, the plaintiff had denied knowing that she had even
signed an arbitration agreement, and the court determined that certain factors in that case
supported her contention. Specifically, the fact that the arbitration agreement
69
"consist[ed] of a single-page document in a small font" (id. at p. 499) that had been
included in a stack of other paperwork that the plaintiff had been required to sign
immediately, "the lack of time for any real review of the documents" (id. at p. 508), and
"the failure of anyone to explain the significance of the agreement" (ibid.) all supported
the plaintiff's claim that she was unaware that she had signed an arbitration agreement.
In contrast, in this case, Macy's presented Teimouri with a separate, relatively easy-to-
read booklet that explains the entire InSTORE Program, including the arbitration step.
That booklet included information about the substantive rights that employees give up by
agreeing to arbitrate their claims. Most significantly, Teimouri had 30 days to review the
documentation and opt out of the arbitration provision. Teimouri thus had more than
enough time to review the arbitration agreement, and, unlike the plaintiff in Ontiveros,
could have chosen to opt out at a later point in time. We therefore reject Teimouri's
contention that the manner in which the arbitration agreement was presented to her
rendered the agreement procedurally unconscionable.
Based on all of these circumstances, including the nature of the documents and the
manner in which they were presented to Teimouri and other employees, we conclude that
the arbitration agreement at issue here involves a minimal degree of procedural
unconscionability.
b. Substantive unconscionability
The fact that some degree of procedural unconscionability may be present in an
arbitration agreement does not necessarily render the arbitration agreement
unenforceable. The court must consider whether the substantive terms of the agreement
70
are so one-sided or oppressive as to be substantively unconscionable. " 'Substantive
unconscionability' focuses on the terms of the agreement and whether those terms are 'so
one-sided as to "shock the conscience." ' [Citations.]" (Kinney v. United HealthCare
Services, Inc. (1999) 70 Cal.App.4th 1322, 1331.)
Teimouri asserts that the Macy's arbitration agreement "contains at least four
substantively unconscionable terms." Specifically, Teimouri contends that the
agreement: (1) gives Macy's the authority to unilaterally cancel or modify the program;
(2) lacks "operational mutuality"; (3) includes a confidentiality clause that favors Macy's;
and (4) includes a broad delegation clause.
i. Unilateral right to cancel or modify
The Solutions InSTORE program allows Macy's to alter the program's rules and
procedures, or to cancel the program entirely, upon giving employees 30 days' written
notice. In Ingle, supra, 328 F.3d at page 1179, the Ninth Circuit held this type of
provision to be substantively unconscionable, stating a "provision affording [an
employer] the unilateral power to terminate or modify the [arbitration] contract is
substantively unconscionable."22
The arbitration agreement contains a severability provision that states: "In the
event any of these Solutions InSTORE Early Dispute Resolution Rules and Procedures
are held to be unlawful or unenforceable, the conflicting rule or procedure shall be
22 The Ingle court did not address whether the existence of this term, by itself, would
render the entire arbitration contract unenforceable. (Ingle, supra, 328 F.3d at p. 1179,
fn. 23.)
71
modified automatically to comply with applicable law," thereby indicating that should it
be necessary to do so, this provision could potentially be severed from the rest of the
arbitration agreement Based on the Ninth Circuit's opinion in Ingle, the Quevedo court
determined that the provision of the Macy's arbitration agreement that grants Macy's the
unilateral right to cancel or modify the terms of the program is substantively
unconscionable, but further determined that the court did not have to decide whether this
provision was unenforceable because even if it was, the court could sever it from the
remainder of the agreement. (Quevedo, supra, 798 F.Supp.2d 1138-1139.) The Quevedo
court therefore concluded that the provision did not render the entire arbitration
agreement unenforceable. (Id. at p. 1139.) We agree with this assessment. There has
been no suggestion that Macy's utilized this provision to undermine Teimouri's claims or
to alter the terms under which the arbitration is to take place. We conclude that the
inclusion of this provision, alone, does not render the entire agreement sufficiently
substantively unconscionable so as to make it unenforceable.23 We next turn to
Teimouri's other contentions concerning substantive unconscionability.
ii. Lack of mutuality
Teimouri contends that although the arbitration provision, on its face, appears to
be mutual in that it theoretically applies to both the employee and Macy's, in practice, the
arbitration agreement favors Macy's. According to Teimouri, "Macy's specifically
23 We discuss in part III.B.2.b.v., post, whether the substantive unconscionability of
this provision, in combination with at least one other unconscionable provision renders
the entire agreement unenforceable, or whether the offending provisions may be severed.
72
requires 'employment-related disputes' to be subject to arbitration, which notably leave
out charges that a retailer like Macy's typically have against an employee, including
property damage and conversion."
An arbitration agreement that "compels arbitration of the claims employees are
most likely to bring against [the employer]" but "exempts from arbitration the claims [the
employer] is most likely to bring against its employees" may be considered substantively
unconscionable. (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 176 (Mercuro);
see also Ferguson v. Countrywide Credit Indus. (9th Cir. 2002) 298 F.3d 778, 785
(Ferguson).) In both Mercuro and Ferguson, the courts found Countrywide's arbitration
agreement substantively unconscionable because it specifically excluded from its
coverage claims "for intellectual property violations, unfair competition and/or the use
and/or unauthorized disclosure of trade secrets or confidential information." (Ferguson,
supra, at p. 785; Mercuro, supra, at p. 176.)
However, an arbitration agreement is not required to mandate the arbitration of all
claims between an employee and employer in order to avoid being deemed
unconscionable. Rather, "an arbitration agreement imposed in an adhesive context lacks
basic fairness and mutuality if it requires one contracting party, but not the other, to
arbitrate all claims arising out of the same transaction or occurrence or series of
transactions or occurrences." (Armendariz, supra, 24 Cal.4th at p. 120.) What is
required is that an arbitration provision offer a " 'modicum of bilaterality.' " (Id. at p.
119.)
73
The arbitration agreement in this case provides for more than a " 'modicum of
bilaterality.' " The agreement states that "[e]xcept as otherwise limited, all employment-
related legal disputes, controversies or claims arising out of, or relating to, employment
or cessation of employment, whether arising under federal, state or local decisional or
statutory law ('Employment-Related Claims'), shall be settled exclusively by final and
binding arbitration."24 The agreement later states that "[a]rbitration shall apply to any
and all such civil disputes, controversies or claims asserted by the Company against the
Associate." (Italics added.) The arbitration provision thus generally applies equally to
Macy's and the employee.25
The fact that the arbitration provision does not specifically carve out an exemption
for certain claims in a manner that benefits Macy's is significant. Teimouri relies on
Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 665 (Abramson),
Palmer v. Infosys Techs., Ltd., Inc. (M.D.Ala. 2011) 832 F.Supp.2d 1341, 1345-1346
24 Our review of the agreement suggests that the language "[e]xcept as otherwise
limited" refers to the class and collective action waiver, as well as to "[c]laims by
Associates that are required to be processed under a different procedure pursuant to the
terms of an employee pension plan or employee benefit plan," "[c]laims by Associates for
state employment insurance," and claims "under the National Labor Relations Act."
25 Teimouri provides no authority to support her contention that claims for "property
damage and conversion" are "charges that a retailer like Macy's may typically have
against an employee" or that such claims are necessarily excluded from the terms of the
arbitration agreement. Even if one were to assume that a major portion of Macy's claims
against employees are claims for property damage and/or conversion, we see no basis to
conclude that such claims would not be subject to arbitration. An employee who
damaged Macy's property and/or converted it would likely have done so by virtue of his
or her employment with Macy's and such a claim would therefore likely be deemed to be
related to that employee's employment.
74
(Palmer), and Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138, 1147
(Samaniego) as support for her claim that agreements that are mutual on their face may
nevertheless be unconscionable because they lack operational mutuality by exempting
from arbitration claims typically brought by employers. All of the cases on which
Teimouri relies are distinguishable from this case on this basis. Although the contract in
Samaniego included general language that suggested mutuality, in that it purported to
cover "[a]ny dispute or claim arising from any provision of this Agreement or relating in
any way to the business relationship between Flooring Install and the Subcontractor"
(Samaniego, supra, at p. 1142), the court noted that another provision of the contract
"exempts from the arbitration requirement claims typically brought by employers—
namely, those seeking declaratory and preliminary injunctive relief to protect Empire's
proprietary information and noncompetition/nonsolicitation provisions—while restricting
to arbitration any and all claims plaintiffs might bring." (Id. at pp. 1142, 1147.)
Similarly, in Palmer, supra, 832 F.Supp.2d at pages 1345-1346, the court noted
that despite the fact that the arbitration agreement ostensibly required that "all disputes
between Infosys and Palmer, regardless of who asserts the claim, shall be decided by an
arbitrator" (id. at p. 1345), the agreement proceeded to specifically list the types of claims
that would be decided by an arbitrator and those that the parties could bring in a court of
law. The Palmer court observed that the types of claims to be decided by an arbitrator
were claims that "rely on antidiscrimination or labor statutes protecting employee rights"
(ibid.), while the claims for which a party could seek injunctive relief in court were
claims "relating to intellectual property or trade secrets." (Id. at p. 1346.) The Palmer
75
court observed, "While these provisions are fair on their face, it is obvious that the types
of claims that must be arbitrated are those most commonly brought by an employee,
while those likely initiated by an employer can be filed in court." (Ibid.)
The contract addressed in Abramson, supra, 115 Cal.App.4th at pages 664-665,
included a similar carve-out of certain types of claims, which were those most likely to be
brought by employer against an employee: "Both provisions require the parties to
arbitrate all claims—except those related to trade secrets, confidential information, and
other intellectual property." (Ibid.) The Abramson court rejected the defendant
employer's contention that the carve-out applied equally to both parties, noting that in the
offer made to employees, the "carve-out is explicitly unilateral" because it "grants only
'the Company' the right to seek injunctive relief in court for 'misuse or appropriation of
the Company's trade secrets or confidential and proprietary information.' " (Ibid.)
Although the employment contract "nominally grant[ed] 'both parties' the right to seek
judicial relief" (ibid.), the rest of the provision was clearly one-sided, requiring the
employee to assent to a judicial forum for the determination of "all claims that the
employer would be likely to assert against the employee" (ibid.), such as those arising
from the protection of intellectual property. (Ibid., italics omitted.) The Abramson court
determined that the carve-out provision in the employment contract "addresses only the
employee's breach of covenants designed to protect only the employer's interests," and as
a result it "lacks mutuality, both facially and operationally." (Ibid., italics omitted.)
Unlike the arbitration agreement in these cases, there is no carve-out for certain
types of claims in the arbitration agreement at issue in this case. Rather, the agreement
76
applies broadly to any claims arising out of the employment relationship between an
employee and Macy's, and does not unfairly protect Macy's interest in asserting its claims
in court while relegating those claims likely to be brought by an employee to an arbitral
forum. We therefore reject Teimouri's contention that the arbitration agreement lacks
sufficient mutuality.
iii. Confidentiality
Teimouri contends that the confidentiality provision in the arbitration agreement
favors Macy's. She cites Davis v. O'Melveny & Myers (2007) 485 F.3d 1066, 1078
(Davis), in which the court determined that a confidentiality clause favored the defendant
to a degree that rendered it unconscionable. The confidentiality clause at issue in Davis
precluded the "mention to anyone 'not directly involved in the mediation or arbitration' of
'the content of the pleadings, papers, orders, hearings, trials, or awards in the arbitration'
or even 'the existence of a controversy and the fact that there is a mediation or an
arbitration proceeding.' " (Ibid.) The Davis court recognized that "[s]uch restrictions
would prevent an employee from contacting other employees to assist in litigating (or
arbitrating) an employee's case," and "would handicap if not stifle an employee's ability
to investigate and engage in discovery." (Ibid.) As a result of the restrictions in the
confidentiality agreement, the defendant would be " 'in a far superior legal posture' "
because every individual employee would be prevented from "accessing precedent while
allowing O'Melveny to learn how to negotiate and litigate its contracts in the future."
(Ibid.) The court concluded that the breadth of the confidentiality provision rendered it
substantively unconscionable. (Ibid.)
77
Teimouri also relies on Grabowski v. C.H. Robinson Co. (2011) 817 F.Supp.2d
1159, 1176 (Grabowski), to argue that the confidentiality provision in Macy's arbitration
agreement is overly broad, rendering it substantively unconscionable. She contends that
the confidentiality provision in Grabowski, which the Grabowski court determined was
substantively unconscionable, is "almost identical" to the confidentiality provision here.
The confidentiality provision in Grabowski provided:
"All aspects of the arbitration, including without limitation, the
record of the proceeding, are confidential and shall not be open to
the public, except (a) to the extent both Parties agree otherwise in
writing, (b) as may be appropriate in any subsequent proceedings by
the Parties, or (c) as may otherwise be appropriate in response to a
governmental agency or legal process, provided that the Party upon
whom such process is served shall give immediate notice of such
process to the other Party and afford the other Party an appropriate
opportunity to object to such process.
"At the request of a Party or upon his or her initiative, the Arbitrator
shall issue protective orders appropriate to the circumstances and
shall enforce the confidentiality of the arbitration as set forth in this
article." (Ibid.)
The confidentiality provision in the arbitration agreement at issue here provides:
"All aspects of an arbitration pursuant to these Solutions InSTORE
Early Dispute Resolution Rules and Procedures, including the
hearing and recording of the proceeding, shall be confidential and
shall not be open to the public. The only exceptions are: (i) to the
extent both parties agree otherwise in writing; (ii) as may be
appropriate in any subsequent proceeding between the parties; or
(iii) as may otherwise be appropriate in response to a governmental
agency, legal process, or as required by law.
"All settlement negotiations, mediations, and any results shall be
confidential."
78
Macy's acknowledges that the confidentiality provision at issue in this case and the
one at issue in Grabowski are "somewhat similar." However, relying on Chin v.
Advanced Fresh Concepts Franchise Corp. (2011) 194 Cal.App.4th 704, 714 (Chin),
Macy's contends that the inclusion of the "as required by law" disclosure exception
makes the agreement in this case sufficiently different from the confidentiality
agreements at issue in Davis and Grabowski to render it not unconscionable.
The Chin court determined that the confidentiality agreement in that case did "not
raise colorable claims of unconscionability," in part because the confidentiality
agreement would "not apply when disclosure is required by law . . . ." (Chin, supra, 194
Cal.App.4th at p. 714.) In Chin, however, the plaintiff was not complaining of the
problem addressed in Davis and Grabowski—i.e., that the confidentiality provision might
handicap employees and provide a benefit to the employer in the form of knowledge
resulting from repeated cases brought by different employees. Rather, the plaintiff in
Chin cited a concern about the possibility of the "unfairness of the 'repeat player effect,'
where an employer derives an advantage from repeatedly appearing before the same
arbitrators." (Chin, supra, at p. 714, italics added.) In response to the plaintiff's
complaint, the Chin court noted that under at least one provision of the Code of Civil
Procedure, a plaintiff could seek information from an arbitrator revealing information
such as " '[t]he names of the parties to all prior or pending noncollective bargaining cases
involving any party to the arbitration or lawyer for a party for which the proposed neutral
arbitrator served or is serving as neutral arbitrator, and the results of each case arbitrated
to conclusion, including the date of the arbitration award, identification of the prevailing
79
party, the names of the parties' attorneys and the amount of monetary damages awarded,
if any.' " (Chin, supra, at p. 714, fn. 4, quoting Code Civ. Proc., § 1281.9, subd. (a)(4).)
The "as required by law" language in the confidentiality agreement at issue in Chin
would thus permit the plaintiff to identify those arbitrators before whom the defendant
had appeared a number of times, thereby addressing the plaintiff's concern. The Chin
court did not address the issue that Teimouri raises concerning the confidentiality
agreement. Chin therefore provides no assistance in determining whether the
confidentiality provision in Macy's arbitration agreement should be considered
substantively unconscionable.
The slight differences between the confidentiality provision here and the one
considered in Grabowski are not sufficient to remediate the problems identified in Davis
and Grabowski. As in those cases, the provision is likely to unfairly benefit an employer
such as Macy's, to the detriment of individual employees. We therefore conclude that the
confidentiality provision is substantively unconscionable.
Macy's argues that if this court determines that the confidentiality provision is
substantively unconscionable, we may "sever the provision from the remainder of the
agreement." We discuss whether the substantive unconscionability of the confidentiality
provision undermines the entire agreement or whether that and/or other unconscionable
provisions may be severed in part III.B.2.b.v., post.
iv. Broad delegation clause
Teimouri contends that the arbitration agreement "delegates the determination of
unconscionability—whether the arbitration clause itself is enforceable—to the arbitrator
80
himself, who has every incentive to find such a clause enforceable." She cites the
following language of the arbitration provision as being too broad a delegation clause:
"all employment-related legal disputes, controversies or claims arising out of, or relating
to, employment or cessation of employment . . . shall be settled exclusively by final and
binding arbitration."
Under the FAA, the enforceability of an arbitration agreement is ordinarily to be
determined by the court. However, the parties may agree in an arbitration provision that
the issue of enforceability is to be determined by the arbitrator. (See, e.g., AT&T
Technologies, Inc. v. Communications Workers of America (1986) 475 U.S. 643, 649.)
Although too broad a delegation clause may be found to be unconscionable if it
purports to delegate issues of formation to the arbitrator (see Chin, supra, 194
Cal.App.4th at p. 707; Ontiveros, supra, 164 Cal.App.4th at pp. 503-505), we conclude
that Teimouri has misinterpreted the delegation clause at issue in this case as granting the
arbitrator the authority to determine whether the arbitration agreement itself is
enforceable. The arbitration agreement at issue in Ontiveros stated that the arbitrator
" 'shall have exclusive authority to resolve any dispute relating to the interpretation,
applicability, enforceability or formation' " of the agreement. (Ontiveros, supra, at p.
503.) Similarly, the arbitration agreement at issue in Chin provided, " 'Any dispute that
arises out of or relates directly or indirectly to this Agreement or the relationship of the
parties hereto, including, without limitation, any claimed breach of this Agreement or any
claim that any part of this Agreement (including this Section 16.8 or any part thereof) is
invalid, illegal, voidable or void, shall be resolved by arbitration . . . .' " (Chin, supra, at
81
p. 707.) In contrast to the broad delegation language that was determined to be
unconscionable in Ontiveros and Chin, the language in the arbitration agreement in this
case does not purport to grant to the arbitrator the authority to resolve disputes over the
interpretation, enforceability, formation, or legality of the arbitration agreement.
Given that the United States Supreme Court has cautioned that "[c]ourts should
not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and
unmistakabl[e]' evidence that they did so [citation]" (First Options of Chicago, Inc. v.
Kaplan (1995) 514 U.S. 938, 944), we reject Teimouri's contention that the arbitration
agreement's delegation clause "delegates the determination of unconscionability" to the
arbitrator and is therefore substantively unconscionable.
v. The substantively unconscionable terms do not render the
entire agreement unenforceable
We have identified two provisions in the arbitration agreement as being
substantively unconscionable—the provision granting Macy's the unilateral right to
cancel or modify the terms of the agreement, and the broad confidentiality provision.
However, the fact that the arbitration agreement contains these flawed provisions does
not necessarily mean that the entire arbitration agreement is substantively
unconscionable. Rather, it may be possible to sever one or both of the unconscionable
provisions. The arbitration agreement itself provides for such a remedy, as does
California law. (See Cal. Civ. Code, § 1670.5, subd. (a) ["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
82
the contract without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result"].) The question we must
address is whether the offending clause or clauses are merely "collateral" to the main
purpose of the arbitration agreement, or instead, whether the arbitration agreement is
" 'permeated' " by substantive unconscionability, such that the entire agreement may not
be enforced. (Armendariz, supra, 24 Cal.4th at pp. 123-124.)
We conclude that the "central purpose of the contract" at issue in this case is not
"tainted with illegality"; rather, the illegality is found in provisions that are "collateral to
the main purpose of the contract." (Armendariz, supra, 24 Cal.4th at p. 124.) Given the
overall fairness of the arbitration agreement, we conclude that Macy's unilateral right to
terminate or modify the agreement and/or the broad confidentiality provision, taken alone
or in combination, do not render the agreement so substantively unconscionable as to be
wholly unenforceable, particularly given the relatively low level of procedural
unconscionability of the agreement. Rather, these two substantively unconscionable
terms may be severed from the remainder of the agreement without substantially
affecting the manner in which the agreement operates.
We therefore reject Teimouri's contention that this court may affirm the trial
court's order denying Macy's motion to compel individual arbitration on the ground that
the arbitration agreement is unconscionable.
3. The policy does not violate the National Labor Relations Act
Teimouri suggests that we may uphold the trial court's order denying Macy's
motion to compel individual arbitration of her claims based on provisions of the National
83
Labor Relations Act (29 U.S.C. § 151 et seq. (NLRA)), as interpreted in D.R. Horton
(2012) 357 NLRB No. 184 (2012 NLRB Lexis *11) (D.R. Horton).
In D.R. Horton, the National Labor Relations Board (NLRB) considered whether a
mandatory arbitration agreement that required that all employment-related disputes be
resolved through individual arbitration, and that precluded class litigation and arbitration,
violated the NLRA. The NLRB concluded that the arbitration agreement violated the
NLRA because it prohibited the exercise of substantive rights protected by section 7 of
the NLRA. (D.R. Horton, supra, 2012 NLRB Lexis at *1.) Section 7 of the NLRA
provides in part that employees shall have the right "to engage in . . . concerted activities
for the purpose of collective bargaining or other mutual aid or protection . . . ." (29
U.S.C. § 157.) The NLRB determined that "employees who join together to bring
employment-related claims on a class-wide or collective basis in court or before an
arbitrator are exercising rights protected by Section 7 of the NLRA." (D.R. Horton,
supra, at *3.) The NLRB further concluded that the FAA did not preempt its
interpretation of the NLRA as rendering class arbitration waivers of employment-related
disputes unenforceable. (D.R. Horton, supra, at *7-*12.)
A number of courts have found the NLRB's analysis in D.R. Horton to be
unpersuasive. (See, e.g., Truly Nolen, supra, 208 Cal.App.4th at pp. 514-515; Nelsen v.
Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1134-1135; Jasso v.
Money Mart Express, Inc., supra, 879 F.Supp.2d at pp. 1046-1047.) These courts refer to
the United States Supreme Court's decision in CompuCredit Corp. v. Greenwood, supra,565 U.S. ___ [132 S.Ct. 665], in which the court held that a federal statute will not be
84
found to override an arbitration agreement under the FAA unless such a congressional
intent can be shown with clarity in the language or legislative history of the statute. (Id.
at pp. ___-___ [132 S.Ct. at pp. 672-673].) Teimouri has pointed to no language in the
NLRA demonstrating that Congress intended that the Act override the terms of an
arbitration agreement under the FAA. We agree with the courts that have rejected the
NLRB's analysis in D.R. Horton, and find this argument unavailing as a basis for
affirming the trial court's order.
IV.
DISPOSITION
The order of the trial court denying Macy's motion to compel individual arbitration
of Teimouri's claims is reversed. The parties are to bear their own costs on appeal.
AARON, J.
I CONCUR:
McCONNELL, P. J.
85
HALLER, J., concurring:
After AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, the enforceability
of class action arbitration waivers in employment agreements and the continued viability
of the California Supreme Court's decision in Gentry v. Superior Court (2007) 42 Cal.4th
443 (Gentry) have been hotly debated and are the subject of numerous appellate
decisions. (See maj. opn. ante, fn. 7.) In Truly Nolen of America v. Superior Court
(2012) 208 Cal.App.4th 487 (Truly Nolen), this court traced the history and analytical
underpinnings of the Concepcion and Gentry decisions, and concluded that Concepcion
"implicitly disapproved the reasoning of the Gentry court . . . ," but we declined to
"disregard [Gentry] without specific guidance from our high court." (Truly Nolen, supra,
at p. 507.) We also held "the factual analysis as to whether the [four] Gentry factors
apply in any particular case must be specific, individualized, and precise." (Id. at p. 511.)
Applying this standard, we determined the employer failed to present sufficient evidence
to satisfy the Gentry factors.
I adhere to our court's decision in Truly Nolen to apply Gentry until such time as
our Supreme Court directs otherwise. Inasmuch as our high court has granted review on
this specific issue (Iskanian v. CLS Transportation of Los Angeles, LLC (2012) 206
Cal.App.4th 949, review granted Sept. 19, 2012, No. S204032), I believe the approach in
Truly Nolen is particularly appropriate. However, I concur in the majority's reversal in
this case because I conclude that the evidence plaintiff offered in this case in support of
the Gentry factors did not meet the criteria set forth in Gentry and Truly Nolen.
HALLER, J.
2