Plaintiff and Respondent,
Defendant and Appellant.
(Super. Ct. No. 30-2013-00675702)
O P I N I O N
Appeal from an order of the Superior Court of Orange County, Kim Garlin Dunning, Judge. Affirmed.
Ogletree, Deakins, Nash, Smoak & Stewart, Rafael G. Nendel-Flores and Seth E. Ort for Defendant and Appellant.
Trush Law Office, James M. Trush; Perona, Langer, Beck, Serbin, Mendoza & Harrison, Ellen R. Serbin, Todd H. Harrison and Brennan S. Kahn for Plaintiff and Respondent.
* * *
Defendant and appellant CWPSC, Inc. (CW Painting) appeals the trial court’s order denying its motion to compel its former employee, plaintiff and respondent Martha Carbajal, to arbitrate her wage and hour claims under the arbitration provision in her employment agreement. The trial court denied the motion because it found the arbitration provision was both procedurally and substantively unconscionable. We agree with the trial court.
The arbitration provision is procedurally unconscionable because it is part of an adhesion contract CW Painting imposed on Carbajal as a term of her employment. Moreover, although the arbitration provision required the parties to arbitrate their disputes under the American Arbitration Association’s (AAA) rules, the provision did not identify which of AAA’s many different rules would apply, CW Painting failed to provide Carbajal with a copy of the rules it believed applied, and CW Painting required Carbajal to sign the agreement without telling her where she could find the governing rules or giving her an opportunity to determine which rules would apply.
The arbitration provision is substantively unconscionable because it allows CW Painting to obtain injunctive relief in court while requiring Carbajal to seek relief through arbitration, it waives the statutory requirement that CW Painting post a bond or undertaking to obtain injunctive relief, and it effectively waives Carbajal’s statutory right to recover her attorney fees if she prevails on her Labor Code claims.
Contrary to CW Painting’s contention, the trial court was not required to sever these unconscionable terms and enforce the remainder of the arbitration provision. A trial court has discretion to deny enforcement of an arbitration agreement when the existence of multiple unconscionable terms permeates the entire agreement. The record supports the trial court’s exercise of its discretion.
Finally, we reject CW Painting’s contention the Federal Arbitration Act (9 U.S.C. § 1 et seq.; FAA) governs. The party asserting the FAA bears the burden to show it applies by presenting evidence establishing the contract with the arbitration provision has a substantial relationship to interstate commerce, but CW Painting failed to timely present such evidence.
Facts and Procedural History
CW Painting provides residential painting services for homeowners. It hires college students as “interns” to sell its services and manage its painting crews. In November 2011, Carbajal was a student at the University of California, San Diego when CW Painting made an on-campus solicitation for new interns. After the presentation, CW Painting accepted her into its internship program. During her interview, CW Painting asked Carbajal to sign the “2012 Season Employment Agreement – CWP Intern” (Agreement), but no one explained its provisions to her.
Under the heading “LET’S TALK IT OUT,” the Agreement included an arbitration provision that required Carbajal and CW Painting “to submit any and all disputes to final and binding arbitration in accordance with the rules of the [AAA].” The arbitration provision had a class action waiver that required Carbajal to arbitrate any claims she asserted on an individual basis, and prohibited the arbitrator from “enter[ing] an award or otherwise provid[ing] relief on a class, collective or representative basis.” The same paragraph also provided that Carbajal and CW Painting “specifically retain a right to appeal in a court of competent jurisdiction any determination or award of an arbitrator made in contravention of this section, including without limitation, a determination (i) that a claim may proceed as a class, collective, or representative action; or (ii) that awards relief on a class, collective, or representative basis. In such appeal, the standard of review to be applied to the arbitrator’s decision shall be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury.”
The arbitration provision further provided, “The costs of arbitration will be shared equally by [Carbajal] and [CW Painting]; however, if the law expressly requires [CW Painting], as the employer, [to] bear the entire cost of arbitration then [CW Painting] will then pay the entire cost.” Finally, the provision required Carbajal and CW Painting to be “responsible for your own attorneys’ fees.”
The Agreement also required Carbajal to keep CW Painting’s trade secrets and other information confidential and required her to use that information exclusively for CW Painting’s benefit. If Carbajal breached these obligations, the Agreement included a liquidated damages provision that required her to “pay to [CW Painting], immediately upon demand, the sum of ten thousand dollars ($10,000.00) per breach.” The Agreement further provided that Carbajal “agrees that, in addition to the foregoing remedy, if [Carbajal] breaches any of [the confidentiality or exclusive use provisions, CW Painting] will have the right to obtain an injunction from a court of competent jurisdiction restraining such breach or threatened breach and a right to specific performance of any such provision of this Agreement. [Carbajal] further agrees that no bond or other security shall be required in obtaining such equitable relief.” (Capitalization omitted.)
After attending an orientation and two-day training seminar, Carbajal began working for CW Painting in February 2012. In May 2012, CW Painting informed Carbajal it was missing some of her employment documents, including page two of the Agreement, which contained the arbitration, liquidated damages, and injunctive relief provisions described above. CW Painting e-mailed the documents to Carbajal, who signed and returned them to CW Painting as instructed.
Carbajal quit in August 2012, and filed this class action against CW Painting approximately a year later. The operative first amended complaint alleges the following clams on behalf of all similarly situated interns: (1) recovery of unpaid wages; (2) failure to provide meal periods; (3) failure to provide paid rest periods; (4) illegal deductions from wages; (5) failure to provide accurate itemized wage statements; (6) failure to compensate for business expenses; (7) failure to timely pay wages upon separation; (8) “declaratory relief – fraud in inducement, void and unenforceable agreement”; and (9) unfair business practices. (Capitalization omitted.)
CW Painting asked Carbajal to submit her claims to arbitration on an individual basis as the Agreement required, but Carbajal refused and sent CW Painting a notice purporting to rescind the Agreement because CW Painting had never signed it. Based on Carbajal’s refusal, CW Painting filed a motion to compel her to arbitrate her claims on an individual basis. CW Painting argued the Agreement was enforceable and governed by the FAA, which preempts all California statutes and case law invalidating class action waivers or otherwise limiting the enforceability of the parties’ arbitration agreement.
Carbajal opposed the motion, arguing (1) no enforceable arbitration agreement existed because CW Painting never signed the Agreement; (2) the FAA does not apply because CW Painting failed to present any evidence showing the Agreement involved interstate commerce; (3) Labor Code section 229 invalidates any private agreement to arbitrate Labor Code claims for unpaid wages; and (4) the Agreement’s arbitration provision is procedurally and substantively unconscionable. CW Painting filed a reply brief arguing the FAA applied because Carbajal’s duties bore a substantial relationship to interstate commerce. In support, CW Painting submitted new declarations from one of its officers and a supplier stating many of the materials CW Painting used in its painting business were shipped from other states.
The trial court denied the motion. In its order, the court simply stated the motion was denied “on the basis that the court finds that the subject Employment Agreement is procedurally and substantively unconscionable.” Neither party requested a statement of decision, and the trial court provided no further explanation of its ruling. This appeal followed.
A. Standard of Review
“‘Unconscionability is ultimately a question of law for the court.’ [Citations.] ‘However, numerous factual issues may bear on that question. [Citation.] Where the trial court’s determination of unconscionability is based upon the trial court’s resolution of conflicts in the evidence, or on the factual inferences which may be drawn therefrom, we consider the evidence in the light most favorable to the court’s determination and review those aspects of the determination for substantial evidence.’ [Citation.] If there are no material conflicts in the evidence bearing on the issue of unconscionability, our review is de novo.” (The McCaffrey Group, Inc. v. Superior Court (2014) 224 Cal.App.4th 1330, 1347 (McCaffrey); see Serafin v. Balco Properties Ltd., LLC (2015) 235 Cal.App.4th 165, 178 (Serafin).)
When a trial court denies a motion to compel arbitration, a party may request the court to provide a statement of decision explaining the factual and legal basis for its decision. (Code Civ. Proc., § 1291; Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 970 (Acquire II); Metis Development LLC v. Bohacek (2011) 200 Cal.App.4th 679, 687 [“the Legislature intended to require the trial court to issue a statement of decision, upon proper request under [Code of Civil Procedure] section 632, when denying a petition to compel arbitration”].) No statement of decision is required if the parties fail to request one. (Acquire II, at p. 970.)
“A party’s failure to request a statement of decision when one is available has two consequences. First, the party waives any objection to the trial court’s failure to make all findings necessary to support its decision. Second, the appellate court applies the doctrine of implied findings and presumes the trial court made all necessary findings supported by substantial evidence. [Citations.] This doctrine ‘is a natural and logical corollary to three fundamental principles of appellate review: (1) a judgment is presumed correct; (2) all intendments and presumptions are indulged in favor of correctness; and (3) the appellant bears the burden of providing an adequate record affirmatively proving error.’” (Acquire II, supra, 213 Cal.App.4th at p. 970.) Here, neither CW Painting nor Carbajal requested a statement of decision.
Moreover, “[e]ven if the record demonstrates that the trial court misunderstood or misapplied the law, the ruling must be affirmed if it is supported by any legal theory. [Citation.] ‘Because we review the correctness of the order and not the court’s reasons, we will not consider the court’s oral comments or use them to undermine the order ultimately entered.’ [Citation.] If the decision itself is correct, there can be no prejudicial error from incorrect logic or reasoning.” (Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1201 (Hoover).)
B. CW Painting Failed to Establish the FAA Applies
As a threshold matter, CW Painting contends the FAA governs the Agreement and the motion to compel arbitration. We disagree.
The FAA “‘“is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. . . .” . . . “[I]n enacting [the FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.”’” (Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1565, quoting Perry v. Thomas (1987) 482 U.S. 483, 489.)
“The ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’” (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 344.) When it applies, the FAA preempts any state law rule that “‘stands as an obstacle to the accomplishment of the FAA’s objectives.’” (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 384, quoting AT&T Mobility, at p. 343.)
The FAA applies to any “contract evidencing a transaction involving commerce” that contains an arbitration provision. (9 U.S.C. § 2; Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal.App.4th 651, 657.) “[T]he phrase ‘“involving commerce”’ in the FAA is the functional equivalent of the term ‘“affecting commerce,”’ which is a term of art that ordinarily signals the broadest permissible exercise of Congress’s commerce clause power.” (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1097 (Shepard), citing Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 55.) Accordingly, “although Congress’s power to regulate commerce is broad, it does have limits. . . . [A] relatively trivial impact on interstate commerce cannot be used as an excuse for broad regulation of state or private activities.” (Shepard, at p. 1099.)
Applying these principles, the United States Supreme Court has identified “three categories of activity that Congress may regulate under the commerce power: (1) the channels of interstate commerce, (2) the instrumentalities of interstate commerce and persons or things in interstate commerce, and (3) those activities having a substantial relation to interstate commerce.” (Shepard, supra, 148 Cal.App.4th at p. 1098, citing United States v. Lopez (1995) 514 U.S. 549, 558-559.)
The party asserting FAA preemption bears the burden to present evidence establishing a contract with the arbitration provision affects one of these three categories of activity, and failure to do so renders the FAA inapplicable. (Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 687 (Lane); Hoover, supra, 206 Cal.App.4th at p. 1207; Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 211 (Woolls); cf. Shepard, supra, 148 Cal.App.4th at p. 1101.)
For example, in Lane, an employee brought a wage and hour lawsuit and the defendant employer moved to compel arbitration under an arbitration agreement the employee signed when she was hired. The employee opposed the motion, arguing Labor Code section 229 prevented enforcement of any agreement requiring an employee to arbitrate Labor Code wage and hour claims.1 In response, the employer asserted the FAA preempted Labor Code section 229. (Lane, supra, 224 Cal.App.4th at pp. 680-682.) The Lane court rejected the employer’s FAA preemption argument, explaining the employer failed to establish the contract affected interstate commerce because the employer failed to submit any declarations or other evidence showing the nature of the employer’s business or the scope of the employee’s work. (Lane, at p. 688; see Woolls, supra, 127 Cal.App.4th at pp. 213-214 [FAA did not apply because party asserting preemption failed to “present any facts to show the instant transaction involved interstate commerce”]; Hoover, supra, 206 Cal.App.4th at pp. 1207-1208 [same]; cf. Shepard, supra, 148 Cal.App.4th at pp. 1100-1101 [FAA applied because party asserting preemption presented evidence showing materials involved in transaction were shipped from other states].)
Here, CW Painting claimed the FAA applied, but it presented no evidence to establish any connection to interstate commerce. Indeed, CW Painting presented nothing about the nature of its business or Carbajal’s work that showed any connection with interstate commerce. Carbajal’s complaint shows she worked for CW Painting in California serving California customers. Accordingly, CW Painting failed to meet its burden to show the FAA applied.
CW Painting contends it had no burden to produce any evidence establishing an interstate commerce connection because Carbajal’s opposition established that connection by admitting she made frequent phone calls to customers and used a facsimile machine to return the second copy of the Agreement she signed in May 2012. According to CW Painting, telephones are instruments of interstate commerce and establish the requisite connection with interstate commerce. To support this contention CW Painting cites two U.S. District Court cases, Makarowski v. AT & T Mobility, LLC (C.D.Cal. 2009) 2009 WL 1765661 (Makarowski), and Maye v. Smith Barney Inc. (S.D.N.Y. 1995) 897 F.Supp. 100 (Maye). We find this argument and these two nonprecedential cases unpersuasive.
In Makarowski, a customer sued her cell phone provider alleging a variety of consumer claims and the provider moved to compel arbitration based on an arbitration provision in the customer’s contract. (Makarowski, supra, 2009 WL 1765661, *1.) In an unpublished decision, the District Court found the FAA applied and granted the motion. Without analysis, the court concluded the telephone services the defendant provided involved interstate commerce because “‘telephones, even when used intrastate, are instrumentalities of interstate commerce.’” (Makarowski, at p. *3.)
Makarowski is readily distinguishable. The contract at issue in that case had a substantial relationship to interstate commerce because it involved using a channel or instrumentality of interstate commerce (the phone lines) to provide a service (cellular telephone service). In contrast, the Agreement does not have a substantial relationship to interstate commerce because its subject matter (residential painting services) does not involve a channel or instrumentality of interstate commerce and CW Painting failed to present evidence establishing any other substantial relationship to interstate commerce. Carbajal’s intrastate use of a telephone to speak with some customers is at most a trivial connection to interstate commerce, especially where there is no other relationship between the Agreement and interstate commerce. (See Shepard, supra, 148 Cal.App.4th at pp. 1098-1099.)
Maye likewise is readily distinguishable. There, an assistant purchasing agent sued his employer, Smith Barney, for illegal discrimination. The District Court granted the employer’s motion to compel arbitration based on the employee’s arbitration agreement. (Maye, supra, 897 F.Supp. at pp. 102 104.) The court concluded the FAA applied because the employer presented evidence showing the employee’s duties included using the mail, telephones, and other instrumentalities of interstate commerce to receive and place orders across state lines. (Maye, at p. 105.) Here, there is no evidence showing Carbajal had any contact or involvement with anyone in another state.
As further support for the argument using phone lines, even intrastate, establishes the requisite connection to interstate commerce, CW Painting points to federal wire fraud statutes that make it a federal crime to use phone lines to commit certain frauds. This argument misses the point. Those federal statutes have the necessary connection to interstate commerce because they regulate a channel or instrumentality of interstate commerce by making it a crime to use the phone lines to commit certain frauds. In contrast, the FAA does not per se regulate channels or instrumentalities of interstate commerce but rather has the requisite connection to interstate commerce when the subject matter of a contract containing an arbitration agreement either involves a channel or instrumentality of interstate commerce or otherwise has a substantial relationship to interstate commerce. The evidence here does not show painting a house involves a channel or instrumentality of interstate commerce, and simply using phone lines intrastate to follow up with customers is not a substantial relationship to interstate commerce.
CW Painting also contends it met its burden to show the FAA applied because it presented evidence with its reply brief showing many of the supplies Carbajal used to market and perform residential painting services were purchased and shipped from other states. “The general rule of motion practice, which applies here, is that new evidence is not permitted with reply papers. . . . ‘[T]he inclusion of additional evidentiary matter with the reply should only be allowed in the exceptional case . . .’ and if permitted, the other party should be given the opportunity to respond.” (Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537-1538.) Whether to accept new evidence with the reply papers is vested in the trial court’s sound discretion, and we may reverse the trial court’s decision only for a clear abuse of that discretion. (Alliant Ins. Services, Inc. v. Gaddy (2008) 159 Cal.App.4th 1292, 1308; see Jay, at p. 1538.)
Carbajal objected to the new evidence on this ground, and we presume the trial court sustained that objection because the court did not continue the hearing to allow Carbajal to respond and neither party requested a statement of decision. (See Acquire II, supra, 213 Cal.App.4th at p. 970 [appellate court must presume trial court made all findings necessary to support its decision when parties fail to request statement of decision].) CW Painting nonetheless contends it properly submitted the new evidence with the reply because Carbajal did not challenge the FAA’s applicability until her opposition to the motion to compel. Not so. CW Painting’s moving papers argued the FAA applied, and therefore it was required to present evidence to support its claim. The new evidence was not simply evidence responding to a new issue Carbajal raised; rather, it was evidence on an issue CW Painting raised, but failed to establish, in its moving papers.2
We conclude CW Painting did not meet its burden to show the FAA applied, and therefore its arguments the FAA preempts California statutes or case law lack merit.
C. The Trial Court Properly Found the Arbitration Agreement to be Unconscionable
1. The Unconscionability Doctrine
“‘Unconscionability is a judicially created doctrine, which the Legislature codified in 1979.’” (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1280.) Civil Code section 1670.5 provides, “If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.” (Civ. Code, § 1670.5, subd. (a).) The doctrine applies to arbitration agreements, even those governed by the FAA. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 912 (Sanchez); Peng v. First Republic Bank (2013) 219 Cal.App.4th 1462, 1469 (Peng).)