Rappaport v. Federal Savings Bank et al

Filing 37

ORDER granting 12 Motion to Stay and 33 Motion to Strike. The Parties shall file a Joint Status Report regarding the status of the arbitration on 10/29/2018 and every 90 days thereafter until the stay is lifted. Signed by Judge G Murray Snow on 7/31/18. (DXD)

1

WO

2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7

FOR THE DISTRICT OF ARIZONA

8
9

Jason E. Rappaport,
Plaintiff,

10
11

ORDER

v.

12

No. CV-18-01404-PHX-GMS

Federal Savings Bank, et al.,

13

Defendants.

14
15
16
17
18

Pending before the Court are Defendants’ Motion to Stay, (Doc. 12), and
Plaintiff’s Motion to Strike, (Doc. 33). The Court grants both motions.
BACKGROUND
Plaintiff Jason E. Rappaport brought suit against his former employer, Defendant

19

The Federal Savings Bank (“TFSB”), and its CEO, Stephen M. Calk.

(Doc. 1).

20

Mr. Rappaport alleges that TFSB illegally terminated his employment after he developed

21

leukemia, and that TFSB and Mr. Calk lied to Mr. Rappaport’s clients about his

22

dismissal. (Doc. 1). The first four counts of Mr. Rappaport’s Complaint concern the

23

defamation and intentional interference with a business relationship claims, and the last

24

two counts concern the wrongful dismissal and retaliation claims. (Doc. 1).

25

Mr. Rappaport’s employment contract with TFSB included an arbitration

26

agreement. (Doc. 12, Exh. A ¶ 10). It states that any dispute “concerning the wages,

27

hours, working conditions, terms, rights, responsibilities or obligations between them or

28

arising out of their employment relationship . . . shall be resolved through binding

1

arbitration in accordance with the rules of JAMS Arbitration . . . .” (Doc. 12, Exh. A

2

¶ 10). Pursuant to this clause and the Federal Arbitration Act, Defendants have requested

3

the Court to stay this case until arbitration is completed. (Doc. 12).

4
5

DISCUSSION
I.

Legal Standard

6

Under the Federal Arbitration Act (“FAA”), an arbitration provision in an

7

employment contract “shall be valid, irrevocable, and enforceable . . . .” 9 U.S.C. § 2;

8

see, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113–19 (2001) (holding that

9

the FAA applies to employment contracts except those of transportation workers); Chiron

10

Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000); Tracer

11

Research Corp. v. Nat'l Envtl. Servs. Co., 42 F.3d 1292, 1294 (9th Cir. 1994), cert.

12

dismissed, 515 U.S. 1187 (1995). “Although [a] contract provides that [state] law will

13

govern the contract’s construction, the scope of the arbitration clause is governed by

14

federal law.” Tracer Research Corp, 42 F.3d at 1294 (citing Mediterranean Enters., Inc.

15

v. Ssangyong Corp., 708 F.2d 1458, 1463 (9th Cir. 1983)); see Circuit City Stores, Inc. v.

16

Adams, 279 F.3d 889, 892 (9th Cir. 2002) (holding that FAA “not only placed arbitration

17

agreements on equal footing with other contracts, but established . . . a federal common

18

law of arbitrability which preempts state law”); Simula, Inc. v. Autoliv, Inc., 175 F.3d

19

716, 719 (9th Cir. 1999) (“Federal substantive law governs the question of

20

arbitrability.”).

21

“Notwithstanding the federal policy favoring it, ‘arbitration is a matter of contract

22

and a party cannot be required to submit to arbitration any dispute which he has not

23

agreed so to submit.’”

24

Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)); see

25

French v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 784 F.2d 902, 908 (9th Cir.

26

1986). Where the arbitrability of a dispute is in question, a court must look to the terms

27

of the contract. See Chiron Corp., 207 F.3d at 1130. “Any doubts concerning the scope

Tracer Research Corp., 42 F.3d at 1294 (quoting United

28

-2-

1

of arbitrable issues should be resolved in favor of arbitration.” Simula, 175 F.3d at 719

2

(quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 20 (1983)).

3

However, a court “cannot expand the parties’ agreement to arbitrate in order to

4

achieve greater efficiency.” Tracer Research Corp., 42 F.3d at 1294. “[T]he judicial

5

inquiry . . . must be strictly confined to the question whether the reluctant party did agree

6

to arbitrate . . . .” United Steelworkers, 363 U.S. at 582. “The court’s role under the

7

[FAA] is therefore limited to determining (1) whether a valid agreement to arbitrate

8

exists and, if it does, (2) whether the agreement encompasses the dispute at issue.”

9

Chiron Corp., 207 F.3d at 1130 (citations omitted); see Simula, 175 F.3d at 720 (stating

10

that “the district court can determine only whether a written arbitration agreement exists,

11

and if it does, enforce it in accordance with its terms”) (citation omitted).

12

II.

Analysis

13

A.

14

In evaluating whether the parties intended to arbitrate, courts apply ordinary state-

Conscionability of Arbitration Provision

15

law contract principles.

16

Fed.Appx. 740, 741 (9th Cir. 2012) (applying New York law in arbitrability

17

determination) (citing First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).

18

The arbitration agreement states that the terms were “made and entered into in the State

19

of Illinois” and shall be governed by “the laws of the State of Illinois.” (Doc. 12, Exh. A

20

¶ 10).

Wynn Resorts, Ltd. v. Atlantic-Pacific Capital, Inc., 497

21

Illinois law favors arbitration and enforces valid arbitration agreements. Williams

22

v. Jo-Carroll Energy, Inc., 382 Ill. App. 3d 781, 784 (2d Dist. 2008) (citations omitted).

23

An arbitration agreement is not enforceable if it is unconscionable.

24

“Unconscionability may be either procedural or substantive, or a combination of both.”

25

Id. (citation omitted).

26

1.

Id.

Procedural Unconscionability

27

Procedural unconscionability considers whether “a term is so difficult to find,

28

read, or understand that the plaintiff cannot fairly be said to have been aware he was

-3-

1

agreeing to it.” Razor v. Hyundai Motor America, 222 Ill.2d 75, 100 (2006). It also takes

2

into account a lack of bargaining power. Id. The procedural unconscionability analysis

3

considers “whether each party had the opportunity to understand the terms of the

4

contract, whether important terms were hidden in a maze of fine print, and all of the

5

circumstances surrounding the formation of the contract.” Phoenix Ins. Co. v. Rosen, 242

6

Ill.2d 48, 60 (2011) (internal quotations removed) (citations omitted).

7

Illinois courts have not considered whether an arbitration agreement is

8

unconscionable if it fails to attach all of the applicable rules of arbitration. By analogy,

9

Mr. Rappaport refers to California precedent on the issue. In general, California courts

10

consider what the weaker party in the agreement would expect in the unattached rules.

11

One court found procedural unconscionability when the unattached rules contradicted

12

elements in the employment contract and were different than the ones typically used in

13

employment disputes. Lou v. Ma Labs., Inc. 2013 WL 2156316 at *3–*4 (N.D. Cal.

14

2013). Another California court found unconscionability when the unattached rules

15

included prohibitive fees that a typical person would not expect in dispute resolution.

16

Parada v. Superior Court, 176 Cal.App.4th 1554, 1571 (3d Div. 2009) (citing Gutierrez

17

v. Autowest, Inc., 114 Cal.App.4th 77, 90 (5th Div. 2003)); see also Harper v. Ultimo,

18

113 Cal.App.4th 1402, 1406 (3d Div. 2003) (finding procedural unconscionability when

19

unattached rules had elements that would surprise the weaker party). Simple failure to

20

attach the arbitration rules does not conclusively show that the arbitration agreement is

21

unconscionable. See Coup v. Scottsdale Plaza Resort, LLC, 623 F.Supp.2d 931, 953 (D.

22

Ariz. 2011) (“Even California's pro-employee law in the arbitration arena has rejected . .

23

. [the] argument that an employer’s mere reference to unattached arbitration rules renders

24

an arbitration agreement unconscionable per se.”) (citing Mathis v. Screen Actors Guild

25

Producer Pension Health Plan, 2011 WL 199002, *6 (Cal.App. 2 Dist. January 24,

26

2011)).

27

The arbitration agreement in Mr. Rappaport’s employment contract explicitly

28

states that disputes “shall be resolved through binding arbitration in accordance with the

-4-

1

rules of JAMS Arbitration applicable to employment claims . . . .” (Doc. 12 Exh. A

2

¶ 10). The clause is plainly set in the contract and is not otherwise hidden. Although the

3

specific rules used in JAMS Arbitration of employment claims were not attached to the

4

agreement, those rules are easily accessible. The applicable arbitration rules require a

5

standard $1,500 filing fee, twelve percent case management fee, and other customary

6

procedures to efficiently resolve the dispute. (Doc. 12 Exh. B). Illinois courts have

7

upheld these JAMS rules. See Tritsis v. BankFinancial Corp., 2017 WL 1134472 at *4

8

(N.D. Ill. Mar. 27, 2017); Bahoor v. Varonis Systems, Inc., 152 F.Supp.3d 1091, 1100–

9

1101 (N.D. Ill. 2015). The rules do not contradict the employment contract and conform

10

to expected rules governing arbitration. Further, the claim allows for a party to opt out at

11

the time of signing the agreement or within thirty days of its execution. (Doc. 12 Exh. A

12

¶ 10).

13

unconscionable.

14

2.

Considering all of this, the arbitration agreement is not procedurally

Substantive Unconscionability

15

“Substantive unconscionability concerns the actual terms of the contract and

16

examines the relative fairness of the obligations assumed.” Phoenix Ins. Co. v. Rosen,

17

242 Ill.2d 48, 60 (2011) (internal quotations removed) (citations omitted).

18

substantive unconscionability analysis considers whether terms are “so one-sided as to

19

oppress or unfairly surprise an innocent party, [presenting] an overall imbalance in the

20

obligations and rights imposed by the bargain, and significant cost-price disparity.”

21

Kinkel v. Cingular Wireless LLC, 223 Ill.2d 1, 28 (2006) (quoting Maxwell v. Fidelity

22

Financial Services, Inc., 184 Ariz. 82, 89 (1995)).

The

23

The arbitration agreement is not “one-sided” and does not present an imbalance of

24

obligations. It states that “parties will share equally in the cost of such Arbitration.”

25

(Doc. 12 Exh. A ¶ 10). If the underlying statute allows recovery of attorney’s fees, then

26

the arbitrator may reward fees in line with the statute. (Doc. 12 Exh. A ¶ 10). If the

27

claim is minimal, TFSB may pay the employee’s share of the arbitration fee. (Doc. 12

28

-5-

1

Exh. A ¶ 10).

2

Mr. Rappaport or present an overall unbalance.

The terms of the agreement are not so one-sided as to oppress

3

Mr. Rappaport also argues that the agreement may be substantively

4

unconscionable due to his inability to pay for arbitration. (Doc. 22). A party seeking to

5

invalidate an arbitration agreement as substantively unconscionable because it is

6

prohibitively expensive has the burden to show the likelihood of incurring the prohibitive

7

costs. Bess v. DirecTV, Inc., 381 Ill.App.3d 229, 240–41 (5th Dist. 2008) (citing Green

8

Tree Financial Corp.—Alabama v. Randolph, 531 U.S. 79, 92 (2000)). “An arbitration

9

provision is not rendered inherently unconscionable because some of the arbitration costs

10

will be imposed” on the plaintiff. Id. at 41. A plaintiff may fail to demonstrate that the

11

cost of arbitration is prohibitively expensive when the “plaintiff has not demonstrated that

12

the cost of an arbitration hearing will be greater than that of litigating the case in court.”

13

Williams v. Jo-Carroll Energy, Inc., 382 Ill.App.3d 781, 788 (2d Dist. 2008).

14

Mr. Rappaport’s attorney has stated that “the only cost for Mr. Rappaport to

15

pursue his claims in this Court is the filing fee, which Mr. Rappaport has already incurred

16

and was able to afford.” (Doc. 22, Exh. B ¶ 25). Thus, Mr. Rappaport has showed that

17

the cost of arbitration would exceed the cost of litigating the case in court.

18

Concerning Mr. Rappaport’s ability to afford arbitration, the parties disagree about

19

the expected cost of arbitration and Mr. Rapaport’s ability to pay. Mr. Rappaport relies

20

on his attorney’s declaration that arbitration would cost between $40,000 and $75,000.

21

(Doc. 22, Exh. B ¶ 24). TFSB anticipates that the true cost would be between $7,000 and

22

$15,750. (Doc. 35 at 5). Mr. Rappaport claims that he cannot pay this cost because his

23

annual living expenses of $312,000 are greater than his annual salary of $147,300. (Doc.

24

22, Exh. B ¶¶ 14, 21). Mr. Rappaport’s report of annual expenses is exaggerated. He

25

reports that he pays $2,000 per month to care for his children, which is separate from a

26

$3,000 per month court order payment that provides for his children. (Doc. 22, Exh. A

27

¶¶ 6, 9). He estimates $3,500 per month in “medical and dental expenses, including

28

insurance costs” which are also separate from $1,700 per month in miscellaneous

-6-

1

expenses that “include medical expenses and other household fees.” (Doc. 22, Exh. A

2

¶¶ 8, 12).

3

Mr. Rappaport’s monthly expenditure of $2,300 for personal food and clothing would

4

mean that anyone could defeat an arbitration agreement if his or her lifestyle was

5

expensive enough. The arbitration agreement is not substantively unconscionable.

To find that the arbitration agreement is unconscionable based on

6

B.

7

For agreements under the FAA, federal law governs questions of arbitrability

8

unless parties clearly and unmistakably designate that nonfederal arbitrability law

9

applies. Brennan v. Opus Bank, 796 F.3d 1125, 1129 (9th Cir. 2015) (citations omitted).

10

The Ninth Circuit has directed that a general choice-of-law provision is not clear and

11

unmistakable evidence that the parties agreed to apply non-federal law to the question of

12

arbitrability. Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914, 920–921 (9th Cir.

13

2011). Mr. Rappaport’s employment contract has a general choice-of-law provision

14

applying Illinois law to the terms of employment, but it does not clearly and

15

unmistakably designate which law applies to the question of arbitrability. (Doc. 12 Exh.

16

A ¶ 10). Therefore, federal arbitrability law determines the arbitrability of Counts One

17

through Four.

Arbitration of Counts One through Four

18

As previously noted, a Court must first determine two gateway issues: (1) whether

19

there is an arbitration agreement between the parties; and (2) whether the agreement

20

covers the dispute. Chiron Corp., 207 F.3d at 1130. “However, these gateway issues can

21

be expressly delegated to the arbitrator where ‘the parties clearly and unmistakably [so]

22

provide.” Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015) (quoting AT&T

23

Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986)). “Courts should not

24

assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and

25

unmistakabl[e]’ evidence that they did so.” First Options of Chicago, Inc. v. Kaplan, 514

26

U.S. 938, 944 (1995). An agreement clearly and unmistakably delegates the question of

27

arbitrability by expressly incorporating arbitration rules which provide that the arbitrator

28

shall have power to rule on his or her own jurisdiction. Brennan v. Opus Bank, 796 F.3d

-7-

1

1125, 1130 (9th Cir. 2015) (holding that incorporation of AAA arbitration rules

2

sufficiently designated question of arbitrability to arbitrator because the rules included a

3

jurisdictional provision that arbitrator would decide arbitrability); see also Oracle

4

America, Inc. v. Myriad Group A.G., 724 F.3d 1069, 1074 (9th Cir. 2013) (observing

5

that“[v]irtually every circuit to have considered the issue has determined that

6

incorporation of the [AAA] arbitration rules constitutes clear and unmistakable evidence

7

that the parties agreed to arbitrate arbitrability”).

8

The arbitration clause of Mr. Rappaport’s employment contract clearly and

9

unmistakably states that such disputes “shall be resolved through binding arbitration in

10

accordance with the rules of JAMS Arbitration applicable to employment claims.” (Doc.

11

12 Exh. A ¶ 10). The JAMS rules, like the AAA rules, includes a provision that

12

“[j]urisdictional and arbitrability disputes, including disputes over the . . . scope of the

13

agreement under which Arbitration is sought, and who are proper Parties to the

14

Arbitration, shall be submitted to and ruled on by the Arbitrator.” (Doc. 12 Exh. B, Rule

15

11(b)). Accordingly, the parties agreed to delegate the question of arbitrability to the

16

arbitrator.

17

Mr. Rappaport argues that the arbitration agreement does not apply to Counts One

18

through Four because the misconduct surrounding the defamation and business

19

interference claims occurred after TFSB terminated the employment contract with Mr.

20

Rappaport. (Doc. 22). Yet, it appears that a primary question in these claims concerns

21

Mr. Rappaport’s conduct while employed at TFSB and the nature of his termination.

22

(Doc. 1 ¶¶ 63–128). Thus, whether these claims relate to the “rights, responsibilities or

23

obligations” between Mr. Rappaport and TFSB is a valid question. The Court finds that

24

the employment contract delegates the question of arbitrability and the arbitrator will

25

determine whether Counts One through Four are arbitrable.

26

C.

27

While the Federal Arbitration Act (“FAA”) requires a court to dismiss or stay an

28

arbitrable claim, the Ninth Circuit has not squarely addressed whether a district court

Arbitration of Claims against Mr. Calk

-8-

1

should order a stay for non-arbitrating parties. To avoid “piecemeal litigation,” Dean

2

Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985), the Supreme Court has

3

recognized that “[i]n some cases, . . . it may be advisable to stay litigation among the

4

non-arbitrating parties pending the outcome of the arbitration.”

5

Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 20 n. 23 (1983). Whether a stay

6

should be granted for non-arbitrating parties is a decision “left to the district court . . . as

7

a matter of its discretion to control its docket.” Id. (citing Landis v. North American Co.,

8

299 U.S. 248, 254–55 (1936)).

Moses H. Cone

9

Staying the proceedings may be appropriate “where the arbitrable claims

10

predominate, or where the outcome of the nonarbitrable claims will depend upon the

11

arbitrator’s decision.” United Commc’ns Hub, Inc. v. Qwest Commc’ns, Inc., 46 F. Appx.

12

412, 415 (9th Cir.2002) (unpublished) (citations omitted). “[A]voiding a duplication of

13

effort” is another ground that may justify granting a stay. United States ex rel. Newton v.

14

Neumann Caribbean Int’l, Ltd., 750 F.2d 1422, 1427 (9th Cir. 1985).

15

In Mr. Rappaport’s Complaint, the arbitrable claims against TFSB predominate.

16

In fact, Counts Two through Six do not even mention Mr. Calk, but instead claim that

17

“TFSB acted with actual malice in portraying Mr. Rappaport in a false light” and “TFSB

18

intentionally interfered with Mr. Rappaport’s business relationships.” (Doc. 1 ¶¶ 113,

19

122). Count One references Mr. Calk, but only as one TFSB employee of many who

20

defamed Mr. Rappaport. (Doc. 1 ¶ 64).

21

against TFSB predominate, and that a stay in the proceedings against Mr. Calk is

22

appropriate.

The Court finds that the arbitrable claims

23

D.

24

Mr. Rappaport argues that TFSB has not yet initiated arbitration and has therefore

25

waived its right to arbitrate this dispute. Mr. Rappaport has not provided any legal

26

authority for this position. The Fifth Circuit has persuasively described that requiring a

27

defendant to initiate arbitration before the filing of the lawsuit will create a duty to

28

institute proceedings which may establish his own liability. General Guaranty Insurance

Waiver of Right to Arbitrate and Plaintiff’s Motion to Strike

-9-

1

Co. v. New Orleans General Agency, Inc., 427 F.2d 924, 928 (5th Cir. 1970). Further,

2

the arbitration agreement does not include a provision concerning waiver or a timeframe

3

to initiate arbitration. (Doc. 12 Exh. A ¶ 10). The Court finds that TFSB has not waived

4

its contractual right to resolve any applicable dispute through binding arbitration.1

5

CONCLUSION

6
7

As described above, the Court finds that the arbitration agreement is enforceable
and grants the motion to stay.

8

IT IS HEREBY ORDERED that:

9

1.

Defendant’s Motion to Stay (Doc. 12) is GRANTED;

10

2.

Plaintiff’s Motion to Strike (Doc. 33) is GRANTED;

11

3.

The Parties shall file a Joint Status Report regarding the status of the

12

arbitration on October 29, 2018 and every ninety (90) days thereafter until the stay is

13

lifted.

14

Dated this 31st day of July, 2018.

15
16

Honorable G. Murray Snow
United States District Judge

17
18
19
20
21
22
23
24
25
26
27
28

1

To show that it has not been slow to initiate arbitration, TFSB referenced an email
between Mr. Rappaport and his attorney. (Doc. 35 at 12; Doc. 35-1 Sub-Exhibit 6).
Mr. Rappaport requests the Court to strike the email as privileged. (Doc. 33).
Mr. Rappaport explains that he inadvertently sent the email to Mr. Rappaport’s outdated
TFSB account instead of sending it to Mr. Rappaport’s personal account. (Doc. 33). The
Court may strike “any redundant, immaterial, impertinent, or scandalous matter.” Fed. R.
Civ. P. Rule 12(f). TFSB does not object to Plaintiff’s motion. (Doc. 36). The Court
grants the motion to strike.
- 10 -