Gutierrez, et al. v. Carter Brothers Security Services, LLC, et al.
Filing
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MEMORANDUM and ORDER denying 33 Motion to Change Venue and 34 Motion to Compel signed by Chief Judge Morrison C. England, Jr on 10/29/14. (Kaminski, H)
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UNITED STATES DISTRICT COURT
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EASTERN DISTRICT OF CALIFORNIA
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RAMSES GUTIERREZ, et al.,
individually and on behalf of all others
similarly situated,
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Plaintiffs,
No. 2:14-cv-00351-MCE-CKD
MEMORANDUM AND ORDER
v.
CARTER BROTHERS SECURITY
SERVICES, LLC, AT&T DIGITAL LIFE,
INC., PACIFIC BELL TELEPHONE
COMPANY DBA AT&T DATACOMM,
INC., AT&T CORP. and DOES 1
through 10, inclusive,
Defendants.
On March 10, 2014, Plaintiffs filed the instant class action on behalf of themselves
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and other putative class members (collectively “Plaintiffs or “Class Members”) against
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Carter Brothers Security Services, LLC (“Carter Brothers”), AT&T Digital Life, Inc.
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(“AT&T”), Pacific Bell Telephone Company dba AT&T Datacomm, Inc. (“PacBell”), AT&T
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Corp., and Does 1 through 10 inclusive (“Doe Defendants”). See ECF No. 8. Plaintiffs
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are seeking damages, restitution, civil penalties, and injunctive relief as a result of
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Defendants’ alleged violations of both state and federal labor laws. Plaintiffs further
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allege causes of action for conversion and violations of California’s Unfair Competition
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Law. Id. Presently before the court are two motions brought by Defendant Carter
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Brothers. The first seeks an order compelling arbitration and dismissing, or alternatively
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staying the action, and the second seeks to dismiss the complaint or, in the alternative,
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to transfer the proceedings to Georgia. See ECF Nos. 33, 34. For the following
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reasons, both motions are DENIED.1
BACKGROUND2
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In 2012, Carter Brothers entered into a contract with AT&T that called for Carter
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Brothers to provide technicians for the installation of AT&T Digital Life security systems
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in customer homes and businesses. Carter Decl., ¶ 2. Under the terms of that contract,
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Carter Brothers pledged to hire, train, and supply labor and construction related
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installation and monitoring technicians to AT&T in California and various other states.
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Prior to commencing work, Carter Brothers required Plaintiffs and Class Members to
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sign an Independent Contractor Agreement (“Agreement”), which Plaintiffs allege
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misclassified them as independent contractors rather than employees. Plaintiffs claim
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that Carter Brothers entered into these Agreements knowing the contract between Carter
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Brothers and AT&T did not include sufficient funds to comply with all applicable local,
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state, and federal laws or regulations governing the labor or services to be provided.
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The thrust of Plaintiffs’ argument is that Plaintiffs were required to enter into the
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Agreements so that Carter Brothers and AT&T could avoid and evade federal and state
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labor laws, wage and hour laws, and other laws, taxes, and requirements. According to
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Plaintiffs, Carter Brothers and AT&T knew that their contract failed to provide sufficient
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funds to comply with such requirements. As an inducement for Plaintiffs to sign the
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Agreements, Plaintiffs claim that Defendants fraudulently promised Class Members they
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would be converted to W-2 employees after a short introductory period of employment,
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which never happened. The Agreements, Plaintiffs claim, contained illegal,
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Because oral argument would not be of material assistance, the Court ordered this matter
submitted on the briefs. E.D. Cal. Local R. 230(g).
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The following recitation of facts is taken, sometimes verbatim, from Plaintiffs’ Complaint. Compl.,
March 10, 2014, ECF No. 8.
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unconscionable, void and voidable terms. Those terms included provisions relating to
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non-competition, indemnification, dispute resolution, and governing law. Plaintiffs seek
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to rescind the Agreements, and request that the Court find the Agreements
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unconscionable and therefore invalid and unenforceable in their entirety.
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Although Plaintiffs signed Agreements purporting to state they were independent
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contractors, Plaintiffs claim they were in fact employees of both Carter Brothers and
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AT&T. In support of that proposition, Plaintiffs aver that Class Members were given their
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work schedule, for example, by both Carter Brothers and AT&T, and were expected to
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abide by the scheduling dictated by those two entities. Additionally, Class Members
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were required to drive vehicles owned and provided by AT&T, that displayed AT&T’s
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logo and branding. Class Members were not allowed to use those vehicles for any
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personal reason. Class Members had no ownership or investment in the work they did
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for Carter Brothers and for AT&T, and had to provide their own tools and supplies, even
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though Carter Brothers and AT&T promised those items would be provided. Class
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Members were also required to wear uniforms bearing AT&T logos and were expressly
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forbidden from engaging in any outside work with competing employers during and after
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the term of the Agreements. Class Members were required to participate in a two-week
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initial training session provided by Carter Brothers and AT&T, and to also participate in
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on-going training sessions. Additionally, Class Members’ work was regularly overseen,
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supervised, and directed by Carter Brothers and by AT&T.
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In Carter Brothers’ first motion, the company seeks to compel arbitration under
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the terms of the Agreement and to dismiss the present action by virtue of the
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Agreement’s alternative dispute resolution provisions. See ECF No. 34. In Carter
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Brothers’ second motion, it asks the Court to transfer this action to Georgia under
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Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. §1406(a), pursuant to the forum
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selection clause contained in the Agreement, and to accordingly dismiss the action
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pending in this District. Alternatively, Carter Brothers requests that these proceedings
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be stayed pending completion of arbitration proceedings. See ECF No. 33.
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As set forth below Defendant’s motions to compel arbitration and to dismiss or
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stay the action based upon the arbitration provision are denied. Because the Court
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concludes the Agreements at issue are unconscionable and therefore unenforceable,
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Defendant Carter Brothers’ Motion to Compel Arbitration based on the Agreements must
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necessarily fail. Additionally, the fact that the Agreements are unenforceable means that
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Carter Brothers’ second motion, to dismiss or transfer venue of the action based on the
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Agreements’ forum selection clause, also fails.
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ANALYSIS
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The Federal Arbitration Act (“FAA”) provides that a written provision in a “contract
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evidencing a transaction involving commerce to settle by arbitration a controversy
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thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable,
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save upon such grounds as exist at law or in equity for the revocation of any contract.”
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9 U.S.C. § 2. The FAA allows a party to seek a court order compelling arbitration where
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another party refuses to arbitrate. 9 U.S.C. § 4. Valid arbitration agreements must be
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“rigorously enforced.” Perry v. Thomas, 482 U.S. 483, 490 (1987) (citation omitted).
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The FAA “leaves no place for the exercise of discretion by a district court, but instead
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mandates that district courts shall direct the parties to proceed to arbitration on issues as
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to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd,
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470 U.S. 213, 218 (1985) (emphasis in the original).
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Generally, in deciding whether a dispute is subject to the arbitration agreement, a
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court must answer two questions: (1) “whether a valid agreement to arbitrate exists,”
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and, if so, (2) “whether the agreement encompasses the dispute at issue.” Chiron
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Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). If a party
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seeking arbitration establishes these two factors, the court must compel arbitration.
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9 U.S.C. § 4; Chiron, 207 F.3d at 1130. Accordingly, the Court’s role “is limited to
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determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the
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claim and any defenses to the arbitrator.” Republic of Nicaragua v. Standard Fruit Co.,
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937 F.2d 469, 479 (9th Cir. 1991).
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In determining the existence of an agreement to arbitrate, the district court looks
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to “general state-law principles of contract interpretation, while giving due regard to the
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federal policy in favor of arbitration.” Wagner v. Stratton Oakmont, Inc., 83 F.3d 1046,
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1049 (9th Cir. 1996).
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“Although ‘courts may not invalidate arbitration agreements under state law
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applicable only to arbitration provisions,’ general contract defenses such as fraud,
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duress, or unconscionability, grounded in state contact law, may operate to invalidate
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arbitration agreements.” Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.
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2002) (quoting Doctor’s Ass’n., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)). However,
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courts cannot apply even generally applicable defenses to contract enforceability, such
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as duress and unconscionability, in a way that disfavors and undermines arbitration.
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AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747 (2011). Finally, “as a matter of
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federal law, any doubts concerning the scope of arbitrable issues should be resolved in
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favor of arbitration, whether the problem at hand is a construction of the contract
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language or an allegation of waiver, delay, or like defense to arbitrability.” Moses H.
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Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25 (1983). “An order to
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arbitrate . . . . should not be denied unless it may be said with positive assurance that
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the arbitration clause is not susceptible of an interpretation that covers the asserted
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dispute.” United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83
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(1960).
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A. Choice of Law
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As a threshold matter, when an agreement contains a choice of law provision, the
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parties’ choice of law applies “unless the analytical approach articulated in § 187(2) of
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the Restatement (Second) of Conflict of Laws ('§ 187(2)”) dictates a different result.”
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Hoffman v. Citibank (S. Dakota), N.A., 546 F.3d 1078, 1082 (9th Cir. 2008). First, it must
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be determined whether the chosen state, Georgia, “has a substantial relationship to the
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parties or their transaction … or whether there is any other reasonable basis for the
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parties’ choice of law.” Id. Carter Brothers’ principal place of business is located in
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Atlanta, Georgia, and therefore Georgia has a substantial relationship to the parties.
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ECF No. 8 at 4; see Ruiz v. Affinity Logistics Corp., 667 F.3d 1318, 1323 (9th Cir. 2012).
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The next step in the inquiry is whether the “chosen state’s law is contrary to a
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fundamental policy of California.” Hoffman, 546 F.3d at 1082. If the answer to that
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question is in the affirmative, then “the court must determine whether California has a
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materially greater interest than the chosen state in the determination of the particular
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issue.” Id.
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Under Georgia law, Plaintiffs are presumptively independent contractors. Ruiz,
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667 F.3d at 1324. Under California law, on the other hand, courts must consider
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legislation designed to protect and aid employees when determining the employee-
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independent contractor issue. Id. Applying Georgia law would therefore contravene
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fundamental California public policy “in favor of ensuring worker protections.” Id.
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California also has a materially greater interest than Georgia in determining this case in
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any event. Plaintiffs completed all work in California, were domiciled in California, and
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signed the agreements in California, while the only connection to Georgia is Carter
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Brothers’ principal place of business. ECF No. 38 at 7; ECF No. 38-2 at 2; see Ruiz,
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667 F.3d at 1324. Given this materially greater interest, California law should apply in
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adjudicating this matter.
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B.
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As indicated above, Defendant Carter Brothers moves to compel arbitration of the
Unconscionability
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claims asserted against them in the Complaint pursuant to the terms of its Agreement
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with Plaintiffs, and urges the Court to dismiss or stay the action, pending arbitration. See
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ECF No. 34 at 8, 12. According to Carter Brothers, the arbitration provision is valid and
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enforceable because “[p]laintiffs signed the Agreements under circumstances free of
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fraud, duress, or other untoward circumstances.” ECF No. 34 at 9.
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In evaluating the validity of arbitration agreements, federal courts “should apply
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ordinary state-law principles that govern the formation of contracts.” First Options of
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Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, (1995) (citations omitted). In determining
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whether a contract is unconscionable, the court must first determine whether or not the
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agreement at issue is one of adhesion. Armendariz v. Found. Health Psychcare Servs.,
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Inc., 24 Cal.4th 83, 113 (2000) (citing Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 817-
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819 (1981)). Once the contract is found to be adhesive, the court must then assess
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whether the contract is unduly oppressive or unconscionable. Id. In order to find a
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contract unenforceable, the unconscionability analysis requires that the court find both a
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procedural and substantive element are present. A & M Produce Co. v. FMC Corp.,
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135 Cal. App. 3d 473, 486 (1982). The procedural element focuses on “surprise” and
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“oppression,” while cases have found the substantive element looks to whether there are
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“one-sided” or “overly harsh” results. Id. at 486-487. These two elements however, do
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not need to be present in the same degree. A sliding scale approach is invoked, where a
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greater showing of one element requires less of a showing of the other. Armendariz, 24
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Cal. 4th at 114.
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As an initial matter, the Supreme Court has held that “generally applicable
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contract defenses, such as fraud, duress, or unconscionability, may be applied to
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invalidate arbitration agreements without contravening § 2 [of the FAA].” Doctor's
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Assocs., Inc. v. Casarotto, 517 U.S. 681, 686 (1996). Contrary to Defendants’ position,
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the validity of an arbitration provision is subject to “initial court determination.” Nitro-Lift
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Technologies, L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012). If the court finds the
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arbitration provision is valid, only then is the validity of the remainder of the contract for
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the arbitrator to decide. Id.
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Adhesion Contracts
The Ninth Circuit describes a contract of adhesion as a “standard-form contract,
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drafted by the party with superior bargaining power, which relegates to the other party
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the option of either adhering to its terms without modification or rejecting the contract
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entirely.” Circuit City Stores, 279 F.3d 889, 893 (citing Stirlen v. Supercuts, Inc.,
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51 Cal. App. 4th 1519, 1533 (1997)). In this case, the Agreement was a standardized
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contract, drafted by Carter Brothers. Because Plaintiffs’ only option was to either accept
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or reject the Agreements, with no opportunity to negotiate their terms, Carter Brothers
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clearly had superior bargaining strength and the Agreements must be considered
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contracts of adhesion. See Graham, 28 Cal. 3d 807, 817 (a contract of adhesion is
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signified by “a standardized contract, which, imposed and drafted by the party of superior
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bargaining strength, relegates to the subscribing party only the opportunity to adhere to
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the contract or reject it”) (citing Neal v. State Farm Ins. Cos., 188 Cal.App.2d 690, 694
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(1961)). That determination is not the end of the Court’s inquiry, however, since in order
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to be found unenforceable the Court must look to whether the Agreement is both
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procedurally and substantively unconscionable. That inquiry follows.
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Procedural Unconscionability
Procedural unconscionability focuses on the manner in which the contract was
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negotiated by the parties, and specifically focuses on factors of oppression and surprise.
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Kinney v. United HealthCare Servs., Inc., 70 Cal. App. 4th 1322, 1329 (1999) (citing
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A & M Produce Co., 135 Cal. App. 3d at 486) (explaining oppression arises from an
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inequality of bargaining power devoid of any real negotiations, and surprise relates to
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whether or not the terms of the contract are hidden by using excess text in the contract)
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(citations omitted). Plaintiffs’ declarations clearly indicate they were required to sign the
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Agreements as a condition of employment, and would have had to obtain employment
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elsewhere if they chose not to do so. See Decl. of Sapasap, ECF No. 38-1 at 20 (stating
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“I knew if I did not sign the agreement I could not work for Carter Brothers and AT&T”),
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Decl. of Jacob ECF No. 38-1 at 25 (“I thought I had to sign the Agreement to get a job”),
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Decl. of Osorio, ECF No. 38-1 at 5 (“I was required to sign an Independent Contractor
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Agreement as a condition of employment”). Furthermore, the Ninth Circuit has held that
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“[a] finding of a contract of adhesion is essentially a finding of procedural
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unconscionability.” Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846, 853
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(2001). Consequently, the procedural element of the unconscionability analysis is met.
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Substantive Unconscionability
The substantive element of unconscionability hinges on the “terms of the
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agreement and whether those terms are so one-sided as to shock the conscience.”
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Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1172 (9th Cir. 2003) (citing Kinney,
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70 Cal. App. 4th 1322, 1330). In this case, numerous substantive terms of the
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Agreement are one-sided; in particular, the provisions concerning arbitration,
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non-competition, and governing law. See ECF No. 38-2 at 2-10.
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First and foremost, the dispute resolution and choice of law provisions are one
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sided. ECF No. 38-2 at 6-10 (requiring Plaintiffs to travel to Atlanta, Georgia, pay for
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one-half of the arbitration costs and fees, and consent to jurisdiction in a venue that has
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no relation to where the work was performed). The arbitration provision does not provide
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notification to the Plaintiffs that by agreeing to binding arbitration they forfeit substantial
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rights such as potentially waiving their right to class arbitration. ECF No. 38-2 at 7.
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Also, the burden placed on Plaintiffs to pay for travel and lodging expenses, along with
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mediation and arbitration fees and costs, are likely much larger than any of the Plaintiffs’
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individual wage claims. Decl. of Rose, ECF No. 38-4 at 1-2.
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The financially onerous conditions set forth in the Agreements are further
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amplified in the event Plaintiffs do not ultimately prevail. Pursuant to the arbitration
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provision, Plaintiffs may be required to pay “one-half of the costs of the arbitration
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against the party who does not prevail.” ECF No. 38-2 at 7. In addition, any party who
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seeks to enforce the arbitration provision is entitled to all costs, fees, and expenses,
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including attorneys’ fees, to be paid “by the party against whom enforcement is ordered.”
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Id.
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Under these circumstances, the alternative dispute resolution provision of the
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Agreements fail to provide an accessible forum for Plaintiffs to vindicate their statutory
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rights. See, Shankle v. B-G Maint. Mgmt. of Colorado, Inc., 163 F.3d 1230, 1235 (10th
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Cir. 1999) (Arbitration provision was unenforceable where “it prohibited use of the judicial
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forum, where a litigant is not required to pay for a judge's services, and the prohibitive
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cost substantially limited use of the arbitral forum,” concluding the costs associated with
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arbitration failed to provide an accessible forum where Plaintiff could vindicate his
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statutory rights, rendering the Agreement unenforceable.).
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Similarly one-sided is the non-competition provision, which restrains Plaintiffs
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from competing in the same market for one year after expiration of their “Term,” which
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was limited to one year under the Agreement. ECF No. 38-2 at 2-4. Not only is this
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provision overly-harsh and one-sided, it is also contrary to California Law. See Cal. Bus.
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& Prof. Code § 16600 (every contract which restrains one from engaging in a lawful
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profession is to that extent void). Assuming Plaintiffs can prove they were employees of
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Carter Brothers, the indemnification provision in the Agreement is also contrary to
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California law and unenforceable. See ECF No. 38-2 at 6, Cal. Lab. Code §§ 2802,
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2804 (requiring an employer to indemnify employees for necessary expenditures or
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losses, and an agreement to waive this benefit is void).
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Because these one-sided provisions favor Defendant Carter Brothers, under
California law these terms are substantively unconscionable.
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C.
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In addition to finding the above-mentioned provisions unconscionable, under
Illegality
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California law, if a contract’s “central purpose” is “tainted with illegality,” then the contract
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as a whole is unenforceable. Armendariz, 24 Cal. 4th 83, 124. The California Supreme
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Court explained that if a court is unable to distinguish between the lawful and unlawful
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parts of the contract, the “illegality taints the entire contract, and the entire transaction is
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illegal and unenforceable.” Keene v. Harling, 61 Cal. 2d 318, 321 (1964). The Court
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agrees with Plaintiffs’ characterization of the Agreements as an apparent attempt by
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Carter Brothers to avoid paying employment taxes and other benefits that would, in turn,
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give it a competitive edge over employers who properly paid applicable taxes and
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benefits. In that regard, then, the Agreements have an unlawful purpose. See ECF No.
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30 at 16. Agreements whose object, “directly or indirectly, is to exempt [their] parties
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from violation of the law are against public policy and may not be enforced.” Iskanian v.
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CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 382 (2014) (citing In re Marriage of Fell,
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55 Cal. App. 4th 1058, 1065 (1997)). Because the Agreements’ underlying purpose
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appears to be illegal, the Court declines to enforce it.
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CONCLUSION
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For the reasons set forth above, Defendant’s Motion to Compel Arbitration, and to
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dismiss or stay this action based upon the Agreements’ arbitration provisions (ECF No.
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34) is DENIED. Moreover, the fact that the Court has found the Agreements at issue to
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be unconscionable and therefore unenforceable means that Carter Brothers’ second
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motion to dismiss the action, given the Agreement’s arbitration provisions or to transfer
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venue based on the Agreement’s forum selection clause, also fails. That Motion, ECF
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No. 33, is consequently DENIED as moot.
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IT IS SO ORDERED.
Dated: October 29, 2014
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