Bankwitz et al v. Ecolab, Inc.,

Filing 35

ORDER by Judge Edward M. Chen Granting in Part and Denying in Part 21 Defendant's Motion to Compel Arbitration and to Stay Proceedings. (emcsec, COURT STAFF) (Filed on 10/17/2017)

1
2
3
4

UNITED STATES DISTRICT COURT

5

NORTHERN DISTRICT OF CALIFORNIA

6
7

Plaintiffs,

8
9
10
11

Case No. 17-cv-02924-EMC

ROBERT BANKWITZ, et al.,

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT’S
MOTION TO COMPEL ARBITRATION
AND TO STAY PROCEEDINGS

v.
ECOLAB, INC., A DELAWARE
CORPORATION,

Docket No. 21

12
For the Northern District of California

United States District Court

Defendant.
13

Plaintiffs filed a class action wage and hour complaint against their employer, Ecolab, after

14

signing an arbitration agreement purporting to require arbitration of all employment-related claims

15

and to prohibit class, collective, and representative actions in any forum. Before the Court is

16

Ecolab’s motion to compel arbitration or to stay this action until the Supreme Court reviews the

17

enforceability of employment class action waivers in Morris v. Ernst & Young, LLP, 137 S. Ct.

18

809 (2017). The Court conditionally DENIES the motion to compel arbitration and GRANTS IN

19

PART AND DENIES IN PART the motion to stay because the Supreme Court’s Morris decision

20

will be dispositive.

21

22

I.

BACKGROUND

Plaintiffs are employees of Ecolab who claim they were misclassified as exempt

23

employees and therefore wrongfully denied overtime and doubletime premiums. They bring

24

claims under the California Labor Code, the Unfair Competition Law, and the Private Attorney

25

General Act (―PAGA‖). Ecolab moved to compel arbitration of all Plaintiffs’ claims except the

26

PAGA claim, or in the alternative to stay this case pending the United States Supreme Court’s

27

ruling on the enforceability of arbitration agreements like Ecolab’s in Morris.

28

Plaintiffs assented to Ecolab’s Arbitration Agreement as a condition of employment with

1

no option to opt-out. Docket No. 21, Declaration of Amy Daly (―Daly Decl.‖), ¶ 5. The

2

agreement mandates that both parties arbitrate all claims and requires Plaintiffs to arbitrate in an

3

individual capacity—not as a collective or class claim. Daly Decl. ¶ 10, Ex. 5 (―Agreement‖) at 2.

4

The Agreement permits severance of unlawful provisions ―except that arbitration may only

5

proceed in an individual capacity.‖ Id. Furthermore, the Agreement states, ―[t]he arbitrator shall

6

not have the authority to hear multiparty, class, collective or representative actions.‖ Agreement

7

at 3.

under Morris because it requires them to waive their right to bring ―any class or collective action

10

in any court or in arbitration related to any dispute.‖ Agreement at 2. Plaintiffs also argue that,

11

irrespective of the legality of the class action waiver, the Agreement is unconscionable and

12
For the Northern District of California

In opposition to Defendant’s motion, Plaintiffs argue that the Agreement is unenforceable

9

United States District Court

8

therefore unenforceable.
II.

13
14
15

A.

DISCUSSION

Class Action Waiver
The Ninth Circuit has held that arbitration agreements requiring employees to pursue

16

work-related claims individually are unenforceable because class and collective actions are

17

protected forms of ―concerted activity‖ under the National Labor Relations Act. Morris v. Ernst

18

& Young, LLP, 834 F.3d 975, 975 (9th Cir. 2016).

19

The agreement in Morris prohibited concerted action of all legal claims, required that

20

employees use only arbitration, and was a condition of employment with no opt-out provision. Id.

21

Likewise, the Agreement here prohibits class actions against Ecolab in all forums, compels

22

employees to arbitration, and is a condition of employment. Agreement at 1–3. The Agreement’s

23

class action waiver provision is therefore unlawful under Morris, as Ecolab concedes. Docket No.

24

21 at 15.

25

Moreover, the class action waiver provision is not severable under the Agreement’s own

26

terms, which permit severance of unlawful provisions ―except that arbitration may only proceed in

27

an individual capacity.‖ Agreement at 2. Accordingly, after severing the class action waiver, the

28

Court would not be able to compel arbitration of class claims because the parties did not contract
2

1

to class-wide arbitration. Stolt-Nielsen S.A. v. Animal Feeds Int'l. Corp., 559 U.S. 662, 684

2

(2010). The Agreement also expressly deprives the arbitrator of any authority to hear multiparty,

3

class, collective or representative claims. Agreement at 3. Thus, Ecolab’s Arbitration Agreement

4

is unenforceable under Morris because the class action waiver is not severable.
The Supreme Court heard oral arguments in Morris on October 2, 2017. Its ruling is

5
6

forthcoming. Unless and until the Supreme Court reverses Morris, it continues to be the law of

7

this circuit and this Court is bound to follow it. See Yong v. INS, 208 F.3d 1116, 1119 n.2 (9th

8

Cir. 2000). Nevertheless, if appropriate, the parties may revisit the issue after the case is decided.

9

B.

10

Unconscionability
Plaintiffs argue that even if Morris does not apply, the agreement is unenforceable because

it is unconscionable. A successful unconscionability defense requires a showing of both

12
For the Northern District of California

United States District Court

11

procedural and substantive unconscionability. Armendariz v. Found. Health Psychcare Svcs., Inc.,

13

24 Cal.4th 83, 99 (2000). As explained below, Plaintiffs have demonstrated only marginal

14

procedural unconscionability and no substantive unconscionability. For that reason, the

15

Arbitration Agreement is not unconscionable.

16

1.

Procedural Unconscionability

17

Procedural unconscionability focuses on ―oppression‖ and ―surprise‖ during the

18

negotiation of a contract. Id. at 114. ―Oppression‖ arises from an inequality of bargaining power.

19

Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1171 (9th Cir. 2003). ―Surprise‖ involves the

20

extent to which the disputed terms are hidden by the party seeking to enforce them. Id. All

21

contracts of adhesion are at least slightly oppressive, but adhesion alone gives rise to only a low

22

degree of procedural unconscionability. Poublon v. C.H. Robinson Co., 846 F.3d 1251, 1261–62

23

(9th Cir. 2017). Without other indications of procedural unconscionability, contracts of adhesion

24

will still be enforced. Id. Here, it is undisputed that the Agreement is a slightly oppressive

25

contract of adhesion because it was imposed upon Plaintiffs as a condition of employment with no

26

opt-out provision. Docket No. 21, Daly Decl. ¶ 5.

27
28

Plaintiffs fail to demonstrate additional procedural unconscionability, however. They
claim that Ecolab’s failure to attach the governing American Arbitration Association (―AAA‖)
3

read the AAA rules before signing. However, incorporation of arbitration rules is only

3

unconscionable when significant rights are ―artfully hidden‖ from the party giving them up. See

4

Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237, 1246 (2016). Plaintiffs do not claim that any

5

significant rights were hidden in the AAA rules. Rather, they challenge the incorporation of the

6

rules in and of itself. Ecolab correctly notes that both the California Supreme Court and the Ninth

7

Circuit have rejected that argument, finding that the incorporation of rules in and of itself is not

8

procedurally unconscionable. See Baltazar, 62 Cal. 4th at 1246 (rejecting claim that employer's

9

failure to provide copy of AAA rules with arbitration agreement gave rise to a ―greater degree of

10

procedural unconscionability‖); Poublon, 846 F.3d at 1262 (same); compare Fitz v. NCR Corp.,

11

118 Cal. App. 4th 702, 721 (2004) (holding that an incorporated AAA discovery rule was

12
For the Northern District of California

rules to the Agreement resulted in unconscionable ―surprise‖ because Plaintiffs were unable to

2

United States District Court

1

deliberately hidden by a conflicting discovery provision in the arbitration agreement).

13

Plaintiffs also argue that the Agreement is unconscionable because it does not specify

14

which version of the AAA rules will apply. See Harper v. Ultimo, 113 Cal.App.4th 1402, 1406–

15

1407 (2003) (finding unconscionability where neither the arbitration agreement nor the

16

incorporated Better Business Bureau rules specified which version of the rules applied). Ecolab’s

17

Agreement provides a link to an online copy of the AAA rules, which state that the rules in place

18

at the time of arbitration apply. See AAA Employment Arbitration Rules, Art. 1. Courts have

19

held that an agreement is not procedurally unconscionable for failure to specify what version of

20

arbitration rules apply when the rules themselves do so. Lucas v. Gund, 450 F. Supp. 2d 1125,

21

1131–32 (C.D. Cal. 2006) (holding that ―[w]hen an agreement references other rules . . . [which]

22

specify which version of the rules should apply to the dispute, those rules control‖ and are not

23

unconscionable); see also, Evans v. CenterStone Dev. Co., 134 Cal. App. 4th 151, 158 (2005)

24

(finding that when an agreement provided certain rules should govern but did not specify which

25

version of the rules, the rules’ provision applying those in effect on the date of commencement of

26

the arbitration should control).

27

2.

Substantive Unconscionability

28

Because the Agreement is only slightly procedurally unconscionable, Plaintiffs must prove
4

1

a high degree of substantive unconscionability. Armendariz, 24 Cal. 4th at 114 (holding that ―the

2

more substantively oppressive the contract term, the less evidence of procedural unconscionability

3

is required to come to the conclusion that the term is unenforceable, and vice versa‖). Contracts

4

are substantively unconscionable when their terms are unreasonably one-sided or have overly

5

harsh effects. Id.

6

Plaintiffs argue that the Agreement is unreasonably one-sided or overly harsh because it

7

(1) requires them to pay attorney fees they would not have to pay in court; (2) demands a ―free

8

peek‖ at Plaintiffs’ case by requiring informal dispute resolution; (3) allows for unilateral

9

termination by Ecolab; and (4) requires use of arbitrators who may not be neutral because Ecolab

10

Plaintiffs’ attorney fee argument fails under the plain language of the Agreement. The

12
For the Northern District of California

United States District Court

11

is a ―repeat player.‖ These arguments are not persuasive.

Agreement does not require Plaintiffs to pay fees that they would not have to pay in court. The

13

relevant provision states, ―If, under applicable federal, state, or local law, the prevailing party

14

would be entitled to an award of attorney’s fees and costs, the arbitrator may award such fees and

15

costs.‖ Agreement at 3. Thus, the Agreement explicitly permits the arbitrator to award Plaintiffs’

16

attorney fees subject to any applicable fee shifting statute. That the Agreement does not

17

affirmatively mandate fee shifting does not render it unconscionable, because courts presume that

18

arbitrators follow the law. Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 82

19

(2000) (holding that an arbitration agreement that did not mention arbitration costs and fees was

20

not unenforceable on the theory that it failed to provide the plaintiff with protection from

21

prohibited costs); compare Armendariz, 14 Cal. 4th at 110 (holding that an arbitration agreement

22

that required an employee to bear expenses he would not have to bear in court was

23

unconscionable).

24

Likewise, the Agreement does not require Plaintiffs to provide Ecolab with a ―free peek‖ at

25

Plaintiffs’ case. The Agreement merely encourages an attempt at dispute resolution through

26

Ecolab’s Human Resources Department prior to filing for arbitration. Agreement at 2

27

(―[a]ssociates are encouraged to . . . resolve any work-related problem [through HR Policy Manual

28

procedures] before initiating [arbitration]‖). It does not require such dispute resolution prior to
5

1

filing arbitration. Id. Although a contractual requirement of pre-dispute resolution may add a

2

degree of unconscionability, that is not the situation here. Compare Nyulassy v. Lockheed Martin

3

Corp., 120 Cal. App. 4th 1267, 1282–83 (2004) (finding that an arbitration agreement requiring

4

the plaintiff to submit to employer-controlled dispute resolution gave the defendant an

5

unconscionable ―free peek‖ at the plaintiff’s case.).

6

Plaintiffs also fail to show that the unilateral termination provision is unconscionable.

7

Plaintiffs cite Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) to support this

8

argument, but that case is distinguishable. There, the unilateral modification applied retroactively

9

to disputes arising prior to the date of notice of termination. Ingle, 328 F.3d at 1179. In contrast,

notice of termination. Agreement at 2. Ecolab does not have the unilateral right to avoid or

12
For the Northern District of California

Ecolab’s modification provision applies only prospectively, not to disputes arising prior to the

11

United States District Court

10

terminate arbitration once a dispute arises. Plaintiffs have not cited a case where the unilateral

13

right to terminate prospectively has been held unconscionable. Moreover, the entire arbitration

14

agreement in Ingle applied only to claims brought by employees and contained a number of other

15

unconscionable provisions that do not appear here. Ingle, 328 F.3d at 1175-78 (agreement also

16

required employees to pay an arbitration filing fee to the employer, split the cost of arbitration, and

17

follow a strict one-year statute of limitations, all of which were more burdensome than a court

18

proceeding). Absent other unconscionable terms, Ecolab’s unilateral modification provision does

19

not render the Agreement unconscionable. Shierkatz Rllp v. Square, Inc., No. 15-CV-02202-JST,

20

2015 WL 9258082, at *12 (N.D. Cal. Dec. 17, 2015) (finding no authorities supporting the

21

proposition that a unilateral modification provision can render a delegation provision substantively

22

unconscionable by itself).

23

Lastly, Plaintiffs’ claim that the Agreement does not guarantee a neutral arbitrator also

24

fails. Plaintiffs argue the Agreement favors Ecolab because it requires an arbitrator from the AAA

25

and Ecolab has previously arbitrated with the AAA. Docket No. 23 at 10. However, merely

26

asserting a ―repeat player effect‖ claim is insufficient to support an unconscionability finding. See

27

Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1285 (9th Cir. 2006) (holding that repeat player

28

argument without any evidence of bias of AAA arbitrators did not support a finding of
6

1

unconscionability). Plaintiffs must present ―particularized evidence demonstrating impartiality.”

2

Nagrampa, 469 F.3d at 1285. They have not. Absent evidence to the contrary, California courts

3

have generally found the AAA provides a neutral forum for dispute resolution. See Nagrampa,

4

469 F.3d at 1302 (O’Scannlain, J., concurring in pertinent part). Cf. Mercuro v. Superior Court,

5

96 Cal.App.4th 167, 178 (2002) (finding substantive unconscionability because the employer

6

benefited from repeatedly appearing before a pool of only eight arbitrators).
In sum, though traces of unconscionability are present, the Court finds that it is not enough

7
8

to render the Agreement unenforceable. Accordingly, the enforceability of Ecolab’s Arbitration

9

Agreement rises and falls with the lawfulness of the class action waiver under Morris.

10

C.

Stay Pending Morris
In light of the Supreme Court’s impending decision in Morris, Ecolab requests a stay of

12
For the Northern District of California

United States District Court

11

proceedings. The parties agree that this Court has the discretionary power to stay proceedings.

13

See Landis v. N. Am. Co., 229 U.S. 248, 254 (1936). In deciding whether to stay a case pending a

14

Supreme Court ruling, courts consider: (1) ―the possible damage which may result from granting

15

of a stay;‖ (2) ―the hardship or inequity which a party may suffer in being required to go forward;‖

16

and (3) ―the orderly course of justice measured in terms of the simplifying or complicating of

17

issues, proof, and questions of law which could be expected to result from a stay.‖ CMAX, Inc. v.

18

Hall, 300 F.2d 265, 268 (9th Cir. 1962) (citing Landis, 229 U.S. at 254-55).1 Ecolab bears the

19

burden of establishing the need for the stay. Clinton v. Jones, 520 U.S. 681, 706 (1997).

20

1.

21

The first Landis factor concerns the possible damage that could arise from granting the

22

Possible Damage from Granting Stay

stay. CMAX, 300 F.2d at 268. Plaintiffs argue that the stay would damage them by delaying the

23
1

24
25
26
27
28

The Landis standard applies where a party seeks to stay a district court proceeding pending
resolution of another action, as is the case here. Plaintiffs list factors from Hilton v. Braunskill,
481 U.S. 770, 776 (1987)—likelihood of success on the merits and the public interest—that do not
apply under the Landis standard. However, the Hilton standard applies where a party seeks to stay
enforcement of a judgment or order pending an appeal of that same judgment or order in the same
case. See Lal v. Capital One Fin. Corp., No. 16-CV-06674-BLF, 2017 WL 282895, at *2, *5
(N.D. Cal. Jan. 23, 2017) (citing Hilton v. Braunskill, 481 U.S. 770, 778 (1987)); see also
McElrath v. Uber Techs., Inc., No. 16-CV-07241-JSC, 2017 WL 1175591, at *5 (N.D. Cal. Mar.
30, 2017) (applying the Landis factors, not the Hilton factors, to a stay pending the Supreme
Court’s Morris decision). Here, Landis, not Hilton, applies.
7

1

relief they are allegedly owed. The forthcoming Supreme Court ruling in Morris minimizes the

2

potential damage because the stay would be short and not indefinite. See McElrath v. Uber

3

Techs., Inc., No. 16-CV-07241-JSC, 2017 WL 1175591, at *5 (N.D. Cal. Mar. 30, 2017) (granting

4

a stay pending Morris because it would be of ―short, not indefinite, duration‖). The first factor

5

does not weigh against granting a stay.

6

2.

Possible Hardship from Denying Stay

7

The second factor considers the possible harm from requiring Ecolab to litigate while

Supreme Court overturns Morris, the Agreement’s class action waiver may ultimately be deemed

10

enforceable. In such a scenario, Plaintiffs would be precluded from pursuing class claims in any

11

forum, the Court would have to refer Plaintiffs’ individual claims to arbitration, and only

12
For the Northern District of California

Morris is pending in the Supreme Court. CMAX, 300 F.2d at 268. As explained above, if the

9

United States District Court

8

Plaintiffs’ PAGA claims would arguably remain in this Court. Continued litigation on class

13

certification issues—discovery concerning the Rule 23(a) and Rule 23(b)(3) factors, including

14

motion practice related to class certification—might cause unnecessary hardship on Ecolab if the

15

class action waiver were ultimately enforced. See McElrath, WL 1175591, at *5. Further,

16

allowing substantive motion practice on Plaintiffs’ individual claims to proceed absent a stay —

17

such as motions to dismiss or motions for summary judgment—might also be prejudicial insofar

18

as it would deprive Defendant of the right to benefit from arbitration of those issues. Id.

19

However, Defendant is unlikely to suffer prejudice from limited discovery on Plaintiffs’

20

individual claims in the interim, since a similar exchange of information would likely need to

21

occur in arbitration, too. See Daugherty v. SolarCity Corp., No. C 16-05155 WHA, 2017 WL

22

386253, at *4 (N.D. Cal. Jan. 26, 2017) (allowing limited discovery because it would be useful for

23

both class action and in individual arbitration).

24

The same may not be true for Plaintiffs’ PAGA claim, however, even if it may ultimately

25

proceed in this Court. To some extent, discovery on the PAGA representative claim may

26

ultimately resemble class-like discovery. For example, PAGA permits the recovery of fixed civil

27

penalties. See Cal. Lab. Code § 2699. Such penalties are typically fixed based on the number of

28

violations, ―except [where] a civil penalty is specifically provided‖ elsewhere. Id. § 2699(f)(2)
8

1

(setting default fixed penalties of $100 for each aggrieved employee per pay period for initial

2

violation and $200 for each subsequent violation). Identifying the number of violations, however,

3

may require discovering the hours worked and wages received by each employee on a daily or

4

weekly basis, and then calculating whether they were underpaid any wages. Other penalties are

5

keyed to variables like employees’ rate of pay, see, e.g., Cal. Labor Code § 203(a) (waiting time

6

penalties for violations of §§ 201 and 202 are a continuation of ―wages‖ ―from the due date

7

thereof at the same rate until paid or until an action therefor is commenced‖ but not more than 30

8

days), or the amount of underpaid wages, see, e.g., Cal. Labor Code § 558 (a) (initial violations are

9

$50 for each underpaid employee for each pay period ―in addition to an amount sufficient to

calculating the amount of civil penalties might also require discovery of information that would be

12
For the Northern District of California

recover underpaid wages‖ and $100 for subsequent violations plus the underpaid amount). Thus

11

United States District Court

10

similar to class discovery.

13

Allowing discovery of the PAGA representative claims may be premature. If Morris is

14

reversed and arbitration is compelled, there is possibility (though not a certainty) that PAGA

15

representative claims might be stayed. If the Court were to stay the PAGA claims pending

16

arbitration of the individual claims and Plaintiffs were to lose those claims in arbitration, Ecolab

17

might be able to demonstrate that the outcome of those proceedings should have a collateral

18

estoppel effect on the question of Plaintiffs’ standing under PAGA. See Clark v. Bear Stearns &

19

Co., Inc., 966 F.2d 1318 (9th Cir. 1992) (recognizing that arbitration decisions may have collateral

20

estoppel effect in federal court). In that event, Ecolab would be prejudiced by having to engage in

21

PAGA discovery that might ultimately be mooted depending on the outcome of Plaintiffs’

22

individual arbitration.

23

To be sure, if the Court were not to stay Plaintiff’s PAGA claim and allow it to proceed

24

even where his individual labor code claims are subject to arbitration, were Plaintiff to prevail on

25

his PAGA claim, findings therein could be imported into, perhaps binding on, arbitration. See

26

Collins v. D.R. Horton, Inc., 505 F.3d 874, 880 (9th Cir. 2007) (arbitrators are also bound by

27

doctrine of collateral estoppel); Arias v. Sup. Ct., 46 Cal.4th 969, 987 (2009) (finding of Labor

28

Code violation under PAGA has a collateral estoppel effect that permits employees ―to obtain
9

1

remedies other than civil penalties for the same Labor Code violations‖ in separate actions).

2

Discovery on Plaintiff’s PAGA claims, including representative claims, would in that event

3

advance the litigation, and thus a stay would cause delay in Plaintiff’s prosecution of the PAGA

4

claim.
Nonetheless, given the risk that PAGA claims might be stayed pending arbitration, and the

5
6

relatively short stay pending Morris, the second Landis factor leans slightly in favor of granting a

7

stay of the litigation provided Plaintiffs are allowed to proceed with discovery on Bankwitz’s

8

individual claims. See McElrath ,WL 1175591, at *6.
3.

9

Orderly Course of Justice

The third factor considers whether a stay will simplify or complicate the judicial process.

10

CMAX, 300 F.2d at 268. Ecolab argues that the stay is in the interest of judicial economy because

12
For the Northern District of California

United States District Court

11

Morris may foreclose Plaintiffs’ class claim. The Court agrees. There is little value in litigating a

13

class certification motion or undertaking class discovery now when the Supreme Court’s

14

impending ruling might ultimately moot those claims. The third factor thus weighs in favor of

15

granting the stay. However, no matter the resolution in Morris, Plaintiffs will be entitled to bring

16

their individual claims in some forum and their PAGA claims in this Court. Thus, some limited

17

discovery into the individual claims will not involve a potential waste of resources.
In these circumstances, a limited stay of this litigation pending the Supreme Court’s review

18
19

of Morris is justified. The stay is granted upon the following conditions: (1) the parties may

20

proceed with individual discovery, (2) the parties shall undertake preservation of evidence relevant

21

to all claims pursuant to Federal Rule of Civil Procedure 26(f), and (3) the parties shall meet and

22

confer regarding a limited discovery plan to facilitate ADR.

23

///

24

///

25

///

26

///

27

///

28

///
10

III.

1
2

CONCLUSION

For the reasons stated above, the Court DENIES Defendant’s motion to compel

3

arbitration, and conditionally STAYS proceedings, except as specified above, pending the

4

Supreme Court’s decision in Morris. The Court will hold a case management conference on

5

October 26, 2017 at 9:30 a.m., with an updated case management statement due one week earlier.

6

ADR will be discussed at that time.

7

This order disposes of Docket No. 21.

8
9

IT IS SO ORDERED.

10

12
For the Northern District of California

United States District Court

11

13

Dated: October 17, 2017
______________________________________
EDWARD M. CHEN
United States District Judge

14
15
16
17
18
19
20
21

22
23
24
25
26
27
28

11