Zaborowski v. MHN Gov't Servs., Inc.

936 F.Supp.2d 1145

Thomas ZABOROWSKI, et al., on behalf of themselves and a putative class, Plaintiffs,

v.MHN GOVERNMENT SERVICES, INC. and Managed Health Network, Inc., Defendants.

No. C 12–05109 SI.

United States District Court, N.D. California.

April 3, 2013.

Mark Philip Pifko, Natasha Ketan Mehta, Roland K. Tellis, Baron & Budd, P.C., Encino, CA, Allen Ryan Vaught, Baron and Budd, P.C., Dallas, TX, Jahan C. Sagafi, Kelly M. Dermody, San Francisco, CA, for Plaintiffs.

Timothy Joseph Long, Lauri Ann Damrell, Sacramento, CA, for Defendants.

ORDER DENYING DEFENDANTS' MOTION TO COMPEL ARBITRATION

SUSAN ILLSTON, District Judge.

On March 15, 2013, the Court heard argument on defendants' motion to compel arbitration. Having carefully considered the arguments of counsel and the papers submitted, the motion is DENIED, for the reasons set forth below.

BACKGROUND

Defendants hired plaintiffs to provide counseling to military service members and their families. Plaintiffs, as Military Family Life Consultants (“MFLCs” or “MFL Consultants”), provide financial counseling, child services, and victim advocacy counseling at U.S. military installations across the country and internationally. Plaintiffs have professional licenses and are rotated on short-term assignments to different locations. Plaintiffs filed this suit alleging that MHN Government Services, Inc. and Managed Health Network, Inc. (collectively “MHN”) misclassified them as independent contractors, and that they should be classified as employees and entitled to overtime compensation. They assert claims under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 216(b), and similar state labor laws.

The standard counseling services contract between MHN and an MFL Consultant is called a Provider Services Task Order Agreement (“Agreement”). The Agreement contains an express mandatory arbitration clause. The arbitration clause states in pertinent part:

The parties agree that any controversy or claim arising out of or relating to this Agreement ... or the breach thereof, whether involving a claim in tort, contract or otherwise, shall be settled by final and binding arbitration in accordance with the provisions of the American Arbitration Association. The parties waive their right to a jury or court trial.

First Amended Complaint (“FAC”), Ex. A ¶ 20. Some of the procedural rules set forth in the Agreement include: the provisions of the American Arbitration Association (“AAA”) govern; the arbitration shall be conducted in San Francisco, California; the arbitrator must be licenced to practiced law; MHN shall choose three arbitrators, and the MFL Consultant shall choose one amongst them; each party may depose one individual and any opposing expert witness; arbitration must be initiated within six months of the claim's occurrence; the arbitrator may not modify or refuse to enforce any agreements; the parties may not be awarded punitive damages; and the prevailing party or substantially prevailing party's costs are borne by the other party. Id.

Plaintiffs argue that the arbitration clause is both procedurally and substantively unconscionable, and therefore they should not be compelled to arbitrate their claims.

LEGAL STANDARD

Section 4 of the Federal Arbitration Act (“FAA”) permits “a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration [to] petition any United States District Court ... for an order directing that ... arbitration proceed in the manner provided for in [the arbitration] agreement.” 9 U.S.C. § 4. Upon a showing that a party has failed to comply with a valid arbitration agreement, the district court must issue an order compelling arbitration. Id.

The FAA espouses a general policy favoring arbitration agreements. AT & T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 1746, 179 L.Ed.2d 742 (2011); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Federal courts are required to rigorously enforce an agreement to arbitrate. See Hall Street Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 582, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). Courts are also directed to resolve any “ambiguities as to the scope of the arbitration clause itself ... in favor of arbitration.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 476, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).

However, the strong presumption in favor of arbitration “does not confer a right to compel arbitration of any dispute at any time.” Volt, 489 U.S. at 474, 109 S.Ct. 1248. The FAA provides that arbitration agreements are unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Arbitration agreements may be invalidated by “ ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” AT & T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 1746, 179 L.Ed.2d 742 (2011) (quoting Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). This is because “arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960). Accordingly, the Court reviews arbitration agreements in light of the “liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract,” and therefore the Court “must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.” Concepcion, 131 S.Ct. at 1745–46 (quotations and citations omitted).

DISCUSSION

I. Unconscionable Arbitration Agreement

In Concepcion, the lower courts had relied on a California Supreme Court case, Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), which created a rule that prohibited as unconscionable class action waivers in arbitration agreements. The Concepcion Court explained that when a rule “prohibits outright the arbitration of a particular type of claim,” then it is preempted by the FAA. 131 S.Ct. at 1747. However, Concepcion explicitly reaffirmed California's general contract defense of unconscionability as applied to arbitration agreements. Only “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue” are preempted by the FAA, and therefore invalid. Concepcion, 131 S.Ct. at 1746.

Under California law,¹ a contract is not enforceable if it is found to be unconscionable. See, e.g., Armendariz v. Found. Health Psychcare Svcs., Inc., 24 Cal.4th 83, 91, 99 Cal.Rptr.2d 745, 6 P.3d 669 (2000). In order for a court to find an arbitration agreement unconscionable as a whole, the court must find that the agreement is both procedurally and substantively unconscionable. Kilgore v. KeyBank, Nat. Ass'n, 673 F.3d 947, 963 (9th Cir.2012) (citing Armendariz, 24 Cal.4th at 99, 99 Cal.Rptr.2d 745, 6 P.3d 669). “Courts use a ‘sliding scale’ in analyzing these two elements: ‘[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.’ ” Id. (quoting Armendariz, 24 Cal.4th at 99, 99 Cal.Rptr.2d 745, 6 P.3d 669).

A. Procedural Unconscionability

Under California law, a contract is procedurally unconscionable if there is “oppression” or “surprise.” Armendariz, 24 Cal.4th at 114, 99 Cal.Rptr.2d 745, 6 P.3d 669. Additionally, “California law treats contracts of adhesion ... as procedurally unconscionable to at least some degree.” Lau v. Mercedes–Benz USA, LLC, CV 11–1940 MEJ, 2012 WL 370557, at *8 (N.D.Cal. Jan. 31, 2012) (quoting Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1004 (9th Cir.2010)). “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice, while surprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir.2006) (quoting Flores v. Transamerica HomeFirst, Inc., 93 Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001)) (quotations omitted).

Here, the Agreement is a contract of adhesion because it is “a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Armendariz, 24 Cal.4th at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669;see FAC ¶ 83; Baldini Decl. ¶¶ 3–4; Zaborowski Decl. ¶ 25.² The Court in Concepcion explicitly recognized that California is “free to take steps addressing the concerns that attend contracts of adhesion.” 131 S.Ct. at 1750 n. 6. Adhesion alone, however, is insufficient to find a contract unconscionable.

Additionally, the Agreement contains elements of oppression. MHN is in a superior bargaining position to the individual MFL Consultants. It is a sophisticated business entity whose lawyers drafted the agreement, while the employees generally do not retain attorneys to review their contracts. Although the disparity in bargaining power is diminished because MFL Consultants are well-educated professionals, it is not fully dispelled. Moreover, signing the Agreement was a condition of employment with MHN, and MFL Consultants were given no general opportunity to renegotiate the terms. Compare Kilgore, 673 F.3d at 964 (finding no procedural unconscionability because there was a 60–day opt-out provision), with Lau, 2012 WL 370557, at...