SANCHEZ v. WESTERN PIZZA ENTERPRISES, INC












Filed 3/17/08






CERTIFIED FOR PUBLICATION



IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

OCTAVIO SANCHEZ et al., Plaintiffs and Respondents, v. WESTERN PIZZA ENTERPRISES, INC., Defendant and Appellant.

B203961 (Los Angeles County Super. Ct. No. BC375868)

APPEAL from an order of the Superior Court of Los Angles County, Elizabeth Allen White, Judge. Affirmed.
Van Vleck Turner & Zaller, Brian F. Van Vleck and Anthony J. Zaller for Defendant and Appellant.
Law Offices of James T. Grant and James T. Grant for Plaintiffs and Respondents.

_______________________________________
Western Pizza Enterprises, Inc. (Western Pizza), appeals the denial of its motion to compel arbitration of a complaint filed by Octavio Sanchez. The trial court determined that a provision in the arbitration agreement prohibiting class arbitration was unenforceable, that other terms of the agreement were unconscionable, and that the agreement could not be enforced. Western Pizza contends (1) the enforceability of the arbitration agreement is a question for the arbitrator to decide; (2) the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts California law to the extent that California law would prevent the enforcement of the agreement; (3) the class arbitration waiver does not impermissibly interfere with the employees’ ability to vindicate their statutory rights, and therefore is enforceable; and (4) the terms of the arbitration agreement are neither procedurally nor substantively unconscionable. We reject these contentions, conclude that the denial of the motion to compel arbitration was proper, and affirm the order.
FACTUAL AND PROCEDURAL BACKGROUND
1. Factual Background
Sanchez works as a delivery driver at a Domino’s Pizza restaurant owned by Western Pizza.[1] He drives his own car in making deliveries. His hourly wage has ranged from the legal minimum wage to approximately 50 cents above minimum wage. Western Pizza reimburses him at a fixed rate of 80 cents per delivery regardless of the number of miles driven or actual expenses incurred.
Sanchez and Western Pizza are parties to an undated arbitration agreement. The record does not indicate when the parties signed the agreement. The agreement states that the execution of the agreement “is not a mandatory condition of employment.” It states that any dispute that the parties are unable to resolve informally will be submitted to binding arbitration before an arbitrator “selected from the then-current Employment Arbitration panel of the Dispute Eradication Services,” and that the arbitrator must be approved by both parties. It states that the parties waive the right to a jury trial. It also states that the arbitration fees will be borne by Western Pizza and, “Except as otherwise required by law, each party shall bear its own attorney fees and costs.”
The arbitration agreement states that the arbitrator “shall be responsible for resolving any disputes over the interpretation or application of this Arbitration Agreement.” It also states, “[e]xcept as expressly provided, the interpretation, scope and enforcement of this ADR Agreement and all procedural issues shall be governed by the procedural and substantive provisions of the Federal Arbitration Act , 9 U.S.C. § 1 et seq. (the ‘FAA’, the federal decisional law construing the FAA, and the Rules of the Arbitrator, provided the Arbitrator’s rules do not conflict with the FAA.”
The arbitration agreement also provides a procedure for small claims: “If either Party asserts that a dispute involves an amount in controversy that is too small to warrant resolution by standard arbitration procedures, the claim may be resolved by a summary small claims procedure (the ‘Small Claims Procedure’. The Parties shall meet and confer to agree on whether the use of a Small Claims Procedure is appropriate in light of the nature and amount of the claim and, if so, what dispute resolution procedures are most appropriate. To the extent the Parties are unable to agree, the Arbitrator shall decide whether and to what extent a Small Claims Procedure shall apply. The Small Claims Procedure may involve relaxed rules of evidence, the use of broad principles of equity in place of strict application of law, telephonic hearings, and such other economic procedures as the Arbitrator deems appropriate under the circumstances of the dispute and consistent with due process. In no event, however, shall the Arbitrator utilize a Small Claims Procedure for a dispute involving a claim in excess of $50,000.”
The arbitration agreement includes a waiver of class arbitration, stating: “the Arbitrator shall not consolidate or combine the resolution of any claim or dispute between the two Parties to this ADR Agreement with the resolution of any claim by any other party or parties, including but not limited to any employee of the Company. Nor shall the Arbitrator have the authority to certify a class under Federal Rule of Civil Procedure Rule 23, analogous state rules, or Arbitrator’s rules pertaining to class arbitration, and the Arbitrator shall not decide claims on behalf of any other party or parties.”
The arbitration agreement also provides for the appointment of a referee (Code Civ. Proc., § 638, subd. (a)) to decide any issue in the event that any part of the agreement is determined to be unenforceable or any issue is determined to be nonarbitrable. It states that the referee’s fees will be paid by Western Mutual and that the referee will have no authority to certify a class or decide the merits of any third party claim.
2. Trial Court Proceedings
Sanchez filed a putative class action complaint against Western Pizza in August 2007. He alleges that Western Pizza does not record the number of miles driven by its delivery drivers but instead reimburses them at the rate of 80 cents per delivery. He alleges that the drivers not only are not adequately reimbursed for their expenses incurred in the performance of their job duties, but also as a result are paid less than the legal minimum wage. He alleges counts for (1) failure to reimburse job expenses (Lab. Code, § 2802); (2) failure to pay minimum wage (id., § 1194); (3) failure to itemize wage statements (id., § 226); (4) unfair business practices (Bus. & Prof. Code, § 17200 et seq.); and (5) conversion.
Western Pizza asked Sanchez, through their respective counsel, if he would submit the dispute to binding arbitration and provided a copy of the arbitration agreement. Sanchez’s counsel responded that the class arbitration waiver was unenforceable, that the agreement impermissibly restricted the right to discovery, and that the agreement purported to require the use of an arbitrator whose website included a testimonial by a former colleague of the defendant’s counsel who stated that the arbitrator had persuaded the plaintiff to “ ‘settle for a very small sum.’ ” Sanchez’s counsel stated that Sanchez would submit to arbitration only if the class arbitration waiver and the provisions for small claims and a referee were stricken from the agreement and the arbitration proceeded as a class arbitration before JAMS or AAA.
Western Pizza moved to compel arbitration and stay the action (Code Civ. Proc., §§ 1281.2, 1281.4). It argued that both the FAA and the California Arbitration Act (id., § 1280 et seq.) required the enforcement of the arbitration agreement. Sanchez argued in opposition that the class arbitration waiver was unenforceable under Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) and that the arbitration agreement as a whole was unconscionable because (1) the small claims procedure allows disputes to be decided without “strict application of law” and using “relaxed rules of evidence”; (2) the arbitration agreement does not require a written arbitration award; (3) the arbitration panel designated in the arbitration agreement has only one arbitrator, Alan Saler, whose website includes a testimonial from an attorney at the former firm of Western Pizza’s counsel; and (4) the arbitration agreement includes no provision for discovery.
Western Pizza argued in reply that only an arbitrator could determine the enforceability of the class arbitration waiver or the unconscionability of the arbitration agreement as a whole, that the class arbitration waiver was not unenforceable under Gentry, supra, 42 Cal.4th 443, and that the arbitration agreement was not unconscionable.
The trial court at the hearing on the motion cited Gentry, supra, 42 Cal.4th 443, and Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138 (Murphy), and stated, “we have an individual plaintiff with a small claim who would otherwise be unable to afford legal services, and the class action would be an appropriate mechanism by which he could, in effect, bundle his claim with other claims and make it more efficient and expedient.” The court also stated that the “small claims procedure” did not allow discovery in cases where the amount in dispute was up to $50,000, and that the agreement waived other rights and was procedurally and substantively unconscionable. The court entered a minute order denying the motion. Western Pizza timely appealed the order.[2]
CONTENTIONS
Western Pizza contends (1) the enforceability of the arbitration agreement is a question for the arbitrator to decide; (2) the FAA preempts California law to the extent that California law would prevent the enforcement of the agreement; (3) the class arbitration waiver does not impermissibly interfere with the employees’ ability to vindicate their statutory rights, and therefore is enforceable; and (4) the arbitration agreement is neither procedurally nor substantively unconscionable.
DISCUSSION
1. Applicability of the FAA
The FAA compels judicial enforcement of a wide range of arbitration agreements in transactions affecting interstate commerce. (Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 273-275, 281 [115 S.Ct. 834].) Congress in enacting the FAA intended to exercise the full extent of its authority to regulate interstate commerce. (Allied-Bruce, supra, at p. 277.) The parties do not discuss whether Sanchez’s employment involves interstate commerce and do not meaningfully discuss whether the FAA applies to the arbitration agreement. Both parties appear to assume that the FAA applies. The arbitration agreement states that the FAA governs “the interpretation, scope and enforcement of this ADR Agreement and all procedural issues.” We need not decide whether the FAA applies by its own terms or the effect of the provision just quoted because our conclusions stated in this opinion are the same regardless of whether the FAA applies, as we will explain. Because the FAA does not conflict with California law as applied in this case, there is no preemption. (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 477 [109 S.Ct. 1248].)
2. The Enforceability of the Arbitration Agreement Is a Question
for the Court to Decide

Section 2 of the FAA provides that a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) Thus, under the FAA, the validity and enforceability of an arbitration agreement is governed by state law applicable to contracts generally. (Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 686‑687 [116 S.Ct. 1652].)
The FAA was intended to overcome a historical judicial hostility to arbitration agreements. (Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 626, fn. 14 [105 S.Ct. 3346].) The FAA preempts state laws, whether legislative or judicial, that are directed at and disfavor arbitration agreements in particular, but does not preempt state laws applicable to contracts generally. (Perry v. Thomas (1987) 482 U.S. 483, 492-493, fn. 9 [107 S.Ct. 2520].) Rather, a state court may refuse to enforce an arbitration agreement, in whole or in part, to which the FAA applies, based on generally applicable contract defenses, such as fraud, duress, or unconscionability. (Doctor’s Associates, Inc. v. Casarotto, supra, 517 U.S. at p. 687; Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 165, 167 (Discover Bank).)
The California Arbitration Act (Code Civ. Proc., § 1280 et seq.) also compels the enforcement of valid arbitration agreements. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97 (Armendariz).) Code of Civil Procedure section 1281 states: “A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” Under California law, as under the FAA, an arbitration agreement may be invalidated upon the same grounds as any other contract. (Armendariz, supra, at p. 98.) In other words, although arbitration agreements ordinarily are enforced according to their terms, their enforceability is limited by the same general contract law principles governing the enforceability of any contract. (Discover Bank, supra, 36 Cal.4th at p. 163.)
Under California law, the question whether an arbitration agreement is unenforceable, in whole or in part, based on general contract law principles is a question for the court to decide, rather than an arbitrator. (Discover Bank, supra, 36 Cal.4th at p. 171; Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1530; see Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1365.) This includes the determination whether an arbitration agreement is unconscionable or contrary to public policy. (Discover Bank, supra, at p. 171.) Discover Bank concluded that the FAA, and particularly the opinion by the United States Supreme Court in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 [123 S.Ct. 2402], did not conflict with California law on this point and that the California rule therefore governs.
Some opinions by the Courts of Appeal have suggested, without holding, that the enforceability of an arbitration agreement is a question for the arbitrator to decide if the arbitration agreement “ ‘clearly and unmistakably’ ” so provides.[3] (Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1286-1288, 1290-1291; Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 893-894 (Baker); Murphy, supra, 156 Cal.App.4th 138 at pp. 144-145; see also Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 503 & fn. 2 (Ontiveros).) We need not decide whether such a clear and unmistakable provision would be enforceable because the arbitration agreement here does not clearly state that the arbitrator will decide whether the arbitration agreement is enforceable. Rather, the provision that the arbitrator will resolve “any disputes over the interpretation or application of this Arbitration Agreement” does not appear to encompass disputes concerning the enforceability of the arbitration agreement based on unconscionability, public policy, or other grounds.
Accordingly, we conclude, consistent with the rule stated in Discover Bank, supra, 36 Cal.4th at page 171, that the question whether the arbitration agreement is enforceable based on general contract law principles, including the question whether it is unconscionable or contrary to public policy, is a question for the court to decide rather than an arbitrator, regardless of whether the FAA applies.
3. The Class Arbitration Waiver Is Contrary to Public Policy
and Unenforceable

a. Gentry v. Superior Court
The California Supreme Court in Gentry, supra, 42 Cal.4th 443, decided two principal issues. First, Gentry held that a class arbitration waiver in an employment arbitration agreement was contrary to public policy and therefore unenforceable if the waiver impermissibly interfered with the employees’ ability to vindicate unwaivable statutory rights. (Id. at pp. 456-457, 466.) This holding was based on the general principle that courts will not enforce a contract that is contrary to public policy, rather than the principle of unconscionability. (See id. at p. 467.) Second, Gentry held that the arbitration agreement as a whole was procedurally unconscionable despite a provision allowing employees to opt out of the arbitration agreement within 30 days. (Id. at pp. 470-472.)
Gentry framed the first issue as, “whether a class arbitration waiver would lead to a de facto waiver of statutory rights, or whether the ability to maintain a class action or arbitration is ‘necessary to enable an employee to vindicate . . . unwaivable rights in an arbitration forum.’ [Citation.]” (Gentry, supra, 42 Cal.4th 443 at p. 457.) Gentry concluded that a class arbitration waiver is contrary to public policy and therefore unenforceable if the waiver would impermissibly interfere with the employees’ ability to vindicate unwaivable statutory rights. (Ibid.)
Gentry stated that the rights to minimum wage and overtime compensation under Labor Code section 1194 are unwaivable. (Gentry, supra, at pp. 455-456.) Gentry stated: “class actions play an important function in enforcing overtime laws by permitting employees who are subject to the same unlawful payment practices a relatively inexpensive way to resolve their disputes. . . . [T]he requirement that numerous employees suffering from the same illegal practice each separately prove the employer’s wrongdoing is an inefficiency that may substantially drive up the costs of arbitration and diminish the prospect that the overtime laws will be enforced.” (Id. at p. 459.) Gentry also stated that an employee who sues his or her employer individually is at greater risk of retaliation, that the risk of retaliation “is likely greater for employees further down on the corporate hierarchy,” and that statistics showed that “retaliation against employees for asserting statutory rights under the Labor Code is widespread.” (Id. at pp. 459-461.) Gentry stated further that some workers may be unaware of their legal rights, particularly immigrants with limited English language skills, and that class actions may be necessary to ensure the effective enforcement of labor laws despite the fact that some claims may be large enough to provide an incentive for individual action. (Id. at pp. 461-462.)
Gentry stated that a trial court determining whether a class arbitration waiver impermissibly interferes with unwaivable statutory rights must consider: “[(1)] the modest size of the potential individual recovery, [(2)] the potential for retaliation against members of the class, [(3)] the fact that absent members of the class may be ill informed about their rights, and [(4]) other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” (Gentry, supra, 42 Cal.4th at p. 463.) Gentry continued: “If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘ vindicate [their] unwaivable rights in an arbitration forum.’ [Citation.]”[4] (Ibid.)
Gentry stated further: “The kind of inquiry a trial court must make is similar to the one it already makes to determine whether class actions are appropriate. ‘[T]rial courts are ideally situated to evaluate the efficiencies and practicalities of permitting group action . . . .’ (Linder v. Thrifty Oil Co. [(2000)] 23 Cal.4th [429,] 435.) Class arbitration must still also meet the ‘community of interest’ requirement for all class actions, consisting of three factors: ‘(1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.’ (Sav-On Drug Stores[, Inc. v. Superior Court (2004)] 34 Cal.4th [319,] 326.)” (Gentry, supra, 42 Cal.4th at pp. 463‑464.)
Gentry expressly declined to hold that all class arbitration waivers in cases involving overtime laws are unenforceable. (Gentry, supra, 42 Cal.4th at p. 462.) Instead, Gentry emphasized the particularized inquiry that trial courts must undertake based on the facts in each case. (Id. at p. 463.) Gentry reversed the judgment by the Court of Appeal upholding the class arbitration waiver and remanded the case with directions to remand the case to the trial court to determine “whether, in this particular case, class arbitration would be a significantly more effective means than individual arbitration actions of vindicating the right to overtime pay . . . .”[5] (Id. at p. 466.)
Gentry stated that like the generally applicable contract defense of unconscionability, the rule invalidating class arbitration waivers that impermissibly interfere with unwaivable statutory rights is “an arbitration-neutral rule” because “it applies to class waivers in arbitration and nonarbitration provisions alike. [Citations.]” (Gentry, supra, 42 Cal.4th at p. 465.) The rule therefore is not preempted by the FAA. (Ibid.)
b. Standard of Review
A trial court’s determination whether a class arbitration waiver is enforceable based on whether class arbitration would be significantly more effective than individual arbitrations as a means to vindicate unwaivable rights, under the rule established in Gentry, supra, 42 Cal.4th 443, depends largely on consideration of “ ‘the efficiencies and practicalities of permitting group action’ ” (id. at pp. 463-464) in the particular case. In light of the similarity of this inquiry to the inquiry a trial court makes in determining whether a class action is appropriate (ibid.), we conclude that the standard of review of the court’s ruling is the same. (Cf. Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 859 [“any determination underlying any order is scrutinized under the test appropriate to such determination”].)
A ruling on class certification is reviewed for abuse of discretion. (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 326.) “Because trial courts are ideally situated to evaluate the efficiencies and practicalities of permitting group action, they are afforded great discretion in granting or denying certification. . . . [I]n the absence of other error, a trial court ruling supported by substantial evidence generally will not be disturbed ‘unless (1) improper criteria were used [citation]; or (2) erroneous legal assumptions were made [citation].’ [Citation.] Under this standard, an order based upon improper criteria or incorrect assumptions calls for reversal ‘ “even though there may be substantial evidence to support the court’s order.” ’ [Citations.] Accordingly, we must examine the trial court’s reasons for denying class certification. ‘Any valid pertinent reason stated will be sufficient to uphold the order. [Citation.]” (Linder v. Thrifty Oil Co., supra, 23 Cal.4th at pp. 435-436.) Similarly here, we will examine the trial court’s reasons for determining that the class arbitration waiver is unenforceable under the rule from Gentry, supra, 42 Cal.4th 443, and review that determination for abuse of discretion.
c The Class Arbitration Waiver Is Unenforceable Under
the Rule from Gentry

Sanchez argued in opposition to the motion to compel arbitration that the class arbitration waiver was unenforceable under the four-factor test in Gentry, supra, 42 Cal.4th 443, and that the arbitration agreement as a whole was unconscionable. The trial court stated at the beginning of the hearing, “I note that plaintiff is on the same page as the court,” and cited Gentry and Murphy, supra, 156 Cal.App.4th 138.[6] The court stated with respect to the analysis under Gentry, “we have an individual plaintiff with a small claim who would otherwise be unable to afford legal services[,] and the class action would be an appropriate mechanism by which he could, in effect, bundle his claim with other claims and make it more efficient and expedient.” Thus, the court determined that group action was likely to be significantly more effective than individual arbitrations as a means to vindicate the employees’ statutory rights.

TO BE CONTINUED AS PART II….

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