Shadow v. Empire Carpets

Filed 11/24/09 Shadow v. Empire Carpets CA2/2

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION TWO

APPEAL from an order of the Superior Court of Los Angeles County. Soussan G. Bruguera, Judge. Reversed and remanded.

Wildman, Harrold, Allen & Dixon, James D. Nguyen, Dominique E. Shelton, Clinton J. McCord, and John Letchinger for Defendant and Appellant.

Hodges and Associates and A. Clifton Hodges for Plaintiffs and Respondents.

Empire Carpets California Limited Partnership (Empire) appeals from an order denying its motion to compel arbitration as to claims brought by David Shadow (Shadow) and Cynthia Macklin (Macklin) (collectively plaintiffs).^[1] Empire claims that the trial court erred in applying California law, rather than Illinois law, in determining that the arbitration agreements were not enforceable.

A choice of law provision found in the contracts between Empire and plaintiffs mandates that Illinois law govern the contracts. We find that the trial court should have honored the parties contractual choice of law in determining the issues raised by Empires motion to compel arbitration. Therefore, we reverse and remand for a determination of whether the contractual arbitration provision is enforceable under Illinois law.

FACTUAL BACKGROUND

Empire is in the business of selling and installing home improvement products. Empire sells its products by way of sales representatives. Plaintiffs are former sales representatives of Empire, engaged to sell Empire products in California. Each of the plaintiffs entered into a Sales Representative Agreement (collectively the contracts) to govern the terms of their relationships with Empire.

Each contract contains a Governing Law provision, which reads, in pertinent part: This Agreement shall be governed by, and construed in accordance with the laws of Illinois. In addition, each contract contains an arbitration provision, which provides, in relevant part:

14. Arbitration. Any claim, controversy or dispute arising out of or in any way relating to this Agreement, performance hereunder or termination hereof, including, but not limited to the validity of this Agreement or the validity or enforceability of this arbitration provision, shall be adjudicated by final and binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association in effect at the time the demand for arbitration is made. The arbitration shall be heard on an expedited basis in the county in which the Sales Rep resides. The arbitration and any results therefrom shall remain confidential between the parties and shall not be made public. The arbitrator(s) shall apply, as applicable, federal or Illinois substantive law and law of remedies. The remedial authority of the arbitrator(s) shall be no greater than that which is available under the statutory or common law theory asserted. Notice of the demand for arbitration will be filed with the American Arbitration Association by the party asserting the dispute, claim or controversy, who shall be responsible for any applicable filing fees and costs, and will be copied to the other party to this Agreement. The demand for arbitration shall be made by the party alleging the dispute, claim or controversy within a reasonable time after the dispute, claim or controversy in question has arisen, and in no event shall any such demand be made after the date when institution of legal or equitable proceedings based on such dispute, claim or controversy in question would be barred by the applicable statute of limitations. Either the Company or Sales Rep may bring an action in any court of competent jurisdiction, if necessary, to compel arbitration under this provision, to obtain preliminary relief in support of claims to be adjudicated by arbitration, or to enforce an arbitration award. A judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction.

Both Company and Sales Rep are hereby agreeing to choose arbitration, rather than litigation or some other means of dispute resolution, to address their grievances or alleged grievances with the expectation that this resolution process may be more cost-effective and expedient for the parties than litigation. By entering into this Agreement and the arbitration provisions of this section, both parties are giving up their constitutional right to have any dispute decided in a court of law before a jury, and instead are accepting the use of arbitration, other than as set forth immediately below.

Empire and Shadow entered into the Sales Representative Agreement on April 26, 2005. Empire and Macklin entered into the Sales Representative Agreement on January 23, 2006.

PROCEDURAL HISTORY

On July 7, 2008, plaintiffs filed a putative class action against Empire, alleging that Empire deliberately misclassified plaintiffs as independent contractors, rather than employees, in order to avoid obligations imposed upon employers under California law. In their first amended complaint, filed September 8, 2008, plaintiffs alleged five causes of action: (1) violation of Labor Code section 2802 -- failure to reimburse employee expenses; (2) violation of Labor Code sections 201, 202, 203 -- failure to timely pay wages; (3) violation of Labor Code sections 970 and 976 -- misrepresentation of amount of compensation and nature of employment; (4) violation of Business and Professions Code section 17200 -- unfair business practices; and (5) civil penalties under the Labor Code Private Attorney General Act.

On September 5, 2008, Empire filed a motion to compel arbitration. Empire argued that, because all of plaintiffs claims are based on their assertion that Empire violated California law by misclassifying them as independent contractors rather than employees, they clearly arise out of or are related to plaintiffs respective Sales Representative Agreement. Therefore, Empire argued, the claims are subject to mandatory arbitration.

Plaintiffs conceded that they signed the contracts therefore the existence of the arbitration provision was not in dispute. Plaintiffs also conceded that their claims fell within the purview of the arbitration provision. The only issue in dispute was whether the arbitration provision was enforceable. In their opposition to Empires motion to compel arbitration, plaintiffs argued that the trial court should apply California law, not Illinois law, to determine whether the arbitration provision was enforceable. Plaintiffs further argued that, under California law, the arbitration provision was unenforceable because it failed to meet two of the five requirements set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz) and because it was procedurally and substantively unconscionable.

Empire filed its reply on October 8, 2008, arguing that the trial court should follow the clear choice of law provision in the contracts and apply Illinois law to determine the enforceability of the arbitration provision. Empire further argued that, even if the trial court applied California law, the arbitration provision was enforceable. To the extent that any provisions of the contracts were unenforceable, Empire argued, they could be severed and the remainder of the contracts enforced.

On January 30, 2009, the trial court entered an order denying the motion with respect to Shadow and Macklin.^[2] The court did not discuss the choice of law provision contained in the contracts, or provide a choice of law analysis. Applying California law, the court found that the arbitration provision satisfied the Armendariz requirements but was nevertheless procedurally and substantively unconscionable, and therefore unenforceable. The court declined to sever the provisions it found substantively unconscionable.

On February 20, 2009, Empire filed a timely appeal of the trial courts order denying its motion to compel arbitration as to Shadow and Macklin.

DISCUSSION

I. Appealability and standard of review

The trial courts order denying Empires motion to compel arbitration is appealable pursuant to Code of Civil Procedure section 1294, subdivision (a).

There is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the courts order is based on a decision of fact, then we adopt a substantial evidence standard [citations]. Alternatively, if the trial courts denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.] (Robertson v. Health Net of California, Inc. (2005) 132 Cal.App.4th 1419, 1425.)

The issue we must decide is whether the trial court erred in applying California law, rather than Illinois law, in determining the enforceability of the contracts arbitration clause. The trial court did not directly address this choice of law issue. However, the trial court implicitly concluded that California law should be applied. It is this implicit choice of law ruling that we review.

When no facts are in dispute, review of a trial courts choice of law ruling is de novo. (Brack v. Omni Loan Co., Ltd. (2008) 164 Cal.App.4th 1312, 1320.) The interpretation of a choice-of-law provision on undisputed facts presents a purely legal question and is reviewed de novo. [Citations.] Moreover, whether, on undisputed facts, the contractual choice-of-law provision supplants the law which would otherwise apply is also a question of law reviewed de novo. [Citation.] (Ibid.) Because the parties have raised no relevant factual issues regarding the enforcement of the choice of law provision, our review is de novo.

II. Enforcement of choice of law provision

Where a choice of law provision exists in a private contract, California courts will generally honor the provision. (See Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-465 (Nedlloyd) [In determining the enforceability of arms-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflect a strong policy favoring enforcement of such provisions].)^[3] Application of the parties choice of law will extend to all causes of action arising from or related to their contract, including related tort causes of action. (Nedlloyd, at p. 468.) As the Supreme Court noted, this natural extension of a contractual choice of law provision comports with common sense and commercial reality. When an individual agrees to a choice of law provision, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship. (Id. at p. 469.)

As set forth in Nedlloyd:

Briefly restated, the proper approach under Restatement section 187, subdivision (2) is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties choice of law. If, however, either test is met, the court must next determine whether the chosen states law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue . . . . (Rest., 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this states fundamental policy.

(Nedlloyd, supra, 3 Cal.4th at p. 466, fns. omitted.)

Empires motion to compel arbitration arises out of the . . . [contractual] relationship. (Nedlloyd, supra, 3 Cal.4that p. 469.) Thus, Nedlloyd dictates that the contractual choice of law provision is applicable to the issues raised by the motion.^[4] Pursuant to Nedlloyd, we apply the Restatement test to determine whether the choice of law provision will be honored in the context of this dispute over the enforceability of the arbitration provision.^[5]

A. The chosen state has a substantial relationship to the parties

The first question that must be answered under the Restatement test is (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties choice of law.

Plaintiffs agree that the first part of the test is met because Empire is an Illinois company. The substantial relationship and reasonable basis tests are met when one of the parties is domiciled in the chosen state. [Citations.] (Expansion Pointe Properties, Limited Partnership v. Procopio, Cory, Hargreaves & Savitch, LLP (2007) 152 Cal.App.4th 42, 59.) Thus, we turn to the other factors.

B. Illinois law regarding enforcement of arbitration agreements is not contrary to a fundamental policy of California

In order to determine whether Illinois law regarding enforcement of contractual arbitration provisions is contrary to a fundamental policy of California, we must undertake a brief overview of each states law on the subject in the context of employment contracts.^[6]

1. Both states have strong public policies in favor of enforcing arbitration agreements

California law expresses a strong public policy of enforcing arbitration agreements, including agreements to arbitrate statutory rights. [Citation.] (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 892 (Baker).)

Like California law, Illinois law reflects a strong public policy in support of enforcement of arbitration agreements. (Reed v. Doctors Associates, Inc. (Ill.Ct.App. 2002) 772 N.E.2d 372, 375.)

Because the law of Illinois reflects a strong public policy in favor of enforcing valid arbitration agreements, it does not conflict with this fundamental policy of California.

2. California public policy regarding arbitration agreements implicating unwaivable public rights

In Armendariz, the California Supreme Court announced a fundamental public policy of this state regarding the enforcement of arbitration agreements involving unwaivable public rights. The Armendariz court held thatan arbitration agreement that encompasses unwaivable public rights must satisfy the following minimum requirements: (1) it must provide for a neutral arbitrator; (2) it must allow adequate discovery; (3) it must provide all types of relief otherwise available in court; (4) it must require a written arbitration award that permits limited judicial review; and (5) it must require the employer to pay the arbitrators fees and all costs unique to arbitration. (Armendariz, supra, 24 Cal.4th at pp. 100-103.)

Public rights are those that affect society at large rather than the individual. (Fitz v. NCR Corp. (2004)118 Cal.App.4th 702, 711-712.) Public rights are implicated whenever a claim involves the enforcement of rights under any statute enacted for a public reason. (Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 180.) The Labor Code and Business and Professions Code sections cited in plaintiffs complaint were enacted for a public reason. Thus, in evaluating this arbitration agreement under California law, the Armendariz requirements would apply.

We must, therefore, determine whether Illinois law contains comparable minimum requirements for arbitration agreements that encompass unwaivable public rights, as set forth in Armendariz.^[7]

Illinois has not uniformly adopted the five Armendariz requirements. However, similar requirements are found in Illinois law. In Melena v. Anheuser-Busch, Inc. (Ill. 2006) 847 N.E.2d 99 (Melena), the Illinois Supreme Court found an arbitration agreement between an employer and employee to be enforceable. In doing so, the court noted that the agreement in this case does not limit the remedies available to plaintiff. Indeed, the agreement makes clear that the arbitrator is free to award any remedy recognized under the law. (Id. at p.111.) Thus, the Illinois high court, like the Armendariz court, has recognized that an arbitration involving important public rights must provide all types of relief otherwise available in court.

The Melena court also noted that [i]n this case, the agreement makes clear that the employer is to pay all costs, with the employee paying only a $125 fee. We do not believe that such a fee would have the effect of precluding litigants from effectively vindicating their rights . . . . (Melena, supra, 847 N.E.2d at p. 111.) Illinois law thus supports the rule set forth in Armendariz requiring that employers bear the majority of costs involved in the arbitration of public rights. (Armendariz, supra, 24 Cal.4th at p. 110.)

Illinois law also supports the Armendariz requirements that the arbitration agreement provides for a written arbitration award and permit limited judicial review. Under the Illinois Compiled Statutes (710 ILCS 5/8, subd. (a)), an arbitration award shall be in writing and signed by the arbitrators joining in the award. And under 710 ILCS 5/12, subdivision (a), limited judicial review is permitted.

Armendariz also requires a neutral arbitrator. While Illinois does not affirmatively require a neutral arbitrator in this setting, it defers to the parties choice of methods for appointment of the arbitrator: If the arbitration agreement provides a method of appointment of arbitrators, this method shall be followed. In the absence thereof, any method of appointment of arbitrators agreed upon by the parties to the contract shall be followed. (710 ILCS 5/3.)

By their adoption of the commercial arbitration rules of the American Arbitration Association, the parties have agreed to a neutral arbitrator. (See, e.g., Lucas v. Gund, Inc. (C.D.Cal. 2006) 450 F.Supp.2d 1125, 1133 [the agreement, via the AAA rules, does provide for a neutral arbitrator, and thus the Court finds that this prong of Armendariz has been satisfied].) Illinois courts will enforce the parties choice of neutrality. (See 710 ILCS 5/12, subd. (a)(2) [allowing judicial review on the grounds of evident partiality by an arbitrator appointed as a neutral or corruption in any one of the arbitrators or misconduct prejudicing the rights of any party].) Because the parties choice of a neutral arbitrator will be enforced in Illinois, no fundamental conflict with this Armendariz requirement exists.

As to discovery, the Armendariz court found that the arbitration agreement must allow for discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s). (Armendariz, supra, 24 Cal.4th at p. 106.) Again, Illinois law does not conflict with this requirement. Illinois Compiled Statutes (710 ILCS 5/7) provides that arbitrators may issue subpoenas for witnesses, documents, and other evidence, and also permits depositions to be taken. Adequate discovery is permitted under Illinois law, thus no fundamental conflict with California law exists.^[8]

Based on this analysis, we find that Illinois law provides sufficient protections for employees asserting unwaivable public rights. No fundamental conflict with the California policy set forth in Armendariz exists.

3. Procedural and substantive unconscionability

In addition to the requirements for arbitration of unwaivable statutory claims, the Armendariz court set forth standards that apply more generally to any type of arbitration imposed on the employee by the employer as a condition of employment, regardless of the type of claim being arbitrated. (Armendariz, supra, 24 Cal.4th at p. 113.) These standards form the judicially created doctrine of unconscionability. (Ibid.) We need not decide whether the doctrine of unconscionability encompasses fundamental policy concerns of this state, because, as set forth below, Illinois recognizes and enforces this doctrine.

In California, unconscionability has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results. [Citation.] The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. [Citation.] But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves. [Citations.] In other words, the 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. (Armendariz, supra, 24 Cal.4th at p. 114.)

Illinois also recognizes the concept of unconscionability, both procedural and substantive. (Kinkel v. Cingular Wireless, LLC (Ill.Ct.App. 2005) 828 N.E.2d 812, 818.) Under Illinois law, [a] contract provision is procedurally unconscionable if some impropriety in the formation of the contract leaves a party with no meaningful choice in the matter. A provision is substantively unconscionable if it is overly harsh or one-sided. [Citation.] (Ibid.) As in California, [i]n order to be unconscionable, a contract provision must be both procedurally and substantively unconscionable. [Citation.] (Ibid.)

As set forth in Zobrist v. Verizon Wireless (Ill.Ct.App. 2004) 822 N.E.2d 531, 541, The best method of weighing procedural and substantive unconscionability is to use a sliding scale as adopted in Ting v. AT&T (9th Cir. 2003) 319 F.3d 1126. As stated in Ting v. AT&T, the 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. [Citations.] (319 F.3d at p. 1148, quoting Armendariz, supra, 24 Cal.4th at p. 114.) Thus, in its evaluation of the unconscionability of arbitration agreements, Illinois applies a substantially similar standard as used in California.^[9]

Illinois law contains the same general principles of unconscionability as California law. No fundamental conflict between the laws of the two states exists.

C. Summary of choice of law analysis

Illinois has a substantial relationship to the parties in this matter. Illinois law regarding the enforcement of arbitration agreements is not contrary to any fundamental policy of California. Because Illinois law does not present a fundamental conflict with California law on this subject, we need not determine whether California has a materially greater interest than Illinois in the determination of this issue. (Nedlloyd, supra, 3 Cal.4th at p. 466.)

III. Conclusion

Under the analysis set forth in Nedlloyd, the trial court should have honored the parties choice of law and applied Illinois law to determine whether the arbitration agreement is enforceable.

The question of the enforceability of this particular arbitration clause under Illinois law was not fully briefed before this court therefore we express no opinion as to the outcome of this determination.^[10] Instead, we reverse and remand for full consideration of this question in the trial court.

DISPOSITION

The order is reversed and the matter remanded for a determination of whether the arbitration provision is enforceable under Illinois law. Each party is to bear its own costs of appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

__________________________, J.

CHAVEZ

We concur:

__________________________, Acting P. J.

DOI TODD

__________________________, J.

ASHMANN-GERST

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^[1] The claims of Shadow, Macklin, and David Price (Price) were brought against Empire as a putative class action. However, Prices contract with Empire differed from the contracts signed by Shadow and Macklin. The trial court granted Empires motion to compel arbitration as to Price, but stayed the arbitration pending the outcome of the court action as to Shadow and Macklin. The portion of the trial courts order pertaining to Price is not before us in this appeal.

^[2] As to Price, the trial court found that the arbitration provision in his contract satisfied the Armendariz requirements and was not substantively unconscionable.

^[3] Even though Nedlloyd was decided in the context of a negotiated arms length transaction between sophisticated business entities, its analysis appears suitable for a broader range of contract transactions. (Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 917 (Washington Mutual).) Such contracts include consumer adhesion contracts. (Id. at p. 918.) Neither plaintiffs nor Empire suggest that the Nedlloyd analysis is inapplicable to the employment contracts at issue.

^[4] Although the scope of a choice-of-law clause in a contract is a matter that ordinarily should be determined under the law designated therein, we may interpret the clause pursuant to Nedlloyd because no party has requested judicial notice of Illinois law on this point nor supplied evidence of the relevant aspects of that law. (Washington Mutual, supra, 24 Cal.4th at p. 916, fn. 3.)

^[5] Plaintiffs argue strenuously against enforcement of the arbitration agreement based on Californias fundamental policy of providing a broad range of protections to employees. However, the narrow issue before the trial court was to determine the enforceability of the contractual arbitration provision -- not to determine the substantive issues raised by the complaint. [A] separate conflict of laws inquiry must be made with respect to each issue in the case [citations]. (Washington Mutual, supra, 24 Cal.4th at p. 920.) Whether the matter is ultimately heard before a court or an arbitrator, that tribunal will have to make any choice of law decisions that might arise in connection with plaintiffs substantive claims.

^[6] As noted above, plaintiffs have not addressed the question of whether the law of Illinois regarding enforcement of arbitration conflicts with a fundamental policy of California. In fact, neither the parties nor the trial court have set forth a complete analysis of this question. In order to determine whether the trial courts application of California law was correct, we have undertaken an independent review and comparison of the two states laws.

^[7] While the trial court found that the Armendariz requirements were met in this case, that finding is irrelevant to our choice of law determination. The trial court had to make its choice of law decision before going forward with the actual analysis of the arbitration clause. Because it is the choice of law decision alone that we are reviewing, we do not consider the outcome of the courts analysis of the arbitration clause in determining error.

^[8] Again, by adopting the AAA commercial arbitration rules, the parties have privately agreed that adequate discovery will be permitted. The AAA rules provide that the arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute. (Lucas v. Gund, Inc., supra, 450 F.Supp.2d at p. 1133.) Illinois law permits such discovery, thus does not present a fundamental conflict.

^[9] Empire argues that the arbitration clauses at issue are enforceable under Illinois law because Illinois law requires a much higher showing of procedural unconscionability in order to find that an arbitration agreement is unenforceable. Neither party argues that such variances in the range of unconscionability amount to a fundamental conflict with a policy of California. Because Illinois applies the same concepts of unconscionability, using the same sliding scale, any minor differences between the states laws in application of these tests do not amount to a fundamental policy conflict as contemplated by the Restatement. (Brack v. Omni Loan Co., Ltd., supra, 164 Cal.App.4th at p. 1323 [To be fundamental within the meaning of Restatement section 187, a policy must be a substantial one].)

^[10] We decline to address the carve-out provision contained in the contract, as neither party has presented Illinois law on this subject. Illinois law regarding the unconscionability of arbitration agreements with carve-outs, and the severability of such provisions under Illinois law, are issues to be determined on remand.