Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-01988/USCOURTS-caed-2_07-cv-01988-2/pdf.json

Nature of Suit Code: 791
Nature of Suit: Employee Retirement Income Security Act (ERISA)
Cause of Action: 29:1132 E.R.I.S.A.-Employee Benefits

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

MARK GELOW, et al.,

NO. CIV. S-07-1988 LKK/KJM

Plaintiffs,

v. O R D E R

CENTRAL PACIFIC MORTGAGE

CORPORATION, et al.,

Defendants.

 /

Plaintiff Mark Gelow and ten other individuals bring the

present action against their former employer, Central Pacific

Mortgage Corporation (“CPM”); its subsidiary, Ivanhoe Financial,

Inc. (“Ivanhoe”); and several executive officers of the two

companies, including John Courson, John Cassell, and Ed Fuchs.

Plaintiffs seek recovery on numerous grounds, including violation

of the Racketeering Influenced and Corrupt Organizations Act and

numerous state law claims. 

Pending before the Court is defendants’ motion to compel

arbitration. The court resolves the motion on the papers and after

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Each side has lodged objections to various pieces of evidence 1

offered by the other. To the extent that the court relies on that

evidence in this order, those objections are OVERRULED.

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oral argument. For the reasons stated below, the motion is denied.

I. BACKGROUND AND ALLEGATIONS1

Plaintiffs allege that defendants CPM and Ivanhoe existed as

mortgage loan companies until their demise in early 2007. Complaint

¶¶ 12, 13, 28. During the times relevant to the complaint, either

CPM or Ivanhoe employed each of the plaintiffs as branch managers.

Id. ¶ 22. Each branch had an account containing all of the net

profits for that branch. Id. ¶ 23. Plaintiffs made monthly salary

withdrawals from these accounts, as well as withdrawals from the

accounts for various other expenses, including vacation, illness,

disability, and retirement. Id. In 2007, CPM and Ivanhoe informed

plaintiffs of the companies’ closures. Id. ¶ 28. Defendants also

informed Plaintiffs at this time that the funds in each of the

accounts were no longer available. Id. Consequently, Plaintiffs

filed this action alleging violation of ERISA, violation of RICO,

fraud, conversion, breach of fiduciary duty, and breach of

contract.

In this motion, the defendants seek to enforce arbitration

agreements that they allege were part of the plaintiffs’ employment

contracts. Some of these contracts (those of plaintiffs Stefanski,

Just, Meier, Herndon, Sierra, and Trout) have been tendered in

support of this motion. See Declaration of Kristina Launey in

Support of Defendants’ Motion to Compel Arbitration (“Launey

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An exception is the contract of plaintiff Sierra, which is 2

entirely typed, and the contract of plaintiff Trout, which is

almost entirely typed. Launey Decl. ¶ 6, Exh. E (employment

contract of Arturo Sierra); ¶ 7, Exh. F (employment contract of

Bruce Trout). 

Plaintiff Trout’s contract is exceptional, in that there is 3

only one section of the contract discussing arbitration. It states,

in its entirety:

Any controversy or claim arising out of or relating to

this agreement, or a breach thereof, shall be settled

by arbitration in accordance with the Commercial

Arbitration Rules of the American Arbitration

Association, and judgment upon the award rendered by the

arbitrator(s) may be entered in any court having

jurisdiction thereof. The costs of arbitration shall be

borne by the losing party or in such proportions as the

arbitrator(s) decide.

Launey Decl. ¶ 7, Exh. F (employment contract of Bruce Trout) §

6.04.

Defendants acknowledge this discrepancy and contend that,

during the course of his employment, plaintiff Trout signed an

“updated” employment contract that contains all of the arbitration

provisions described above. Declaration of Valerie Silva In Support

of Defendants’ Motion to Compel Arbitration ¶ 9.

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Decl.”), Ex. A-F. Each of these contracts is nearly identical. Each

is typed, with blank spots left for the employee’s name, address,

choice of law, and date and place of signing; this information has

been filled in by hand on most of the contracts. See, e.g., Launey 2

Decl. ¶ 2, Exh. A (employment contract of Jase Stefanski); ¶ 3,

Exh. B (employment contract of Jeffrey Just). 

Each employment contract contains a provision by which the

employer and employee agree to arbitrate disputes. See, e.g., See,

e.g., Launey Decl. ¶ 2, Exh. A (employment contract of Jase

Stefanski) § 6.01. The agreement to arbitrate applies to “any 3

dispute involving Employer and Employee that would otherwise be

cognizable in a court of law,” excluding ERISA claims and several

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other types of claims. Id. §§ 6.03, 6.04. The agreement is governed

by the Federal Arbitration Act, 9 U.S.C. § 1, et seq., “or the

provisions of any applicable state arbitration statute.” See, e.g.,

Launey Decl. ¶ 3, Exh. B (employment contract of Jeffrey Just) §

6.10. 

The contract provides for a single, neutral arbitrator

selected in accordance with AAA rules. Id. § 6.06. Among the

arbitrator’s authorities, he may “permit reasonable discovery.”

Id. § 6.08. Each party may subpoena witnesses and documents for the

arbitration hearing. Id. § 6.09. 

The contract further states:

The arbitrator shall apply the substantive law

applicable and may award, any remedy authorized by law.

The arbitrator has no authority to (a) add to or modify

the terms of any contract between the parties, (b)

require Employer to adopt new Company policies or

procedures, or (c) hear or decide any matter that was

not processed in accordance with this Article, absent

written consent of both parties.

Id. § 6.08. The arbitrator will issue written findings of fact,

findings on each issue supporting the award, and the necessary

conclusions of law to support the award decision. Id. § 6.09. 

The contract also describes the fee arrangement for

arbitration. If the employer initiates arbitration, it pays all

administration fees. If the employee initiates it, he must pay up

to $150 in administration fees, with the remainder paid by the

employer. Id. § 6.07. If the employee’s claims are “based on

statutes that govern the employment relationship,” the employer

will pay all the fees and expenses of the arbitrator, unless the

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employee agrees to pay half of the fees himself. Finally, “[i]f

[the] Employee's claims are based on the contract or common law,

the fees and expenses of the arbitrator shall be split by the

parties, with [the] Employee bearing one-half of the initial filing

fee, case service fee, and any additional fees imposed by the

arbitrator.” Id. 

Defendants represent that all of the plaintiffs signed

employment contracts containing these arbitration agreements.

Declaration of Valerie Silva In Support of Defendants’ Motion to

Compel Arbitration (“Silva Decl.”) ¶¶ 5-9. Defendant Courson has

declared that these contracts were not retained by defendants after

Central Pacific Mortgage Corporation was bought by another company.

Declaration of John Courson in Support of Defendants’ Reply to

Plaintiffs’ Opposition to Defendants’ Motion (“Courson Decl.”) ¶

4.

Except for plaintiffs Gelow and Mann, all of the remaining

plaintiffs acknowledge having signed employment contracts, although

they do not describe whether they contained arbitration provisions.

See, e.g., Declaration of Erik Fridley In Opposition to Motion to

Compel Arbitration ¶ 3. Plaintiff Gelow has declared that he does

not recall whether his contract contained an arbitration provision.

Declaration of Mark Gelow In Opposition to Motion to Compel

Arbitration (“Gelow Decl.”) ¶¶ 3-4. Plaintiff Mann stated that she

does not recall having signed an employment contract with the

defendants and that she did not recall her contract with Ivanhoe

Financial containing an arbitration provision. Declaration of Jenny

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Mann In Opposition to Motion to Compel Arbitration (“Mann Decl.”)

¶ 3. 

All the plaintiffs (with the exception of plaintiffs Gelow and

Mann) have declared that their employment contracts with the

defendant, which contained the arbitration provision, were nonnegotiable in their terms and were required for continuing

employment with the defendant. See, e.g., Declaration of Stephen

Herndon In Opposition to Motion to Compel Arbitration ¶ 3. 

On September 21, 2007, the plaintiffs filed their complaint.

On December 20, 2007, defendants Cassell and Fuchs moved to dismiss

on the grounds that the plaintiffs’ state law claims were preempted by ERISA and that plaintiffs’ RICO claims were inadequately

pled. The court denied the motion. On February 11, 2008, the court

held a scheduling conference, which counsel for all parties

attended. Neither at that conference nor in their status report

filed prior to the conference did defendants alert the court to the

possibility of arbitration. In March 2008, the plaintiffs filed a

First Amended Complaint, which defendants answered on April 14,

2008.

II. STANDARD FOR A MOTION TO COMPEL ARBITRATION

A party to an arbitration agreement may move to compel

arbitration when the other party “unequivocally refuses to

arbitrate, either by failing to comply with an arbitration demand

or by otherwise unambiguously manifesting an intention not to

arbitrate[.]” PaineWebber, Inc. v. Faragalli, 61 F.3d 1063, 1066

(3rd Cir. 1995); 9 U.S.C. § 4. The petition to compel must be

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supported by an independent basis for federal subject-matter

jurisdiction under Title 28 to be brought in federal court, such

as diversity of citizenship. Southland Corp. v. Keating, 465 U.S.

1, 15 n. 9. Once these requirements are met, and if the court is

satisfied that the agreement covers the dispute in question and a

valid agreement to arbitrate exists, the court must issue an order

directing the matter to arbitration. 9 U.S.C. § 4; see also Chiron

Corp v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir.

2000) (the Court’s role is limited to determining whether a valid

agreement to arbitrate exists and whether the agreement encompasses

the dispute at issue). 

III. ANALYSIS

The Federal Arbitration Act (FAA) governs arbitration

agreements that concern interstate commerce. 9 U.S.C. § 2. The

purpose of the FAA is to “place such agreements upon the same

footing as other contracts,” and thus represents Congress’s intent

to favor the enforceability of arbitration agreements. Volt

Information Sciences, Inc. v. Bd. of Trustees of Leland Stanford

Junior University, 489 U.S. 468, 474-75 (1989) (internal citations

omitted). Because the crux of the FAA is to ensure the enforcement

of valid arbitration agreements, valid choice of law provisions

within the agreement should be honored. Id. at 472. Generally

courts apply state contract law in determining the enforceabililty

of an arbitration agreement that falls within the ambit of the FAA.

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995);

Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir.

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The parties dispute whether state or federal procedural law 4

should govern, as the court considers whether to stay the nonarbitrable claims. The court need not reach this question, as none

of the arbitration agreements are enforceable. 

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2003). 

Here, the contracts at issue concern interstate commerce

because the defendants’ business operated in several states. See

The Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-58 (2003).

Accordingly, here the court turns to California law in considering

plaintiffs’ arguments that the agreement is unenforceable because

it is unconscionable and because defendants waived their right to

compel arbitration.4

A. Which Plaintiffs Are Bound By Arbitration Agreements

Preliminarily, the parties dispute which plaintiffs agreed to

arbitration as part of their employment contracts.

The party seeking to enforce an arbitration agreement bears

the burden of showing that the agreement exists and that its terms

bind the other party. See, e.g., Sanford v. Memberworks, Inc., 483

F.3d 956, 962 (9th Cir. 2007); Three Valleys Mun. Water Dist. v.

E.F. Hutton & Co., 925 F.2d 1136, 1139-41 (9th Cir. 1991); see also

Opals on Ice Lingerie v. Bodylines, Inc., 320 F.3d 362 (2d Cir.

2003) (holding that arbitration clause of a contract was

unenforceable because party seeking to enforce had not shown that

a lawful contract had been created). This burden is a substantial

one:

Before a party to a lawsuit can be ordered to arbitrate

and thus be deprived of a day in court, there should be

an express, unequivocal agreement to that effect. . . .

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The district court, when considering a motion to compel

arbitration which is opposed on the ground that no

agreement to arbitrate had been made between the

parties, should give to the opposing party the benefit

of all reasonable doubts and inferences that may arise.

Three Valleys Mun. Water Dist., 925 F.2d at 1141 (citing Par-Knit

Mills, Inc. v. Stockbridge Fabric Co., 636 F.2d 51, 54 (3rd Cir.

1980)). 

Here, defendants have tendered the employment contracts of

plaintiffs Stefanski, Just, Meier, Herndon, Sierra, and Trout. See

Launey Decl. Exh. A-F. Most of these contracts contain similar

arbitration provisions, with the exception of plaintiff Trout’s,

as noted supra. Defendants also have tendered declarations that all

of the remaining plaintiffs also signed contracts containing the

same arbitration provisions, though these agreements have not been

tendered. See Silva Decl. ¶¶ 5-9; Declaration of John Cassell in

Support of Defendants’ Reply to Plaintiffs’ Opposition to

Defendants’ Motion (“Cassell Decl.”) ¶ 3. Except for plaintiffs

Gelow and Mann, all of the plaintiffs acknowledge having signed

employment contracts, although they do not describe whether they

contained arbitration provisions. See, e.g., Declaration of Erik

Fridley In Opposition to Motion to Compel Arbitration ¶ 3. 

The evidence that plaintiffs Gelow and Mann signed employment

contracts that contained arbitration agreements is minimal,

consisting principally of Valerie Silva’s declaration that her

recollection is that all branch managers signed employment

contracts containing arbitration provisions and that she

specifically recalled that plaintiff Gelow’s employment contract

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contained such a provision. Silva Decl. ¶¶ 5-9. Defendants also

have tendered evidence that it was their practice to have employees

sign employment contracts containing arbitration provisions.

Cassell Decl. ¶ 3. These imprecise descriptions and recollections

do not suffice to show that these plaintiffs in fact agreed to

arbitrate disputes with defendants, particularly in light of the

plaintiffs’ contradictory declarations. See Sanford, 483 F.3d at

962; Three Valleys Mun. Water Dist., 925 F.2d at 1139-41.

Defendants have not met their burden to show that arbitration

agreements were made with plaintiffs Gelow and Mann.

B. Unconscionability of the Arbitration Agreements

Plaintiffs further contend that none of the arbitration

agreements are enforceable because they are unconscionable. The

court agrees.

An arbitration agreement that falls within the ambit of the

FAA is nevertheless unenforceable if it is unconscionable under

state law. Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d

778, 782 (9th Cir. 2002). A contract is unconscionable where there

are elements of procedural and substantive unconscionability,

though each need not be present to the same degree. Id. at 783;

Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83,

114 (2000). 

1. Procedural Unconscionability

Oppression and surprise are the hallmarks of procedural

unconscionability. Ingle v. Circuit City Stores, Inc., 328 F.3d

1165, 1171 (9th Cir. 2003) (applying California law). Oppression

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exists where one party has a weaker bargaining position, precluding

him from a meaningful opportunity to negotiate the terms of the

contract. Id., citing Stirlen v. Supercuts, Inc., 51 Cal. App. 4th

1519, 1532 (Cal. Ct. App. 1997). Courts have found employment

contracts oppressive where they are drafted by the employer and

presented to the employee on a take-it-or-leave-it basis. See id.;

Circuit City Stores, Inc. v. Adams (Adams III), 279 F.3d 889, 892-

93 (9th Cir. 2002); Armendariz, 24 Cal. 4th at 114-15; Stirlin, 51

Cal. App. 4th at 1533-34. An adhesive contract is procedurally

unconscionable even when the employee has had several days to

review it before signing. Ingle, 328 F.3d at 1172 (adhesive

arbitration agreement procedurally unconscionable where employee

had three days to consider it). 

The sophistication of the employee or the likelihood that he

has other employment options does not mitigate the procedural

unconscionability of an adhesive contract. In Stirlen, the

plaintiff had been a successful executive working for another

company when he was approached by defendant Supercuts. Stirlin, 51

Cal. App. 4th at 1533. Supercuts “hired [him] away” from the other

corporation by offering a “generous” salary and benefit package.

Id. The court was unpersuaded that this showed that the employment

contract was not procedurally unconscionable. Id. at 1534. Although

the plaintiff may have been able to negotiate his compensation, the

employment contract itself was a standard form used by the

defendant for all of its employees and there was no evidence that

its terms were negotiable by the plaintiff. Id. This, the court

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Given that we deal with an employment contract, the court 5

does not find the fact that several of the plaintiffs were business

owners prior to the sale to the defendants as sufficiently

distinguishable as to suggest a different result.

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held, was procedurally unconscionable. Id.; see also Szetela v.

Discover Bank, 97 Cal. App. 4th 1094, 1100 (Cal. Ct. App. 2002)

(holding that an adhesive contract for credit card services was

procedurally unconscionable, notwithstanding the plaintiffs’

ability to acquire the same services elsewhere).5

Here, the arbitration agreements defendants seek to enforce

are similarly procedurally unconscionable. Every plaintiff (with

the exception of plaintiffs Gelow and Mann) has declared that the

employment contracts with the defendant, which contained the

arbitration provision, were non-negotiable in their terms and were

required for continuing employment with the defendant. See, e.g.,

Declaration of Stephen Herndon In Opposition to Motion to Compel

Arbitration ¶ 3. The copies of the employment agreements of

plaintiffs Herndon, Just, Meier, Sierra and Stefanski, which the

defendants have tendered to the court, appear to be virtually

identical form contracts. See Launey Decl., Exh. A-E. Declarant

Silva’s description of the process by which employment contracts

were created confirms this impression, as she describes the

contracts as originating from and being revised periodically by the

defendant. Silva Decl. ¶¶ 6-7. 

Whether the plaintiffs were sophisticated business-persons who

had other employment options does not bear on the issue, despite

defendant’s contention otherwise. See Cassell Decl. ¶ 6. California

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law is clear that the dispositive question is whether the employee

had a meaningful opportunity to alter the terms of the employment

contract and, specifically, to reject the arbitration provision if

he chose. See Stirlin, 51 Cal. App. 4th at 1534; Szetela, 97 Cal.

App. 4th at 1100. The evidence before the court indicates that the

plaintiffs did not. Consequently, the arbitration agreements were

procedurally unconscionable. 

2. Substantive Unconscionability

A contract is substantively unconscionable when its terms are

so one-sided as to shock the conscience. Ingle, 328 F.3d at 1172;

Kinney v. United HealthCare Serv., Inc., 70 Cal. App. 4th 1322,

1330 (Cal. Ct. App. 1999). When an arbitration agreement is

required by the employer as part of the employment contract, the

agreement must contain five minimum elements in order to be lawful:

(1) reference to a neutral arbitrator, (2) provision for more than

minimal discovery, (3) requirement that award decision be written,

(4) provision for all of the types of relief that may be awarded

by the court, and (5) it “does not require employees to pay either

unreasonable costs or any arbitrators’ fees and expenses as a

condition of access to the arbitration forum.” Armendariz v.

Foundation Health Psychcare Serv., 24 Cal. 4th 83, 102-103 (2000)

(citing Cole v. Burns Intern. Sec. Serv., 105 F.3d 1465, 1482 (D.C.

Cir. 1997)). 

Here, it appears that several of these minimum standards have

been met. The arbitration agreements provide for reference to a

neutral arbitrator, require written awards, and allow for more than

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As it is required to do, the court construes this 6

inconsistency against the drafter. Cal. Civ. Code § 1654.

Defendants do not dispute that they drafted the employment

contracts. Silva Decl. ¶¶ 5-6; Cassell Decl. ¶ 5.

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minimal discovery. See, e.g., Launey Decl. ¶ 3, Exh. B (employment

contract of Jeffrey Just) §§ 6.06, 6.08, 6.09. Plaintiffs do not

dispute this. Nevertheless, in their provisions for remedies and

employees’ fee payment, the arbitration agreements fail to meet

even the minimum standards of Armendariz and therefore are

substantively unconscionable. 

1. Limitation of Remedies

In order for an arbitration agreement to be lawful, it must

allow for all types of relief that a court could order. Armendariz,

24 Cal. 4th at 102. For example, an arbitration agreement that

allowed the employee to recover only damages was “contrary to

public policy and unlawful.” Id. at 103-104. Similarly, an

agreement that would not allow an employee to recover punitive

damages that were permitted by statute was held substantively

unconscionable. Ingle, 328 F.3d at 1178-79; Adams III, 279 F.3d at

895.

Here, the language of the arbitration agreements is equivocal.

Although they state that the arbitrator “may award any remedy

authorized by law,” the very next sentence limits the arbitrator’s

authority. See, e.g., Launey Decl. ¶ 3, Exh. B (employment 6

contract of Jeffrey Just) § 6.08. Among other limitations, it

states that the arbitrator may not “require Employer to adopt new

Company policies or procedures.” Id. This is a remedy that a court

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could order as a form of injunctive relief. Because the arbitration

agreements do not allow it, their limitation on the possible

remedies available to an employee is substantively unconscionable.

See Ingle, 328 F.3d at 1178-79; Armendariz, 24 Cal. 4th at 102. 

2. Fee Allocation Provision

A contract is unconscionable if it requires the employee to

pay a fee or incur an expense in order to access the arbitration

forum. Armendariz, 24 Cal. 4th at 102. This is true whether the fee

is characterized as a “filing fee” or as a cost-splitting

arrangement. See Ingle, 328 F.3d at 1177-78; see also Armendariz,

24 Cal. 4th at 110 (“when an employer imposes mandatory arbitration

as a condition of employment, the arbitration agreement . . .

cannot generally require the employee to bear any type of expense

that the employee would not be required to bear if he or she were

free to bring the action in court” (emphasis in original)).

Here, there are two expenses in the arbitration agreements

that are potentially problematic. First, the agreements require

that the employee pay $150 in administration fees if he institutes

an action against the defendants. See, e.g., Launey Decl. ¶ 3, Exh.

B (employment contract of Jeffrey Just) § 6.07. Although this

represents an expense that the employee must incur in order to

access the arbitration forum, the California courts have held that

this type of filing fee is not problematic since it resembles the

types of fees that a plaintiff would incur when filing a complaint

in court. Armendariz, 24 Cal. 4th at 108 (quoting Cole, 105 F.3d

at 1484). Moreover, the arbitration agreements provide that the

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employee pay this fee to the arbitration administrator, not to the

defendants themselves, distinguishing this case from others in

which courts have found “filing fee” provisions substantively

unconscionable. See Ingle, 328 F.3d at 1177-78. Therefore, the $150

filing fee is not substantively unconscionable. 

The cost-splitting provision of the agreement, however, is.

The agreement requires the employee to pay half of the fees and

expenses of the arbitrator if the employee has brought a claim

against the employer based on the contract or common law. See,

e.g., Launey Decl. ¶ 3 Exh. B (employment contract of Jeffrey Just)

§ 6.07. Such provisions have been uniformly found to be

unconscionable, as they plainly favor the employer and discourage

the employee from bringing his claims. See, e.g., Ingle, 328 F.3d

at 1177-78; Adams III, 279 F.3d at 894; Cal. Teachers Ass’n v.

State of Cal., 20 Cal. 4th 327, 355-56 (1999). Particularly where,

as here, the employee must pay these fees even if he succeeds in

his claim against the employers, this provision “blatently offends

basic principles of fairness.” Ingle, 328 F.3d at 1177-78. In fact,

it is so one-sided, that courts have held that the presence of this

provision alone renders a contract substantively unconscionable.

Id.; Adams III, 279 F.3d at 894. 

The defendants acknowledge that this provision is “potentially

problematic,” but encourage the court to sever it and enforce the

remaining terms of the agreement. Severance is not proper when

there are more than one unlawful provisions in a contract, as a

multiplicity of defects indicates a systematic effort to discourage

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employees from arbitrating claims. Armindariz, 24 Cal. 4th at 124;

Little v. Auto Steigler, Inc., 29 Cal. 4th 1064, 1074-75 (2003).

Here, both the cost-splitting provisions and the limitation on

remedies are unlawful. Severance is inappropriate.

Accordingly, because the arbitration agreements are both

procedurally and substantively unconscionable, and both to a

significant degree, they are unenforceable.

IV. CONCLUSION

For the reasons expressed herein, the defendants’ motion to

compel arbitration is DENIED.

IT IS SO ORDERED. 

DATED: June3, 2008.

Case 2:07-cv-01988-LKK -KJM Document 46 Filed 06/03/08 Page 17 of 17