Jose Ceja Meraz v. Schwager Davis, Inc.

In determining the rights of parties to enforce an arbitration agreement within the scope of the Federal Arbitration Act (“FAA”), “courts apply state contract law while giving due regard to the federal policy favoring arbitration.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.) But the FAA’s policy favoring arbitration ... is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.

Or in another formulation: The policy is to make arbitration agreements as enforceable as other contracts, but not more so. Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind. (Morgan v. Sundance, Inc. (2022) 596 U.S. 411, internal citations and quotations omitted.) The moving party must prove by a preponderance of evidence the existence of the arbitration agreement and that the dispute is covered by the agreement. (See Cruise v. Kroger Co. (2015) 233 Cal.App.4th 390, 396 [under both federal and state law, “the threshold question presented by a petition to compel arbitration is whether there is an agreement to arbitrate”]; Rosenthal v.

Great Western Fin’l Securities Corp. (1996) 14 Cal.4th 394, 413 (Rosenthal) [moving party’s burden is a preponderance of evidence]; see Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165-166 [normal formalities regarding document authentication are not required].) The burden then shifts to the resisting party to prove a ground for denial. (Rosenthal, supra, 14 Cal.4th at p. 413.)

III. MOTION TO COMPEL ARBITRTATION SDI moves for an order: (1) compelling Plaintiff to arbitrate his individual claims against SDI; (2) dismiss his class claims; and (3) stay this action pending completion of arbitration. SDI contends that Plaintiff agreed to arbitrate all claims related to his employment on an individual basis and waived his ability to pursue class relief. In opposition, Plaintiff argues that the arbitration agreement is unenforceable for two reasons: (1) state law prohibits arbitration of Labor Code violations and SDI has not met its burden to show that the FAA preempts state law in this matter, and (2) the arbitration agreement is procedurally and substantively unconscionable.

a. Existence of Agreement to Arbitrate To establish the existence of an arbitration agreement, SDI submits the declaration of Michael Schwager (“Schwager”), the President of Schwager Davis Inc. (Declaration of Michael Schwager (“Schwager Decl.”), p. 1:24-25.) Schwager states that at the time Plaintiff was hired, SDI’s normal practice was to send new hires an Employee Handbook and an unsigned Acknowledgement and Receipt of the Employee Handbook via email. (Schwager Decl., p. 2:8-11.) Schwager further states that he reviewed emails between SDI’s former Human Resources Administrator Alicia Cardenas and Plaintiff in which on January 24, 2023, Plaintiff signed an Employee Handbook Acknowledgment binding him to the Arbitration Agreement in the Employee Handbook. (Id. at p. 2:23-27.)

The signed Employee Handbook Acknowledgment document and the Arbitration Agreement in the Employee Handbook are attached to the declaration. (Schwager Decl., Exs. B, C.) Exhibit B bears Plaintiff’s electronic signature dated January 24, 2023. (Schwager Decl., Ex. B.) SDI contends that by executing the Agreement, Plaintiff agreed to arbitrate all claims related to his employment. (Motion, p. 6:17-19.) The Employee Handbook

Acknowledgment includes the following statement: “I understand and agree to comply with the Dispute Resolution process and abide by the Arbitration Agreement described in Section 9.1.1 of the Handbook.” (Schwager Decl., Ex. B.) The relevant provisions of the Arbitration Agreement state: c) Alternative Dispute Resolution Process — Arbitration Agreement • SDI has developed an alternative dispute resolution process to replace resolving legal disputes in the court system. The arbitration procedure described in this Agreement provides an efficient, fair and private process before a neutral arbitrator for resolving significant employment disputes that cannot be resolved informally between you Employee and Employer. • The parties to this Agreement agree to arbitrate any and all disputes, claims, or controversies (“Arbitrable Dispute”) they may have against each other, including their current and former agents, owners, officers, directors, or employees, which arise from the employment relationship between Employee and Employer or the termination thereof.

Claims covered by this Agreement include, but are not limited to: claims of employment discrimination and harassment under Title VII of the Civil Rights Act, as amended; the California Fair Employment & Housing Act; the Age Discrimination in Employment Act, as amended; the Americans with Disabilities Act, 42 U.S.C. section 1981; the Employment Retirement Income Security Act; breach of employment contract or the implied covenant of good faith and fair dealing; wrongful discharge; or tortious conduct (whether intentional or negligent) including defamation, misrepresentation, fraud, infliction of emotional distress; and any claims under the California Labor Code, including but not limited to any claims brought by the Employee related to wages and/or penalties, but excluding claims under PAGA and for workers' compensation benefits to remedy work-related injury or illness.

The parties understand and agree that they are waiving their right to bring such claims to court, including the right to a jury trial. • The parties expressly intend and agree that they are waiving the right to bring, maintain or participate in any class or collective proceeding, whether in arbitration or otherwise and agree that they will not bring any class or collective claims against each other. • Nothing in this Agreement precludes an employee from filing a charge or from participating in an administrative investigation of a charge before any appropriate government agency, including the National Labor Relations Board.

However, Employee understands and agrees that Employee cannot, except as otherwise required by law, obtain any monetary relief or recovery from such a proceeding. • Any arbitration under this Agreement shall be conducted by a neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes issued by the American Arbitration Association (“AAA”) which may be viewed at www.adr.org and which are incorporated herein by reference. The Employer will pay the arbitrator’s fee for the proceeding, as well as any room or other charges assessed by

the AAA. Either party may file pre-hearing motions directed at the legal sufficiency of a claim or defense equivalent to a demurrer or summary judgment prior to the arbitration hearing. Either party may conduct adequate discovery in the arbitration proceedings. • The arbitrator will issue a detailed written decision and award, resolving the dispute. The arbitrator’s written opinion and award shall decide all issues submitted and set forth the legal principle(s) supporting each part of the opinion. • The decision or award of the arbitrator shall be final and binding upon the parties.

The arbitrator shall have the power to award any type of legal or equitable relief that would be available in a court of competent jurisdiction including, but not limited to attorneys’ fees and punitive damages when such damages and fees are available under the applicable statute and/or judicial authority. Any arbitral award may be entered as a judgment or order in any court of competent jurisdiction. The parties agree that any relief or recovery to which they are entitled arising out of the employment relationship or cessation thereof shall be limited to that awarded by the arbitrator. • The parties agree to file any demand for arbitration within the time limit established by the applicable statute of limitations for the asserted claims or within one year of the conduct that forms the basis of the claim if no statutory limitation is applicable.

Failure to demand arbitration within the prescribed time period shall result in waiver of said claims. • Neither the terms nor the conditions described in this Agreement are intended to create a contract of employment for a specific duration of time or to limit the circumstances under which the parties’ employment relationship may be terminated. Since employment with the Employer is voluntarily entered into, Employee is free to resign at any time. Similarly, the Employer may terminate the employment relationship with or without cause or notice at any time for any lawful reason. • This Agreement shall be governed by the Federal Arbitration Act 9 U.S.

C. Section 1 et. seq. and shall be interpreted in accordance with applicable law. Either party may seek provisional relief remedies in court as provided in California Code of Civil Procedure Section 1281.8. The terms of this Agreement shall not be orally modified. This Agreement can be modified only by a written document signed by the President of the company and the Employee. • A court or other entity construing this Agreement should administer, modify, or interpret it to the extent and such manner as to render it enforceable.

If, for any reason, this Agreement is declared unenforceable and cannot be administered, interpreted, or modified to be enforceable, the parties agree to waive any right they may have to a jury trial with respect to any dispute or claim relating to employment, termination from employment, or any terms and conditions of employment with the Employer. • By signing the Employee Handbook Acknowledgement/Receipt form, employee agrees to comply with the policies set forth in the Handbook, including this Arbitration Agreement, in consideration of employment

by Employer. Employee has been advised of their right to consult with counsel regarding this Agreement. EMPLOYEE ALSO UNDERSTANDS THAT BY ENTERING INTO THIS AGREEMENT, THEY ARE WAIVING ANY RIGHT TO A TRIAL BY JURY. (Schwager Decl., Ex. C.) By producing an Employee Handbook with an arbitration agreement and an Acknowledgement of the Handbook purportedly bearing Plaintiff’s signature, SDI has established the existence of an agreement to arbitrate between SDI and Plaintiff which covers the Labor Code claims Plaintiff brought in his Complaint and preclude Plaintiff’s pursuit of class claims.

In opposition, Plaintiff does not dispute the existence of the Agreement nor that Plaintiff signed the agreement. Accordingly, SDI has met its initial burden by submitting prima facie evidence of a written agreement to arbitrate the claims asserted in the action. (Espejo v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1060 [a defendant may meet their initial burden on a motion to compel arbitration “by attaching a copy of the arbitration agreement purportedly bearing [the opposing party’s] electronic signature”].)

b. Validity and Scope of the Agreement to Arbitrate Plaintiff argues that the arbitration agreement is unenforceable because SDI has not shown that the FAA preempts state law prohibiting forced arbitration of Labor Code claims and the Arbitration Agreement is unconscionable. (Opposition, p. 1:3-24.)

i. FAA preemption Plaintiff argues that the FAA does not apply in this matter because the FAA can only preempt state law where the employment relationship evidences a transaction involving interstate commerce and thus Labor Code sections 229 and 432.6 apply to bar enforcement of the agreement. Plaintiff further argues that any language invoking the FAA in any arbitration agreement is invalid because “Plaintiff is unaware of any authority which can be persuasively read to support the proposition that private parties may contract to incur substantive preemptive [sic] jurisdiction under the FAA.” (Opposition, p. 6:4-6.)

Plaintiff cites the language of the FAA and two cases, Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 211 (Woolls) and Guiliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1286 (Guiliano), to support the proposition that “a petitioner seeking an order to compel arbitration must show that the subject matter of the agreement involves interstate commerce.” (Opposition, 9:1-3.) However, the arbitration agreements at issue in Woolls and Guiliano did not contain clauses expressly invoking the FAA as the governing law.

In Woolls, the court held that an arbitration clause was unenforceable because it failed to comply with Business and Professions Code section 7191, further finding that the FAA did not preempt application of state law because Respondent failed to meet its burden to provide evidence of interstate commerce. (Woolls, supra, 127 Cal.App.4th at p. 214.) In Guiliano, like here, an employer sought to compel arbitration on the basis that the FAA preempted state law prohibiting arbitration of statutory wage claims, but unlike here, the arbitration clauses at issue did not specifically invoke the FAA as governing law, thus necessitating the court’s inquiry into FAA’s applicability. (Guiliano, supra, 149 Cal.App.4th at p. 1281 fn. 1 & fn. 2 [excerpting the arbitration clauses at issue wherein no governing law is specified].)

The authorities cited by Plaintiff to support the proposition that only arbitration agreements

involving interstate commerce can be preempted by the FAA are inapposite because neither involved an arbitration agreement that expressly invoked the FAA as governing law. SDI correctly states in reply that there are cases establishing that the “the presence of interstate commerce is not the only manner under which the FAA may apply...the parties may also voluntarily elect to have the FAA govern enforcement of the Agreement, as they did here.” (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 355 (Victrola); see also Volt Information Sciences v.

Board of Trustees (1989) 489 U.S. 468, 479 (Volt) [“Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.”].) However, the arbitration agreement at issue in Victrola invoked both state law and the FAA, thus necessitating the courts to determine in what manner state law applied and in what manner FAA applied. (Victrola, supra, 46 Cal.App.5th at p. 349 [agreement stated that parties agreed to arbitration “as provided by California law” but also contained a specific provision stating that “enforcement” of the agreement would be under the FAA.].)

In Volt, the court found that the FAA did not preempt state law where parties agreed to be bound by state law. (Volt, supra, 489 U.S. at p. 479.) Victrola stands for the general idea that parties who invoke the FAA in an arbitration agreement agree to be bound by the FAA, and Volt for the idea that parties can freely add valid choice of law provisions to arbitration agreements without worry of preemption, but neither is instructive on the issue of the applicability of the FAA in an arbitration agreement that only invokes the FAA.

Nevertheless, it logically follows from Victrola and Volt that if parties can agree to be bound by the FAA with respect to its procedural provisions, they can also agree to be bound by the FAA with respect to its substantive provisions. Moreover, courts have found that the FAA can apply to an arbitration agreement in the absence of evidence of interstate commerce if the FAA is invoked as governing law in the agreement. (Barrera v. Apple American Group LLC (2023) 95 Cal.App.5th 63, 76 (Barrera); Davis v.

Shiekh Shoes, LLC (2022) 84 Cal.App.5th 956, 963.)5 Thus, this court holds that the FAA applies to the instant action. ii. Unconscionability Plaintiff also argues that the arbitration agreement is unconscionable and thus unenforceable. “A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. [Citation.] Under this standard, the unconscionability doctrine ‘has both a procedural and a substantive element’...but ‘they need not be present in the same degree’ and are evaluated on ‘a sliding scale.’ [Citation.]” (Barrera, supra, 95 Cal.App.5th at p. 87, internal citations omitted.) “The burden of proving unconscionability rests upon the party asserting it. [Citations.]” (Ibid.)

Plaintiff argues that the “inherently adhesive character of the arbitration terms, as a preprinted form agreement presented to Plaintiff in already finalized form by an employer with significantly stronger bargaining power, is sufficient to establish a baseline of procedural unconscionability.” (Opposition, p. 14:18-20.) While the arbitration agreement may be considered a contract of adhesion, that alone is insufficient to establish procedural unconscionability. (See Fittante v. Palm Springs Motors, Inc. (2003) 105 Cal.App.4th 708, 721

5 Unlike this matter, the parties did not dispute the applicability of the FAA in either case. A case is currently pending in the Supreme Court in which, like here, an employee opposing a motion to compel arbitration argued that the FAA could only apply to matters involving interstate commerce and thus parties could not validly invoke the FAA as governing law in an arbitration agreement. (Tuufuli v. West Coast Dental Administrative Services, LLC (2026) 117 Cal.App.5th 1048, review granted March 25, 2026, S295323.)

[an arbitration agreement that was required for employment was a contract of adhesion but not procedurally unconscionable]; Barrera, supra, 95 Cal.App.5th at p. 89 [where no evidence that “forced to sign” the Agreements, or that they lacked “a meaningful opportunity to negotiate terms,” or that the Agreements were “presented on a take-it or leave-it basis,” court could not find procedural unconscionability].) Plaintiff further argues that the agreement was substantively unconscionable because it lacked mutuality, as the handbook stated that SDI “has the right to amend, interpret, modify or withdraw any of the terms of provisions of the Handbook at any time in its sole discretion, with or without notice,” with “no qualifying language which excludes the arbitration provisions from coverage under this clause.” (Opposition, p. 10:8-12.)

The language Plaintiff points to to show lack of mutuality can be found in the Acknowledgment: I understand that the policies contained in the Handbook are guidelines and are not intended to create any contractual rights or obligations, express or implied, and shall not be construed to create any type of right to a “specific procedure” prior to termination or other disciplinary action. I also understand that the Company has the right to amend, interpret, modify, or withdraw any of the provisions of the Handbook at any time in its sole discretion, with or without notice.

I understand and agree that the terms of this Acknowledgment may not be modified or superseded except by a written agreement signed by me and the President of the Company, that no other employee or representative of the Company has the authority to enter into any such agreement, and that any agreement to employ me for any specified period of time or that is otherwise inconsistent with the terms of this Acknowledgment will be unenforceable unless in writing and signed by me and the President of the Company. (Schwager Decl., Exh.

B.) A lack of mutuality in terms can make a contract substantively unconscionable. A court will determine that a contract was substantively unconscionable not for any “simple oldfashioned bad bargain,” but will find substantive unconscionability when terms are “unreasonably favorable to the more powerful party.” (Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 47, 496, internal citations and quotations omitted.) While a contract that can be unilaterally modified at any time by only one party would suggest terms that are unreasonably favorable, the full context of the language creates ambiguity as to who can modify the contract and by what means.

The language Plaintiff argues establishes lack of mutuality is immediately followed by a provision stating that “the terms of this Acknowledgment may not be modified or superseded except by a written agreement signed by me and the President of the Company.” (Schwager Decl., Ex. B.) Also, the arbitration agreement section of the handbook includes the following language: “[t]his Agreement can be modified only by a written document signed by the President of the company and the Employee.” (Schwager Decl., Ex.

C.) The arbitration agreement is in the employee handbook and can thus be considered a “provision of the Handbook” such that it would be modifiable in the employer’s sole discretion. Civil Code section 1599 states that where a contract has several distinct objects, of which one at least is lawful, and one at least is unlawful, the contract is void as to the unlawful provision and valid as to the rest. (Civ. Code, § 1599.) If the “central purpose of the agreement is tainted with illegality, then the agreement as a whole cannot be enforced.

But if the illegality is collateral to the main purpose of the agreement, and the illegal provision can be extirpated

by means of severance or restriction, then severance and restriction are appropriate.” (County of Ventura v. City of Moorpark (2018) 24 Cal.App.5th 377, 393, internal citations and quotes omitted.) The court severs the provision allowing the employer to make unilateral modifications to the contract, thus leaving the provisions allowing for mutual, written modification of the contract and making the contract enforceable. (See Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 517 [“Accordingly, courts may liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract’s main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice.”].)

Plaintiff also argues that the contract is unenforceable under the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 and because of the contract’s pre-dispute jury waiver. The nature of Plaintiff’s Complaint precludes the first argument, as Plaintiff does not bring any sexual assault or harassment claims that would make that law applicable. As to the latter argument, Plaintiff does not cite any authority stating that pre-dispute jury waivers in arbitration agreements are unlawful, only authority stating that parties cannot waive the right to a jury trial by contract prior to filing suit.

The Plaintiff in that case did not have an arbitration agreement, and that same case states the following: “arbitration agreements are distinguishable from waivers of the right to jury trial in that they represent an agreement to avoid the judicial forum altogether.” (Grafton Partners v. Superior Court (2005) 36 Cal.4th 944, 955.) Plaintiff is unable to meet his burden to prove that the arbitration agreement was unconscionable. Based on the foregoing, SDI’s motion to compel arbitration is GRANTED and the request for stay is GRANTED.

IV. CONCLUSION Defendant SDI’s motion to compel arbitration is GRANTED and the request for stay is GRANTED. The Court will prepare the final order. ****

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