Saravia v. Dynamex: District Court Rebuffs Dynamex’s Motion to Compel Arbitration

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Earlier this month, Judge William Alsup of the Northern District of California denied defendant Dynamex’s motion to compel arbitration of the plaintiff’s wage-and-hour putative class claims. Saravia v. Dynamex Inc., et al., No. 3:14-cv-05003 (N.D. Cal. Oct. 6, 2015) (slip op. available here). In the same order, the court also granted in part and denied in part the plaintiff’s motion for conditional class certification.

The plaintiff, a former delivery driver, who operated a business that provided delivery services for Dynamex and other shipping companies, alleged that Dynamex misclassified him and other delivery drivers as independent contractors and that they were thereby denied minimum wage and overtime pay under the Fair Labor Standards Act. Slip op. at 2. Dynamex presented to the plaintiff, and the plaintiff had signed, delivery services agreements in 2010, 2011, and 2012. Id. at 6. The defendants then jointly moved to compel arbitration, which the district court denied. In denying the motion to compel arbitration, the court made three central findings: (1) the Texas choice-of-law provisions in the two arbitration agreements (2011 and 2012) were unenforceable; (2) the “delegation clauses” by which the defendant purported to delegate to an arbitrator gateway questions of “arbitrability” were both procedurally and substantively unconscionable, and thus unenforceable; (3) and the arbitration agreements, as a whole, were both procedurally and substantively unconscionable, and thus unenforceable. 

In declining to enforce the Texas choice-of-law provisions, the court applied the three prongs of California’s choice-of-law analysis. Slip op. at 6-7. First, the chosen state’s law must have a “substantial relationship” to the parties; the plaintiff conceded, and the court agreed, that this prong is met because Dynamex is headquartered in Texas. Id. Second, the forum state must have no “fundamental policy” inconsistent with the chosen state’s law; here, the court noted several differences between California and Texas law on the enforceability of arbitration agreements, finding “Texas law conflicts with fundamental aspects of California’s substantive law pertaining to unconscionability.” Id. at 7. Finally, the court applied the third prong of the choice-of-law analysis, and found that California has a materially greater interest than Texas in adjudicating the dispute because the plaintiff is located in California and the delivery service agreements at issue were executed and performed in California, whereas Texas’ only interest stems from the fact that one of the defendants is headquartered in that state. Id.

In declining to enforce the delegation clause, the court held that, under California law, if a delegation clause is both procedurally and substantively unconscionable, it may be severed from the broader agreement and rendered unenforceable. Slip op. at 8-9. The factors supporting procedural unconscionability included: (1) the agreements were form contracts, and the plaintiff was “tersely instructed to sign” them (id. at 9); (2) the agreements were written only in English, although the plaintiff had limited English comprehension (id. at 2, 9); (3) the plaintiff first received the agreements on the day they were to be executed (id. at 9); (4) the plaintiff was given no opportunity to re-negotiate any provision (id.); and (5) the defendant never provided the plaintiff with a copy of the rules that were to govern arbitration and that formed the sole basis for delegating arbitrability determinations under the 2012 agreement (id.). The court also indicated that delegation clauses—buried in the middle of more than 10 pages of boilerplate language and otherwise unexplained by the defendant—constituted “unfair surprise” that exacerbated the procedural unconscionability. Slip op. at 10. Although the plaintiff could have requested a translation of the agreements, but did not, and the defendant claimed the plaintiff could have sought to renegotiate the terms without adversely affecting his employment, the court nevertheless found that “the circumstances of the execution of those agreements were so oppressive that any such opportunity was meaningless.” Id. at 9-10.

The court also found the delegation clauses to be substantively unconscionable (substantively unfair) because: (1) the Texas forum selection clause would have imposed prohibitive expenses on the California plaintiff, even just for an arbitrability hearing (id. at 4, 11); (2) both agreements required the plaintiff to pay half the arbitral fees, again imposing substantial fees on the plaintiff (id. at 11); and (3) the agreements imposed two-way fee shifting where, by statute, the plaintiff would be subject to one-way fee shifting rules whereby only the employee, not the employer, could recover his attorneys’ fees as the prevailing party (id.). The court noted that “[s]evering the unenforceable provisions of an arbitration clause (or as here, a delegation clause) would allow an employer to draft one-sided agreements and then whittle down to the least-offensive agreement if faced with litigation, rather than drafting fair agreements in the first instance.” Slip op. at 12. Thus, the court found the delegation clauses to be unenforceable and held that the court must decide arbitrability.

The court found the same reasons for finding the delegation clause to be procedurally and substantively unconscionable as applicable to the broader arbitration agreements. Accordingly, the court denied the motion to compel arbitration. Slip op. at 12.

Authored By:
Katherine Kehr, Senior Counsel