User Name: Date and Time: Sep 05, 2012 09:50 EST Job Number: 854174 Document(1) 1. Ruhe v. Masimo Corp., 2011 U.S. Dist. LEXIS 104811 Client/matter: 002982-0000023-13885 About LexisNexis Privacy Policy Terms& Conditions Copyright 2012 LexisNexis.
Positive As of: September 5, 2012 9:50 AM EDT Ruhe v. Masimo Corp. United States District Court for the Central District of California, Southern Division September 16, 2011, Decided; September 16, 2011, Filed Case No.: SACV 11-00734-CJC(JCGx) Reporter: 2011 U.S. Dist. LEXIS 104811; 2011 WL 4442790 MICHAEL RUHE, and VINCENTE CATALA, Plaintiffs, vs. MASIMO CORPORATION, and DOES 1 through 100, inclusive, Defendants. Notice: Core Terms arbitration, arbitration agreement, unconscionable, sanctions, costs Counsel: [*1] For Michael Ruhe, Vicente Catala, Plaintiffs: Elizabeth R Weiss, Scott Bonagofsky, Bonagofsky and Weiss, San Francisco, CA; Kathryn Burkett Dickson, Dickson Levy Vinick Burrell Hyams LLP, Oakland, CA. For Masimo Corporation, Defendant: Stephen L Berry, LEAD ATTORNEY, Paul Hastings LLP, Costa Mesa, CA; Elena R Baca, Paul Hastings LLP, Los Angeles, CA. Judges: CORMAC J. CARNEY, UNITED STATES DISTRICT JUDGE. Opinion by: CORMAC J. CARNEY Opinion ORDER GRANTING DEFENDANT S MOTION TO COMPEL ARBITRATION AND STAY PROCEEDINGS INTRODUCTION & BACKGROUND Plaintiff Michael Ruhe and Plaintiff Vincent Catala (collectively Plaintiffs ) brought the suit underlying this motion against Defendant Masimo Corporation ( Masimo ) and fictitious defendants, alleging constructive discharge in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 15 U.S.C. 78u ( Dodd-Frank Act ) and in violation of public policy, and violation of the California Unfair Competition Law ( UCL ), and for declaratory re-
2011 U.S. Dist. LEXIS 104811, *3 Page 2 of 5 lief regarding the validity of their arbitration agreements with Masimo. 1 Plaintiffs are two former Masimo employees. Masimo is a publicly traded medical device manufacturer. Masimo hired both Plaintiffs as sales representatives, [*2] known at Masimo as Territory Managers, to sell its devices to physicians offices. Plaintiffs allege they had to resign their positions at Masimo to avoid being forced to engage in unethical conduct surrounding the sale of an allegedly ineffective device, and purported cover-ups of problems with the device. As a condition of their employment, Plaintiffs signed an arbitration agreement and a confidentiality agreement. Plaintiffs were informed in a letter offering employment of these requirements, and signed both agreements. The arbitration agreement requires both Masimo and Plaintiffs to arbitrate all disputes under JAMS rules, except for requests for injunctive relief, which either party may seek in the court system. The confidentiality agreement provides that the court system will be the forum for resolution of disputes regarding the confidentiality agreement, and as Masimo alleges, for protection of both [*3] Masimo s and Plaintiffs intellectual property rights. Masimo has moved to compel arbitration of all of Plaintiffs claims and stay these proceedings until after arbitration. Plaintiffs oppose this motion on the grounds that the agreement fails to meet requirements under California law for arbitration clauses, is unconscionable, and that the Dodd- Frank Act bars arbitration of their claims arising under it. For the reasons explained below, Masimo s motion is GRANTED. ANALYSIS Federal law strongly favors agreements to arbitrate. District courts shall stay further proceedings and order arbitration if (1) a valid agreement to arbitrate exists and (2) the agreement encompasses the dispute at issue. See Lucas v. Gund, Inc., 450 F. Supp. 2d 1125, 1130 (C.D. Cal. 2006). Determining the validity of an arbitration agreement is a question of contract interpretation, and thus governed by state law. Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). However, the FAA only permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract. AT&T Mobility LLC v. Concepcion, U.S., 131 S. Ct. 1740, 1746, 179 L. Ed. 2d 742 (2011) [*4] (quoting 9 U.S.C. 2). [A] court may not rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what... the state legislature cannot. Id. at 1747 (holding that a California common law rule prohibiting collective-action waivers in arbitration agreements on grounds of unconscionability was preempted by the FAA) (quoting Perry v. Thomas, 482 U.S. 483, 493 n.9, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987)). Plaintiffs first assert that the arbitration agreement is invalid because it fails to meet one of the requirements for mandatory, employer-drafted arbitration agreements under California law, set forth in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83, 99 Cal. Rptr. 2d 745, 6 P.3d 669 (2000). The parties dispute whether Armendariz merely creates a test for the general contract doctrine of unconscionability, or provides a separate set of requirements that a mandatory employer-drafted arbitration agreement must meet when an employee asserts claims based on unwaivable public rights. (Pls. Opp. Mot. Compel Arb. at 4.) If Armendariz does the latter, such a requirement would appear to be preempted by the FAA under [*5] the Supreme Court s reasoning in Concepcion. See Concepcion, 131 S. Ct. 1740, 179 L. Ed. 2d 742. Although the Northern District of California has indicated that some portion of Armendariz has been 1 Having read and considered the papers presented by the parties, the Court finds this matter appropriate for disposition without a hearing. See Fed. R. Civ. P. 78; Local Rule 7-15. Accordingly, the hearing set for September 19, 2011, at 1:30 p.m. is hereby vacated and off calendar.
2011 U.S. Dist. LEXIS 104811, *5 Page 3 of 5 abrogated by Concepcion, it did not clarify what portion of Armendariz was abrogated. See Oguejiofor v. Nissan, No. C-11-0544 EMC, 2011 U.S. Dist. LEXIS 99180, 2011 WL 3879482 at *3 (N.D. Cal. Sept. 2, 2011). It seems that no court has yet ruled explicitly on this issue. This Court need not make this determination in this case because, even if Armendariz is not preempted by the FAA, the arbitration agreement in here meets the Armendariz requirements. Plaintiffs assert that the arbitration agreement violates the Armendariz requirement regarding forum costs. The California Supreme Court has held that an arbitration agreement or arbitration process 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 and that it is not only the costs imposed on the claimant but the risk that the claimant may have to bear substantial cost that this requirement seeks to prohibit. 24 Cal. 4th at 110 11. The arbitration agreement in this case satisfies [*6] this requirement because it explicitly states that Masimo will pay arbitration fees and costs. Plaintiffs assertion that the agreement, which requires arbitration under JAMS rules still violates this requirement because JAMS Rule 29, governing sanctions, permits the arbitrator to award arbitration fees as a possible sanction is without merit. First, the Armendariz costs requirement specifically applies to forum costs. The court in this case feared that excessive forum fees would be abused by employers who would take advantage of the chilling effect such fees had on the exercise of employees statutory rights. See id. at 110 113. No such concern is warranted with respect to sanctions, as the impact of the threat of sanctions should induce positive, ethical behavior and does not create the same chilling effect on righteous actions that a high forum fee would. Plaintiff has failed to provide authority for the proposition that the JAMS sanctions rule violates the Armendariz forum costs provision. Moreover, the agreement and the JAMS rule do not give the arbitrator any power greater than a court, which would also be able to levy monetary sanctions, such as costs, when warranted. Because [*7] the Armendariz requirement is satisfied, Plaintiffs have failed to show that the agreement is invalid on this ground. The arbitration agreement is valid because it is not unconscionable under California law. Under California law, an arbitration agreement must be enforced unless it is both procedurally unconscionable and substantively unconscionable. See Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114, 99 Cal. Rptr. 2d 745, 6 P.3d 669 (2002). Procedural unsconscionability focus[es] on oppression or surprise due to unequal bargaining power. Concepcion, 131 S. Ct. at 1746 (quoting Armendariz, 24 Cal. 4th at 114). Substantive unconscionability centers on the terms of the agreement and whether those terms are so one-sided as to shock the conscience. Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1172 (9th Cir. 2003) (quoting Kinney v. United HealthCare Servs., Inc., 70 Cal. App. 4th 1322, 1330, 83 Cal. Rptr. 2d 348 (1999)). It is not enough for a plaintiff to simply show that one provision of the agreement is substantively unconscionable, as courts routinely sever certain clauses when there are no other objectionable components to the agreement. See Cable Connection, Inc. v. DIRECTV, Inc., 143 Cal. App. 4th 207, 229-33, 49 Cal. Rptr. 3d 187 (2006). [*8] To prevent severance and show that the entire agreement is substantively unconscionable, a plaintiff must show that the effect of the defective clause is such that the agreement itself is tainted with illegality. Armendariz, 24 Cal. 4th at 124. Here, the arbitration agreement is not procedurally unconscionable. Although Plaintiffs assert the arbitration agreement was a contract of adhesion, presented as a mandatory condition of employment, [t]he adhesive nature of [a] contract will not always make it procedurally unconscionable. When bargaining power is not grossly unequal and reasonable alternatives exist, oppression typically inherent in adhesion contracts is minimal. Roman v. Super. Ct., 172 Cal. App. 4th 1462, 1470 n.2, 92 Cal. Rptr. 3d 153 (Cal. Ct. App. 2009). Here, Plaintiffs were sophisticated, sought-after em-
2011 U.S. Dist. LEXIS 104811, *8 Page 4 of 5 ployees, who had worked in medical device sales for years prior to their employment with Masimo. Plaintiffs had notice in their offers of employment that they would be required to agree to arbitration and Mr. Ruhe had over three weeks to consider the offer, and Mr. Catala had two weeks. Even if the agreement was an adhesive contract, there is not evidence of either oppression or unfair surprise [*9] sufficient to render the agreement procedurally unconscionable on this basis. Plaintiffs assertion that failure to include a copy of the JAMS rules in the agreement created procedural unconscionability because Plaintiffs purportedly agreed to be bound by an extensive set of rules that they did not even know existed is likewise without merit. (Pls. Opp. Mot. Compel Arb. at 6 7.) In support of their argument, Plaintiffs cite Trivedi v. Curexo Technology Corp., 189 Cal. App. 4th 387, 393, 116 Cal. Rptr. 3d 804 (Cal. Ct. App. 2010). In Trivedi, the court found an employer-employee arbitration agreement procedurally unconscionable because the employee was not given a copy of the AAA rules, which are equivalent in length to the JAMS rules. The court noted that the failure to give Trivedi a copy of the AAA rules was no trifling matter and that this failure, combined with the facts that the employer drafted the employment agreement, and that the arbitration clause was mandatory made the provision unconscionable. Id. at 392 94. Trivedi is inapposite because there are important factual distinctions between it and this case. Most notably, in Trivedi the court found that an important factor was that the arbitration [*10] clause in the contract was in the same typeface and was no more conspicuous than any other provision in the employment agreement and that [l]ack of prominence is one factor the court may consider in determining if the cause is procedurally unconscionable. Id. at 392 (citing Gutierrez v. Autowest, Inc., 114 Cal. App. 4th 77, 89, 7 Cal. Rptr. 3d 267 (Cal. Ct. App. 2003)). In fact, Plaintiffs themselves indicate that the problem in Trivedi was that the employee had no idea he was agreeing to [the AAA rules] when he signed the arbitration. (Pls. Opp. Mot. Compel Arb. at 7.) Unlike Trivedi, Plaintiffs offer letters explicitly noted they would be required to sign an arbitration agreement. (Catala Decl. Ex. A; Ruhe Decl. Ex. A.) Additionally, Masimo s arbitration agreement was a separate document. The first paragraph of it clearly stated that arbitration would occur under the JAMS rules. (Compl. Ex. D 1.) The JAMS rules are easy to locate in an online search. There is no evidence of oppression or unfair surprise either because of the circumstances surrounding Plaintiffs acceptance of the agreement or Masimo s failure to include the JAMS rules and, thus, it is not procedurally unconscionable. Nor is [*11] the agreement sufficiently substantively unconscionable to overcome the lack of procedural unconscionability. Plaintiffs assert that the arbitration agreement is substantively unconscionable because it subjects Plaintiffs to fees unique to the arbitral forum through JAMS Rule 29, and because it lacks bilaterality by allegedly creating carve-out exceptions to arbitration for the types of claims that employers are most likely to bring, while requiring Plaintiffs to arbitrate the claims that they are most likely to bring. The JAMS rule permitting the arbitrator to award arbitration fees as sanctions does not create a unique set of fees. The JAMS arbitrator has no more powers than a judge in a court action to impose monetary sanctions. Moreover, as noted by Masimo, the agreement limits the authority of the arbitrator to that of a court by stating that the arbitrator has authority to award all relief available in a court of law. (Compl. Ex. D 7.) That the arbitrator may impose sanctions including arbitration costs for bad faith conduct during the course of litigation does violate the Armendariz restriction on employees being subject to forum fees, assuming such a requirement is not [*12] preemepted by the FAA under Concepcion. The arbitration agreement along with the Masimo Employee Confidentiality Agreement ( MECA ) do not create carve outs or include terms that are so one-sided as to shock the conscience. While the MECA does create an exception to the arbitration agreement, it appears as though either employee or employer may turn to a court to enforce their intellectual property rights under the
2011 U.S. Dist. LEXIS 104811, *12 Page 5 of 5 MECA. Even assuming the MECA creates a carve-out that favors the employer, does not create sufficient inequity between employer and employee, considering the remainder of claims which employer must arbitrate so as to shock the conscience, especially in light of the lack of procedural unconscionability and lack of other evidence of substantive unconscionability. The arbitration agreement requires both parties to submit all disputes to arbitration, the list of actions subject to arbitration contained in the agreement is non-exhaustive set of examples, and the agreement permits either party to seek an injunction in court, which in this case Plaintiffs have sought. (Compl. at 57; Compl. Ex. D.) Plaintiffs must arbitrate their claims brought pursuant to 15 U.S.C. 78u because [*13] the Dodd- Frank act does not render pre-dispute arbitration agreements invalid or unenforceable for actions brought pursuant to this section. The Dodd-Frank act contains three sections creating rules to protect whistleblowers to be inserted into three different sections of the United States Code. The Dodd-Frank Act s whistleblower amendments to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act both contain provisions that render pre-dispute arbitration agreements unenforceable for claims brought under these two sections. Unlike these other whistleblower provisions of the Dodd-Frank Act, Section 78u contains no such provision. Plaintiffs assert this omission is a drafting error and suggest that the Court read the arbitration provision from the Sarbanes- Oxley act into Section 78u. (Pls. Opp. Mot. Compel Arb. at 15.) Plaintiffs offer as evidence of the inadvertent omission the parallels between the three sections, an SEC statement regarding the implementation of the Securities Exchange Act (not Section 78u), and a claim that having such a provision in Sarbanes-Oxley but not Section 78u would be illogical. This is insufficient evidence for this Court to conclude that Congress [*14] unintentionally omitted this provision from this section of the act. In fact, Congress proposed amendments to Section 78u in July 2011, and those amendments do not include the arbitration restriction Plaintiffs allege was unintentionally omitted. See H.R. 2483, 112th Cong. (1st Sess. 2011). Without more, this Court may not read in such a provision, ignoring the plain language of the statute. Masimo may enforce the arbitration agreement as to Plaintiffs Section 78u cause of action. Plaintiffs have failed to show that the arbitration agreement is invalid because it is not unconscionableand because, if Armendariz remains good law after Concepcion, it complies with the Armendariz requirements. Plaintiffs have also failed to show that the Dodd-Frank Act permits them to avoid arbitration of their claims under Section 78u. Masimo may compel Plaintiffs to arbitrate their claims according to their agreement. CONCLUSION For the foregoing reasons, Masimo s motion to compel arbitration is GRANTED and this action will be STAYED while the parties arbitrate their dispute. DATED: September 16, 2011 /s/ Cormac J. Carney CORMAC J. CARNEY UNITED STATES DISTRICT JUDGE