Zavala vs. Returnmates Inc.

8 Zavala vs. Returnmates Inc.

2024-01389965 Defendant’s Motion to Compel Arbitration Defendant Returnmates, Inc. moves to compel individual arbitration of Plaintiff Keith Zavala’s claims (including the individual portion of his PAGA claim), to dismiss his class claims, and to stay the non-individual portion of his PAGA claim pending completion of arbitration. The motion is DENIED. Because Defendant has requested a Statement of Decision pursuant to CCP § 632 in the event its motion is denied, this ruling will serve as a Statement of Decision.

GROUNDS FOR RULING I. Delegation to Arbitrator Plaintiff does not dispute that he signed the arbitration agreement at issue during the onboarding process, nor that it covers all claims at issue here. His sole argument is unconscionability. In reply, Defendant argues unconscionability is delegated to the arbitrator, so there is nothing for the Court to decide. Defendant has either waived or forfeited this argument, and in any event, Defendant is incorrect on the merits.

As to waiver or forfeiture, Defendant’s opening memorandum argues, “the Arbitration Agreements [sic] should be deemed enforceable under the CAA because it satisfies the specific requirements set forth by the California Supreme Court.” (Memo. at pp. 21-22 (citing Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 102-121).) In a footnote following the citation to Armendariz, Defendant contends, “The Agreement is neither procedurally not [sic] substantively unconscionable.” (Id., at p. 22, fn. 2.) By arguing the arbitration agreement complies with Armendariz and isn’t unconscionable, Defendant has asked the Court to decide this issue. Defendant will not now be heard to argue that the issue is delegated to the arbitrator.

Even if the argument were properly before the Court, Defendant misreads the arbitration agreement. The arbitration agreement is section 9 of Plaintiff’s independent contractor agreement (Wimer Decl. (ROA 39) Ex. A). Section 9(j) sets forth which questions are for a court to decide and which questions are for an arbitrator. It provides: “Notwithstanding any provision in the AAA rules, the Parties agree that a court of law must resolve any dispute concerning the validity and enforceability of the Agreement, the applicability of any exemption to the Federal Arbitration Act [FAA], and the validity, enforceability or interpretation of the provisions in subsections (b) through (i) of this Section 9.

The arbitrator must resolve all other disputes, including the arbitrability of claims pursuant to such other provisions.” (Emphasis added.) Disputes about unconscionability of the agreement are disputes about its enforceability. These disputes are designated for a court to decide. Defendant points to language delegating to the arbitrator “all other disputes, including the arbitrability of claims,” but enforceability is specifically reserved to a court. Accordingly, the Court will decide Plaintiff’s unconscionability argument.

II. Applicability of FAA

An unconscionability analysis depends in part on whether the FAA applies. Plaintiff claims he (and the class he seeks to represent) is exempt from the FAA under 9 U.S.C. § 1, which exempts “contracts of employment of . . . any other class of workers engaged in foreign or interstate commerce.” Section 9(j) of the agreement reserves the applicability of FAA exemptions to a court, so the Court will address this question before moving to unconscionability more generally.

Defendant argues the § 1 exemption must be construed narrowly. But four times since 2019, the United States Supreme Court has “rejected efforts to cabin its reach.” (Flowers Foods, Inc. v. Brock (2026) 146 S.Ct. 1358, 1363 (collecting cases and stating, “Make this case the fourth.”).) First, the Supreme Court held that § 1 applies to independent contractor agreements like Plaintiff’s, not just to contracts with employees. Second, it held that an airline worker who loaded and unloaded cargo qualified for the § 1 exemption even though she didn’t fly planes or otherwise cross state lines.

Third, it held that a worker can qualify for the § 1 exemption so long as his work plays a direct and necessary role in free flow of goods across borders. And fourth, it held that “[a]t least sometimes, a worker who transports goods on an intrastate leg of an interstate journey can qualify for § 1’s exemption.” (Ibid. (discussing prior rulings).)

Plaintiff is “a member of a ‘class of workers’ based on what [he] does at [Returnmates], not what [Returnmates] does generally.” (Southwest Airlines Co. v. Saxon (2022) 596 U.S. 450, 456.) The declaration of Defendant’s CEO, Eric Wimer, establishes what “Driver Partners” like Plaintiff do as a class. Driver Partners sign up for shift-like “blocks” of deliveries and returns. At the start time for the scheduled block, a Driver Partner drives to a local Returnmates warehouse and picks up packages to be delivered to end customers within the block.

The Driver Partner then delivers the packages to end customers. If the block includes returns, the Driver Partner also picks up packages from end customers to be returned, then brings those packages back to the warehouse for unloading. If the returned packages need to be shipped elsewhere, warehouse employees of Returnmates—not Driver Partners—handle the shipping process. (Wimer specifically mentions returns to Target. On its own motion, the Court takes judicial notice that Target is headquartered in Minnesota.)

At no point do Driver Partners cross state lines, nor do they pick up packages from or deliver packages to traditional transportation hubs like airports. (See generally Wimer Decl. (ROA 39) ¶ 4.)

Plaintiff’s testimony confirms that his personal experience matches Wimer’s description of Driver Partners’ overall work. He would report to Defendant’s warehouse in Santa Ana to begin his shift. The first part of his shift was spent unloading packages from trailers and box trucks at the warehouse and sorting them by ultimate destination. Once the packages were sorted, he would load them into his own vehicle and deliver them to end customers. He would also pick up packages from end customers for returns. Based on return addresses on the packages, he knew they originated out-of-state. (Zavala Decl. (ROA 68) ¶¶ 3-7.)

Driver Partners’ last-mile delivery and pickup work is nearly identical to a scenario discussed by the Supreme Court in Flowers Foods, supra, 146 S.Ct. at p. 1364: Some hypotheticals help illustrate the point. Imagine Customer A in State A enters a contract to purchase a truckload of Butterscotch Krimpets from Company B in State B. Company B makes the Krimpets in State B, but the contract requires Company B to deliver them to Customer A’s headquarters in State A. So, Company B hires a driver to take the Krimpets from the bakery in State B to the headquarters in State A.

All agree that the driver in a case like that is engaged in interstate commerce. Now imagine instead that Company B hires three drivers to make the delivery. Driver 1 takes the Krimpets from Company B’s bakery right up to the border between States A and B. He then gets out of his truck, unloads pallets of Krimpets on his side of the border, and drives home. Driver 2 then picks up the Krimpets, drives ten feet across the border, puts the Krimpets down again, and heads off. Finally, Driver 3 picks up the Krimpets in State A and delivers them to Company A’s headquarters.

Who was engaged in interstate commerce? On Flowers’s account, only Driver 2 would be—neither Driver 1 nor Driver 3 crossed state lines or touched a vehicle that had. But that cannot be right. Each of the drivers played a direct, active, and necessary part in ensuring the Krimpets got from a point in State B (the bakery) to a point in State A (the headquarters) as the contract required.

Defendant’s Driver Partners are in the same position as Driver 1 and Driver 3 in the high court’s hypothetical. They pick up packages at California warehouses and deliver them to California addresses, and they pick up packages at California addresses and deliver them to California warehouses. They have no role in what happens before a delivery arrives at the warehouse, nor in what happens after a return arrives. But they play “a direct, active, and necessary part” in ensuring the goods are transported from their origins to their destinations. Zavala testifies that he personally handled packages that either originated out-of-state or were being returned to out-of-state addresses, and Wimer offers an out-of-state retailer as an example for returns. As a result, Driver Partners like Zavala are a class of workers engaged in interstate commerce.

Defendant offers several rebuttals, none of which is convincing. First, it argues that Plaintiff must testify to the experience of a class of employees, but he only testifies to his own experience. To the extent Plaintiff’s testimony is inadequate, Wimer’s detailed description of Driver Partners’ work is more than sufficient to establish what Driver Partners do as a class. Second, Defendant argues “Plaintiff’s role was no different than if the customer had personally transported the item to a UPS Store or post office for shipment; the local pickup and drop-off service constituted a separate and completed transaction, distinct from any subsequent interstate transportation.” (Reply at p. 12.)

This is a poor comparison. A customer who walks into a UPS Store to drop off a package for a return is ineligible for the § 1 exemption because he is a customer, not a worker. The nature of the transaction is irrelevant. Third, Defendant argues Plaintiff is the equivalent of an Uber driver, and the Ninth Circuit held Uber drivers couldn’t claim the § 1 exemption in Capriole v. Uber Technologies, Inc. (9th Cir. 2021) 7 F.4th 854. Capriole, however, involved detailed factfinding about the proportion of Uber trips that were interstate or to airports. (See id., at p. 864.)

No similar level of detail is present in this record. Moreover, to the extent Capriole holds the § 1 exemption applies only when “interstate movement . . . [is] a ‘central part of the class members’ job description’” (id., at p. 865), “[Southwest Airlines v.] Saxon has since made clear that the worker belongs to a class of transportation workers if the worker performs that work ‘frequently.’” (Fraga v. Premium Retail Services, Inc. (1st Cir. 2023) 61 F.4th 228, 236 (discussing development of law after Capriole).)

Plaintiff testifies that “many” of the packages he handled had out-of-state addresses, which supports the conclusion that he handled interstate packages frequently. Because the Court finds the § 1 exemption applies, the arbitration agreement is governed by California law rather than the FAA.

III. Unconscionability “‘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.’” (Armendariz, supra, 4 Cal.4th at p. 114.)

A. Procedural Unconscionability “A procedural unconscionability analysis ‘begins with an inquiry into whether the contract is one of adhesion.’ [Citation.] An adhesive contract is standardized, generally on a preprinted form, and offered by the party with superior bargaining power ‘on a take-it-or-leave-it basis.’ [Citations.] Arbitration contracts imposed as a condition of employment are typically adhesive . . . .” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126.) “[A]lthough adhesion alone generally indicates only a low degree of procedural unconscionability, the potential for overreaching in the employment context warrants close scrutiny of the contract’s terms.” (Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 494.)

The independent contractor agreement, of which the arbitration agreement is a part, is adhesive. It is offered on Defendant’s preprinted form. Plaintiff had no opportunity to negotiate its terms. (Zavala Decl. ¶ 10.) Because the agreement is adhesive, “[t]he pertinent question...is whether circumstances of the contract’s formation created such oppression or surprise that closer scrutiny of its overall fairness is required.” (OTO, supra, 8 Cal.5th at p. 126.) “‘The circumstances relevant to establishing oppression include, but are not limited to (1) the amount of time the party is given to consider the proposed contract; (2) the amount and type of pressure exerted on the party to sign the proposed contract; (3) the length of the proposed contract and the length and complexity of the challenged provision; (4) the education and experience of the party; and (5) whether the party’s review of the proposed contract was aided by an attorney.’” (Id., at pp. 126-127.)

The second factor is dispositive here. Driver Partners like Plaintiff are required to sign the independent contractor agreement to work for Returnmates. (Wimer Decl. ¶ 12.) “With respect to preemployment arbitration contracts, we have observed that ‘the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.’” (OTO, supra, 8 Cal.5th at p. 127.)

Plaintiff was a low-level worker with delivery and warehouse duties. He was far from the C-suite or “the most sought-after” of workers. Defendant cites several cases holding that requiring an employee to sign an arbitration agreement is not grounds to find the agreement unenforceable. This argument is correct so far as it goes, but Defendant overstates things insofar as it contends these cases mean there is no procedural unconscionability. Rather, as Armendariz explains, both procedural and substantive unconscionability must be present to avoid enforcement.

An arbitration agreement imposed as a condition of employment may still be enforced so long as it isn’t substantively unconscionable. In sum, the Court finds the arbitration agreement procedurally unconscionable, but no more so than in the usual case where an arbitration agreement is a condition of work.

B. Substantive Unconscionability As discussed above, the FAA is inapplicable. As a result, California law that would otherwise be preempted by the FAA controls here.

1. Arbitration of Claims for Unpaid Wages It is undisputed that the arbitration agreement requires arbitration of all claims for relief in this matter. This includes claims for unpaid wages—both wages as traditionally understood, and wages in the form of meal and rest break premiums. (See Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1099 (“the remedy provided in Labor Code section 226.7 constitutes a wage”).) Labor Code § 229 provides, “Actions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.” The arbitration agreement purports to require arbitration of claims that, under California law, cannot be compelled to arbitration. This is illegal and unconscionable.

2. Wholesale PAGA Waiver

Plaintiff contends that sections 9(b) to 9(f) of the arbitration agreement, read together, constitute an illegal wholesale PAGA waiver. These sections provide (capitalization in original): (b) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES AGREE THAT ANY DISPUTE RESOLUTION PROCEEDINGS WILL BE CONDUCTED ONLY ON AN INDIVIDUAL BASIS AND NOT ON A CLASS OR COLLECTIVE BASIS. (c) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES FURTHER AGREE THAT NO DISPUTE RESOLUTION PROCEEDING WILL BE CONDUCTED ON A REPRESENTATIVE BASIS. (d) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES WAIVE ANY RIGHT TO PARTICIPATE IN OR RECEIVE ANY RELIEF FROM ANY NON-INDIVIDUAL PROCEEDING REFERENCED ABOVE AND THIS AGREEMENT DOES NOT PROVIDE FOR, AND THE PARTIES DO NOT CONSENT TO, ARBITRATION ON A CLASS OR COLLECTIVE OR REPRESENTATIVE BASIS. (e) NO ARBITRATOR SELECTED TO ARBITRATE ANY DISPUTE BETWEEN THE PARTIES IS AUTHORIZED TO ARBITRATE ANY DISPUTE ON A CLASS, COLLECTIVE OR REPRESENTATIVE BASIS.

FURTHER, NO ARBITRATOR IS AUTHORIZED TO CONSOLIDATE CLAIMS OF MORE THAN ONE INDIVIDUAL UNLESS ALL PARTIES EXPRESSLY AGREE IN WRITING TO ANY SUCH CONSOLIDATION. (f) THIS AGREEMENT SHALL NOT BE INTERPRETED AS REQUIRING EITHER PARTY TO ARBITRATE DISPUTES ON A CLASS, COLLECTIVE OR REPRESENTATIVE BASIS, EVEN IF A COURT OR ARBITRATOR INVALIDATES OR MODIFIES OR DECLINES TO ENFORCE THIS AGREEMENT IN WHOLE OR IN PART.

Because the FAA is inapplicable, the California rule that predispute PAGA waivers are invalid applies. (See Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 384.) Defendant’s contention that the agreement should be interpreted to provide for arbitration of the individual portion of a PAGA claim under Viking River is misplaced, because Viking River only operates when the FAA preempts California law. As drafted, these sections amount to a wholesale waiver of the right to bring PAGA actions, all of which are representative in nature. (The division of a PAGA claim into “individual” and “representative” components only occurs when Viking River applies; in a more general sense, all PAGA claims are “representative” because the plaintiff is the representative of the State.)

Defendant’s reliance on the “to the fullest extent permitted by applicable law” language is no help. Because Iskanian applies, “the fullest extent permitted by applicable law” is none at all. Giving effect to this language would make the PAGA waiver selfnullifying, rendering it superfluous. Accordingly, the Court finds the PAGA waiver substantively unconscionable.

3. Costs Associated With Arbitration Plaintiff raises two complaints about the costs of arbitration. First, he contends the filing fee is unconscionably large because the AAA Commercial Rules, rather than the lower-cost AAA Employment Rules, apply. He objects to paying $1,450 in filing fees rather than $350. This argument is misplaced in the context of a class action filed in complex civil court, where the filing fee is $1,435. (Moreover, the dispute about whether the Commercial Rules or Employment Rules apply appears to turn on whether Plaintiff is properly classified as an independent contractor, a merits issue the Court cannot reach on this motion.)

This is not unconscionable. Second, he contends the agreement potentially requires him to pay the costs of arbitration in violation of applicable law. As Defendant points out, however, the agreement requires Defendant to pay all costs unique to arbitration (including the arbitrator’s fees) when applicable law so requires. (Agreement § 9(j).) There is no dispute that the Labor Code requires Defendant to pay these costs. Accordingly, there is no unconscionability.

4. Waiver of Substantive Rights Plaintiff contends the independent contractor agreement (of which the arbitration agreement is part) unconscionably forces him to give up his substantive rights to reimbursement and the minimum wage under the Labor Code. In reply, Defendant correctly points out that under Rent-a-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, a court ordinarily must determine the validity of an arbitration agreement without reference to other agreements within which it may be contained. Put another way, the question is whether the arbitration agreement is unconscionable, not whether other parts of the independent contractor agreement are unconscionable. This question is not properly before the Court.

C. Conclusion on Unconscionability The arbitration agreement contains a severability clause. But severance is not automatic. “If the central purpose of the contract is tainted with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate.” (Armendariz, supra, 24 Cal.4th at p. 124.)

Here, the Court concludes the central purpose of the arbitration agreement is tainted with illegality. The central purpose of the agreement is to force all claims into individual arbitration. With the FAA inapplicable, California law governs, and the agreement’s central purpose is illegal. It contradicts Labor Code § 229’s prohibition on forced arbitration of wage claims, and it contradicts Iskanian’s rule that pre-dispute PAGA waivers are unenforceable. Also, as set forth below, it contains an unenforceable class action waiver. The Court cannot sever these terms without rewriting the arbitration agreement to be something else entirely. Accordingly, the Court concludes the arbitration agreement is unenforceable.

IV. Class Action Waiver Separate from the unconscionability analysis, Plaintiff contends the class action waiver in the arbitration agreement is invalid under Gentry v. Superior Court (2007) 42 Cal.4th 443, which applies in this case because California law isn’t preempted by the FAA. Under Gentry, four factors are relevant to determining invalidity. A court must “consider: (1) ‘the modest size of the potential individual recovery’; (2) ‘the potential for retaliation against members of the class’; (3) ‘the fact that absent members of the class may be ill informed about their rights’; and (4) ‘other real world obstacles to the vindication of class members’ rights . . . through individual arbitration.’” (Muro v. Cornerstone Staffing Solutions, Inc. (2018) 20 Cal.App.5th 784, 792-793 (quoting Gentry, supra, 42 Cal.4th at pp. 453, 463).)

Gentry held that a trial court may decline to enforce a class action waiver if it concludes, based on these factors, that class arbitration is “likely to be a significantly more effective practical means of vindicating the rights of affected employees than individual litigation or arbitration,” and that there would be a “less comprehensive enforcement” of the applicable laws if the class action device is disallowed.” (Id. at 463.)

As to the first factor: Using Plaintiff’s pay data attached to Wimer’s declaration, Plaintiff’s counsel calculates his maximum recovery as $12,987.40. (Carlsen Decl. (ROA 72) ¶¶ 4-12.) Precedent holds that a potential award as large as $37,000 might not provide sufficient incentive for an individual plaintiff to pursue recovery. (See Muro, supra, 20 Cal.App.5th at p. 793 (discussing Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715).) Moreover, “the Gentry court observed that ‘wage and hour cases will generally satisfy the “modest” recovery factor because they “usually involve[] workers at the lower end of the pay scale.”’” (Ibid.)

Plaintiff’s claims “fall within these general parameters.” (Ibid.) Defendant argues counsel’s calculation lacks any factual foundation. The Court disagrees. Counsel explains the data derived from Wimer’s declaration (such as Plaintiff’s hourly rate when working in the warehouse or the number of miles driven by Plaintiff) and the assumptions she made in her calculations (such as a 100% violation rate for meal and rest breaks, given Plaintiff’s alleged misclassification). Defendant cites Arguelles-Romero v.

Superior Court (2010) 184 Cal.App.4th 825 to argue that counsel underestimates the potential recovery by omitting things like statutory attorney’s fees. As Muro explains, Arguelles-Romero is a case about whether a class action waiver should be invalidated on unconscionability grounds, not on Gentry grounds, which are a different analysis. It is therefore inapposite. (Muro, supra, 20 Cal.App.5th at p. 793, fn. 5.)

As to the second factor: Plaintiff testifies he wasn’t comfortable filing suit while still working for Defendant because “I was concerned that if I sued the Company, they might retaliate against me in some way, like giving me less warehouse hours and/or fewer routes. I also was concerned how the Company would talk about me to other employers that I may work for in the future. They could give me a bad reference if another potential employer asked about my work for them.” (Zavala Decl. ¶ 9.) This is sufficient to demonstrate a potential for retaliation against members of the class. (See Muro, supra, 20 Cal.App.5th at p. 794 (“Muro’s declaration indicated he did not feel realistically able to bring a lawsuit because he feared he would be fired or retaliated against. . . .

Muro’s expression of his own concerns about retaliation provided a sufficient basis for the court, as the finder of fact, to draw the reasonable inference that other similarly situated drivers shared those same concerns.”).)

As to the third factor: Plaintiff testifies, “During the time I worked for the Company, I did not understand all of my rights under California’s labor laws.” (Zavala Decl. ¶ 9.) That Plaintiff was uninformed of his own rights is a basis to infer that other putative class members were similarly uninformed. (Muro, supra, 20 Cal.App.5th at p. 795.) As Muro explains, Defendant’s reliance on Truly Nolen of America v. Superior Court (2012) 208 Cal.App.4th 487 is misplaced, because the plaintiffs in that case testified they were aware of their rights under the Labor Code. (Muro, supra, 20 Cal.App.5th at p. 795, fn. 7.)

As to the fourth factor: Gentry recognizes that although “arbitration can be a relatively quick and inexpensive method of dispute resolution, the requirement that numerous employees suffering from the same illegal practice each separately prove the employer’s wrongdoing is an inefficiency that may substantially drive up the costs of arbitration and diminish the prospect that the overtime laws will be enforced.” (Gentry, supra, 42 Cal.4th at p. 459.) While Defendant contends Plaintiff needs to offer more evidence of real-world obstacles than this quotation from Gentry and the fact that Driver Partners were required to agree to arbitration as a condition of work, published authority holds this showing is sufficient to satisfy a plaintiff’s burden on the fourth factor. (See Garrido v.

Air Liquide Industrial U.S. LP (2015) 241 Cal.App.4th 833, 846-847.) Accordingly, even if the Court hadn’t found the arbitration agreement unconscionable and thus unenforceable, it would still invalidate the class waiver under Gentry.

V.

Conclusion

Because the arbitration agreement is both procedurally and substantively unconscionable, Defendant’s motion is denied. Moreover, even if the agreement were otherwise enforceable, the class action waiver is invalid under Gentry.

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