EDWARD M. CHEN, District Judge.
Plaintiffs Nathan Burgoon and Caleb Landers are individuals who signed up for drug treatment programs at facilities known as "Narconon Centers." Defendants are either Narconon Centers or affiliated in some fashion with such facilities. Plaintiffs have filed a class action against Defendants, asserting in essence that Defendants are not truly offering a drug treatment program but rather recruiting and indoctrinating vulnerable persons (because they have addictions) into Scientology. According to Plaintiffs, Defendants have engaged in fraud by (1) professing to offer a secular program not affiliated with any religion when in fact that was not the case and (2) claiming the program had a high success rate when in fact that was not the case. Plaintiffs also maintain that Defendants breached their contracts by failing to offer a secular program by not having a high success rate.
Having considered the parties' briefs and accompanying submissions, including the supplemental briefing ordered by the Court, the Court hereby
In their complaint, Plaintiffs allege as follows:
Narconon Centers are facilities that purport to be drug rehabilitation centers. Each Narconon Center offers a standardized program. See Compl. ¶ 21. The Narconon program "consists of eight courses founded upon the works of L. Ron Hubbard" and is "substantially identical to the religious practices, doctrines, and rituals of the Church of Scientology." Compl. ¶ 27. According to Plaintiffs, the Narconon program is designed to "recruit people into the Church of Scientology and Patients who complete the Narconon Program are to be `route[d] to the nearest Org for further services if the individual so desires." Compl. ¶ 41. Two of the defendants in this case are, in essence, Narconon Centers: NFS and NNC. Mr. Landers sought treatment from NFS (the Warner Springs facility) and Mr. Burgoon sought treatment from NNC. See Compl. ¶¶ 55, 64.
The Narconon program itself appears to be owned by International. Each Narconon Center gets a license for the program from International. See Compl. ¶ 23. Each Narconon Center also gets a license to use the Narconon trademark from International. See Compl. ¶¶ 21-23. International, in turn, is licensed by ABLE to use the Narconon trademark. ABLE licenses the Narconon trademark on the behalf of the Church of Scientology. See Compl. ¶ 25.
According to Plaintiffs, Narconon Centers such as NFS and NNC are completely controlled by ABLE, International, and (at least for some centers) Western. For example:
As noted above, Mr. Landers sought treatment from the Narconon Center known as NFS. In deciding to enroll, Mr. Landers relied on statements made by Dan Carmichael, "a representative of Defendants." Compl. ¶ 64. (Which specific Defendant actually employs Mr. Carmichael is not identified.) One of those representations was that NFS had a success rate of 76 percent. See Compl. ¶ 65. Another representation was that the Narconon program is a secular one. See Compl. ¶ 68. A different representative of NFS also told Mr. Landers that "NFS was a secular drug rehabilitation facility." Compl. ¶ 69.
In addition to the above, the NFS contract on its face provided that the "`rehabilitation program has an excellent success rate for students who actively and honestly participate in it and complete the entire program.'" Compl. ¶ 47.
On or about October 2, 2014, Mr. Landers arrived at the NFS facility. He paid initially $10,000. See Compl. ¶¶ 71-72. "Shortly thereafter, it became apparent to Mr. Landers that NFS had strong ties to Scientology and the Narconon Program was a tool to promote its teachings." Compl. ¶ 72. Mr. Landers thus decided to leave. See Compl. ¶ 72.
As noted above, Mr. Burgoon sought treatment from the Narconon Center known as NNC. In deciding to enroll, Mr. Burgoon relied on representations that "the Narconon Program provided secular drug rehabilitation with a high success rate." Compl. ¶ 59. It appears that the NNC contract on its face also states that the Narconon program is secular in nature, stating:
Compl. ¶ 46. As for the success rate, Mr. Burgoon saw on NNC's website that there
On or about November 18, 2014, Mr. Burgoon paid $37,500 to receive treatment at NNC. See Compl. ¶ 55. Ultimately, he decided to terminate his treatment "after complying with NNC's direction that he spend six to eight hours a day for twenty straight days in a hot sauna, in accordance with the Narconon Program." Compl. ¶ 60 (emphasis omitted). Mr. Burgoon was not given a refund of any amount. See Compl. ¶ 60.
Based on, inter alia, the above allegations, Plaintiffs assert the following state law claims against Defendants:
As discussed below, Plaintiffs have filed a motion for leave to amend in which they seek to drop the claim for breach of contract.
Based on the parties' submissions, the following facts are essentially undisputed.
Mr. Landers signed a contract with NFS titled "Admission Agreement."
Farnsworth Decl., Ex. 1 (Agreement at 12). As indicated by the above, embedded in this provision is a space for the admitee to provide his/her initials. Mr. Landers's father, but not Mr. Landers himself, initialed the provision.
Mr. Burgoon signed two contracts with NNC (both substantively the same) titled "Agreement for Drug and Alcohol Rehabilitation Services."
Quaid Decl., Exs. A-B (Agreements at 8-9) (emphasis in original). Immediately after this provision, there is a space for the Student to provide his/her initials as well as the date. Mr. Burgoon initialed the provision, as well as provided the date.
Although the above facts regarding the arbitration agreements are, in essence, undisputed, the parties have a significant dispute regarding the formation of those agreements — including the larger contracts (i.e., the admission agreements) of which the arbitration agreements are a part. Plaintiffs take the position that they lacked the mental capacity to contract and/or were unduly influenced to enter into the contracts, which included the arbitration agreements. See, e.g., Burgoon Decl. ¶¶ 3-4 (testifying that, when he was admitted to the facility on July 27, 2014, he was "under the influence of heroin" and "was higher than [he] had ever been before"); Burgoon Decl. ¶¶ 11-17 (testifying that he signed another admissions agreement on August 3, 2014, after being pressured); Landers Decl. ¶ 7 (testifying that, on the day of his admittance to the facility, he signed something but he did not know what he signed because he was experiencing withdrawal symptoms). Defendants argue to the contrary. See generally Quaid Reply Decl.; Hardig Decl.; Ryan Decl.; Harris Decl.; Bogart Decl.; Chapurski Decl.; Walters Decl.
The parties agree that the Federal Arbitration Act ("FAA") governs the instant case. The FAA provides that
9 U.S.C. § 2.
Id. § 4.
Although their admission agreements contain arbitration provisions, Plaintiffs argue that they cannot be compelled to arbitrate because they lacked the mental capacity to contract and/or were unduly influenced to enter into the contracts. They further argue that the arbitration agreements are unconscionable, which provides an independent ground to deny arbitration. Finally, Plaintiffs argue that, at least as to Mr. Burgoon, the "higher-up" Narconon companies (i.e., Western, International, and ABLE) are nonsignatories to the arbitration agreements and, therefore, cannot compel arbitration.
As a preliminary matter, the parties disagree as to whether the Court or an arbitrator should decide the issues of mental incapacity and undue influence, as raised by Plaintiffs. Defendants do not dispute that, "[g]enerally, in deciding whether to compel arbitration, a court must determine [the] `gateway' issue[] [of] whether there is an agreement to arbitrate between the parties." Brennan v. Opus Bank, No. 13-35580, 796 F.3d 1125, 1130, 2015 WL 4731378, at *4, 2015 U.S.App. LEXIS 14039, at *12 (9th Cir. Aug. 11, 2015). But, Defendants point out, here, Plaintiffs are not just arguing mental incapacity and undue influence with respect to the agreements to arbitrate but rather mental incapacity and undue influence with respect to the larger contracts (i.e., the admission agreements) of which the arbitration provisions are just a part. According to Defendants, in such a circumstance, i.e., where the contract as a whole is claimed invalid and not just the arbitration provision specifically, the arbitrator decides the issue and not the court. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (stating that, "unless the challenge is to the arbitration clause itself, the issue of the contract's validity [e.g., fraudulent inducement] is considered by the arbitrator in the first instance").
The Court rejects Defendants' position. First, Defendants ignore the fact that, in Buckeye, the Supreme Court specifically noted in its opinion that
Id. at 444, 126 S.Ct. 1204 (emphasis added).
Second, in Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 130 S.Ct. 2847, 177 L.Ed.2d 567 (2010), the Supreme Court expressly stated that it is "well settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide." Id. at 2855-56 (emphasis added). Contrary to what Defendants suggest, both mental incapacity and undue influence are issues concerning contract formation. See, e.g., Lee v. Aurora Loan Servs., No. C 09-4482 JF (HRL), 2010 WL 1999590, at *5, 2010 U.S. Dist. LEXIS 56094, at *18 (N.D.Cal. May 18, 2010) (stating that "[u]ndue influence is not an independent claim, but rather a defense to the formation of a contract"). It is thus the Court's duty, and not the arbitrator's, to assess Plaintiffs' assertions of mental incapacity and undue influence.
As to the merits of Plaintiffs' mental incapacity and undue influence arguments, the Court finds that, based on the competing declarations submitted by the parties, there is a question of fact in need of resolution. Accordingly, the Court shall schedule a trial for resolution of these issues. See 9 U.S.C. § 4 ("If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.").
In making its ruling above, the Court acknowledges Defendants' contention that Plaintiffs cannot assert mental incapacity and undue influence as defenses to contract formation because they have asserted a claim for breach of contract and therefore implicitly ratified the contracts containing the arbitration provisions. Defendants are correct that "a statement in a complaint may serve as a judicial admission." Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 859 (9th Cir.1995). That being said, a party is not always conclusively bound to such an admission. The Ninth Circuit has stated that "[f]actual assertions in pleadings and pretrial orders, unless amended, are considered judicial admissions conclusively binding on the party who made them." Am. Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir.1988). The court has also noted: "Where ... the party making an ostensible judicial admission explains the error in a subsequent pleading or by amendment, the trial court must accord the explanation due weight."
Not surprisingly, Defendants have opposed the proposed amendment, arguing bad faith, prejudice, and even futility. The futility argument makes little sense. Defendants assert that "[t]he contracts exist, whether Plaintiffs plead them or not," Docket No. 57 (Opp'n at 8), but that argument misses the point. Plaintiffs are not disputing that there are signed contracts; with their amendment, they are simply making clear that they are not seeking any relief based on those contracts because it is their view that those contracts are not enforceable because of a contract formation problem. To the extent Defendants also argue futility because the proposed amendment renders Plaintiffs inadequate class representatives, see Docket No. 57 (Opp'n at 8), that argument also has little merit. At this point, the case is in its infancy and not even close to the class certification stage. Thus, the Court is evaluating the claims — at least at this point — on an individual basis only, and not a class basis.
As to prejudice, here as well Defendants' arguments are weak. The proposed amendment does not render Defendants' motions to compel arbitration nugatory. Moreover, Defendants can still argue, at the trial contemplated above, that Plaintiffs' prior judicial admission has evidentiary force — i.e., that the admission supports Plaintiffs having the mental capacity to contract and/or that Plaintiffs were not unduly influenced to enter into the contracts. See Huey v. Honeywell, Inc., 82 F.3d 327, 333 (9th Cir.1996) (noting that "admissions" made in a superseded pleading "are still admissible evidence, though not conclusive, like any other extrajudicial admission made by a party or its agent"); see also Andrews v. Metro N. Commuter R. Co., 882 F.2d 705, 707 (2d Cir.1989) (holding that "[t]he amendment of a pleading does not make it any the less an admission of the party").
Defendants' best contention is that Plaintiffs have made the amendment in bad faith, but even here the Court is not persuaded that there is enough to deny Plaintiffs the ability to amend. In their motion to amend, Plaintiffs state:
Docket No. 49 (Mot. at 3).
According to Defendants, it is implausible that Plaintiffs did not know, at the outset of this case, that they lacked the mental capacity to contract or were unduly influenced to contract. While this argument is not without any force, Plaintiffs themselves are laypersons, not attorneys, and therefore the Court cannot say that they even knew those defenses were potentially available to them. Plaintiffs, of course, are represented by attorneys who, presumably, should have known of the defenses; apparently, they failed to explore the exact circumstances surrounding the signing of the contracts, at least at or about the time the complaint was filed. While an argument could be made that competent counsel should have fully explored the circumstances earlier, there is no indication that the failure to do so here was in bad faith. The Court also notes it was not unreasonable for Plaintiffs to assert a claim for breach of contract to the extent the claim repeats or contains similar allegations that representations were made to Plaintiffs about the Narconon program being nonsecular in nature and having a high success rate.
To the extent Defendants argue that Plaintiffs are simply amending in order to avoid arbitration, that may be true, but that fact is not damning in and of itself, particularly as there appears to be an evidentiary basis for Plaintiffs' assertion that they lacked the mental capacity to contract and/or were unduly influenced to contract. Cf. W. Run Stud. Hous. Assocs., LLC v. Huntington Nat'l Bank, 712 F.3d 165, 172 (7th Cir.2013) (stating that dismissal was not "warranted because Plaintiffs sought to `take a contrary position ... to avoid dismissal'[;] [p]laintiffs routinely amend complaints to correct factual inadequacies in response to a motion to dismiss [-] even when the proposed amendment flatly contradicts the initial allegation"); St. Paul Fire & Mar. Ins. Co. v. Heath Fielding Ins. Broking Ltd., No. 91 Civ. 0748(MJL), 1996 WL 19028, at *6, 1995 U.S. Dist. LEXIS 19847, at *19-20 (S.D.N.Y. Jan. 17, 1996) (stating that "[a] party cannot be deemed to act in bad faith simply because it seeks to avoid being bound by judicial admissions it no longer endorses"). Moreover, the Court cannot fault Plaintiffs for not seeking to amend at the time they filed their oppositions to the motions to compel because, as Plaintiffs point out, nothing barred them from having the breach-of-contract claim as an alternative claim (i.e., should the Court reject Plaintiffs' mental incapacity and undue influence defenses to contract formation).
Finally, the Court notes that the situation in the case at bar is materially different from that in Hernandez v. DMSI Staffing, LLC, No. C-14-1531 EMC, 70 F.Supp.3d 1054, 1059, 2015 WL 458083, at *3, 2015 U.S. Dist. LEXIS 12824, at *10 (N.D.Cal. Feb. 3, 2015). In Hernandez, there was far more evidence to substantiate the Court's finding of bad faith, including, e.g., the fact that the plaintiff had filed a duplicative state court action in an attempt to "manipulate the risk of compelled arbitration." Id. at 1059, 2015 WL 458083, at *3, 2015 U.S. Dist. LEXIS 12824, at *8. Here, the evidence shows at best that counsel should have done a better job of getting all relevant facts at the outset of the case.
Accordingly, the Court hereby grants Plaintiffs' motion for leave to amend. Plaintiffs shall
To the extent there is also an argument that there was ratification of the contracts (containing the arbitration provisions) as a result of Plaintiffs' conduct, Defendants fare no better.
First, it does not appear that Defendants argued ratification by conduct in their original papers. Second, even if they had, while there can be ratification through conduct, see Cal. Civ. Code § 1588 (providing that "[a] contract which is voidable solely for want to due consent, may be ratified by a subsequent consent"), that kind of ratification has limits. For example, California Civil Code § 1589 provides: "A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting." Cal. Civ. Code § 1589 (emphasis added); see also Changzhou AMEC Eastern Tools & Equip. CP., Ltd. v. Eastern Tools & Equip., Inc., No. EDCV 11-00354 VAP (DTBx), 2012 WL 3106620, at *17, 2012 U.S. Dist. LEXIS 106967, at *56 (C.D.Cal. July 30, 2012) (stating that "[t]he test for ratification is `whether the releasor with full knowledge of material facts entitling him to rescind has engaged in some unequivocal conduct giving rise to an inference that he intended his conduct to amount to a ratification'"; adding that "`[w]hether the releasor has such knowledge ... [is] normally [a] question[] for the trier of fact'") (emphasis added); Saret-Cook v. Gilbert, Kelly, Crowley & Jennett, 74 Cal.App.4th 1211, 1226, 88 Cal.Rptr.2d 732 (1999) (noting that a party will be presumed to have waived the right to rescind a contract if he has "`full knowledge of the circumstances which would warrant him rescinding [but] nevertheless accepts and retains benefits accruing to him under the contract'"; for example, "`[a]n affirmance of the contract at a time subsequent to the discovery of the falsity of the representations inducing its execution [inducement of contract by false representations provides a basis for rescission analogous to lack of capacity to contract] forecloses the exercise of the right of rescission'"). Here, Plaintiffs fairly argue that, even if they accepted the benefits of the Narconon facilities, they did not thereby know or have reason to know that the contracts with the facilities they signed earlier while lacking capacity (as alleged) contained arbitration provisions and that those contracts were subject to rescission. See Dougherty v. Mieczkowski, 661 F.Supp. 267, 275 (D.Del.1987) (stating that "defendants cite no authority for the proposition that a person should know, by reason of having requested a broker to execute securities transactions, they will be bound by the broker's form contract mandating arbitration of all disputes[;] [b]asic contract principles require some objective evidence of assent, especially in the present context where an agreement to arbitrate forces a party to forego substantial rights"); cf. Serafin v. Balco Properties Ltd., LLC, 235 Cal.App.4th 165, 176, 185 Cal.Rptr.3d 151 (2015) (stating that "[e]vidence confirming the existence of an agreement to arbitrate, despite an unsigned agreement, can be based, for example, on `conduct from which one could imply either ratification or implied acceptance of such a provision'") (emphasis added). An analogy can be made here to waiver, which requires the intentional relinquishment of a known right after knowledge of the facts. See Hardisty v. Moore, No. 11-cv-01591-BAS (BLM), 2015 WL 756517, at *13 n. 10, 2015 U.S. Dist. LEXIS 22203, at *35 n. 10 (S.D.Cal. Feb. 20, 2015) (stating that defendants failed to show that plaintiff ratified the contract and thereby waived his rights to claim damages for fraud).
The Court acknowledges that Plaintiffs have raised an independent ground for denying Defendants' motions to compel arbitration — i.e., that the arbitration provisions are unconscionable. However, the Court concludes that, even if some of the provisions were assumed to be unconscionable, Plaintiffs have failed to make an adequate showing of nonseverability. Thus, arbitration would not be defeated because of unconscionability.
Under California law, unconscionability has two components: procedural unconscionability and substantive unconscionability. See Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 (2000) (stating that both procedural and substantive unconscionability must be present "`in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability'"). "But they need not be present in the same degree.... [T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." Id.
For purposes of this opinion, the Court assumes arguendo that there is some level of procedural unconscionability in both Plaintiffs' cases. Even if Plaintiffs had the mental capacity to contract and were not unduly influenced to contract, the same facts underlying Plaintiffs' claims of mental incapacity and undue influence may arguably support some level of procedural unconscionability. Moreover, there is an argument that the contracts at issue were contracts of adhesion or akin to such contracts,
As for substantive unconscionability, the Court assumes for the sake of argument that there are provisions that may be unconscionable. First, however, the Court addresses Plaintiffs' contention that the arbitration agreements are generally unconscionable because of their scope. Mr. Landers's admission agreement specified: "The parties agree that any controversy, dispute or claim arising out of or relating to or involving this Admission Agreement shall be resolved by binding arbitration." Farnsworth Decl., Ex. 1 (Agreement at 12). Similarly, Mr. Burgoon's admission agreements provided:
Quaid Decl., Exs. A-B (Agreements at 8). According to Plaintiffs, "[a] reasonable consumer would not expect claims unrelated to [the] admissions agreement to be included, such as the claims for false advertising asserted here, since those claims do not relate to the terms of the agreement or the client's experience at [the Narconon Center]." Docket No. 30 (Opp'n at 12).
But contrary to Plaintiffs' naked assertion, Plaintiffs' misrepresentation claims are sufficiently related to the admission agreements. Clearly, Defendants' advertising that the Narconon facilities are non-secular and have high success rates is designed to induce a person to enter into an admissions agreement — which contains similar representations — and enroll in a facility. Plaintiffs' reliance on Lima v. Gateway, Inc., 886 F.Supp.2d 1170 (C.D.Cal.2012), and Bruni v. Didion, 160 Cal.App.4th 73 Cal.Rptr.3d 395 (2008), is unavailing as both cases are distinguishable. In Lima, the arbitration provision was far broader, providing that the contracting parties "`agree that any Dispute between you and Gateway will be resolved exclusively and finally by arbitration,'" thus leading the court to state that "it is difficult to imagine any dispute between [the parties] that would lie outside its bounds." Lima, 886 F.Supp.2d at 1180. In Bruni, the court put stock on the fact that "the arbitration provisions were not contained within the main purchase and sale agreement; instead, they were contained in what was labeled as a warranty," thus leading to the reasonable expectation that the provisions "would apply only to disputes over the Warranty." Bruni, 160 Cal.App.4th at 1294, 73 Cal.Rptr.3d 395.
Beyond their general challenge above, Plaintiffs also contest three specific provisions as substantively unconscionable: (1) the statute-of-limitation provision in Mr. Burgoon's contracts; (2) the confidentiality provision in Mr. Landers's contract; and (3) the cost-splitting provisions in both Plaintiffs' contracts.
Id. at 124-25, 99 Cal.Rptr.2d 745, 6 P.3d 669; see also Stacy v. Brinker Rest. Corp., No. 1:12-cv-00851-LJO-BAM, 2012 WL 5186975, at *11, 2012 U.S. Dist. LEXIS 150345, at *29 (E.D.Cal. Oct. 18, 2012) (report and recommendation) (noting that "[a] high frequency of unconscionable clauses not only indicates an attempt to systematically disadvantage an employee, but it also makes it more likely that severance
In Mr. Landers's case, there are two allegedly unconscionable provisions, namely, the cost-splitting provision and the confidentiality provision. In Mr. Burgoon's case, there are likewise two allegedly unconscionable provisions, more specifically, the cost-splitting provision and the statute-of-limitations provision. While the Armendariz Court found that the two unconscionable provisions before it were enough to "indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage," id. at 124, 99 Cal.Rptr.2d 745, 6 P.3d 669, the Court did not hold that any time there is more than one unconscionable provision, severance is not possible. Indeed, there are cases in which courts have severed as many as three provisions. See, e.g., Grabowski v. C.H. Robinson Co., 817 F.Supp.2d 1159, 1179 (S.D.Cal.2011) (severing three unconscionable provisions — "the `carve out' provision stating that the Dispute Resolution Agreement does not apply to `any claims by the Company that includes a request for injunctive or equitable relief; the confidentiality provision; and the attorney's fees provision"); Pope v. Sonatype, Inc., No. 5:15-cv-00956-RMW, 2015 WL 2174033, at*7, 2015 U.S. Dist. LEXIS 60815, at *16-17 (N.D.Cal. May 8, 2015) (also severing three unconscionable provisions — "(1) [the] trade secret misappropriation injunctive relief carve-out, (2) the requirement that arbitration take place in Washington, D.C., and (3) the requirement that Pope pay attorney's fees unless he is a prevailing party").
Because the exact number of unconscionable provisions is not dispositive, the Court must focus instead, as indicated above, on whether "the central purpose of the contract is tainted with illegality." Armendariz, 24 Cal.4th at 124, 99 Cal.Rptr.2d 745, 6 P.3d 669. Here, the Court cannot say that the "taint" from the cost-splitting and confidentiality provisions in Mr. Landers's case and the cost-splitting and statute-of-limitations provisions in Mr. Burgoon's case permeated the arbitration agreements to such an extent that the purpose of the agreements — i.e., to arbitrate rather than litigate — was transformed — i.e., to impose arbitration "not simply as an alternative to litigation, but as an inferior forum." Id. Compare, e.g., Lucas v. Gund, Inc., 450 F.Supp.2d 1125, 1134 (C.D.Cal.2006) (noting that, aside from costs and fees provision and forum selection clause, "nothing else in the agreement is patently unfair to the employee, and nothing suggests that the agreement was drafted with the purpose of depriving employees of the right to litigate their claims""), with Zaborowski v. MHN Gov't Servs., 936 F.Supp.2d 1145, 1157 (N.D.Cal. 2013) (finding that the arbitration agreement was permeated with unconscionability as a result of "provisions rang[ing] from the method of selecting the arbitrator, the shortened statute of limitations, and limits on statutory remedies, to the filing fees and the allocation of fees and costs"). In this regard, it is worth noting that the cost provisions — even if found to be substantively unconscionable — were not clearly designed to create an inferior forum (that is to say, an inaccessible forum). This is because the case at bar is unlike the typical consumer case where the cost of arbitration dwarfs the cost of the product or services at issue. Here, the services sought by Plaintiffs were significant in terms of cost.
The Court's conclusion above is buttressed by the fact that it is possible to sever the unconscionable provisions, without any need for the Court to reform the contracts by augmenting them with additional
Accordingly, Plaintiffs' contention that there is an independent ground to avoid arbitration — i.e., unconscionability — lacks merit because any unconscionability is capable of being severed.
The Court's analysis above concerns potential arbitration between Plaintiffs and NFS and NNC only, and not the "higher-up" Narconon companies (i.e., Western, International, and ABLE). This is because only NFS and NNC were signatories to the admission agreements. There is no dispute that Western, International, and ABLE are nonsignatories. Nevertheless, the higher-up Narconon companies contend in their papers that they are equally entitled to arbitration (that is, assuming the cases will be arbitrated based on the admission agreements with NFS and NNC).
Mr. Landers concedes that the higher-up Narconon companies may seek the benefit of arbitration because, if he had the mental capacity to contract and was not unduly influenced to contract, then the admission agreement specifies that it "applies to disputes, controversies or claims involving not only [NFS] but any related entities, licensors, the members of the Board of Directors, the officers and the staff." Farnsworth Decl., Ex. 1 (Agreement at 12). Mr. Burgoon's contracts, however, do not contain a comparable provision and thus he contests the right of the higher-up Narconon companies to seek arbitration.
In their papers, the higher-up Narconon companies invoked only an equitable estoppel doctrine as a basis to compel Mr. Burgoon to arbitration. See Docket No. 27 (Mot. at 8). Thus, even though the parties have now submitted supplemental briefing (as ordered by the Court) as to whether an agency theory may also be applicable, the Court now declines to address the merits of that theory. The higher-up Narconon companies could have raised an agency theory in their opening brief but failed to do so, and thereby have waived the argument.
Under California law, equitable estoppel allows a nonsignatory to arbitration agreement to compel a signatory to
Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1128-29 (9th Cir.2013). Both prongs reflect the core concept of equitable estoppel: to prevent "a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes." Murphy v. DirecTV, Inc., 724 F.3d 1218, 1229 (9th Cir.2013).
Now that Plaintiffs have dropped their breach-of-contract claim, the Court need only evaluate whether Mr. Burgoon's statutory and tort claims "are dependent on or inextricably bound up with the contractual obligations of the agreement containing the arbitration clause." Goldman v. KPMG LLP, 173 Cal.App.4th 209, 213-14, 92 Cal.Rptr.3d 53,4 (2009).
A claim is not bound up with a contract when a plaintiff's claims do not depend on the agreement's terms. For example, in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir.2013), the plaintiffs sued Best Buy for making misrepresentations to customers at the point of sale that they were actually buying, rather than just leasing, certain DirecTV service equipment (e.g., receivers and digital video recorders). Best Buy did not have any agreement with the plaintiffs containing an arbitration clause, but there was an arbitration clause in the customer agreements that plaintiffs had with DirecTV. Best Buy, as a nonsignatory to the customer agreements, tried to compel the plaintiff-signatories to arbitration on the basis of equitable estoppel. The Ninth Circuit rejected Best Buy's contention that the plaintiffs' fraud claims relied on or were intertwined with the DirecTV customer agreements.
Id. at 1230-31; see also Kramer, 705 F.3d at 1129 (stating that "`[m]erely `mak[ing] reference to' an agreement with an arbitration clause is not enough"); In re Carrier IQ, Inc. Consumer Priv. Litig., No. C-12-md-2330 EMC, 2014 WL 1338474,
As in Murphy, the statutory and tort claims asserted by Mr. Burgoon in the instant case do not depend on the obligations (or even the existence) of the contract. Because of this, there is no inequity to remedy. See Goldman, 173 Cal.App.4th at 213-14, 92 Cal.Rptr.3d 534 ("[T]he lynchpin for equitable estoppel is equity, and the point of applying it to compel arbitration is to prevent a situation that would fly in the face of fairness.") (internal quotation marks omitted). This is particularly evident because the alleged misconduct (misrepresentations about the Narconon program being secular in nature and having a high success rate) occurred before the contracts were signed. Since it would not create an unfair situation, the Court concludes that the doctrine of equitable estoppel should not apply and, accordingly, Western, International, and ABLE cannot — as nonsignatories to the arbitration agreements — compel arbitration.
This leaves the Court with somewhat of a predicament: NFS and NNC may be able to arbitrate, and the higher-up Narconon companies may also be able to arbitrate to the extent the claims are related to NFS (Mr. Landers). The higher-up Narconon companies, however, cannot arbitrate with respect to the claims related to NNC (Mr. Burgoon) — even if NNC is ultimately able to arbitrate — because there is no contract provision authorizing such and equitable estoppel is not available.
Although the higher-up Narconon companies cannot arbitrate with respect to the claims related to NNC (Mr. Burgoon) and must litigate such claims in court, the Court finds that it makes sense to temporarily stay proceeding on these claims, at least until the trial on the mental incapacity and undue influence issues is resolved. The Court, however, hereby issues a preservation order — applicable to all Defendants — to ensure that all relevant information will not, inadvertently or not, be destroyed. This ruling does not bar Plaintiffs from asking for leave to take third-party discovery, if necessary, as the preservation order does not extend to third parties. Moreover, this ruling does not bar the Court from lifting the stay should the trial on mental incapacity and undue influence be delayed. Finally, this ruling shall not dictate whether or not the Court would continue a stay if in fact arbitration would proceed against NFS and NNC (and the Narconon companies to the extent the claims are related to NFS).
As for the pending motion to dismiss filed by, inter alia, the higher-up Narconon companies, the Court notes that said motion is not a bar to any possible third-party discovery, especially as there is nothing to show that any deficiency in
For the foregoing reasons, the Court grants Plaintiffs' motion for leave to amend, defers ruling on the motions to compel arbitration, and defers ruling on the motions to dismiss. As discussed above, within two weeks of the date of this order, the parties shall meet and confer, consult with Courtroom Deputy Betty Lee regarding available trial dates, and file a joint proposed trial plan to adjudicate the issues of mental incapacity and undue influence.
This order disposes of Docket No. 49.
IT IS SO ORDERED.
For Mr. Landers (a resident of Forksville, Pennsylvania), the contract provided that the forum would be Los Angeles County and, for Mr. Burgoon (a resident of Arcata, California), the contracts provided that the forum would be Santa Cruz County. See Farnsworth Decl., Ex. 1 (Agreement at 12); Quaid Decl., Exs. A-B (Agreements at 9). Both fora are close to or are where the NFS and NNC facilities are located where Plaintiffs sought treatment (San Diego County and Santa Cruz County, respectively). Thus, it would be difficult to say that the selection of the forum was one-sided or unreasonable. See Bolter v. Superior Court, 87 Cal.App.4th 900, 910, 104 Cal.Rptr.2d 888 (2001) (stating that company's "prohibition against consolidation, limitation on damages and forum selection provisions have no justification other than as a means of maximizing an advantage over the petitioners"); see also Am. Online v. Superior Court, 90 Cal.App.4th 1, 12, 108 Cal.Rptr.2d 699 (2001) (stating that "[o]ur law favors forum selection agreements only so long as they are procured freely and voluntarily, with the place chosen having some logical nexus to one of the parties or the dispute, and so long as California consumers will not find their substantial legal rights significantly impaired by their enforcement").
