Guglielmo v. LG&M Holdings LLC

          ORDER

          Honorable Susan M. Brnovich United States District Judge.

         At issue is Defendants LG&M Holdings, LLC d/b/a Xplicit Showclub, (“Defendant Company”), Fred Martori, Kevin Owensori, Jeffrey Bertoncino, and Michael Scott's (collectively, “Defendants”) Motion to Dismiss for Lack of Subject Matter Jurisdiction or, alternatively, Motion to Stay These Proceedings and Compel Arbitration. (Doc. 23). Kristina Guglielmo (“Plaintiff”) has filed a Response (Doc. 27, “Resp.”), to which Defendants replied (Doc. 29, “Reply”). Plaintiff alleges violations of state and federal employment law and brought this action on behalf of all others similarly situated. (Doc. 1). Six people claiming they are similarly situated-Mehlihia Saralehui, Stacee Landenberger, Emily Litcoff, Brandi Egnash, and Demaje Jeter (collectively, “Plaintiffs”)-have opted into the lawsuit. (Docs. 22, 24, 25). Defendants argue the case should be dismissed for lack of jurisdiction or, alternatively, stayed because Plaintiffs signed arbitration agreements but have not yet arbitrated. For the reasons that follow, the Court will deny Defendants' motion to dismiss for lack of jurisdiction but grant the alternative motion to stay the proceeding and compel arbitration.

         I. Background

         The Motion at issue concerns whether Defendants can compel Plaintiff to arbitrate her claims before bringing this action. The Federal Arbitration Act (the “FAA”) provides “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “The Court's role under the act is . . . limited to determining (1) whether a valid agreement to arbitrate exists, and if it does, (2) whether the agreement encompasses the dispute at issue.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

         Plaintiff alleges she represents a class of current or former exotic dancers that worked at Defendant Company, which is owned by Martori, Owensori, Bertoncino, and Scott. She brings claims under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq., the Arizona Wage Act (“AWA”), A.R.S. § 23-350 et seq., and the Arizona Minimum Wage Act (“AMWA”), A.R.S. § 23-363 et seq. Defendants' motion argues this Court does not have jurisdiction to hear the case because Plaintiffs signed arbitration agreements. Alternatively, Defendants ask the Court to stay the proceeding and compel arbitration. Plaintiffs argue that the arbitration agreements cannot be enforced because they are unconscionable and cannot be severed from the agreements.

         There are two different agreements at issue in this case. Both include arbitration clauses. All Plaintiffs signed at least one of these agreements and some signed both. A manager signed the agreements on behalf of the Defendant Company. The first is titled “Xplicit Showclub Entertainment Performance Lease” (“Contractor Lease”). Plaintiffs Guiglielmo, Litcof, Cabiles, Landenberger, Saralehui, and Egnash signed a Contractor Lease. The second agreement does not have a title, but the Court will refer to it as the “Entertainment Lease.” Plaintiffs Guglielmo, Litcof, Cabiles, and Jeter signed an Entertainment Lease. Defendants included a copy of Guglielmo's agreements as attachments to their motion. Plaintiffs submitted Gugliemo's and the other plaintiffs' agreements as exhibits to a declaration filed with the Court. (Doc. 28). The Contractor Lease is a short, two-page document, and the Entertainment Lease is a more comprehensive eight-page document. (Doc. 28).

         II. Legal Standards

         Courts apply state-law principles to determine whether an agreement to arbitrate is valid. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995); Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). Neither party contests that Arizona state law governs the agreements. “Arizona law . . . clearly provides that the determination of unconscionability is to be made by the court as a matter of law.” Maxwell v. Fidelity Fin. Serv., Inc., 907 P.2d 51, 56 (Ariz. 1995). The test for unconscionability comes from comment 1 to the Uniform Commercial Code § 2-302:

The basic test (for unconscionability) is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so onesided as to be unconscionable under the circumstances existing at the time of the making of the contract. . . . The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.

Seekings v. Jimmy GMC of Tucson, Inc., 638 P.2d 210, 216 (Ariz. 1981); accord Maxwell, 907 P.2d at 57. The Arizona Supreme Court in Maxwell further explained that most jurisdictions, including Arizona, divide the unconscionability doctrine into substantive and procedural parts. Procedural unconscionability concerns “‘unfair surprise,' fine print clauses, mistakes or ignorance of important facts or other things that mean bargaining did not proceed as it should.” Maxwell, 907 P.2d at 57-58 (quoting Dan B. Dobbs, 2 Law of Remedies 406 (2d ed. 1993)). Substantive unconscionability, on the other hand, considers whether a contract is “unjust or ‘one-sided.'” Id. If a term of a contract is unconscionable, a court may enforce the remainder of the contract without the unconscionable term or “refuse enforcement of the contract altogether.” Id. at 60 (quoting Dobbs, 2 Law of Remedies 705); accord Restatement (Second) of Contracts § 208 (1981)).

         Here, Plaintiffs argue the agreements are substantively unconscionable, but do not argue they are procedurally unconscionable. While some courts require “some quantum of both procedural and substantive unconscionability to establish a claim, ” Arizona allows unconscionability to be established “with a showing of substantive unconscionability alone, especially in cases involving either price-cost disparity or limitation of remedies.” Id. at 58-59. Accordingly, the Court will consider whether the agreements are substantively unconscionable.

         “[T]he actual terms of the contract” determine whether a contract is substantively unconscionable. Id. at 58. They must be “so one-sided as to oppress or unfairly surprise an innocent party, [have] an overall imbalance in the obligations and rights imposed by the bargain, [or have] a significant cost-price disparity.” Id. (citing Resource Mgmt. Co. v. Weston Ranch & Livestock Co., 706 P.2d 1028, 1041 (Utah 1985)). An example of an unconscionable provision in the context of arbitration is if it makes the cost to arbitrate so high that it effectively denies a person the opportunity to vindicate her rights. Clark v. Renaissance West, LLC, 307 P.3d 77, 79 (Ariz.Ct.App. 2013).

         Defendants argue that even if Plaintiffs are correct about portions of the agreements being unconscionable, those portions are severable. In Arizona, the “primary” determinant of whether provisions of a contract are severable is “the contractual language.” Kahl v. Winfrey, 303 P.2d 526, 529 (Ariz. 1956). “If it is clear from its terms that a contract was intended to be severable, the court can enforce the lawful part and ignore the unlawful part.” Olliver/Pilcher Ins., Inc. v. Daniels, 715 P.2d 1218, 1221 (Ariz. 1986). “A lawful promise made for lawful consideration is not invalid merely because an unlawful promise was made at the same time for the same consideration.” Hackin v. Pioneer Plumbing Supply Co., 457 P.2d 312, 319 (Ariz.Ct.App. 1969).

         III. Analysis

         1. Subject Matter Jurisdiction

         As a preliminary matter, Defendants have not provided any authority to support the contention that a valid arbitration agreement divests this Court of jurisdiction. As the District of Connecticut has explained:

While the FAA may require the Court to enforce the disputed arbitration agreement as a matter of contract, see 9 U.S.C. § 2, Defendants have provided no authority to support the proposition that a valid arbitration agreement divests a federal court of its subject-matter jurisdiction. It would be odd if a valid arbitration agreement could have that effect, ...