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Burnett v. Pagliacci Pizza, Inc.

Court of Appeals of Washington, Division 1

June 17, 2019

STEVEN BURNETT, individually and on behalf of all others similarly situated, Respondent,
v.
PAGLIACCI PIZZA, INC., a Washington corporation, Appellant.

          SMITH, J.

         When Steven Burnett was hired as a delivery driver by Pagliacci Pizza Inc., he was required to sign an "Employee Relationship Agreement" to begin work. He was also given an employee handbook containing a mandatory arbitration policy and told to read it at home. When Burnett later sued Pagliacci for various wage-related claims, Pagliacci moved to compel arbitration under the policy printed in its handbook. Pagliacci appeals the trial court's denial of that motion.

         We hold that because Burnett did not have a reasonable opportunity to review the arbitration policy before he was required to sign the Employee Relationship Agreement, the circumstances surrounding the formation of the parties' agreement to arbitrate were procedurally unconscionable. We hold further that the mandatory arbitration policy is substantively unconscionable because certain prerequisites to arbitration required by the policy unreasonably favor Pagliacci by limiting employees' access to substantive remedies and discouraging them from pursuing valid claims. Therefore, we affirm.

         FACTS

         Pagliacci hired Burnett as a delivery driver for Pagliacci's Valley Street location in October 2015. Upon hire, Burnett attended a mandatory orientation, which took between 40 minutes and an hour. At the orientation, Burnett was shown around the store, given Pagliacci T-shirts, and told about Pagliacci's history and values. He also watched some videos about how to succeed as a delivery driver. Additionally, Burnett was given some forms and told to sign them so that he could start working. One of those forms was an Employee Relationship Agreement (ERA), which Burnett signed. Burnett was also given a copy of Pagliacci's "Little Book of Answers" (Little Book) and told to read it at home. Although the ERA directs the employee to "learn and comply with the rules and policies outlined in our Little Book . . ., including those that relate to positive attitude, public safety, company funds, tips and FAIR [Fair and Amicable Internal Resolution] Policy," the ERA does not mention arbitration.

         Pagliacci terminated Burnett's employment on January 22, 2017. In October 2017, Burnett filed a putative class action against Pagliacci, alleging among other things that Pagliacci failed to provide delivery drivers with required rest and meal periods, failed to pay all wages due to delivery drivers, wrongfully retained delivery charges, and made unlawful deductions from delivery drivers' wages.

         Pagliacci moved to compel arbitration of Burnett's claims under its mandatory arbitration policy, which is printed in the Little Book. That policy provides:

The company has a mandatory arbitration policy with which you must comply for the binding resolution of disputes without lawsuits. If you believe you have been a victim of illegal harassment or discrimination or that you have not been paid for all hours worked or at less than the rate of pay required by law or that the termination of your employment was wrongful, you submit the dispute to resolution in accordance with the F.A.I.R. Policy and if those procedures are not successful in resolving the dispute, you then submit the dispute to binding arbitration before a neutral arbitrator pursuant to the Washington Arbitration Act.

         The "F.A.I.R. Policy" referred to in the mandatory arbitration policy requires that before commencing arbitration, the employee first "report the matter and all details" to his or her supervisor (Supervisor Review). If Supervisor Review does not resolve the matter to the employee's satisfaction, he or she may initiate nonbinding conciliation, wherein the "F.A.I.R. Administrator will designate a responsible person at Pagliacci Pizza (who may be its owner) to meet face-to-face with you in a non-binding Conciliation." The F.A.I.R. Policy also includes the following limitations provision:

You may not commence an arbitration of a claim that is covered by the Pagliacci Pizza Arbitration Policy or commence a lawsuit on a claim that is not covered by the Pagliacci Pizza Arbitration Policy unless you have first submitted the claim to resolution in conformity with the F.A.I.R. Policy and fully complied with the steps and procedures in the F.A.I.R. Policy. If you do not comply with a step, rule or procedure in the F.A.I.R. Policy with respect to a claim, you waive any right to raise the claim in any court or other forum, including arbitration. The limitations set forth in this paragraph shall not be subject to tolling, equitable or otherwise.

         Burnett opposed Pagliacci's motion to compel arbitration. He argued that the mandatory arbitration policy was both procedurally and substantively unconscionable, but the trial court did not reach those arguments. Instead, it concluded that although Burnett agreed under the ERA to "learn and comply with the rules and policies outlined in our Little Book," the Little Book was not incorporated by reference into the ERA. The court therefore denied Pagliacci's motion, finding there was no agreement to arbitrate.[1]

         Pagliacci moved for reconsideration, arguing that the Little Book was incorporated by reference into the ERA. Pagliacci also argued that regardless of whether it was incorporated by reference into the ERA, the Little Book created an agreement to arbitrate because Burnett received a copy of it and then continued his employment thereafter. The court denied Pagliacci's motion for reconsideration. Pagliacci appeals.[2]

         ANALYSIS

         Pagliacci argues that the trial court erred by denying its motion to compel arbitration and its subsequent motion for reconsideration. We disagree.

         Arbitrability is a question of law that we review de novo. McKee v. AT&T Corp., 164 Wn.2d 372, 383, 191 P.3d 845 (2008). "The burden of proof is on the party seeking to avoid arbitration." McKee, 164 Wn.2d at 383. "Regardless of whether the Federal Arbitration Act[3]... or the Washington uniform arbitration act[4]... applies, our analysis as to whether... claims are subject to arbitration begins in the same manner." Weiss v. Lonnquist, 153 Wn.App. 502, 510, 224 P.3d 787 (2009).[5] Specifically, "[a]s arbitration is a matter of contract, parties cannot be compelled to arbitrate unless they agreed to do so." Weiss, 153 Wn.App. at 510.

         In determining whether an agreement to arbitrate exists, we first determine whether the parties have agreed to arbitrate a particular matter by applying ordinary contract principles. Weiss, 153 Wn.App. at 511: see also Tjart v. Smith Barney, Inc., 107 Wn.App. 885, 895-97, 28 P.3d 823 (2001) (considering whether an arbitration agreement existed before analyzing whether the arbitration agreement was enforceable). Where, as here, no material facts are in dispute, contract interpretation is a question of law that we review de novo. Dave Johnson Ins. v. Wright, 167 Wn.App. 758, 769, 275 P.3d 339 (2012). Additionally, if an agreement to arbitrate exists, "[g]eneral contract defenses such as unconscionability may invalidate arbitration agreements." McKee, 164 Wn.2d at 383. Unconscionability is also a question of law reviewed de novo. McKee, 164 Wn.2d at 383.

         For the reasons that follow, we conclude that an agreement to arbitrate exists here but that the agreement is unconscionable and unenforceable.

         Existence of Arbitration Agreement

         Pagliacci argues that the trial court erred by concluding that the mandatory arbitration policy was not incorporated into the ERA and consequently there was no agreement to arbitrate. We agree.

         "Incorporation by reference allows the parties to 'incorporate contractual terms by reference to a separate . . . agreement to which they are not parties, and including a separate document which is unsigned."' W. Wash. Corp. of Seventh-Day Adventists v. Ferrellgas, Inc., 102 Wn.App. 488, 494, 7 P.3d 861 (2000) (alteration in original) (quoting 11 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 30:25, at 233-34 (4th ed. 1999)). "'But incorporation by reference is ineffective to accomplish its intended purpose where the provisions to which reference is made do not have a reasonably clear and ascertainable meaning."' Seventh-Day Adventists, 102 Wn.App. at 494 (quoting 11 Williston & Lord, § 30:25, at 234). "'[I]t must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms[.]"' Seventh-Day Adventists, 102 Wn.App. at 494-95 (alterations in original) (quoting 11 Williston & Lord, § 30:25, at 234).

         In Seventh-Day Adventists, the court held that a "Trade Contract" "clearly and unequivocally incorporate[d] the 'Contract Project Documents' and the 'Contract Documents'" by stating that work would be performed "in accordance with the 'Project Contract Documents'" and "'in accordance with Contract Documents.'" Seventh-Day Adventists, 102 Wn.App. at 492, 495. Here, like the Trade Contract in Seventh-Day Adventists, the ERA clearly and unequivocally incorporates the Little Book. Specifically, the ERA expressly provides that employees will, on their own initiative, "learn and comply with the rules and policies outlined in our Little Book of Answers." Furthermore, Burnett does not argue that there was any lack of clarity that the Little Book described in the ERA is the same Little Book that he received at orientation. For these reasons, the rules and policies in the Little Book were incorporated by reference into the ERA.

         Burnett makes no attempt to distinguish Seventh-Day Adventists even though he cites that case for the proposition that incorporation by reference must be clear and unequivocal. Instead, he argues that "an employment contract telling an employee to read 'on your own time' a separate employment handbook is not 'clear and unequivocal' incorporation by reference." But the ERA not only directs the employee to read the Little Book on his or her own time, it also requires the employee to comply with the rules and policies outlined therein. Therefore, Burnett's argument is not persuasive, and we conclude that an agreement to arbitrate exists here.[6]

         Enforceability of Arbitration Agreement

         Having concluded that the parties agreed to arbitrate, we next consider whether the parties' agreement is enforceable. For the reasons that follow, we conclude that the circumstances surrounding the formation of the parties' arbitration agreement were procedurally unconscionable and that the mandatory arbitration policy is substantively unconscionable. We also conclude that severance of the substantively unconscionable provisions is inappropriate here and thus hold that the mandatory arbitration policy is unenforceable.[7]

         Procedural ...


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