California courts, from its Supreme Court on down, have been hostile to efforts to deny employees and consumers access to the judicial process through devices such as mandatory binding arbitration and class action waivers. At the same time, the U.S. Supreme Court has expansively read federal law, principally the Federal Arbitration Act (FAA), as creating a federal policy favoring arbitration, which with state law must not interfere, except in narrowly prescribed circumstances. Specifically, as mandatory arbitration must be agreed upon by contracting parties, and is subject to terms to which the parties also must agree, the FAA recognizes that if an agreement to arbitrate is invalid under a state's generally applicable contract laws, it may be unenforceable despite federal law favoring arbitration.
One ground often relied upon by California courts in particular is "unconscionability" – a concept rooted in public policy that prohibits one-sided agreements in which the favored party is said to use its superior power to coerce the other in to waiving valuable rights. California courts take a broad view of unconscionability and apply it aggressively to invalidate mandatory arbitration agreements, including class action waivers, leading to inevitable clashes over the broad scope given to mandatory arbitration agreements by the FAA. The California Supreme Court typically has construed the FAA and the U.S. Supreme Court opinions giving it broad application as narrowly as possible, reserving for itself the widest latitude to declare arbitration agreements unenforceable.
This post concerns the latest chapter in the back and forth between the U.S. and California Supreme Courts.
In 2011, the California Supreme Court held in Sonic-Calabassas A, Inc. v. Moreno that it would be unconscionable and contrary to public policy to enforce a mandatory arbitration agreement signed as a condition of employment in a way that deprives an employee of the statutory right to an informal "Berman hearing" before the state Labor Commissioner on a wage claim created by state legislation. Under California law, either party is entitled to a de novo trial in court following the Berman hearing.
Construing the existing U.S. Supreme Court precedent, the court held that the de novo trial after a Berman hearing was subject to mandatory arbitration. The U.S. Supreme Court granted certiorari, vacated the California judgment and remanded the case to the California Supreme Court for consideration in light of the Court's then-recent opinion in AT&T Mobility LLC v. Concepcion.
Concepcion held that while the FAA allows courts to apply state contract law to void an arbitration agreement as unconscionable, FAA preemption does not permit state law to categorically void and invalidate arbitration agreements categorically on that basis. In other words, a court may apply state contract law to invalidate an unconscionable arbitration agreement, so long as by doing so it does not "interfere with the fundamental attributes of arbitration."
On October 17, the California Supreme Court filed a new 70-page opinion reconsidering its initial Sonic-Calabasas ruling, referred to as Sonic-Calabasas II.
Sonic-Calabasas II did not provide employers with clear guidance on avoiding unconscionability in crafting mandatory arbitration agreements. It instead undertook an elaborate defense of its right embedded in the FAA, and acknowledged in Concepcion, to invalidate arbitration agreements that it deems unconscionable under state contract law. The California court concluded that while Concepcion prevents it from rejecting as unconscionable per se any waiver of a Berman hearing in favor of arbitration, that holding simply requires it to undertake a deeper analysis before deciding whether a Berman hearing waiver is unconscionable.
Thus, Sonic-Calabasas II instructs that a court must (i) "value" the process or procedure that the employee was required to waive and replace with arbitration and determine whether the arbitration agreement provides for an adequate substitute, and (ii) examine the circumstances of the agreement's adoption and its full content to decide if it unreasonably favors the employer.
Initiating that analysis in the case before it as guidance for the courts below, the court observed that a Berman hearing is said to offer California employees an "accessible and affordable" forum to attempt to resolve claims. The court remanded the case to the trial court to "examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided," including whether the arbitral forum would provide equivalent opportunity for an "accessible and affordable" resolution.
Sonic-Calabassas II does not leave those wishing to create enforceable arbitration provisions in California entirely without guideposts; but the guidance offered is inexact at best. Thus, the opinion merely reminds employers of the variable standards applied by the state's courts to find unconscionability, and describes several arbitration agreements it previously struck down as unconscionable on grounds it declares are still valid after Concepcion. Still unconscionable and not interfering with fundamental benefits of arbitration, the court asserts, are agreements that allowed the more powerful party to choose a biased arbitrator; required employees to split arbitration costs with the employer; imposed unequal rights to appeal; permitted only prevailing employers to recoup their attorneys' fees; and requiring the weaker party (e.g., employee or consumer) to post fees that they cannot afford as a condition of arbitration.
Sonic-Calabassas II will require those using binding arbitration agreements in California to continue to take on substantial uncertainty and risk. It will subject the agreement's proponent to a case-by-case analysis by a trial court applying subjective unconscionability formulations that are framed differently by the case law cited by the court majority. Moreover, by directing trial courts to weigh as part of the unconscionability analysis the "value" of what the employee sacrifices by agreeing to arbitration invites even more subjectivity in the analysis.
Even worse, the process envisioned can only delay resolution of a dispute over an arbitration agreement as the parties conduct discovery and develop evidence, including expert analyses, over the value of a benefit of civil or administrative litigation lost and the equivalence of what is provided in its place by arbitration. Ironically, as the California Supreme Court conceded at the outset of its Sonic-Calabassas opinion, significant delay in the commencement of arbitration is the sort of interference with the fundamental attributes of arbitration that is inconsistent with the FAA and cannot be imposed.
While crafting Sonic-Calabassas II to defer to Concepcion as narrowly as possible and retaining the widest possible berth to apply California's unconscionability doctrine to perpetuate the state's hostility to mandatory arbitration, the California Supreme Court may have given too little respect to the intent of an opinion of the U.S. Supreme Court. Time will tell whether the subjective calculus endorsed by Sonic-Calabassas II will lead to impermissible interference with the FAA in the form of delay or other obstacles imposed that frustrate arbitration agreements in California.
In the interim, employers would be well advised to closely and pragmatically review their present or contemplated mandatory arbitration agreements covering their California employees to identify any provisions that might be considered unfair or could deprive employees of a valuable right. Those that are not offset or otherwise addressed by a beneficial provision of the arbitration agreement in place or being considered should be identified and eliminated, modified or addressed specifically in that arbitration agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.