United States: California Courts Continue To Rule In Favor Of Arbitration

California Supreme Court reverses rule that first required administrative hearing by state Labor Commissioner before permitting arbitration of wage and hour claims

In 2011, the California Supreme Court in Sonic-Calibasas A, Inc. v. Moreno refused to enforce an arbitration agreement where an employee had filed a wage and hour claim with the state Labor Commissioner, and required the employer to first participate in the administrative hearing with the Labor Commissioner before allowing arbitration of the claim. If the employer was dissatisfied with the results of the administrative hearing (referred to as a "Berman hearing"), then the employer would be permitted to appeal the determination to an arbitrator who would issue a final determination. The court held that the public policy in favor of administrative Berman hearings was not preempted by the federal Arbitration Act ("FAA").

On appeal, the U.S. Supreme Court ordered the California Supreme Court to reconsider its decision. On remand, the California Supreme Court reversed course, and ruled that a court may not force the employer to first participate in the administrative action and permitted the arbitrator to decide the matter in the first instance. The court concluded that such a court-imposed delay of arbitration was contrary to, and preempted by the FAA.

However, the California Supreme Court also remanded the matter to the lower court to consider whether the arbitration agreement at issue was unconscionable and unenforceable, i.e., whether the arbitration agreement at issue imposed costs and risks on the wage claimant that would make the resolution of the wage dispute inaccessible and unaffordable. In making the determination of unconscionability, the issue for the court is not whether the arbitration agreement was a "bad deal" for the employee, but rather whether the agreement was so "unreasonably one-sided" as to render the provision legally unenforceable, for instance, an arbitration agreement that effectively deprives wage claimants of an accessible and affordable dispute-resolution mechanism.

Carefully crafted employment arbitration provisions that require the employer to bear the costs unique to the arbitral forum and call for a speedy and fair hearing by a neutral arbitrator should satisfy this legal standard and avoid an unconscionability challenge.

Federal Appeals Court in California strikes down rule that prohibited arbitration of injunctive-relief claims that affect the public interest

In a non-employment case, the federal Ninth Circuit Court of Appeals (which covers California) in Ferguson v. Corinthian Colleges, Inc. re-considered the so-called "Broughton-Cruz" rule that claims for injunctive relief under California's unfair competition law were exempt from arbitration because the claims sought "public injunctive relief." Ferguson on behalf of a class of college students sued the college over alleged misrepresentations about the quality and cost of the education and career prospects of graduates. They sought, among other remedies, injunctive relief to prevent further violations of California's unfair competition and false advertising laws.

In Broughton v. Cigna Health Plans and a second case Cruz v. PacifiCare Health Systems, the California Supreme Court had previously held that arbitration agreements could not prohibit court claims, on behalf of the general public, to obtain injunctive relief against deceptive practices. The Ninth Circuit adopted this reasoning in Davis v. O'Melveny & Myers, allowing employees to pursue court action for injunctive relief under the unfair competition laws.

Reversing its ruling in Davis, and rejecting the Broughton-Cruz rule, the court held that the Broughton-Cruz rule was preempted by the federal Arbitration Act ("FAA"), and that claims for public injunctive relief for alleged violations of the California unfair competition laws must also be resolved through arbitration. Since the arbitration agreement between the college and its students covered "all claims ... arising from my enrollment," and did not exclude claims for injunctive relief, the court directed arbitration of the entire action including the students' claims for public injunctive relief.

In Iskanian v. CLS Transportation Los Angeles, LLC, pending before the California Supreme Court, the court is scheduled to decide whether the Private Attorney General Act ("PAGA") claims and claims for violation of the unfair competition laws are exempt from arbitration under the Broughton-Cruz rule. The Ferguson court's conclusion that the FAA preempts the Broughton-Cruz rule, while not binding on the California court, may nonetheless be persuasive to convince the California court to also abandon the Broughton-Cruz rule. If so, then the California court in Iskanian may decide to compel arbitration of PAGA and unfair competition claims that are commonly alleged in employment wage and hour cases.

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