On October 17, 2013, the California Supreme Court issued its
second decision in Sonic-Calabasas v. Moreno. In Sonic
I, the court ruled that an arbitration agreement's waiver
of an administrative hearing on wage claims was void and
unenforceable. In Sonic II, the court reversed its prior
decision, holding that the Federal Arbitration Act
("FAA") preempted any rule categorically prohibiting
arbitration agreements that include waiver of administrative
hearings. However, the court reaffirmed that traditional defenses
to contracts, such as unconscionability, may still be used to
prevent enforcement of an arbitration agreement.
In 2011, the California Supreme Court held in Sonic-Calabasas
v. Moreno, 51 Cal. 4th 659, 671-72 (2011), that an employer
could not use a binding arbitration agreement signed by an employee
as a condition of employment to avoid the employee's right to
invoke an administrative procedure, known as a Berman-hearing, to
make a wage claim against her employer. The court held that
"requiring" the employee to waive the Berman-hearing
violated public policy and was unconscionable.
In so ruling, the court rejected the arguments of the employer
that refusing to enforce the arbitration clause violated the FAA.
The FAA provides that arbitration clauses are "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 California Supreme Court acknowledged that the U.S.
Supreme Court has made clear that the FAA's "Saving
Clause" cannot be used to discriminate against arbitration
agreements. Id. at 688 (citing Perry v. Thomas,
482 U.S. 483, 492-93 (1987). Nonetheless, the California Supreme
Court concluded that its invalidation of the Berman-hearing waiver
did not discriminate against arbitration agreements because its
prohibition applied to all such waivers, whether included in an
arbitration agreement or some other agreement. Id. at
688-89.
Upon review, the U.S. Supreme Court vacated the California Supreme
Court's judgment and remanded the case for reconsideration in
light of the U.S. Supreme Court's decision in AT&T
Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). In
Concepcion, plaintiffs challenged an arbitration agreement
that required all disputes to be brought on an individual basis and
prohibited the formation of any class for purposes of resolving
disputes. The district court held that under California law, a
waiver of class arbitration was unconscionable and therefore
unenforceable. The U.S. Supreme Court reversed.
The U.S. Supreme Court began by holding that the general purpose
of the FAA was to promote efficient, streamlined procedures for
resolving disputes. Concepcion, 131 S. Ct. at 1749. The
Court recognized that in order to accomplish this purpose, federal
law has developed a preference for enforcing arbitration agreements
according to their terms. Id. at 1745-46. Consistent with
this preference, the Court noted that while the FAA's Savings
Clause preserves generally applicable contract defenses against
unfair arbitration agreements, "nothing in [the Saving Clause]
suggests an intent to preserve state-law rules that stand as an
obstacle to the accomplishment of the FAA's objectives."
Id. at 1748. In other words, when a state law rule
purportedly based on traditional contract defenses such as fraud,
duress, or unconscionability stands as an obstacle to the
accomplishment of the FAA's objectives, the FAA may preempt and
displace such a rule. Applying this standard, the Court held that
California's rule prohibiting collective-arbitration waivers as
unconscionable was preempted by the FAA because the rule stood as
an obstacle to the FAA's objectives of efficient, streamlined
procedures. Id. at 1753.
On remand, the California Supreme Court first held that Sonic
I was overruled by Concepcion. In particular, the
court recognized that a Berman-hearing would delay the arbitration,
and prohibiting the waiver of the hearing would thus interfere with
the fundamental attribute of arbitration, "namely, its
objective to achieve streamlined proceedings and expeditious
results." Op. at p. 25-26 (citing Concepcion,
131 S.Ct. at 1749). The court distinguished the delay caused by a
Berman-hearing from the delay caused by litigating the
enforceability of an arbitration agreement. The court stated,
"the parties to a contract must have an opportunity to
determine whether the arbitration agreement should be enforced....
But it does not follow that the FAA, as interpreted by
Concepcion, permits additional delay that results not from
adjudicating whether there is an enforceable agreement, but from an
administrative scheme to effectuate state policies unrelated to the
agreements' enforceability." Op. at p. 27.
Despite having acknowledged the purpose of the FAA and the
dictates of Concepcion, the California Supreme Court's
apparent eagerness to permit litigants to assert reflexive
unconscionability defenses whenever faced with motions to compel
arbitration stands in stark contrast to the recent prevailing
dictates from the U.S. Supreme Court. The Sonic II base
holding that the plaintiff should have the opportunity to
demonstrate that the mandatory arbitration clause and waiver of the
Berman-hearing is unconscionable under the circumstances is not, in
a vacuum, surprising; even the U.S. Supreme Court has recognized
that the FAA's Savings Clause allows parties to rely on
defenses such as unconscionability to prevent the enforcement of an
arbitration agreement. Concepcion, 131 S.Ct. at 1748. But
the California Supreme Court did not articulate a clear standard
for what would constitute unconscionability, especially considering
that "forcing" a party to abide by an arbitration
provision to which it agreed is precisely what the FAA was intended
to protect.
In concurring opinions, Justices Corrigan and Chin criticized the
majority for not clearly providing a sufficiently rigorous standard
for invoking the unconscionability defense. They argued that the
proper test should be "whether the terms are so one-sided as
to shock the conscience." Conc. Op. of Justice Corrigan at p.
1 (internal citations omitted); Conc. and Dis. Op. of Chin, at p.
7-8. The majority's explanation of the unconscionability test
was much more equivocal, focusing on "whether the arbitral
scheme imposes costs and risks on a wage claimant that make the
resolution of the wage dispute inaccessible and
unaffordable...." Op. at p. 35.
This last conclusion—that the arbitration agreement may be
unconscionable if it fails to provide an affordable venue to
resolve a wage claim—seemingly contradicts the recent U.S.
Supreme Court decision American Express Co. v. Italian Colors
Restaurant, 133 S.Ct. 2304 (2013). In Italian Colors,
the Supreme Court held that waiver of class arbitration was
nonetheless valid even if the cost of arbitrating individuals
claims so outweighed potential recovery such that relief was
elusive and unaffordable. The Court explained that parties are not
guaranteed the "right to pursue" the antitrust remedy at
issue in "an affordable procedural path to the vindication of
every claim." Italian Colors, 133 S.Ct. at 2309. The
Sonic II court distinguished Italian Colors
in two ways: (i) Italian Colors examined the
"effective vindication" doctrine that deals with the
harmonization of federal statutes, whereas the issue in
Sonic-Calabsas is preemption; and (ii) unlike the
antitrust statute in Italian Colors, which did not
guarantee efficient and affordable resolution of a claim, the
Berman-hearing was a legislative guarantee to effective and
cost-efficient resolution of an employee's wage claims. Op. at
pp. 44-50 ("Whereas the class waiver in Italian
Colors eliminated no statutory entitlement specifically
designed to help vindicate the rights at issue there, the same is
not true of the waiver of statutorily provided Berman protections
in this case.").
The practical effect of the majority's holding (unless the
U.S. Supreme Court grants review again) is unclear. On the one
hand, its holding that a court should consider whether the
arbitration provides a cost-effective means of litigating a wage
claim is limited to this specific situation, whether the California
Legislature enacted a specific procedural law to provide
inexpensive means of litigating a wage claim. This is particularly
true because the court distinguished Italian Colors by
relying on the specific nature of the Berman-hearing statutes. To
that end, the holding could be very limited.
On the other hand, the Ninth Circuit Court of Appeal's recent
decision in Chavarria v. Ralph's Grocery Co., -- F.
--, Case No. 11-56673 (Oct. 28, 2013), will also help clear the
path for challenging arbitration clauses. There, the court held
Ralph's arbitration clause was unconscionable because it
effectively allowed Ralph's to choose the arbitrators in each
case and it forced the employees to pay half the arbitration costs.
The court distinguished Italian Colors because there the
plaintiff complained that the costs of individual
arbitration—as a result of the class arbitration
waiver—far outweighed the potential relief, rendering relief
illusory. In contrast, in Chavarria,the arbitration fees
themselves made relief illusory.
The lesson for businesses is to carefully craft their arbitration
clauses and to not overreach. Indeed, businesses can be certain
that parties opposing arbitration will rely on
Sonic II to argue that the agreement is
"unreasonably one sided" and therefore unconscionable. As
Justice Chin noted in his concurring and dissenting opinion, this
can easily lead to mini-trials of whether the arbitration agreement
is enforceable. As some small consolation, though, parties can
enter into arbitration agreements that require the arbitrator to
make the initial determination of whether the agreement is
unconscionable. See, e.g., Fallo v. High-Tech
Inst.,559 F.3d 874, 880 (8th Cir. 2009) (holding
unconscionability argument directed at the arbitration provision
itself had to be decided by arbitrator because parties incorporated
AAA rules). And given the intricacies in the interplay between
federal and state law as well as the shifting sands in judicial
opinions, it will be prudent for companies to obtain legal advice
when drafting any arbitration clause.
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.