California Confirms Preemption by FAA Over State Rule Barring Employee Waiver - Mostly

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In Sonic-Calabasas A, Inc. v. Moreno (Sonic II), the California Supreme Court addressed an employee’s waiver of access to an administrative hearing, in this case a Berman hearing, in an arbitration agreement imposed as a condition of employment. The unanimous court concluded that a categorical rule prohibiting such waivers is preempted by the Federal Arbitration Act (FAA) in light of the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion (Concepcion). A divided court (5-2) further held that state courts can still invalidate such an arbitration agreement on a case-by-case basis by finding that is unconscionable, so long as waiver of the Berman hearing is not the sole basis and the finding does not “interfere with the fundamental attributes of arbitration.” Such a finding could be based on the benefits received by the employee under the arbitration agreement in comparison to those which were waived, in light of the totality of circumstances.

Sonic I. As a former employee of Sonic-Calabasas A, Inc., Moreno filed a claim with the Labor Commissioner for unpaid vacation time totaling nearly $28,000. Under California law, Labor Code §§ 98, et seq., this triggers an administrative process referred to as a Berman hearing procedure. This provides an expedited process for employee wage claims and provides additional protections to employees, such as potential access to representation by the Labor Commissioner in pursuing the claim. Any party can appeal the result, but the employer must post a bond to cover any adverse judgment, which otherwise becomes enforceable. Also, if the employer’s appeal is unsuccessful, the employee can recover all costs and fees, but the employer can only recover costs and fees if it obtains a judgment of zero on appeal.

In Sonic I, a bare majority of the California Supreme Court (4-3) held categorically that waiver of the Berman hearing procedure as a condition of employment was a violation of public policy. In addition, the court held that such a waiver was unconscionable and therefore unenforceable in any case. In doing so, the court did not invalidate the arbitration agreement, only the waiver of the statutory right to a Berman hearing. Should either party appeal the administrative ruling, that appeal could be submitted to arbitration. In that way, the employee would still have the significant protections provided by the Berman hearing procedure, and the employer could still compel arbitration for an ultimate resolution. The court explained that the FAA did not preempt this approach because any waiver of the Berman hearing was invalidated, whether or not it was part of an arbitration agreement.

Concepcion and Sonic II. Shortly after Sonic I, the U.S. Supreme Court issued its decision in Concepcion, which addressed Discover Bank, an earlier decision by the California Supreme Court. Discover Bank had invalidated a waiver of class actions and the corresponding arbitration agreement as unconscionable in a consumer protection context. Concepcion abrogated Discover Bank, holding that the FAA preempted any state law rule or holding which was aimed at destroying arbitration or which demanded procedures incompatible with arbitration. This includes any rule which is generally applicable to contracts, such as unconscionability, but which is applied in a fashion which disfavors arbitration. Conception held that requiring the availability of class actions, whether judicial or some sort of class arbitration, would sacrifice the principle advantages of arbitration – lower costs, informality which results in greater efficiency and speed, and the ability to choose the adjudicator.

The U.S. Supreme Court granted certiorari, vacated Sonic I, and remanded for further consideration in light of Concepcion. Following Concepcion, a unanimous California Supreme Court reversed its decision in Sonic I, holding that any general rule against waiving a Berman hearing, whether based on public policy or unconscionability, was preempted by the FAA since it would categorically favor Berman hearings over arbitration and add a significant delay to the arbitration process, thus infringing on one of its fundamental attributes.

Sonic II’s Unconscionability Doctrine. A divided court (5-2) noted that Concepcion only bars the application of unconscionability if it interferes with the “fundamental attributes of arbitration,” leaving open any other application of the doctrine. While acknowledging that states cannot categorically prefer one form of dispute resolution (e.g. Berman hearings) over arbitration, the court concluded this does not prevent a case specific evaluation from finding that an arbitration agreement which includes such a waiver is unconscionable. Sonic II discusses several previous California holdings finding unconscionability on grounds not preempted by the FAA, such as an arbitration process in which a full recovery is not even theoretically possible, up-front costs that deter employees, or unfairly one-sided provisions. As such, while the waiver of an administrative process, in itself, cannot support unconscionability, that waiver could be part of a larger evaluation to determine whether the arbitration agreement was unconscionable.

Such an evaluation should address the adequacy of the arbitration process provided, both as described in the contract and as implemented, in comparison to the Berman protections that were waived. The Berman hearing procedures provide a speedy, informal and affordable means of resolving a wage claim. Thus, the waiver of such protections in favor of an arbitration process which does not provide the same type of protections may be unconscionable and unreasonably one-sided, as well as contrary to the goals of the FAA. Importantly, the court acknowledged that there are many different means to reach these goals, and that the arbitration procedures need not mirror the Berman procedures. Of course, such an evaluation should consider the totality of circumstances (e.g., contract of adhesion?). Since the record did not address these issues, the court remanded to the trial court for further proceedings.

Concur and Dissent. Justice Corrigan concurred, but wrote separately to complain that the majority failed to articulate a clear standard for assessing the unconscionability of an arbitration agreement, and instead seemed to provide multiple formulations. She agreed with Justice Chin on the standard – terms which are so one sided that they shock the conscience.

Justices Chin and Baxter dissented from the new unconscionability doctrine primary on grounds that Moreno forfeited the argument by failing to raise it below, and that he could not show unconscionability in any case. The dissent also disagreed with the majority‘s “advisory opinion” regarding the unconscionability doctrine, which it argued was contrary to state law and preempted by the FAA.

The Next Step.  Sonic II is hardly the last word from the California Supreme court on the issue of FAA preemption. The court has two such cases already fully briefed. In Sanchez, the issue is whether the FAA, a’ la Concepcion, preempts state law rules which invalidate as unconscionable mandatory arbitration provisions in a consumer contract. In Iskanian, the court granted review to address whether Concepcion implicitly overruled Gentry, with respect to contractual class action waivers in the context of non-waivable labor law rights and whether Concepcion permits arbitration agreements to override the statutory right to bring representative claims under state law. Between them, Sanchez and Iskanian have twelve grant and holds cases waiting for a decision, indicating the broad interest in these rulings. For more details on ADR cases pending before the California Supreme Court, see our summary here.

 

Topics:  American Express v Italian Colors Restaurant, Arbitration, Arbitration Agreements, AT&T Mobility v Concepcion, Federal Arbitration Act, Preemption, SCOTUS, Waivers

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Conflict of Laws Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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