California State and Federal Courts Renew Their Attacks On Arbitration Agreements

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In 1991, Sega introduced the video character Sonic the Hedgehog. Sonic became insanely popular, spawning several generations of videogames that are still being designed and sold today, comic books, and even a short-lived television show. Sonic is a blue hedgehog who must frequently fight to save a fictional world from the evil Dr. Ivo “Eggman” Robotnik, assisted by other characters such as Knuckles the Echidna, Nack the Weasel, and a group called the Chaotix. Seem a little strange? Well, a different sort of Sonic is even stranger and harder to explain.

Given the hostility with which California state and federal courts have treated arbitration agreements in the past, it was only a matter of time before they began to concoct ways to avoid the recent spate of United States Supreme Court cases broadly upholding the use of such agreements in multiple contexts. In Sonic-Calabasas A, Inc. v. Moreno, Case No.  (Oct. 17, 2013) (now generally referred to as “Sonic II”), a case that took it over two years to decide, the California Supreme Court indicated that its deference to those rulings would, at the very best, be begrudging and narrow.

Like many cases in this context, the Sonic case has a lengthy procedural history. The plaintiff in that case worked for Sonic between 2002 and July of 2006, when he left the company. In late 2006, he attempted to file an  informal hearing in front of the California Labor Commissioner, a so-called “Berman” hearing, claiming that his employer owed him 61 days’ vacation pay at the rate of $441 per day (a total of a little over $25,000). The employer asserted that the proceedings were barred due to an arbitration agreement and sought to compel arbitration. The lower court refused to enforce the agreement, finding enforcement premature, the court of appeals reversed, and then the case went to the California Supreme Court. The California Supreme Court, on February 24, 2011, found that the arbitration agreement requiring waiver of the option of a Berman hearing was both contrary to public policy and unconscionable and could not be enforced. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal.4th 659 (2011) (“Sonic I”).

Enter the U.S. Supreme Court. After the California Supreme Court’s decision in Sonic I, the U.S. Supreme Court decided the case of AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). We blogged that case here after it came out, but the U.S. Supreme Court in that case struck down the type of analysis California courts had used to invalidate arbitration agreements for several years. Afterwards, the U.S. Supreme Court accepted certiorari in Sonic I, and then remanded the case for further consideration under Concepcion.

On that further consideration, the California Supreme Court issued a 70-page opinion, along with a concurrence and lengthy dissent. In a not-terribly-surprising holding, the majority first concluded, as Concepcion dictated, that because compelling the parties to undergo a Berman hearing would impose significant delays in the commencement of arbitration, it could not declare a per se rule that such provisions were unenforceable. Following that holding, however, the court resurrected the unconscionability analysis it had advocated prior to Concepcion and found that a court must still consider whether the arbitration provision was unconscionable before determining whether to enforce it. You might want to grab a friendly 13- or 14- year old here to find how the Hedgehog Sonic performed the “spin dash” move or collected chaos crystals, because the majority’s analysis requires a similar degree of manual dexterity and suspension of reason. The majority essentially created a rubric to determine unconscionability, but woven into that rubric was the underlying assumption that arbitration was not as good as statutory or court proceedings and thus its perceived shortcomings can be factored into that analysis. In in doing so, the court provided a virtual catalog of arbitration provisions it had found to be unconscionable in the past, without much discussion as to whether Concepcion precluded them from being followed.

The majority concluded that the trial court had to make a “fact-specific inquiry” regarding the arbitration agreement to determine “whether the overall bargain was unreasonably one-sided.” After more than six years of litigation over a claim worth less than $30,000, the California Supreme Court  remanded the case to make that determination.

Sonic II is important in at least two respects. First, the court all but guaranteed that an employer using arbitration to streamline the process and reduce costs could still be forced into a probing but vague inquiry before the trial court before it could learn whether its arbitration provisions will ever be enforced. Second, the court’s decision, likely intentionally, discouraged employers from including many of the provisions that might make arbitration more appealing for them.

So, can a California employer hit the “new game” button and just remove the case to federal court? Fat chance. Only two weeks after Sonic II, the Ninth Circuit, which had been equally hostile to arbitration agreements prior to Concepcion, issued its own decision adopting a similar analysis to find an arbitration agreement unconscionable and unenforceable. Chavarria v. Ralphs Grocery Co., Case No. 11-56673 (Oct. 28, 2013). Thus, California employers must decide whether to prepare for further challenges before the federal Supreme Court or consider amending their agreements to cope with the obstacles the state Supreme Court and Ninth Circuit have created. Given the lack of any guarantee of U.S. Supreme Court review in the foreseeable future, employers in the California and the Ninth Circuit may want to review their arbitration provisions to determine which of the types of provisions California disapproves of might be in them.

The Bottom Line: Enforcing arbitration agreements continues to be hampered by uncertainty in California despite seemingly definitive rulings from the United States Supreme Court.