The enforceability of employment-related arbitration agreements has been a hot-button issue these past couple of years. The latest fight, federal vs. California law, has just played out in the California Supreme Court’s very recent (and lengthy) decision in Sonic-Calabasas A, Inc. v. Moreno, (“Sonic II”) where the Court addressed the enforceability of arbitration agreements under California law in light of the U.S. Supreme Court’s recent decision in AT&T Mobility, LLC v. Concepcion (“Concepcion”). So did the California Supreme Court give the U.S. Supreme Court the “thumbs-up”? – well, kind of.
While the California Supreme Court stated that it could not rule on (and therefore remanded to the California trial court) the issue of whether the Sonic-Calabasas employment arbitration agreement was actually unconscionable and therefore unenforceable, it did find that in light of Concepcion an arbitration agreement cannot be per se unconscionable solely because it requires parties to arbitrate a wage dispute as opposed to allowing the employee to first proceed with an administrative hearing before the California Labor Commissioner. The Court did not leave it there though.
Its decision suggests that California courts should apply a very narrow interpretation of Concepcion and its sister U.S. Supreme Court decision American Express v. Italian Colors, in an attempt to give as much power to California courts to continue to regulate the unconscionability in arbitration agreements without butting heads with the Federal Arbitration Act (“FAA”) and Concepcion.
The Background: The Sonic-Calabasas arbitration agreement did not provide its employees with an exception that allowed them to pursue individual wage claims with the California Labor Commissioner (known as the Berman hearing – a streamlined procedure for employees, without the assistance of counsel, to adjudicate a wage dispute with both sides having the right to appeal the Labor Commissioner’s ruling to a California trial court). The case previously went all the way to the California Supreme Court (“Sonic I”).
In Sonic I, the California Supreme Court found that the FAA did not preempt California’s law allowing employees to pursue Berman hearings, and further found that the Sonic Calabasas arbitration agreement was unconscionable, and therefore unenforceable, because it precluded an employee from pursuing administrative remedies in a Berman hearing. Later the U.S. Supreme Court issued its Concepcion decision, which rejected California’s per se rule that arbitration agreements are unconscionable if they contain class action waivers. Recognizing the conflict between California’s recent arbitration agreement decisions and the FAA, the U.S. Supreme Court also ordered the California Supreme Court to reconsider its decision in Sonic I in light of the U.S. Supreme Court’s decision in Concepcion.
The California Supreme Court’s Sonic II Decision: This time around, the California Supreme Court found that, consistent with Concepcion, the Sonic Calabasas arbitration agreement was enforceable even though it prohibited employees from pursuing Berman hearings to address wage disputes. But, it left open the question of whether the agreement could still be invalidated on the grounds of unconscionability – something the trial court will now have to decide. Specifically, the California Supreme Court “conclude[d] that the FAA preempts a state-law rule categorically requiring arbitration to be preceded by a Berman hearing,” but it went on to state that “[a]fter Concepcion, courts may continue to apply the unconscionability doctrine to arbitration agreements” to assess whether the arbitration agreement is enforceable. The Court explained that the “[u]nconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as “overly harsh,”… “unduly oppressive,”…”so one-sided as to shock the conscience,”… or “unfairly one-sided.” All of these formulations point to the central idea that [the] unconscionability doctrine is concerned not with “a simple old-fashioned bad bargain,” but with terms that are “unreasonably favorable to the more powerful party.” The Court also noted that “[a]s with any contract, the unconscionability inquiry requires a 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.”
The Court, however, did not provide specific guidance on, or a bright line rule for, an unconscionability standard, and it did not overturn any unconscionability precedent (which unfortunately is a mixed bag). So we can continue to expect future unconscionability decisions that are all over the place.
So What Does This Mean For Employers? First, employers can enforce arbitration agreements even when their employees seek administrative relief for their wage disputes in Berman hearings. That much is clear. The Sonic II decision also at least suggests that the California Supreme Court has conceded that arbitration agreements can contain class action waivers – an important development. But employers should think of the overall decision in Sonic II as a warning (or as putting employers on notice) that if employers use language in their arbitration agreements that is one-sided, overly-harsh, or unduly oppressive in that it restricts an employee’s rights under state laws, then the employer is still in danger of having its agreement found unconscionable and therefore rendered unenforceable. So, break out those arbitration agreements and carefully review them with your trusted employment counsel to ensure that your company is in the best position to defend a challenge to the enforceability of its arbitration agreement.