OTO, L.L.C. v. Kho, 8 Cal. 5th 111, 251 Cal. Rptr. 3d 714 (2019)
Summary: Mandatory arbitration agreement may be unenforceable against employee wage claims if agreement requires employee to forego Labor Commissioner hearing process and adhere to litigation-like arbitral procedures.
Facts: Three years into his employment with defendant OTO, plaintiff Kho was approached at his desk and asked to sign a collection of documents, one of which included an arbitration agreement requiring any employment-related claims to be brought in arbitration. The agreement required procedures that largely mirrored those found in civil litigation, including full discovery and civil rules of pleading and evidence. After his employment ended, plaintiff filed a claim with the California Labor Commissioner to recover allegedly unpaid wages, and his claim was set for a hearing under the applicable Labor Code procedures (known as a Berman hearing). Defendant filed a petition to compel arbitration, but the hearing officer proceeded with the hearing and awarded plaintiff over $158,000. Defendant appealed the hearing officer’s decision to the superior court, and the court vacated the award but declined to compel arbitration. The California Court of Appeal reversed the trial court’s decision.
Court's Decision: The California Supreme Court reversed, refusing to compel arbitration of plaintiff’s wage claims because the arbitration agreement was unconscionable and therefore unenforceable. The court found a high degree of procedural unconscionability as plaintiff was required to sign the agreement without having a real chance to review it, the agreement was lengthy and full of legalese, and no one was available to explain it to him. The court also found the agreement to be substantively unconscionable in this case on grounds that despite being designed to be fair to both sides, the costly, complex and time-consuming civil litigation-type process required by the agreement constituted a barrier to plaintiff’s right to the expedient, largely cost-free Berman hearing process that plaintiff would have otherwise been entitled to have to adjudicate his wage claim. The waiver of Berman procedures does not, in itself, render an arbitration agreement unconscionable, but where, as here, that waiver was imposed in an unconscionable fashion, the agreement was unenforceable.
Practical Implications: Simple and easily-understood arbitration agreements are the best way to go, and since arbitration providers have their own sets of rules, agreements need not take the risk of preserving court-like procedures.