The California Supreme Court Curtails Concepcion’s Protection of Arbitration Agreements

by Mitchell Silberberg & Knupp LLP

In AT&T Mobility v. Concepcion, the United States Supreme Court analyzed whether a court could refuse to enforce an arbitration agreement because the terms are “unconscionable,” meaning that one party did not have meaningful choice in negotiating the terms and the terms are unreasonably favorable to the other party. Concepcion held that, in the context of arbitration agreements in consumer contracts, the Federal Arbitration Act (FAA) prohibits courts from denying enforcement of an arbitration agreement on the grounds of unconscionability where the application interferes with the FAA’s objectives of: (1) enforcing arbitration agreements according to their terms; and (2) facilitating informal, efficient, and streamlined proceedings tailored to the type of dispute at issue.

In Sonic-Calabasas A., Inc. v. Moreno (Sonic II), the California Supreme Court for the first time analyzed the enforceability of an employment arbitration agreement in light of Concepcion. While at first blush the decision appears to be a victory for employers, the Sonic II decision narrowly applies Concepcion and creates more uncertainty for employers in terms of the enforceability of employment arbitration agreements.

The Sonic II Decision

In Sonic II, the Court considered whether an employer could compel arbitration of a wage claim filed with the California Department of Labor Standards Enforcement (“DLSE”), thereby forcing the employee to forfeit his right to adjudicate his wage claim through an administrative proceeding called a “Berman hearing.” The California Supreme Court previously had ruled that an arbitration agreement waiving an employee’s right to a Berman hearing was unenforceable as a matter of law. In Sonic II, the Court reversed its prior decision and held that, in light of Concepcion, its blanket rule prohibiting the arbitration of DLSE claims violates the FAA.

The most important aspect of the Sonic II decision is its analysis of Concepcion.

Concepcion Is Narrowly Construed

In Sonic II, the California Supreme Court analyzed whether Concepcion affects a court’s ability to invalidate employment arbitration agreements on unconscionability grounds. The Court found that unconscionability remains a valid reason to deny enforcement of an employment arbitration agreement or a provision therein, with certain limitations. Specifically, a court may not apply unconscionability rules if the result will go against the “fundamental attributes of arbitration” of having an informal, streamlined means of dispute resolution.

The Court explained that unconscionability should be determined by conducting an individualized assessment and “examin[ing] the totality of the [arbitration] agreement’s substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided.” The Court also explained that a trial court should not only look at the terms of the agreement, but analyze how the arbitration would be conducted in practice.

In addition, Sonic II creates some confusion as to the proper standard to apply for determining whether an agreement is substantively unconscionable. The Court describes the standard as whether the agreement is “unreasonably one-sided,” whereas other courts previously have employed a “shock the conscience” standard that appears more restrictive. The Court did not decide “whether these different formulations actually constitute different standards in practice and whether one is more objective than the other,” creating more uncertainty for employers seeking to enforce arbitration agreements. The Court clarified that unconscionability requires a substantial degree of unfairness that is more than a bad bargain.

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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