Sonic-Calabasas A, Inc. v. Moreno: California Supreme Court Holds That Federal Arbitration Act Preempts California Law Prohibiting Waiver of Employee's Right to Labor Commissioner Hearing; Waiver May Be Unconscionable Depending on Totality of Circumstances

In 2011, the California Supreme Court held: (1) an employee's statutory right to a wage hearing before the Labor Commissioner, known as a Berman hearing, "with all the possible protections that follow from it, is itself an unwaivable right that an employee cannot be compelled to relinquish as a condition of employment;" (2) waiver of an employee's right to seek such a hearing is a substantively unconscionable contract term; and (3) the Federal Arbitration Act (FAA) does not preempt the Court's holdings on points one and two. Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I) (discussed here). 

The Supreme Court of the United States granted review and vacated that decision, remanding the case for further consideration in light of AT&T Mobility LLC v Concepcion 563 U.S. ___ (2011) (discussed here). 

The California Supreme Court issued its new decision last week. Reversing its earlier decision, the Court held as follows: 

Although the Berman statutes (Cal. Labor Code sections 98 to 98.8) provide important benefits to employees by reducing the costs and risks of pursuing a wage claim (slip op. at 6-10), the FAA as construed by Concepcion preempts Sonic I's holding that a waiver of Berman procedures in an arbitration agreement is, in and of itself, unconscionable and contrary to public policy. Slip op. at 23. 

Because a Berman hearing causes arbitration to be substantially delayed, the unwaivability of such a hearing, even if desirable as a matter of contractual fairness or public policy, interferes with a fundamental attribute of arbitration — namely, its objective "'to achieve "streamlined proceedings and expeditious results."'" Sonic I's rule is thus preempted by the FAA. 

Slip op. at 25-26 (internal citations omitted). 

Unconscionability remains a valid defense to petitions to compel arbitration in the wake of Concepcion, but such rules must not facially discriminate against arbitration, must be enforced evenhandedly, and "must not disfavor arbitration as applied by imposing procedural requirements that interfere with fundamental attributes of arbitration, especially its lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes." Slip op. at 28-29. For example, state law rules requiring a neutral arbitrator or requiring the employer to pay the unique costs of arbitration do not interfere with fundamental attributes of arbitration and are not preempted. Slip op. at 29. 

Although waiver of Berman hearing procedures is not unconscionable per se, "waiver of these protections in the context of an agreement that does not provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability." Slip op. at 33. 

The Court remanded to the trial 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." Slip op. at 33. The Court ordered the trial court to consider "not only what features of dispute resolution the agreement eliminates but also what features it contemplates." Slip op. at 33.  The Court noted: 

The unconscionability inquiry is not a license for courts to impose their renditions of an ideal arbitral scheme. Rather, in the context of a standard contract of adhesion setting forth conditions of employment, the unconscionability inquiry focuses on whether the arbitral scheme imposes costs and risks on a wage claimant that make the resolution of the wage dispute inaccessible and unaffordable, and thereby "effectively blocks every forum for the redress of disputes, including arbitration itself."

Slip op. at 35.

The unconscionability analysis outlined is not preempted by the FAA. It does not facially discriminate against arbitration, it applies equally to arbitration and nonarbitration agreements that require employees to forgo the Berman protections in resolving wage claims, and as applied it does not pose an obstacle to the achievement of the FAA's objectives as construed in Concepcion. Slip op. at 37.

Finally, the US Supreme Court's recent holding in American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. __ (discussed here) does not affect the Court's reasoning. Slip op. at 42-48. 

Italian Colors involved the harmonization of the FAA with other federal law; it did not involve preemption of state laws dealing with historical police powers. Slip op. at 44. Further, whereas the class action waiver in Italian Colors "eliminated no statutory entitlement specifically designed to help vindicate the rights at issue there, the same is not true of the waiver of statutorily provided Berman protections in this case." Slip op. at 45. 

Concepcion held that the FAA preempts a state-law rule that interferes with fundamental attributes of arbitration "even if [the rule] is desirable for unrelated reasons," such as facilitating the prosecution of "small-dollar claims that might otherwise slip through the legal system." Concepcion did not hold that the FAA preempts state-law rules designed to facilitate prosecution of small-dollar claims even when the rules do not interfere with fundamental attributes of arbitration... 

Slip op. at 47-48. 

Justice Liu, who has become a leading voice in employment law over the last year, wrote the majority opinion, joined by Chief Justice Cantil-Sakauye and Justices Kennard, Werdegar, and Corrigan. Justice Corrigan concurred in the result but expressed the opinion that unconscionability should be found only where the agreement is "so one-sided as to 'shock the conscience.'"  Justice Chin, joined by Justice Baxter, joined in part and dissented in part, arguing that the FAA preempts the Court's approach, and the Court should find the agreement at issue not unconscionable, rather than remanding to the trial court to determine the issue. 

The opinion is available here.