California Supreme Court Follows Concepcion But Allows Courts to Strike Down Unconscionable Arbitration Agreements

Sonic-Calabasas A, Inc. v. Moreno, No. S174475, (October 17, 2013): As expected following the recent decision by the Supreme Court of the United States interpreting the Federal Arbitration Act (FAA), the California Supreme Court struck down its own rule on arbitration agreements. In Sonic-Calabasas A, Inc. v. Moreno, the state’s highest court categorically prohibited the waiver of a Division of Labor Standards Enforcement (DLSE) Berman hearing in a mandatory pre-dispute arbitration agreement as preempted by the FAA. The court kept alive, however, challenges to such arbitration agreements where the employee can show that such agreements are found to be unconscionable.

The case was brought by Frank Moreno, an employee of Sonic-Calabasas A, Inc., who as a condition of employment was required to sign an agreement that required him and his employer to submit all employment disputes “which would otherwise require or allow resort to any court or other governmental dispute resolution forum” to binding arbitration. After ending his employment with Sonic, Moreno filed an administrative claim for unpaid vacation time and “waiting time” penalties and sought a “Berman” hearing on the matter before the California Labor Commissioner. Sonic petitioned the trial court to compel arbitration under the terms of the agreement. The trial judge refused to order arbitration.

Sonic appealed this decision to the California Court of Appeal, which ordered the matter to be arbitrated. Moreno appealed to the California Supreme Court, which sided with him, holding that an employee who has a wage claim against his or her employer has the right to an administrative proceeding before the employee can be compelled to use arbitration, despite the fact that there is a binding arbitration agreement.

The case was appealed to the Supreme Court of the United States, which returned the case to the California Supreme Court in light of its decision in AT&T Mobility LLC v. Concepcion. In Concepcion, the Supreme Court of the United States held that state law and public policy should not be applied in a manner that disfavors arbitration and that the FAA will preempt such state law or public policy. The state supreme court then ordered that the parties file briefs to address the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant.

According to Robert R. Roginson, a shareholder in the Los Angeles office of Ogletree Deakins: “In short, the California Supreme Court ruled that the FAA preempts California’s rule that prohibits a waiver of a Berman hearing in an arbitration agreement imposed on an employee as a condition of employment. This means that a court cannot automatically throw out an arbitration agreement when an employee files a wage claim with the DLSE.”

Roginson added: “The California Supreme Court, however, also ruled that a court may continue to strike down an arbitration agreement if the court finds that the arbitration agreement is unconscionable. In this context, an agreement would be unconscionable if it imposed risks and costs on an employee that make resolution of the wage dispute inaccessible and unaffordable. Unfortunately, the court did not provide a clear standard outlining what factors are determinative as to whether a particular arbitration agreement is ‘unconscionable.’”