The law governing employment arbitration agreements in California is in an
almost constant state of flux. Ever since the U.S. Supreme Court's decision in
AT&T ...
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Bender’s Labor & Employment Bulletin
Recent Law Governing Employment Arbitration Agreements: California Courts Push Back* By Arthur F. Silbergeld and Jennifer A. Awrey Introduction The law governing employment arbitration agreements in California is in an almost constant state of flux. Ever since the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion,1 California courts have struggled to preserve an independent path for analyzing the enforceability of employment arbitration agreements. Specifically, Concepcion held that California contract law, which had deemed that class-action waivers in arbitration agreements rendered them unenforceable in certain circumstances, is preempted by the Federal Arbitration Act (‘‘FAA’’). Concepcion determined that the California Supreme Court decision invalidating such waivers was as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, thus paving the way for employers to compel arbitration on an individual basis.2 Employer advocates seek to apply Concepcion broadly, often arguing that, under Concepcion and subsequent United States Supreme Court decisions, the FAA preempts much of preexisting California law invalidating arbitration agreements. But the California courts, determined to find a different balance between individual and collective rights, are continuing a tug of war with the federal Supreme Court on the issue. Two recent decisions discussed in this article make clear that the unconscionability doctrine that California law applies to the formation and terms of agreements to
* Reprinted from Bender’s California Labor and Employment Bulletin, 2014 Bender’s Calif. Lab. & Empl. Bull. 1 (January 2014). 1
AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). To view Supreme Court briefs related to the AT&T Mobility LLC case, go to 2009 U.S. Briefs 893 on Lexis.com. To view oral argument transcripts, go to 2010 U.S. Trans. LEXIS 64. 2 AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).
arbitrate employment disputes trumps the view of the United States Supreme Court — that the FAA broadly prevents states in almost all cases from invalidating arbitration agreements based on the availability of class action procedures. This is so regardless of whether enforcement of an arbitration agreement is decided by a California court or a federal court applying California law. In Sonic-Calabasas A, Inc. v. Moreno (Sonic I), the California Supreme Court initially held that an arbitration agreement precluding an employee from proceeding with a wage hearing was unconscionable.3 The United States Supreme Court granted certiorari and sent the decision back to the California Supreme Court to reconsider in light of Concepcion. On remand, the California Supreme Court in Sonic II defended its earlier decision, but held that bypassing a wage hearing is not per se unconscionable. It emphasized, however, that California courts may continue to enforce unconscionability rules that do not ‘‘interfere with fundamental attributes of arbitration.’’4 Similarly, in Chavarria v. Ralphs Grocery Co., the Ninth Circuit rejected a FAA preemption argument under Concepcion and held that an arbitration agreement presented as a condition of employment was unconscionable.5 The Sonic and Chavarria cases illustrate the efforts by the California courts to safeguard portions of state contract law that apply when analyzing the enforceability of arbitration agreements. It seems probable that California courts will continue to closely scrutinize arbitration agreements under state law governing unconscionability, regardless of Concepcion.
Sonic-Calabasas A, Inc. v. Moreno In Sonic-Calabasas A, Inc. v. Moreno, Plaintiff Moreno was required, as a condition of employment, to sign an employment agreement that included a mandatory arbitration clause under the FAA.6 After he left Defendant’s employ, Plaintiff filed a claim before the Division of Labor Standards Enforcement (‘‘DLSE’’) seeking additional, unpaid wages. Defendant brought a motion to compel arbitration in civil court, which the court denied.7 Defendant appealed, the Court of Appeal reversed the trial court, and the California Supreme Court granted review.8 3
Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (‘‘Sonic I’’). 4 Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (‘‘Sonic II’’). 5 Chavarria v. Ralphs Grocery Co., 733 F.3d 916 (9th Cir. 2013). 6 Sonic II, 57 Cal.4th at 1124-25. 7 Sonic II, 57 Cal.4th at 1126-27. 8 Sonic II, 57 Cal.4th at 1124-25. (Pub. 1239)
January 2014 In Sonic I, the California Supreme Court held it contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a ‘‘Berman hearing.’’9 (A Berman hearing, prescribed by the California Labor Code, is an administrative hearing before a deputy labor commissioner in which an employee can seek to recover alleged unpaid wages without incurring attorneys’ fees.) The Court further held that its rule prohibiting an employee’s waiver of a Berman hearing does not discriminate against arbitration agreements and is, therefore, not preempted by the FAA.10 Instead of invalidating the arbitration agreement, the Court held that if one of the parties is dissatisfied with the result of the Berman hearing, it may, on appeal for a trial de novo, then move to enforce an agreement to arbitrate the wage dispute consistent with the arbitration agreement, just as a dissatisfied party can seek a new trial in civil court absent an arbitration agreement.11 Sonic I was appealed to the United States Supreme Court. The Court granted certiorari, vacated the judgment, and remanded the case to the California Supreme Court to consider in light of AT&T Mobility LLC v. Concepcion.12 In Concepcion, the Court clarified the limitations that the FAA imposes on a state’s capacity to enforce its rules of unconscionability on parties to arbitration agreements.13 On remand, the California Supreme Court concluded that ‘‘because compelling the parties to undergo a Berman hearing would impose significant delays in the commencement of arbitration, the approach [it] took in Sonic I is inconsistent with the FAA.’’14 Reversing its opinion in Sonic I, the Court in Sonic II held ‘‘that the FAA preempts our state-law rule categorically prohibiting waiver of a Berman hearing in a pre-dispute arbitration agreement imposed on an employee as a condition of employment.’’15 Such waivers, in its opinion, are not per se unconscionable, but in so stating the Court allowed room for a lower court to find such a waiver unconscionable in the particular circumstances before it. Thus, the Court stated that, based on its reading of Concepcion, state courts may continue to enforce unconscionability rules that do not ‘‘interfere with fundamental attributes of arbitration.’’16 The court went on to say
21 that even though a court may not refuse to enforce an arbitration agreement imposed on an employee as a condition of employment simply because it waives the employee’s right to a Berman hearing, a court may still find such an arbitration agreement unconscionable ‘‘if it is otherwise unreasonably one-sided in favor of the employer.’’17 Further, the Court noted that an arbitral forum can appropriately serve the same function as a court with respect to allowing employees to pursue wage claims efficiently and allowing the employee to enforce any award.18 ‘‘The fundamental fairness of the bargain, as with all contracts, will depend on what benefits the employee received under the agreement’s substantive terms and the totality of circumstances surrounding the formation of the agreement.’’19 The Court ultimately remanded the case back to the trial court to determine whether the arbitration agreement is unconscionable using the principles clarified in its decision.20
Chavarria v. Ralphs Grocery Co. In Chavarria v. Ralphs Grocery Co., Plaintiff was a former grocery clerk who, at the time of her hire, had signed an employment application agreeing to be bound by Defendant Ralphs Grocery Co.’s mandatory and binding arbitration policy.21 Plaintiff filed a class action against the company for meal and rest break violations and violations under California’s Unfair Competition Law. Ralphs filed a motion to compel individual arbitration and Plaintiff opposed, arguing that the arbitration clause was procedurally and substantively unconscionable. The district court denied the motion, and Ralphs appealed to the Ninth Circuit Court of Appeals.22 The Ninth Circuit affirmed the district court’s ruling, explaining that procedural unconscionability concerns the manner in which the contract was negotiated, focusing on the level of oppression and surprise involved in the agreement, and that substantive unconscionability involves terms so one-sided as to shock the conscience. The Ninth Circuit found the agreement unconscionable on both grounds. Specifically, the Ninth Circuit held that the arbitration policy was procedurally unconscionable because all job applicants had to submit to its terms as a condition of employment, and that it was substantively unconscionable because it effectively gave Ralphs the ability to select the
9
Sonic II, 57 Cal.4th at 1124-25. Sonic I, 51 Cal.4th at 669. 11 Sonic I, 51 Cal.4th at 669. 12 Sonic II, 57 Cal.4th at 1124-25. 13 AT&T Mobility LLC, 131 S.Ct. at 1744. 14 Sonic II, 57 Cal.4th at 1124. 15 Sonic II, 57 Cal.4th at 1124. 16 AT&T Mobility LLC, 131 S.Ct. at 1748. 10
17 18 19 20 21 22
Sonic II, 57 Cal.4th at 1125. Sonic II, 57 Cal.4th at 1125. Sonic II, 57 Cal.4th at 1125. Sonic II, 57 Cal.4th at 1125. Chavarria, 733 F.3d at 919-20. Chavarria, 733 F.3d at 920-21. (Pub. 1239)
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Bender’s Labor & Employment Bulletin
arbitrator in almost all cases, precluded the use of institutional arbitration administrators, namely AAA and JAMS and provided that employees had to pay at least half the arbitration fees.23 Noting the company’s argument that the plaintiff did not even have to agree to arbitrate disputes, the Ninth Circuit stated: ‘‘Ralphs has tilted the scale so far in its favor, both in the circumstances of entering the agreement and its substantive terms, that it ‘shocks the conscience.’’’ Ralphs argued that the Concepcion decision precludes a ruling that blocks enforcement of an arbitration agreement based on a state law finding of unconscionability.24 The Ninth Circuit disagreed, reasoning that Concepcion held the FAA preempts state laws that pose an obstacle to achieving the FAA’s objectives and ‘‘impact arbitration agreements disproportionately.’’25 Ralphs, citing the United States Supreme Court’s decision in American Express Corp. v. Italian Colors Restaurant,26 maintained that the Ninth Circuit could not consider the provision requiring employees to pay half the cost of arbitration.27 The Ninth Circuit rejected this argument as well, reasoning that imposing arbitration costs would ‘‘make access to the forum impracticable.’’28 Further, the Ninth Circuit held that California’s procedural unconscionability rules ‘‘do not disproportionately affect arbitration agreements’’ because they apply equally to the formation of all contracts.29
Conclusion California courts and the Ninth Circuit applying California law are somewhat reluctantly finding the FAA may preempt state law as embodied in at least some prior decisions. But notwithstanding the United States Supreme Court’s decision in Concepcion, California courts will continue to closely analyze the enforceability of the specific provisions of arbitration agreements under state law governing procedural and substantive unconscionability. Consistent with
Armendariz v. Foundation Health Psychcare Services, Inc.,30 the agreement may not limit damages available under any statute; discovery must be available to enable the parties to adequately arbitrate their positions; the agreement must provide for a written decision to allow for judicial review sufficient to ensure the arbitrator’s compliance with the statute(s) in question and the employer must pay all types of costs that are unique to arbitration. Some post-Armendariz decisions require that the agreement provide a copy or an internet link to the Employment Dispute Resolution Rules of the American Arbitration Association. Employers and their counsel should carefully review form arbitration agreements and ensure continued compliance with California law. Arthur F. Silbergeld is an employment litigation partner at Dickstein Shapiro LLP in Los Angeles. Mr. Silbergeld defends employers against wage class action, harassment, discrimination, and wrongful termination claims and counsels clients on employment matters as well as labor relations issues. He can be reached at (310) 772-8308 or
[email protected]. Jennifer A. Awrey is an employment associate at Dickstein Shapiro LLP in Los Angeles. Ms. Awrey defends companies and managers against individual and class action lawsuits pertaining to discrimination, harassment, and wage and hour claims and advises employers on a variety of employment issues. She can be reached at (310) 772-8312 or
[email protected]. Editor’s Note: In the above article, the authors have ably set forth the position of the California courts applying California law to the enforcement of arbitration agreements. Counsel in other states should anticipate that arguments based on California law will be raised in other states in which plaintiffs seek to avoid arbitration and litigate directly before state administrative agencies and courts.
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Chavarria, 733 F.3d at 921-27. Chavarria, 733 F.3d at 926. 25 Chavarria, 733 F.3d at 919. 26 American Exp. Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). 27 Chavarria, 733 F.3d at 926-27, citing American Exp. Co., 133 S. Ct. at 2310. 28 Chavarria, 733 F.3d at 927. 29 Chavarria, 733 F.3d at 926. 24
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24 Cal.4th 83 (2000). (Pub. 1239)
