• California Supreme Court: Federal Arbitration Act Preempts State Labor Hearing Waiver Rule
  • October 29, 2013
  • Law Firm: Jackson Lewis P.C. - White Plains Office
  • The Federal Arbitration Act (“FAA”) preempts California law prohibiting the waiver of an administrative hearing before the California Labor Commissioner in an employment arbitration agreement, the California Supreme Court ruled in a 5-2 decision. Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Cal. Oct. 17, 2013).

    In a lengthy opinion authored by Justice Goodwin Liu, the Court also held that unconscionability remains a viable challenge to arbitration agreements and that trial courts should consider the surrender of an administrative hearing as a factor in determining whether an arbitration agreement is unconscionable. Chief Justice Tani Gorre Cantil-Sakauye and Justices Joyce L. Kennard, Kathryn M. Werdegar, and Carol A. Corrigan joined in this opinion. Because the trial court did not develop evidence regarding unconscionability, the Court returned the case to the trial court to address this issue.

    Justice Ming W. Chin, joined by Justice Marvin R. Baxter, vigorously dissented. He criticized the majority’s unconscionability analysis, finding it inconsistent with the FAA and controlling California law. Justice Corrigan issued a concurring opinion criticizing the majority’s failure to articulate a clear standard for determining unconscionability in employment arbitration agreements.

    Background and Procedural History
    Frank Moreno worked for Sonic-Calabasas A, Inc., an automobile dealership. As a condition of his employment, Moreno signed an arbitration agreement requiring employment disputes be submitted to binding arbitration under the FAA. The agreement excluded certain types of claims, including those before the California Department of Fair Employment and Housing, but not before the California Labor Commissioner.

    Moreno left Sonic in 2006 and filed a claim for unpaid vacation time with the California Labor Commissioner. Sonic filed a motion to compel arbitration, arguing that the arbitration agreement barred Moreno’s action. The trial court denied the motion as premature, and Sonic appealed. The California Court of Appeal ruled the arbitration agreement waived Moreno’s right to an administrative adjudication of his claim (commonly referred to as a “Berman hearing”) and was not unconscionable. On Moreno’s appeal, the California Supreme Court reversed, holding that Moreno could not be required to waive his right to a Berman hearing and that the waiver was unconscionable. However, the California Supreme Court did not invalidate the entire agreement; rather, it held the arbitration agreement could be enforced so long as arbitration was preceded by a Berman hearing, if the employee so requested.

    The U.S. Supreme Court granted review of the case, vacated the judgment, and remanded the case for further consideration in light of its decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

    Applicable Law
    In Concepcion, the U.S. Supreme Court struck down California law prohibiting class action waivers in consumer arbitration agreements as preempted by the FAA. It emphasized that the FAA reflects the strong federal policy favoring arbitration and the enforcement of arbitration agreements according to their terms. The Court found that, although the FAA savings clause preserved generally applicable contract defenses, such as unconscionability, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”

    Prohibition of Berman Hearing Waivers Preempted
    Sonic argued at the California Supreme Court that, under Concepcion, the FAA preempted California’s rule prohibiting the waiver of Berman procedures. The Court agreed, finding that compelling parties to undergo a Berman hearing would impose significant delays in the arbitration proceedings. In addition, it pointed out, the U.S. Supreme Court “made clear that courts cannot impose unconscionability rules that interfere with arbitral efficiency, including rules forbidding waiver of administrative procedures that delay arbitration.”

    The Court nevertheless emphasized that unconscionability remains a valid defense to a petition to compel arbitration. Although the waiver provision alone may not support a finding of unconscionability, the Court stressed that a trial court may consider the employee’s waiver of a Berman hearing as a “factor” in determining whether the arbitration agreement is unconscionable. The Court stated, “As with any contract, the unconscionability inquiry requires a 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.” Cautioning that the unconscionability inquiry was not “a license for courts to impose their renditions of an ideal arbitral scheme,” the Court instructed that courts may not “decline to enforce an arbitration agreement simply on the ground that it appears to be a bad bargain or that one party could have done better.” That being said, the Court also explained that, when assessing whether an agreement is unconscionable, trial courts should focus 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.’” Because the record was not fully developed on these issues, the Court returned the case to the trial court to address them.

    Justice Chin dissented, asserting that the case should not be remanded on unconscionability because Moreno forfeited that claim and could not prove the arbitration agreement was unconscionable. Declaring the majority’s approach inconsistent with the FAA and California law, Justice Chin described the majority’s analysis as “a case-by-case, hopelessly vague, subjective, and indeterminable assessment of (1) the value of the benefits of the Berman procedure to a particular employee, and (2) the accessibility and affordability to that employee of the specific arbitration procedure to which he or she has agreed.”

    ***

    The Court did little to clarify California case law on unconscionability as applied to employment arbitration agreements. Rather, it added a new layer of inquiry for arbitration agreements containing waivers of administrative proceedings.

    Further, in stating that courts determining motions to compel arbitration should consider “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’,” the California Supreme Court’s opinion appears incongruent with the U.S. Supreme Court’s ruling in American Express Corp. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013). In American Express, the U.S. Supreme Court held that the FAA precludes courts from invalidating arbitration agreements containing class arbitration waivers even where doing so would cause plaintiffs to incur more in costs to arbitrate their claims than they could possibly recover.