The California Supreme Court recently issued its long-awaited decision in Sonic-Calabasas, Inc. v. Moreno. The Court had earlier ruled that provisions in an arbitration agreement that purportedly waived an employee’s right to seek an administrative “Berman hearing” before the California Labor Commissioner are substantively and procedurally unconscionable. On October 17, 2013, the California Supreme Court found that the Federal Arbitration Act (“FAA”) preempts a California ruling prohibiting the waiver of a Berman hearing. The Court reasoned that a categorical rule requiring the parties to participate in such an administrative hearing, notwithstanding the existence of an arbitration agreement, was contrary to the spirit of the FAA. However, the Court also found that a waiver of a Berman hearing in the context of an arbitration agreement that failed to provide an effective forum for resolving employment disputes could nevertheless be unconscionable and unenforceable. The Court remanded the case to the trial court to determine whether the arbitration agreement at issue fails an unconscionability analysis.
Moreno is a former employee of Sonic-Calabasas A, Inc. (“Sonic”), which owns and operates an automobile dealership. As a condition of employment, Moreno signed an agreement that required the parties 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 leaving his position with Sonic, Moreno filed an administrative claim for unpaid vacation time and waiting time penalties and sought a 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 court refused to order arbitration. Sonic appealed the trial court’s decision to the California Court of Appeal, which ordered the matter to be arbitrated.
Moreno then sought review before the California Supreme Court. In February 2011, in a 4-3 decision, the California Supreme Court sided with Moreno and reversed the Court of Appeal’s decision (“Sonic I”). The Court upheld the trial court’s holding that the arbitration agreement was contrary to public policy and unconscionable. The Court found the waiver was procedurally unconscionable because the arbitration agreement – imposed as a condition of employment – was a contract of adhesion. The Court also found the waiver was substantively unconscionable because only the employer benefits from eliminating the employee-friendly Berman procedures.
Sonic petitioned the U.S. Supreme Court for a writ of certiorari. On October 31, 2011, the U.S. Supreme Court vacated the California Supreme Court’s decision, and remanded the case for further consideration in light of the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion. In Concepcion, the U.S. Supreme Court 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.
Sonic II Decision
In Sonic II, the Court concluded that because compelling the parties to undergo a Berman hearing would impose significant delays in the commencement of arbitration, the approach the Court took in Sonic I is inconsistent with the FAA. Accordingly, the Court held that the FAA preempts Sonic I’s rule categorically prohibiting waiver of a Berman hearing in a predispute arbitration agreement imposed on an employee as a condition of employment. However, the Court also held that after Concepcion, state courts can still invalidate arbitration agreements if determined to be procedurally and substantively unconscionable (based on unfair terms above and beyond precluding an administrative hearing). The Court remanded the case to the trial court to re-examine the arbitration agreement and all the facts as a whole and to determine whether the Sonic arbitration agreement is enforceable or unconscionable.
Implications for Employers
In Sonic II the California Supreme Court did not create a bright line rule for analyzing whether an arbitration agreement is unconscionable, and it remain unclear how trial courts will interpret the murky opinion. However, the tone of the decision appears to warn employers that they must think twice before requiring arbitration agreements that in any way dissuade employees from enforcing their state law rights. California employers should review their arbitration agreements to ensure that they do not contain any overreaching provisions that could give a trial court an excuse to invalidate them as unconscionable on the ground that they unfairly advantage the employer.