California Supreme Court Weighs in on the Unconscionability Defense to Arbitration Agreements in light of the Arbitration-favorable US Supreme Court decision in AT&T v. Concepcion.

In Sonic-Calabasas v. Moreno (Sonic II), the California Supreme Court recently clarified the scope of the state law doctrine of unconscionability as applied to arbitration agreements in light of the United States Supreme Court’s decision in AT&T v. Concepcion, 131 S. Ct. 1740 (U.S. 2011). Sonic II is the Court’s first attempt at reconciling California law with Concepcion, which clarified the limitations that the Federal Arbitration Act imposes on a state’s capacity to enforce its rules of unconscionability on parties to arbitration agreements.[1] Sonic II is the first of four cases that the California high court is scheduled to consider this year that will decide how California courts will navigate the new legal framework for arbitration agreements created by Concepcion.

In 2011, when Sonic-Calabasas v. Moreno, 51 Cal.4^th 659 (Sonic I) was first decided, the Court held that it was contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to enter an arbitration agreement that waived the employee’s right to a Berman hearing (which is a wage and hour hearing before the California Labor Commissioner’s office, otherwise known as the Division of Labor Standards Enforcement or DLSE).  After Concepcion, however, the decision in Sonic I was vacated and remanded back to the Court for reconsideration.  On review, the Court reversed its previous position and concluded “[w]e agree with Sonic that the FAA as construed by Concepcion preempts Sonic I‘s rule categorically prohibiting waiver of a Berman hearing in arbitration agreements.”

Sonic II, however, goes further and articulates a modified doctrine of unconsionability in which a court must consider whether the arbitration agreement compels an employee to waive statutory benefits or protections.  “Although a court may not refuse to enforce an arbitration agreement imposed on an employee as a condition of employment simply because it requires the employee to bypass a Berman hearing, such an agreement may be unconscionable if it is otherwise unreasonably one-sided in favor of the employer.”

The Court continued, “[t]he 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 the circumstances surrounding the formation of the agreement.  Specifically, Sonic II’s unconscionability doctrine “requires an adhesive arbitration agreement that compels the surrender of Berman protections as a condition of employment to provide for accessible, affordable resolution of wage disputes.”

The court framed its new unconscionability doctrine as follows:

“In sum, we do not hold that any time arbitration is substituted for a judicial or administrative forum, there is a loss of benefits. Nor do we hold that the proponent of arbitration will invariably have to justify the agreement through provision of benefits comparable to those otherwise afforded by statute.… But where, as here, a particular class has been legislatively afforded specific protections in order to mitigate the risks and costs of pursuing certain types of claims, and to the extent those protections do not interfere with fundamental attributes of arbitration, an arbitration agreement requiring a party to forgo those protections may properly be understood not only to substitute one dispute resolution forum for another, but also to compel the loss of a benefit. The benefit lost is not dispositive but may be one factor in an unconscionability analysis.”

Or, as the concurrence succinctly summarized “[t]oday’s decision holds only that unconscionability remains a defense to enforcement of arbitration clause in an employment contract and that, while the relinquishment of Berman procedures is one factor to be weighed in considering unconscionability, this factor alone is not sufficient to support an unconscionability finding.”

Sonic II articulates a new doctrine of unconscionability in light of Concepcion that continues to provide trial courts with discretion to invalidate arbitration agreements in appropriate circumstances.  It is possible that this will lead to inconsistent trial court decisions and provide uncertainty for employers who have utilized arbitration clauses in employment contracts.  As such, employers should review their arbitration agreements carefully to ensure enforceability in light of the new standard.   Finally, employers should confirm that their agreements are not vulnerable to invalidation based on California’s previous rulings of unconscionability.[2]

Looking forward, the California Supreme Court is scheduled to hear three additional cases that involve the application of Concepcion to California’s enforcement of arbitration agreements.  The first is Iskanian v. CLS Transportation Los Angeles, LLC, (2012) 206 Cal.App.4th 949, which will determine whether Concepcion impliedly overruled Gentry v. Superior Court (2007) 42 Cal.4th 443’s four-factor test for invalidating class arbitration waivers.  The second is Gil Sancez v. Valencia Holding Company, LLC (2011) 201 Cal.App.4^th 74 which will address whether the Federal Arbitration Act, as interpreted in Concepcion, preempts state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable.  Finally, the court will consider Baltazar v. Forever 21, Inc., (2012) 212 Cal.App.4th 221, the subject of one of our blogs earlier this year (see https://svelf.com/arbitration-provisions-can-include-provisional-relief-by-courts/#more-375), in deciding whether or not an employment arbitration agreement is unconscionable for lack of mutuality if it contains a clause providing that either party may seek provisional injunctive relief in the courts.

We regularly provide litigation and counseling/drafting advice on these issues. If you would like to discuss these issues further, or have any questions about this blog, please contact us.