Sonic-Calabasas the hedgehog

The late Oxford philosopher Isaiah Berlin wrote famously about hedgehogs and foxes: The fox knows many little things, but the hedgehog knows one big thing. The state Supreme Court, in last week's opinion in Sonic-Calabasas A, Inc. v. Moreno, 2013 DJDAR 13893 (Oct. 17, 2013) (Sonic II), has gone full hedgehog on us. The court seems to know one big thing about arbitration: It must preserve Armendariz v. Foundation Health Psychcare Svcs., Inc., 24 Cal. 4th 83 (2000), at all costs. Even at the expense of Gentry v. Superior Court, 42 Cal. 4th 443 (2007), cert. denied sub nom Circuit City Stores, Inc. v. Gentry, 552 U.S. 1296 (2008).

Sonic II is a dispute over unpaid vacation wages. Despite an agreement to arbitrate any dispute with his employer, the employee filed an administrative claim with the labor commissioner (seeking a so-called "Berman hearing") after leaving his employer. The employer filed a petition in superior court to compel arbitration of the administrative claim, which the trial court denied. Ultimately, the state Supreme Court affirmed, holding that the employee's statutory right to file an administrative claim was too important to be arbitrated in the first instance, and any arbitration agreement to the contrary was unconscionable. (The court did hold that after the Berman hearing the employer could seek rehearing de novo in accord with the arbitration agreement rather than in court.)

The U.S. Supreme Court didn't even bother to ask for briefing or oral argument. It summarily took the case and issued a short opinion reversing the California court, ordering it reconsider the matter in light of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). See Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, vacated and remanded, 132 S. Ct. 496 (2011) (Sonic I).

After hearing further oral argument in April, the court issued its opinion last week. The five-justice majority (joined in this aspect of the decision by the dissenters as well) wasted no time in reversing Sonic I and declaring that any state law rule that "categorically" denies enforcement of an arbitration agreement in deference to the Berman hearing process was preempted by the Federal Arbitration Act. Reasoning that Concepcion "make[s] clear" that state-law unconscionability principles "must not disfavor arbitration as applied by imposing procedural requirements that 'interfere[] with fundamental attributes of arbitration,'" and that "a Berman hearing causes arbitration to be substantially delayed," it concludes that the rule established in Sonic I "interferes with a fundamental attribute of arbitration - namely, its objective '"to achieve 'streamlined proceedings and expeditious results.'"'"

The analysis did not, however, end there. Concluding that "state-law rules that do not 'interfere[] with fundamental attributes of arbitration' [Citation omitted] do not implicate Concepcion's limits on state unconscionability rules," the majority holds that state courts could still look at the arbitration agreement to determine whether the proceeding it "contemplates" preserves enough of the substantive and procedural "protections" of a Berman hearing to prevent the arbitration from being "unreasonably one-sided." (These protections include its procedural informality and speed, cost- and fee-shifting rules that discourage meritless challenges to an award, cost-free representation for employees who cannot afford counsel, and assistance in collecting awards for employees.) This is a "fact-specific inquiry" that must first be conducted in the trial court. Accordingly, the majority reversed and remanded the matter to the trial court for further proceedings.

In Gentry, the court established a four-factor test to determine when a waiver of class arbitration in an employment agreement is unenforceable: (1) whether the "potential individual recovery" is "modest"; (2) whether there is a "potential for retaliation against members of the class"; (3) whether "absent members of the class may be ill informed of their rights"; and (4) whether there exist other "real world obstacles to the vindication of class members' rights ... through individual arbitration." It is hard to see how the unanimous portion of the decision - holding that the rule of Sonic I is preempted by the FAA - can be reconciled with the conclusion that the rule of Gentry has any continuing vitality.

"According to Concepcion," Sonic II concludes, "class wide arbitration interferes with fundamental attributes in several ways," namely: It makes arbitration "slower, more costly, and more likely to generate procedural morass"; it "'requires procedural formality' because of due process concerns"; and it "'increases risks to defendants' and 'is poorly suited to the higher stakes of class litigation' because of the lack of judicial review." Gentry clearly "disfavor[s] arbitration as applied by imposing procedural requirements that 'interfere[] with fundamental attributes of arbitration.'" It, no less than the rule of Sonic I, must fall before the FAA under Concepcion.

Gentry's continuing vitality is pending before the court in Iskanian v. CLS Transportation Los Angeles, LLC, 142 Cal. Rptr. 3d 372 (2012) (rev. granted). The court is now likely poised to reverse itself.

A second question pending in Iskanian concerns the continuing vitality of Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), cert. denied, 132 S. Ct. 1910 (2012), which held that a provision in an arbitration agreement providing that a party waived the right to seek class or representative relief in arbitration could not be enforced against a lawsuit under the Labor Code Private Attorneys General Act, California Labor Code Sections 2698 et seq. The very reasons cited in Sonic II for why Gentry "interferes with fundamental attributes" of arbitration apply equally to Brown, especially the third reason: It "'increases risks to defendants' and 'is poorly suited to the higher stakes of class litigation' because of the lack of judicial review."

Sonic I expressly drew from two previous examples of "conditions that [state] public policy could place on arbitration agreements": Gentry and Armendariz. As explained above, Sonic II leaves no breathing room for Gentry (or Brown). The nonunanimous portion of Sonic II attempts to carve some out for Armendariz, which conditions enforcement of employment-related arbitration agreements on the existence of certain procedural features of the arbitration process.

Whether Sonic II will succeed in doing so remains to be seen. That portion of the majority opinion is subject to a vigorous dissent by Justice Ming Chin (joined by Justice Marvin Baxter). That dissent raises in large part the same concerns about FAA preemption that first attracted the high court's attention to the case. Certiorari is not certain, but it is a very real possibility.

The near-term implications of Sonic II seem clear: The court is poised in Iskanian to overrule Gentry. Whether the majority can hold onto their sole long-term idea of saving Armendariz remains to be seen.