Arbitration agreements must be clear, Supreme Court says

Employers may have to take a closer look at their arbitration agreements after the state Supreme Court Thursday invalidated one on grounds it was unfairly convoluted.

The high court's fact-specific opinion overturning a prior appellate court decision ruled an auto dealer's arbitration agreement suffered from a "high degree of procedural unconscionability" and therefore could not be enforced.

The ruling follows the U.S. Supreme Court's decision upholding arbitrations in AT&T Mobility LLC v. Concepcion.

"Nevertheless, we noted that unconscionability remains a valid defense to enforcement, even after Concepcion. The overarching unconscionability question is whether an agreement is imposed in such an unfair fashion and so unfairly one-sided that it should not be enforced," Justice Carol J. Corrigan wrote on behalf of the majority.

Chief Justice Tani G. Cantil-Sakauye, Justices Goodwin H. Liu, Mariano-Florentino Cuéllar, Leondra R. Kruger, and Joshua P. Groban concurred.

The state high court said the agreement presented to Ken Kho, a One Toyota service technician whose first language was Chinese, was opaque and full of knotty, small-font legalese, including one sentence that was 12 lines long. Further, the employee was only given a few minutes to look over the document and could only consult a low-level clerk about its contents. After signing it, Koh eventually sought unpaid wages from the employer.

As a result, the court said it was impossible to conclude Kho knew he was giving up his right to a Berman hearing, or a hearing over wage claims before a labor board, and was voluntarily agreeing to arbitration when he signed the document.

"What he got in return was access to a formal and highly structured arbitration process that closely resembled civil litigation if he could figure out how to avail himself of its benefits and avoid its pitfalls," wrote Corrigan. "Considering the unusually coercive setting in which this bargain was entered, we conclude it was sufficiently one-sided as to render the agreement unenforceable."

In a stinging dissent, Justice Ming W. Chin said the majority's analysis was based on a hostility toward arbitration even though it was less convoluted than an administrative and judicial hearing.

"It is based on the majority's view that arbitration with such procedures ... is not as advantageous for employees with unpaid wage claims as the potentially multi-tiered, multistep, combined administrative and judicial statutory process known as the Berman procedure," wrote Chin.

The justice said there was nothing deceptive about the document, saying it exclusively dealt with arbitration. Ultimately, he observed the invalidation of the arbitration was precluded by the Federal Arbitration Act.

One Toyota attorney John Phillip Boggs of Fine Boggs & Perkins could not be reached for comment.

Kho's attorney David A. Rosenfeld of Weinberg Roger & Rosenfeld said the decision highlights the need for arbitration provisions to be clear.

"This arbitration was complicated. Every employee in California is going to have to rethink their arbitration provisions," he said. "A lot of them are just as ridiculous."

Glenn Danas of Robins Kaplan LLP,who is not involved with the case, said the decision actually protects the arbitration process.

"The court is honoring employers' supposed interest in fast and efficient proceedings in arbitration by holding that replacement of a Berman hearing with a less efficient, more expensive and formal procedure, when coupled with unusually high procedural unconscionability, will invalidate the agreement," Danas wrote in an email.

Danas said the decision is in line with a state court opinion stating an arbitration is invalid only if it is not accessible and affordable. Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal. 4th 1109, 1146 (Sonic II).

The case now goes back before the trial court to hear claims.

The 1st District Court of Appeal, in reversing the trial court, found the agreement was not substantially unconscionable in part because the employer paid costs for the arbitration.