The employment arbitration whipsaw

In last Thursday's decision in OTO, LLC v. Kho, 2019 DJDAR 8320 (2019), the California Supreme Court once again entered into the thicket of wage claim arbitration, attempting to navigate the competing concerns of the Federal Arbitration Act and California employment law. And yet, the court has sailed into rough and forbidding seas.

The court started this journey in Sonic-Calaasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (Sonic I), where it held arbitration agreements that required employees to arbitrate wage claims in the face of an employee election to pursue administrative remedies before the labor commissioner (a so-called "Berman hearing"), were categorically unconscionable. After the U.S. Supreme Court vacated Sonic and remanded the case for reconsideration in light of AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the court reversed course. Since 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 "a Berman hearing causes arbitration to be substantially delayed," the court held that a categorical rule must give way to a "fact-specific inquiry" into whether the arbitration procedures preserve 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, co- 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). Sonic-Calbasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (Sonic II).

OTO returned the court to the Sonic II thicket. In OTO, a service writer for a car dealership was presented with a "dense," "prolix," "single-spaced" one-page arbitration agreement "written in an extremely small font" that he was required to sign on the spot or lose his job. The agreement applied to "nearly any employment-related claims." Arbitrations were conducted before retired judges under the California Arbitration Act. "[F]ull discovery [was] permitted," and the agreement "requires adherence to 'all rules of pleading,'" including rights to file dispositive motions (demurrer, summary judgment, judgment on the pleadings and nonsuit). "[C]ontrolling case law" and statutes governed the allocation of arbitration costs. In other words, the arbitration process required "closely resemble[ed] civil litigation."

Applying California's familiar "sliding scale" approach to unconscionability, the Court of Appeal held that while the facts presented an "extraordinarily high" degree of procedural unconscionability, the arbitration agreement was not substantively unconscionable and fully complied with the requirements established in Armendariz v. Foundation Health Psychare Service, Inc., 24 Cal. 4th 83 (2000). The Supreme Court came to the opposite conclusion on substantive unconscionability.

In Armendariz, the court adopted five indispensable factors for the enforcement of an agreement to arbitrate employment-related claims. "[A]n agreement is lawful if it '(1) provides for neutral arbitrators, (2) provides for more than minimal discovery, (3) requires a written award, (4) provides for all of the types of relief that would otherwise be available in court, and (5) does not require employees to pay either unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum. Thus, an employee who is made to use arbitration as a condition of employment "effectively may vindicate [his or her] statutory cause of action in the arbitral forum."'" By hewing "closely" to ordinary civil litigation, the agreement in OTO was obviously calculated to follow the Armendariz factors.

But, in the eyes of the six-justice majority, this is precisely what doomed the agreement. The majority agreed with the employee -- and the labor commissioner -- that the "arbitral process is so inaccessible and unaffordable ... that it does not offer an effective means for resolving wage disputes" -- in other words, it was too much like litigation, and not enough like the informality of a Berman hearing. While the latter "was specifically designed to give claimants a 'speedy, informal and affordable method' for resolving wages disputes ... the arbitration provided for here incorporates the intricacies of civil litigation." This is the court's new "employment arbitration whipsaw" -- you can satisfy the Armendariz factors, or you can satisfy Sonic II. But you may not be able to satisfy both at the same time.

Is this a "double standard"? You bet. OTO doesn't even shy away from admitting it: "Our cases have taken a different approach in evaluating the compelled arbitration of wage claims, as compared to the arbitration of other types of disputes." So Justice Ming Chin can be forgiven for his bluntness in dissent: "the majority holds that an arbitration agreement is substantively unconscionable -- and therefore unenforceable -- precisely because it prescribes procedures that, according the majority, have been 'carefully crafted to ensure fairness to both sides.' ... If you find that conclusion hard to grasp and counterintuitive, so do I."

As it has done in the past (a prime example is Gentry v. Superior Ct., 42 Cal. 4th 443 (2007)), the majority gives short shrift to FAA preemption, eschewing anything resembling a comprehensive discussion of U.S. Supreme Court doctrine in favor of its own view of what is, and what is not, "fundamental" to arbitration. In doing so, it sets itself once again on a collision course with the U.S. Supreme Court.

The FAA provides that agreements to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 USC Section 2. The U.S. Supreme Court has consistently interpreted this so-called "savings clause" to "establish a sort of 'equal treatment' rule for arbitration contracts." Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018). "A court may invalidate an arbitration agreement based on 'generally applicable contract defenses' like fraud or unconscionability, but not on legal rules that 'apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue.'" Kindred Nursing Centers Ltd. Partnerships v. Clark, 137 S. Ct. 1421 (2017). The "equal-treatment principle" has two broad implications: First, as the California Supreme Court has recognized, unconscionability standards must "be the same for arbitration and nonarbitration agreements" (Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899 (2015)), and applied "evenhandedly" (Sonic II). Second, contract defenses which apply to particular types of contracts are not "generally applicable." Marmet Health Care Center, Inc. v. Brown, 565 U.S. 530 (2012)

The rule established in OTO violates the "equal treatment rule" on both grounds: Not only does it set up a special standard for unconscionability that applies only to arbitration agreements, it sets up multiple standards that apply to the arbitration of particular types of employment disputes. And, to add insult to injury, those standards might be inconsistent. Moreover, even if it did not, earlier this year the U.S. Supreme Court reiterated in Lamps Plus, Inc., v. Varela, 139 S. Ct. 1407 (2019) that even generally-applicable contract defenses are preempted if they "'stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives' of the FAA."

The eternal arbitration tug-of-war between the California and U.S. supreme courts goes on. 