Arbitration unconscionability analysis is revitalized, especially as to unpaid wage claims

The California Supreme Court's decision in OTO, LLC v. Kho, 2019 DJDAR 8320 (Aug. 29, 2019), does not change the standards for determining unconscionability in an arbitration agreement, but it is very important nevertheless because of how it applies the existing standards to the facts at hand, particularly if the employee's claim involves unpaid wages.

In OTO, a human resources porter for One Toyota of Oakland approached Ken Kho, a service technician for the company, at his workstation and asked him to sign several documents, while the porter waited. One of the documents was a one and one-quarter page arbitration clause grafted onto an acknowledgment of at-will employment, which included the waiver of a Berman hearing. (When a California employer does not pay wages as required, the employee may either file a civil action in court or file a wage claim with the labor commissioner, which is called a Berman hearing.) Kho exercised his right to a Berman hearing after his employment ended. One Toyota moved to compel arbitration before the Berman hearing began and then did not appear at that hearing, in which a commissioner ordered that Kho receive certain wages. Thereafter, the trial court found the arbitration agreement to be unconscionable. The appellate court reversed, finding the agreement not to be substantively unconscionable. OTO found the agreement to be one-sided and unenforceable.

The court in OTO first reminded that it had held in Sonic I (51 Cal. 4th 659) that the enforceability of an agreement requiring arbitration of wage disputes and the waiver of a Berman hearing to be categorically unconscionable but, thereafter, backed off from that ruling in Sonic II (57 Cal. 4th 1109) and held that Sonic I's categorical rule of unconscionability was preempted by the Federal Arbitration Act, after AT&T Mobility LLC v. Concepcion (563 U.S. 333) vacated Sonic I. Nevertheless, Sonic II provided that an employee's Berman waiver, while not dispositive, remained a significant factor in considering unconscionability. The OTO opinion also added that "So long as the arbitral procedure is relatively 'low-cost' and provides a forum for wage claimants "'to pursue their claims effectively,'" an arbitration in lieu of the Berman process will not, in itself, be considered unconscionable" (citing Sonic II at 1147-48). In other words, the OTO court said, "the arbitral scheme must offer employees an effective means to pursue claims for unpaid wages, and not impose unfair costs or risks on them or erect other barriers to the vindication of their statutory rights. (Authority deleted.) When imposed in a procedurally unconscionable fashion, such barriers to the vindication of rights may become unenforceable."

OTO then summarized existing procedural and substantive unconscionability analysis, which "need not be present in the same degree." Armendariz, 24 Cal. 4th 83, 114 (2000). Instead, they are evaluated on "a sliding scale." "The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement."

Under the first step of procedural unconscionability, where "The pertinent question ... is whether circumstances of the contract's formation created such oppression or surprise that closer scrutiny of its overall fairness is required," OTO found the following facts to demonstrate "significant oppression": "The agreement was presented to Kho in his workspace, along with other employment-related documents. Neither its contents nor its significance was explained." One Toyota "selected a low-level employee, a 'porter,' to present the Agreement, creating the impression that no request for an explanation was expected and any such request would be unavailing." "By having the porter wait for the documents, One Toyota conveyed an expectation that Kho sign them immediately, without examination or consultation with counsel." Kho was also not given a copy of the Agreement. "By its conduct, One Toyota conveyed the impression that negotiation efforts would be futile." "The agreement is a paragon of prolixity, only slightly more than a page long but written in an extremely small font. The single dense paragraph covering arbitration requires 51 lines." "The sentences are complex, filled with statutory references and legal jargon." "A layperson trying to navigate this block text, printed in tiny font, would not have an easy journey." "Although the agreement anticipates that the "controlling case law" of Armendariz would prevail over the statutory default rule, One Toyota's obligation to pay arbitration-related costs would not be evident to anyone without legal knowledge or access to the relevant authorities." "Under these circumstances, Kho's signature attesting to have read and understood the agreement appears formulaic rather than informed." Thus, "On this record, it is virtually impossible to conclude that Kho knew he was giving up his Berman rights and voluntarily agreeing to arbitration instead." As to the above facts (which have been substantially edited), the majority concluded that "Although the same contract terms might pass muster under less coercive circumstances, a worker who is required to trade the Berman process for arbitration should at least have a reasonable opportunity to understand the bargain he is making. Had One Toyota set out the terms of its agreement in a legible format and fairly understandable language, or had it given Kho a reasonable opportunity to seek clarification or advice, this would be a different case."

Having found "substantial procedural unconscionability, OTO noted that "even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable."

As to the second prong of substantive unconscionability, OTO noted that while the waiver of Berman procedures did not, by itself, render an arbitration agreement unconscionable, "substantive unconscionability analysis is still sensitive to "the context of the rights and remedies that otherwise would have been available to the parties." In this phase of the analysis, OTO found that "the agreement does not explain how to initiate arbitration" ; as contrasted to a Berman hearing, this agreement "does not mention how to bring a dispute to arbitration, nor does it suggest where that information might be found"; "it would be difficult for an unsophisticated, unrepresented wage claimant to effectively navigate the agreement's arbitral procedure"; "the arbitration provided for here incorporates the intricacies of civil litigation" which, by implication, when contrasted with the Berman process, is neither speedy, informal nor affordable; "Because the complexity of One Toyota's arbitral process effectively requires that employees hire counsel, there is also force to Kho's argument that the procedure is not an affordable option"; the lack of affordability should be contrasted with the Berman process, including appeal, where counsel is provided without charge by the labor commissioner. Accordingly, OTO concluded "Kho surrendered the full panoply of Berman procedures and assistance we have described. 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. Considering the unusually coercive setting in which this bargain was entered, we conclude it was sufficiently one-sided as to render the agreement unenforceable. (Emphasis in the original.)

OTO expresses the clear intent that cases involving wage claims subject to arbitration agreements should be more "closely scrutinized" than those involving other employment claims. "For (other employment claims) claims, it may well be that an arbitration process closely resembling civil litigation can be as advantageous for the employee as for the employer. (Citation.) ... 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. Employees who agree to arbitrate claims for unpaid wages forgo not just their right to litigate in court, but also their resort to an expedient, largely cost-free administrative procedure."

OTO shall result in one absolute certainty, a probable consequence and some confusion. Any arbitration agreement involving a California wage claim must now be carefully crafted and presented to employees in a legible format and fairly understandable language, along with a reasonable opportunity to seek clarification or advice. Even if the employee's claim does not involve wages, it is probable that unconscionability analysis of the applicable arbitration agreement will now be treated with more scrutiny, as suggested by the format used by the court in OTO. Left unanswered is the standard for evaluating arbitration agreements when they are being applied to wage and non-wage claims made by the same employee. Will the result of that analysis result in a total denial of arbitration or in a bifurcated process, with the non-wage claims being arbitrated and the wage claims proceeding through a Berman hearing or directly in a superior court? 