California Supreme Court's moderate approach to arbitration continues

The picture painted by defense counsel of the California Supreme Court's decisions in the area of mandatory arbitration is typically one of unrestrained antipathy for the device, accompanied by dire concern and even more dire predictions of clashes with the U.S. Supreme Court. See, e.g., Anthony J. Oncidi , "Arbitration Wars: A report from the front," Daily Journal, Sept. 10, 2019 (suggesting that the U.S. Supreme Court has "much work left to do in the Golden State"); Katz, "The employment Arbitration Whipsaw," Daily Journal Sept. 3, 2019 (noting that in OTO, LLC v. Kho the California Supreme Court "sets itself once again on a collision course with the U.S. Supreme Court"). These opinions are standard fare, but greatly overstate the friction between the California and U.S. high courts.

In ZB, N.A. v. Superior Court (Lawson) 2019 DJDAR 8825 decided on Sept. 12, 2019, the California Supreme Court issued its latest decision on the subject of the Private Attorneys General Act. Lawson involved a single claim brought under PAGA for various wage and hour violations, seeking as relief civil penalties in fixed amounts and also unpaid wages under Labor Code Section 558. The California Court of Appeal had consistently held that "underpaid wages" are recoverable through PAGA as part of the civil penalty provided by Section 558. See, e.g., Thurman v. Bayshore Transit Mgmt., Inc., 203 Cal. App. 4th 1112, 1145 (2012). Although the California Supreme Court has held that PAGA claims for fixed-amount civil penalties cannot be compelled to individual arbitration (see Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014)), there was a question as to whether civil penalties in the form of "wages" per Section 558 would be exempt from mandatory arbitration under Iskanian or would be treated like damages, and subject to the broad reach of Federal Arbitration Act preemption under the U.S. Supreme Court's watershed decision AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). The Court of Appeal in Lawson had held that PAGA claims seeking unpaid wages cannot be compelled to arbitration, per Iskanian, while other divisions of the Court of Appeal had held otherwise, necessitating review. The California Supreme Court granted review ostensibly to resolve this split of authority regarding whether PAGA claims for unpaid wages under Section 558 could be compelled to arbitration.

The California Supreme Court, in an unexpected plot twist, instead resolved the case on grounds of statutory construction, allowing the court to avoid deciding the thorny arbitration issue. Specifically, the Lawson court closely examined Labor Code Section 558, and determined that, based on the structure of Section 558 and by reference to parallel provisions of the Labor Code, the unpaid wages referenced in Section 558 are not part of that section's civil penalty and are not recoverable through a PAGA action at all. Instead, the court held, the "unpaid wages" portion of Section 558 represents compensatory damages, and that only the labor commissioner may issue a citation for civil penalties and unpaid wages. Aside from providing a straightforward answer to a previously nebulous question of substantive PAGA law (questions remained regarding how wages under Section 558 had to be allocated and distributed, for instance), this also allowed the California Supreme Court to avoid ruling on another FAA preemption issue.

This is not the first time the California Supreme Court has exercised such restraint in the area of mandatory arbitration disputes. In Iskanian, the California Supreme Court had the opportunity to decide not only whether PAGA claims were subject to waiver via arbitration agreements, but also whether the California Supreme Court's decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), remained good law in light of Concepcion. In Gentry, the California Supreme Court had held that class action waivers inserted into mandatory arbitration agreements in the employment context were generally unenforceable as a matter of state law. In Iskanian, the court held that Gentry could not survive Concepcion, and was preempted. Iskanian, 59 Cal. 4th at 366. Notably, the Iskanian court also rejected two other potential bases for decision that would have extended Gentry's reach (that CLS Transportation waived the right to compel arbitration, and that the National Labor Relations Act required that employees be permitted to sue as class). Heeding the U.S. Supreme Court's instructions in Concepcion, the Iskanian court crafted a careful, relatively narrow decision that avoided any conflict with U.S. Supreme Court case law, holding that damages claims can be sent to individual arbitration but that PAGA claims cannot. The U.S. Supreme Court has since rejected at least a half-dozen petitions seeking review of Iskanian.

Similarly, in Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (Sonic II), following a GVR ("grant, vacate and remand") with instructions to consider its prior decision (Sonic I) in light of Concepcion, the California Supreme Court followed the then-new decision, and abandoned its categorical rule prohibiting arbitration agreements that waive the right to a Berman hearing. Instead, the Sonic II court held that the appropriate test was to apply a general unconscionability analysis in which the surrender of the Berman protections could be considered as one factor among many in determining whether an arbitration agreement is "unreasonably one-sided" and thus unenforceable. This multi-factor unconscionability test was intended to eliminate Sonic I's categorical imposition of the delay of a Berman hearing, which frustrated the "fundamental attributes of arbitration" outlined by the U.S. Supreme Court in Concepcion, in favor a flexible approach that sought to salvage the Berman protections, which also included procedural informality, cost and fee shifting, and assistance in collecting awards. Again, in other words, the California Supreme Court thoughtfully yielded to new precedent in the U.S. Supreme Court's ever-accelerating pro-arbitration case law.

Last month, the California Supreme Court's decision in OTO, L.L.C. v. Kho, 2019 DJDAR 8320(Aug. 29, 2019) continued this trend. In Kho, plaintiff, an employee of the car dealership and a native-Chinese speaker, was handed papers including an arbitration agreement by a low-level employee tasked with obtaining signatures from other employees like Kho. The papers were only in English, he had no opportunity to ask questions about them, and was not given copies of them. Moreover, "the contract's arbitration clause [was] contained in a dense, single-spaced paragraph, written in a very small typeface that fills almost an entire page." Unsurprisingly, the Supreme Court held that the arbitration agreement had an "extraordinarily high" degree of procedural unconscionability, thus requiring only slight substantive unconscionability to support nonenforcement. That slight bit of substantive unconscionability was found in the fact that the arbitration process was held to be "inaccessible," because, unlike a Berman hearing, "One Toyota's agreement does not mention how to bring a dispute to arbitration, nor does it suggest where that information might be found." Finding the opacity of the arbitration agreement presented an obstacle to an employee being able to use the employer's arbitration process, the Supreme Court, on these unusual facts, rendered the agreement unenforceable.

Defense counsel's recent guest columns ignore the aberrant, extreme facts in Kho, instead suggesting that it lays out a standard that is impossible to satisfy, leading to the rhetorical plea of "What's a California employer supposed to do now?" See "Arbitration Wars: A report from the front." However, an employer need not throw up its hands just yet. It seems that drafting a simple, short arbitration agreement, double-spaced and in 12-point font, that clearly explains how to engage the arbitration process, would go a long way to achieving the employer's goal. Perhaps by also having an HR professional offer to answer employees' questions, and making the agreement available in employees' native language, enforceability would be assured.

The canard of describing the California Supreme Court as a rogue actor when it comes to mandatory arbitration is belied by the record. The California Supreme Court has carefully avoided answering unnecessary questions, has overruled its prior precedent when appropriate, and has replaced bright line rules with flexible tests, all in an effort to craft a moderate and fair arbitration jurisprudence that hews to U.S. Supreme Court precedent. In short, despite defense counsel's frequent exasperation, the California Supreme Court's approach strikes the appropriate balance. 

Mr. Danas has argued dozens of appeals in the state and federal appellate courts, including Iskanian v. CLS Transportation Services, McGill v. Citibank, and Williams v. Superior Court (Marshalls), all in the California Supreme Court.