The California Supreme Court Creates More Questions Concerning Employee Arbitration Agreements

October 22, 2013


On October 17, 2013, in Sonic-Calabasas A, Inc. v. Moreno, No. BS107161 (Cal. Sup. Ct. Oct. 17, 2013) (“Sonic II”) the California Supreme Court revisited the enforceability of employee arbitration agreements, but it likely managed to create more confusion than clarity. As a result of the Court’s ruling, the waiver of an employee’s right to an administrative wage hearing in a mandatory pre-dispute arbitration agreement is no longer per se unenforceable. Instead, the enforceability of an arbitration agreement that purports to waive such administrative hearings depends on whether it provides employees with an “accessible, affordable process for resolving wage disputes.” The Court did not define what qualifies as an “accessible, affordable process for resolving wage disputes,” however; and also did not articulate a clear standard for making this determination.

In 2011, the California Supreme Court addressed whether the waiver of an administrative hearing, known as a “Berman hearing,” in employee arbitration agreements was permissible. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (“Sonic I”). By way of background, pursuant to the California Labor Code an employee who feels that he or she is owed wages by an employer may file a complaint with the Labor Commissioner. If the commissioner accepts the matter, a “Berman hearing” will be conducted within ninety (90) days to hear the merits of the employee’s claim. The Deputy Labor Commissioner then must decide the issue within fifteen (15) days. Accordingly, this Berman hearing procedure provides an alternative to civil litigation and is intended to provide a “speedy, informal, and affordable method of resolving [employee] wage claims.” See Sonic II, slip op. at 7.

The arbitration agreement at issue in Sonic I applied to all employment disputes, including those that could be brought in an administrative proceeding such as a Berman hearing. The employee challenged the Berman waiver in the arbitration agreement, urging the Court to invalidate the arbitration agreement in its entirety. Though the Court found the Berman waiver to be unconscionable and contrary to public policy, the Court did not invalidate the arbitration agreement. Instead, the Court held that the arbitration agreement could be enforced so long as arbitration was preceded by a Berman hearing at the employee’s request.

Sonic petitioned the United States Supreme Court for a writ of certiorari, which the Court granted. On review, the United States Supreme Court vacated the judgment and remanded the case to the California Supreme Court for further consideration in light of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (a case enforcing class action waivers in consumer arbitration agreements). After a lengthy analysis, the California Supreme Court determined that, because a Berman hearing would substantially delay arbitration, Sonic I’s blanket rule barring waiver of a Berman hearing was invalid. The Court, however, went on to discuss the effect a Berman waiver would have on an arbitration agreement, and specifically, whether such a waiver would impact the enforceability of the agreement as a whole under an unconscionability analysis. Ultimately, the Court determined that the waiver of a Berman hearing is insufficient to invalidate the agreement on unconscionability grounds so long as the “arbitral scheme at issue provides employees with an accessible and affordable process for resolving wage disputes.” Sonic II, slip op. at 35.

Unfortunately, as the dissent pointed out, the Court “offer[ed] no clue as to what it means to be ‘accessible,’ ‘affordable,’ ‘low-cost,’ ‘speedy,’ or ‘effective.’” Sonic II. slip op. at 10. The Court declined to offer any such guidance even though it expressly acknowledged that “no uniformity has emerged in our lower courts” with respect to the correct standard for unconscionability. Instead, the Court merely stated that “[i]t is enough to observe that courts, including ours, have used various nonexclusive formulations . . .” Id. slip op. at 53. But that leaves employers and the lower courts in uncertain waters when it comes to drafting and analyzing arbitration agreements. This uncertainty is almost certain to lead to more litigation and further divergence in the case law.

Notably, the opinion does appear to demonstrate the California Supreme Court’s continued hostility towards arbitration. Despite the fact that the United States Supreme Court directed the California Supreme Court to apply the ruling in Concepcion (which recognized the expansive pro-arbitration policy enshrined by the Federal Arbitration Act), as the dissent notes, the Court instead “formulate[d] yet another device for invalidating arbitration agreements.” Id. slip op. at 28. For example, in the wake of Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000) and California’s stringent arbitration-focused unconscionability analysis, employers have been careful to draft arbitration agreements that have numerous protections for employees – such as a full right to discovery, quasi-appellate review, etc. The California Supreme Court, however, appeared to condone the argument that such provisions could cause a court to determine that the arbitral scheme fails to provide a “speedy, informal, and affordable resolution.” See Sonic II, slip op. at 33-34. In other words, the presence of such provisions would run afoul of Sonic II, while their absence would run afoul of established law regarding unconscionability. A classic Catch-22.

One potential way of dealing with Sonic II may be to include expedited proceedings that employees can opt into of their own volition. Another approach might be to simply exclude administrative proceedings from the scope of mandatory pre-dispute arbitration agreements (which many California arbitration agreements already do). Regardless, employers should definitely consider reviewing existing arbitration agreements in light of Sonic II.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Apalla Chopra, an O'Melveny partner licensed to practice law in Califonia, and Adam KohSweeney, an O'Melveny partner licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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