Labor & Employment Law Daily California Supreme Court finds oppressive circumstances in which worker signed arbitration agreement rendered it unenforceable
Friday, September 6, 2019

California Supreme Court finds oppressive circumstances in which worker signed arbitration agreement rendered it unenforceable

By Ronald Miller, J.D.

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.

In view of the oppressive circumstances in which an employee, who spoke Chinese as a first language, entered into an arbitration agreement, a divided California Supreme Court concluded that the agreement was unconscionable, rendering it unenforceable. The state high court concluded that the ultimate question was whether the employee, through oppression or surprise, was coerced or misled into making an unfair bargain. Moreover, the substantive fairness of this particular agreement must be considered in terms of what the employee gave up and what he received in return. Here, by signing the agreement, the employee surrendered the full panoply of Berman procedures and assistance from the Commissioner of Labor. In return, he got a 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. Justice Chin filed a separate dissenting opinion (OTO, LLC v. Kho, August 29, 2019, Corrigan, C.).

In January 2010, the employee was hired as a service technician by an automobile dealership. Three years later, a HR employee approached his workstation and asked him to sign several documents. He was required to sign them immediately and return then to the HR employee, who waited at his workstation. The employee’s first language was Chinese. He had no opportunity to read the documents and the contents were not explained to him. Moreover, he was not given copies of the documents in either language.

Arbitration clause. One of the documents was titled “Comprehensive Agreement—Employment At-Will and Arbitration.” The arbitration clause is contained in a dense, single-spaced paragraph, written in very small typeface that fills almost an entire page. Under its terms, nearly any employment-related claim made by either party must be submitted to binding arbitration, subject to limited exceptions. Class and collective proceedings are generally prohibited. Arbitrations must be conducted before a retired superior court judge, pursuant to the California Arbitration Act, with full discovery permitted. The agreement requires adherence to all rules of pleading and all rules of evidence.

The agreement did not address the allocation of costs, but refers to Code of Civil Procedure Section 1284.2, which generally provides that parties to an arbitration must bear their own expenses. However, the agreement also states that “controlling case law” or statutes will prevail over Section 1284.2 if there is a conflict.

Berman hearing. His employment ended in April 2014. Several months later, he filed a complaint with the Labor Commissioner for unpaid wages. He rejected a settlement offer from the employer and requested a Berman hearing (which is the administrative procedure provided by the Labor Code to recover unpaid wages). The hearing was set for August 2015. However, days before the hearing was to take place, the employer filed a petition to compel arbitration and stay the administrative proceedings.

The employer did not serve the petition on the employee. A hearing officer refused to take the hearing off the calendar, and the employer’s counsel appeared at the scheduled time, but left after serving the employee the petition to compel arbitration. Proceeding without the employer, the hearing officer awarded the employee $102,921 in unpaid wages and $55,634 in liquidated damages. The employer sought to vacate the award. The Labor Commissioner intervened.

Lower court rulings. The trial court vacated the Labor Commissioner’s award, concluding that the hearing should not have proceeded in the employer’s absence. However, it did not compel arbitration. It found a high degree of procedural unconscionability attended the agreement’s execution. The court also found the agreement substantively unconscionable under Sonic-Calabasas A, Inc. v. Moreno (Sonic II), because it “fails to provide a speedy, informal and affordable method of resolving wage claims and had none of the benefits afforded by the Berman procedure.” An appeals court reversed, finding that the arbitration agreement had no objectionable terms.

Waiver of rights. In Sonic-Calabasas A, Inc. v. Moreno (Sonic I), the California Supreme Court held that it is against public policy for an employer to require employees to waive their Berman rights as a condition of employment, and that an arbitration effectively waiving Berman rights is substantively unconscionable as a matter of law. However, that decision was vacated in light of the U.S. Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion.

On remand, the California Supreme Court acknowledged the U.S. Supreme Court’s admonition that states “cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Concepcion taught that “[c]ourts cannot impose unconscionability rules that interfere with arbitral efficiency, including rules forbidding waiver of administrative procedures that delay arbitration.” Nevertheless, the state high court noted that unconscionability remains a valid defense to enforcement. 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.

Unconscionability. Here, the California Supreme Court found the circumstances demonstrated significant oppression. The agreement was presented to the employee in his workstation along with other employment-related documents. Neither its contents nor its significance was explained. He was required to sign the agreement to keep the job he had held for three years. Further, because the employer used a piece-rate compensation system, any time the employee spent reviewing the agreement would have reduced his pay. Additionally, the employer selected a low-level employee to present the agreement, creating the impression that no request for an explanation was expected and any such request would be unavailing. Further, by having the HR employee wait for the documents, the employer conveyed an expectation that the employee had to sign them immediately, without examination or consultation with counsel. Under such circumstances, the agreement was unenforceable. The California Supreme Court reversed the judgment of the appeals court.

Dissent. In a lengthy dissent, Justice Chin observed that the majority ruled on the basis that the arbitration procedures in this case were not as advantageous for employees’ unpaid wage claims as the statutory process known as the Berman procedure. He argued that the majority’s analysis and conclusion were incorrect under state law.

The dissent also believed that the FAA precluded the majority from invalidating this arbitration agreement based on its view that, for purposes of vindicating employees’ “statutory rights,” the prescribed arbitration procedure was not as effective as the statutory Berman procedure. Further, the dissent found the majority’s analysis of procedural unconscionability was inconsistent with established California law. Moreover, the dissent argued that the majority ruling violated federal and state-law principles by invalidating the arbitration rules to which the parties agreed because they are not as advantageous for the employee as the Berman procedure. Such a conclusion is both inconsistent with California law and preempted by the FAA, argued the dissent.

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