In a victory for employees, the California Supreme Court held in Sonic-Calabasas v. Moreno (Sonic II) that the Federal Arbitration Act (FAA) does not preempt California rules of unconscionability, meaning that employees can still seek to invalidate forced arbitration agreements that are unreasonably harsh or one-sided. The issue facing the court in Sonic II was whether an employee can be forced to waive a statutory right to have a wage dispute heard by the Labor Commissioner (a “Berman hearing”), and instead be forced to have the wage dispute heard in arbitration without the assistance of a Deputy Labor Commissioner. While this specific issue will be remanded to the trial court for further consideration, the opinion gives insight into how the California Supreme Court interprets FAA arbitration agreements following the US Supreme Court’s holdings in AT&T Mobility v. Concepcion and American Express v. Italian Colors.

It appears the Supreme Court was attempting to achieve a compromise between recognizing FAA preemption law while continuing to allow state courts to strike arbitration agreements as unconscionable when such agreements unfavorably advantage the employer, including when employees have no accessible and affordable forum in which to seek redress for wage disputes. Specifically, the California Supreme Court held that an arbitration agreement that includes a waiver of statutory rights/protections may be unconscionable. The Supreme Court recognized several formulations of the unconscionability standard and discussed a number of new factors (e.g. value of rights/protections waived, availability of an accessible and affordable forum to vindicate wage claims) that may be considered in the unconscionability determination. While the Supreme Court’s opinion does not clarify the unconscionability standard, it seemingly provides employees with greater flexibility to argue unconscionability as a defense to the enforceability of arbitration agreements.

In the 5-2 majority’s holding that the unconscionability test survives Concepcion, as long as there is not a “categorical rule” declaring an agreement unconscionable as to avoid arbitration, the Supreme Court left the door open as to whether Gentry may be upheld since Gentry does not impose a categorical rule, but instead requires trial courts to conduct a multi-factor analysis to determine if an arbitration agreement should be invalidated if the agreement will prevent employees from vindicating their statutory rights.

Interestingly, the California Supreme Court asked a question within the opinion that may guide a legislature in crafting a law in response to class action waivers that seek to compel individual arbitration while not establishing a “categorical rule” (such as the Discover Bank Rule) that will fall prey to FAA preemption under Concepcion. Specifically, the Court indicated that a legislative body could follow the US Supreme Court’s lead in Concepcion by creating a law to protect small dollar claimants by imposing penalties and fees on Defendants, while possibly declaring arbitration agreements as unconscionable if the agreement does not provide similar penalties and fees to the employees as provided in the new statute. Is this a warning to employers seeking to push individual arbitrations agreements to avoid class actions? Time will tell, but the pertinent section from the Court is as follows:

“Suppose that, in light of Concepcion, a state legislature seeking to protect small-dollar claimants were to enact a generally applicable, unwaivable statute similar to the provision just described, requiring a defendant to pay a penalty plus attorney fees if a plaintiff with a low-value claim obtains an award through litigation or arbitration greater than the defendant’s last settlement offer. Nothing in Concepcion suggests that such a statute — which is designed to achieve the same objective as a rule forbidding class waivers but does not interfere with fundamental attributes of arbitration — would be preempted by the FAA. Moreover, the fact that the statute would render invalid an arbitration (or non-arbitration) agreement at odds with the penalty scheme — and thus leave the parties to their usual rights and remedies under state law, including class proceedings — does not mean that the statute has somehow circumvented the FAA’s preemption of state-law rules forbidding class waivers.”

Brian J. Mankin, Esq.