Sonic-Calabasas v. Moreno: California Supreme Court Holds the Unconscionability Doctrine Survived the U.S. Supreme Court's Concepcion Assault

Workers, consumers, and regular folks of all stripes have some hope, if they live in California. Though the U.S. Supreme Court has marched relentlessly toward completely eviscerating our rights to challenge big corporations when they discriminate or retaliate against us unlawfully or steal from us in various ways, "states' rights" still carry some sway in applying basic contract law. And, California's basic contract law recognizes that some contract terms are just unconscionable, and thus unenforceable.

Today, Justice Goodwin Liu, writing for the Supreme Court, in Sonic-Calabasas v. Moreno, S174475 (Sonic II), in a seventy-page majority opinion, joined by Chief Justice Cantil-Sakauye, and Justices Kennard, Werdegar, and Corrigan, gave new life to our right to challenge contracts that are unconscionable - that is, so unfair, they cannot be enforced. Read the decision here.

Though this Supreme Court (unlike the U.S. Supreme Court) has had a high number of unanimous decisions and harmony, not so, in this case. Justice Corrigan added a three-page concurrence with her two cents, and Justice Chin (joined by Justice Baxter) wrote a 29-page dissent that would not have found the agreement in this case unconscionable.

The Supreme Court in Sonic-Calabasas was reconsidering its prior decision, in Sonic-Calabasas, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I), in light of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion). In Concepcion, as I have written and spoken about previously on this blog here and here, the U.S. Supreme Court rejected California's presumption of unconscionability concerning class action waivers in arbitration agreements (the Discover Bank rule), holding the presumption was discriminatory against arbitration, in violation of the Federal Arbitration Act (FAA). Concepcion drastically undermined our rights as workers and consumers to challenge big companies' indiscretions on a level playing field.

In Sonic I, California's Supreme Court had held that the Federal Arbitration Act did not preempt a state law rule allowing employees to have a hearing with California's Labor Commissioner at the Division of Labor Standards Enforcement (DLSE) (a Berman hearing, as it is called). In light of Concepcion, that holding of Sonic I is dead, according to today's decision. If you signed an arbitration agreement with your employer, you do not have a right to a Berman hearing anymore.

But, that is not the end of the story, fortunately. Today's decision holds:

"Although we conclude that the FAA preempts a state-law rule categorically requiring arbitration to be preceded by a Berman hearing, our holding does not fully resolve the unconscionability claim in this case." Slip Op. at p. 27. "After Concepcion, courts may continue to apply unconscionability doctrine to arbitration agreements." Slip Op. at p. 32.

In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, California's Supreme Court laid out the unconscionability doctrine in the context of arbitration agreements - describing what sorts of arbitration terms go too far in tilting the playing field toward the more powerful party. Armendariz survives, the Supreme Court held today.

The decision by Justice Liu gives several examples of unconscionable terms which are still unacceptable:

• one that effectively gives the more powerful party (which is imposing its own arbitration agreement - called an "adhesion contract") the right to choose a biased arbitrator (Slip Op. at p. 29, citing Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 826–827);
• where "an equal division of costs between employer and employee has the potential in practice of being unreasonably one-sided or burdening an employee's exercise of statutory rights" (citing Armendariz);
• where there is a high threshold for an arbitration appeal that decidedly favors defendants in employment contract disputes (citing Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1076);
• "an arbitration agreement with a damages limitation clause under which the customer does not
  even have the theoretical possibility he or she can be made whole" (citing Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1407);
• "an arbitration agreement that, among other things, impos[ed] upon [the employee] the obligation to pay [the employer's] attorney fees if [the employer] prevails in the proceeding, without granting her the right to recoup her own attorney fees if she prevails" (citing Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 799–800);
• and "where a consumer enters into an adhesive contract that mandates arbitration, it is unconscionable to condition that process on the consumer posting fees he or she cannot pay" (citing Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77).

As the Court explained:

Unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as "overly harsh" (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1532), "unduly oppressive" (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925), "so one-sided as to shock the conscience" (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246), or unfairly one-sided (Little, supra, 29 Cal.4th at p. 1071). All of these formulations point to the central idea that unconscionability doctrine is concerned not with "a simple old-fashioned bad bargain" (Schnuerle v. Insight Communications Co. (Ky. 2012) 376 S.W.3d 561, 575), but with terms that are "unreasonably favorable to the more powerful party" (8 Williston on Contracts (4th ed. 2010) § 18.10, p. 91).

Slip Op. at p. 31.

Significantly, the Court maintained the stance rejecting arbitration agreements that "impair the integrity of the bargaining process or otherwise contravene the public interest or public policy" (Slip Op. at pp. 31-32), though such public policy-driven arguments seemed threatened by American Express, Inc. v. Italian Colors, from June 20, 2013.

Ultimately, Sonic II is a major victory for employees, consumers, and their advocates. The California Supreme Court's analysis, while allowing arbitration agreements to eliminate the Berman hearing right, maintained everything the Berman hearing was designed to accomplish, saying:

The Berman statutes include various features designed to lower the costs and risks for employees in pursuing wage claims, including procedural informality, assistance of a translator, use of an expert adjudicator who is authorized to help the parties by questioning witnesses and explaining issues and terms, and provisions on fee shifting, mandatory undertaking, and assistance of the Labor Commissioner as counsel to help employees defend and enforce any award on appeal. Waiver of these protections does not necessarily render an arbitration agreement unenforceable, nor does it render an arbitration agreement unconscionable per se. But waiver of these protections in the context of an agreement that does not provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability. As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement‘s substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided. In the present case, we remand to the trial court to conduct this fact-specific inquiry.

Slip Op. at p. 33(emph. added).

These days, with a U.S. Supreme Court overtly hostile to workers' and consumers' rights, this is about the best we can hope for.

If you have questions relating to your rights as an employee, or about an arbitration agreement you signed, contact Bryan Schwartz Law today.