The
California Supreme Court handed down a decision earlier this year that adds to
the growing body of law surrounding mandatory arbitration agreements and
delivering a victory for employees. The case is Oto, L.L.C. v.
Kho (2019) 8 Cal.5th 111. This decision,
plus the California Legislature’s recent legislation in AB-51,
limit the extent to which employers can attempt to force their employees into binding
arbitration.
Employers
increasingly require their employees to sign mandatory arbitration agreements. By
these agreements, employees waive their right to pursue employment actions
against their employers by any means besides binding arbitration. The
arbitration process often favors employers and effectively stymies employees’
efforts to vindicate their rights, protecting employers that wish to skirt the
law. Employers’ reliance on mandatory arbitration has ballooned following the
past decade of U.S.
Supreme Court cases whittling away at employees’ right to vindicate their
employment grievances in court or through an administrative proceeding. Given
that mandatory arbitration agreements are so widespread, Bryan Schwartz Law has
blogged about them many times, including here,
here,
here,
here,
and here.
One
of the ways in which an employee may be able to escape from the requirements of
a mandatory arbitration agreement is by arguing that the agreement itself is
invalid, using the same legal arguments that could be made as to any contract. Oto
v. Kho addressed one of these contract defenses in particular: the doctrine
of unconscionability.
A
contract might be unconscionable in one of two ways. First, the contract could
be procedurally unconscionable. This means that the circumstances in which
the contract was formed were so unfair that one of the parties could not have
agreed to it based on their own free will.
Second,
the contract could be substantively unconscionable. This means that the
terms of the contract themselves are so unfair against one party that a court
will refuse to enforce the contract.
Both
were present in Oto v. Kho, the California Supreme Court ruled. The plaintiff
in the case, Ken Kho, worked for One Toyota in Oakland, California, for three
years before he was presented with several documents, including a mandatory
arbitration agreement, by a low-level employee. Kho, whose first language is
Chinese, was forced to sign the agreement immediately without a chance to
review the agreement first. Later, Kho filed a complaint with the California
Labor Commissioner against One Toyota for unpaid wages. One Toyota moved to compel
arbitration on the eve of a hearing before the Labor Commissioner and refused
to participate in the proceedings before the Labor Commissioner any further. The
proceedings took place without One Toyota, and the Labor Commissioner entered an
award for Kho.
The
trial court vacated the award but did not compel arbitration. The court of
appeal reversed, holding that, despite the apparent procedural
unconscionability, the agreement was not substantively unconscionable.
The
California Supreme Court disagreed. First, several aspects of the formation of
the agreement smacked of procedural unconscionability. The agreement was
presented to Kho at his workplace, along with other employment-related
documents. No one explained the document or provided a copy in Kho’s native language,
but he was required to sign it in order to keep his job. If Kho had insisted on
taking the time to review the documents, his pay would have been reduced
because he was paid on a piece-rate basis. The agreement was communicated to
Kho by a low-level employee, indicating that One Toyota would not entertain any
request for explanation. Furthermore, the low-level employee waited for Kho to
review and execute the agreement, which created the impression that Kho was
expected to do so immediately. One Toyota did not give Kho a copy of the
executed agreement.
Moreover,
the language of the agreement was rife with complex legalese and convoluted
sentences. This dense paragraph was printed on tiny font; the court of appeal
characterized it as “visually impenetrable.” The agreement’s deceptive nature
was also apparent in how it characterized the responsibility for the costs of
arbitration. The agreement set forth that the costs of arbitration would be split
between the parties unless controlling case law provided otherwise, without
noting that the controlling decision in Armendariz v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83, created an exception
to this default rule in employment cases. Taken together, these aspects of the
agreement demonstrated that it “did not promote voluntary or informed agreement.”
Second,
the agreement was substantively unconscionable. It provided no indication as to
how one could bring an action in arbitration, as the agreement required. The process
set forth in the mandatory arbitration agreement was as complex and intricate
as the process for civil litigation, requiring arbitration to be initiated
through the filing of a complaint and setting forth specific motions and
discovery procedures. These procedures ran counter to the supposed benefits of
arbitration—its purported speed and efficiency. The Court was also concerned that
the arbitration agreement all but required claimants to hire legal counsel due
to the complexity of its procedures, forcing employees to incur attorneys’ fees,
whereas employees bringing wage claims have access to free legal assistance
from the Labor Commissioner. Given that Kho’s mandatory arbitration agreement
was both procedurally and substantively unconscionable, it was unenforceable.
The
California Legislature also made a foray into mandatory arbitration provisions,
amending the Fair
Employment and Housing Act (“FEHA”) to protect employees against forced
arbitration. The amendment, AB-51,
makes it an unlawful employment action to require any current or prospective
employee to waive the right to pursue their FEHA claims in court or any other
forum—in other words, employers cannot require employees to sign mandatory arbitration
provisions as a condition of employment. The new legislation, set to take
effect on January 1, 2020, also includes a provision prohibiting employers from
retaliating against any employee because of their refusal to agree to mandatory
arbitration.
If
you have an employment dispute against your current or former employer, contact Bryan Schwartz Law.
