October 31, 2013

Sonic-Calabasas II: A New Wrinkle In Arbitration Law In California

The California Supreme Court’s decision in Sonic Calabassas A, Inc. v. Moreno has the potential to eliminate a powerful tool used by employers to avoid administrative hearings before the California Department of Labor, Division of Labor Standards Enforcement (DLSE).  Not only that, but the Court has made the already confusing body of law in Calfiornia concerning arbitration agreements even more confusing and it has thumbed its nose at U.S. Supreme Court decisions which command a different ruling.


In 2011, in Concepcion v. AT&T Mobility, the U.S. Supreme Court reversed the California Supreme Court’s rule that class action waivers were per se unconscionable.  Instead, it found that the expedient resolution of lawsuits was a “fundamental attribute” of arbitration and that a class action would run contrary to that purpose.  As a result, California’s unconscionability rules, as applied to class action waivers, were pre-empted by the Federal Arbitration Act (FAA), a federal statute which favors arbitration.

This past summer, in American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court rejected the so-called “effective vindication” doctrine – a rule which had been adopted by California courts among others.  That doctrine found that parties could not be compelled to arbitration when doing so would be so costly or inefficient that they would be deprived of the opportunity to effectively vindicate their legal rights.

These U.S. Supreme Court decisions are binding on California courts, including the California Supreme Court.  That is because the FAA provides a strong presumption favoring arbitration, regardless of whether a case is brought in state or federal court.

It is against this background that the California Supreme Court was called upon to decide whether it was unconscionable for an employee to agree to arbitrate claims and forego his right to an administrative Berman hearing before the DLSE.  This was the second time the California Supreme Court faced the issue.

The Sonic-Calabasas cases

The first time, in what is now called Sonic-Calabasas I, the California Supreme Court held that such an agreement was per se unconscionable.  But, this decision was issued after Concepcion and Italian Colors.  The U.S. Supreme Court vacated the California Supreme Court’s decision and instructed the California Supreme Court to review its decision in light of Concepcion.

The California Supreme Court was left with no choice but to find that the FAA pre-empted its decision in Sonic Calabassas I that waivers of Berman hearings in favor of arbitration were per se unconscionable.   But that is only where the inquiry begins.

It then declared that the waiver of a Berman hearing is nevertheless a “factor” that a court can consider in determining the validity of an arbitration agreement, adopting a “totality of the circumstances” test.  But rather than providing a bright-line rule as to when and how that “factor” applies, the court simply said that a Berman hearing waiver is permissible only if the legal process available to the employee is “accessible, affordable, low-cost, speedy, and effective” – a standard that other justices derided as being “hopelessly vague.”

Quick Takes

This decision seems to be very thin ice indeed, but it may be a while before the U.S. Supreme Court has its say.  As we have cautioned before, the California Supreme Court and its appellate courts find creative ways to avoid following the rules imposed by the FAA and the U.S. Supreme Court and, in fact, this decision is very difficult to square with Concepcion and Italian Colors.  The California Supreme Court’s decision seems to apply a different standard to arbitration agreements involving the waiver of Berman hearings than it does with other contracts – the very problem the FAA was designed to address.  And, the decision does seem to impose a very vague standard as to when these type of arbitration agreements are enforceable, leaving the lower courts with wide latitude to enforce or reject them.

For the time being, however, Sonic Calabasas II is the law of California.  While Berman  hearing waivers serve a very important purpose, especially given the perceived pro-employee bias of the DLSE, it may take another slap-down from the U.S. Supreme Court before California courts are required to enforce them.


Category: Arbitration,