“Unconscionability” is alive and well, as last week the California high Court renewed its 30-year running dog fight with the U.S. Supreme Court over the enforceability of arbitration agreements. In One Toyota of Oakland v. Kho (“OTO”), the California Court struck down an arbitration agreement as “unconscionable,” and allowed an employee to proceed with administrative proceedings before the Labor Commissioner in a routine wage and hour case. While purporting to base its decision on a “fact specific” analysis, the opinion will make it very difficult to compel any wage and hour case to arbitration.
In 2000 in Armendariz, the California Supreme Court largely invented a new doctrine of “unconscionability” which, unhinged from traditional contract analysis, potentially allows a trial judge to deny arbitration where she feels the circumstances are just darned unfair. That potential was on full display in OTO.
The Court in OTO went out of its way to find that the arbitration agreement (a condition of employment) was highly “procedurally unconscionable,” and fraught with “surprise” and “oppression,” and, of course, “lack of negotiation” and “unequal bargaining power.” (So, unless the arbitration agreement has an opt-out provision, that the employer can prove the employee really, really, understood, the risk of “procedural unconscionability” is high.) Having found that the employer engaged in “unconscionable” behavior in drafting and implementing its arbitration agreement, the Supreme Court thus nimbly moved on to find that the agreement was also “substantively unconscionable.”
While Armendariz requires that an arbitration agreement must provide many of the procedural protections of traditional litigation in order to avoid “unconscionability,” those features ironically can now actually create “unconscionability” when the employee seeks to invoke the administrative remedies under the Labor Code. The “Berman Hearing” is an informal, non-binding trial before a hearing officer to adjudicate wage and hour claims. It is apparently just darned unfair to deprive an employee of this remedy notwithstanding a duly-executed arbitration agreement that dictates otherwise.
The dissent in OTO points out that the six-justice majority not only appears to have deviated from its own prior precedent, but also, once again, runs afoul of U.S. Supreme Court precedent on the preemptive effect of the Federal Arbitration Act (“FAA”). The U.S. Supreme Court has intervened in the past to remind the California Courts that the FAA preempts such attempts to curtail arbitration. See e.g. Perry v. Thomas, 482 U.S. 483 (1987); ATT Mobility v. Concepcion, 563 U.S. 333 (2011).
In recent years, the California Court has attempted to carve out special exceptions to the applicability of the FAA for the California Private Attorneys General Act in Iskanian, the California Business and Professions Code in McGill, and now, in OTO, the “Berman Hearing” under the California Labor Code. The California Court may once again be setting up a constitutional confrontation with the U.S. Supreme Court over the supremacy of Congressional legislation and the enforceability of arbitration agreements.