Unconscionable Arbitration Agreements are unenforceable under California Law -- Sonic-Calabasas v. Moreno

Sonic-Calabasas A, Inc. v. Moreno, addressed the specific legal issue of whether an employer can require an employee to waive his right to have an administrative hearing before the Labor Commissioner (a so-called "Berman Hearing"), as part of an arbitration agreement.  In the end, the California Supreme Court merely remanded the case back to the trial court to decide whether this result would be "unconscionable" based on all of the surrounding circumstances. 

In Concepcion v. AT&T, the U.S. Supreme Court held that federal law requires arbitration agreements to be enforced "according to their terms" and that state law rules to the contrary are preempted.  But Sonic-Calabasas, pushes back against this federalizing of arbitration contracts by explaining that: (a) the state law doctrine of "unconscionability" may still be used to strike down excessively unfair agreements; (b) California's existing caselaw defining unconscionable and unenforceable arbitration terms is still in effect notwithstanding Concepcion; and (c) California courts should continue to evaluate arbitration agreements under the totality of the facts surrounding their formation and substantive terms to determine if "the overall bargain was unreasonably one-sided." 

Examples of arbitration terms cited by the Court as unconscionable include:

  • An arbitration agreement that "effectively gave the party imposing an adhesive contract the right to choose a biased arbitrator."
  • An equal division of costs that "has the potential in practice of being unreasonably one-sided or burdening an employee's exercise of statutory rights."
  • A  $50,000 threshold for an arbitration appeal that "decidedly favored defendants in employment contract disputes."
  • A clause limiting the recovery of damages.
  • An "obligation to pay [the employer's] attorney fees if [the employer] prevails in the proceeding, without granting [the employee] the right to recoup her own attorney fees if she prevails.”
  • A requirement "to pay $8,000 in administrative fees to initiate the arbitration."

Sonic-Calabasas therefore stands for the proposition that the permissible terms of an arbitration agreement in California have not necessarily changed much in the aftermath of Concepcion.  The legal basis for evaluating these agreements, however, should be grounded in a case-by-case analysis under  principles of "unconcionability" rather than on any "categorical" rules based on public policy.  

The unaddressed "elephant in the room" however is whether an arbitration agreement that requires a waiver of class remedies may be found to be unconscionable and unenforceable.  This issue is still pending before the California Supreme Court.  However, the groundwork laid in Sonic-Calabasas suggests that the court is leaning in that direction.      

 

 

 

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