Blog

California Supreme Court Clarifies Standard of Unconscionability Needed to Invalidate Arbitration Agreement With Class Action Waiver, While California Legislature Votes to Prohibit Employee Waiver of Wage/Hour Claims in Arbitration Agreements

Just when it looked like arbitration agreements with class action waivers were getting universal approval by this state, the California legislature has decided to interject itself into employee arbitration agreements creating a big hurdle for employers.

In Sanchez v. Valencia Holding Company (Case Number S199119, issued August 3, 2015), the California Supreme Court was asked to determine the standards of unconscionability needed to invalidate an arbitration agreement.

In Sanchez, the Plaintiff filed a putative class action case against car dealer Valencia Holding asserting various allegations including violation of the California Consumer Legal Remedies Act (“CLRA”). Sanchez claimed Valencia Holding made false representations about the condition of a used car Sanchez purchased. Sanchez signed a sales contract which contained an arbitration clause and class action waiver. Valencia brought a motion to compel arbitration, which the trial court denied. The trial court denied the motion to compel arbitration on the basis the CLRA contained a provision that allowed for class action litigation and prohibited class action waiver. After the trial court’s decision, the U.S. Supreme Court issued the decision in AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, which provided the Federal Arbitration Act preempted state laws which prohibited class actions waivers that were contained in consumer arbitration agreements. Despite Concepcion’s ruling, the Court of Appeal in Valencia upheld the trial court’s decision, stating the question was not “the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the arbitration provision and the purposes of the Federal Arbitration Act (FAA).” Rather, the Court of Appeal took issue with the arbitration provision itself and found the arbitration provision to be unenforceable as procedurally and substantively unconscionable. The Court of Appeal found the provision contained terms favorable and to the company to the detriment of the buyer.

The California Supreme Court thereafter granted review in 2012, explaining the issue was whether under Conception, the FAA preempts unconscionability analysis of an arbitration provision in a consumer contract. The Supreme Court found Concepcion did not limit the unconscionability rules applicable to the provisions of the arbitration agreement. The Court found that while the standard of “shock the conscious” is not the only test of unconscionability, an arbitration agreement must be substantially more than a “simple old-fashioned bad bargain” to be characterized as unconscionable.

The Court found the Court of Appeal erred in the finding that the agreement was not unconscionable. Specifically, the Court found the arbitration terms were not unreasonable one-side. Sanchez argued provisions such as those limiting when a party could appeal an arbitration award (i.e., only if a party was given $0 or against a part in excess of $100,000, or included an award for injunctive relief), requiring a party seeking review by three arbitrators to advance the costs, or allowing the parties to maintain rights to self-help remedies were substantively unconscionable. The Court rejected these assertions reasoning the appeal rule was balanced towards both parties, Sanchez had not made any showing that advancing fees/costs would be unaffordable to him, and self-help remedies are always sought outside the litigation process.

The Court further found another CLRA provision–that a consumer’s waiver of his or her right to bring a class action was not enforceable and void–was preempted in that it barred class action waivers in arbitration agreements which were covered by the FAA. The Court noted the CLRA’s anti-waiver provision, when applied, essentially interfered with the fundamental qualities of arbitration (speed and efficiency).

Several weeks following Sanchez, the California State Senate signed a new bill (“AB 465”) which, if passed by the Assembly and signed by the Governor, would add a new provision to the California Labor Code to prohibit any person from requiring an employee:

to waive any legal right, penalty, remedy, forum, or procedure for a violation of any provision of [the California Labor Code], as a condition of employment, including the right to file and pursue a civil action or complaint with, or otherwise notify, the Labor Commission, state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity.

If this bill becomes law, it would make waivers of wage/hour claims and class action waivers invalid if made as a condition of employment. This bill should not affect arbitration agreements relating to claims made under the Government Code (i.e. Fair Employment and Housing Act (“FEHA”)), or other statutes not contained in the California Labor Code. The bill also would make it unlawful to threaten, retaliate, or discriminate against any person who refuses to sign such a waiver, and provides for the award of attorneys’ fees to the prevailing claimant.

Since this law would essentially prohibit an employer’s use of mandatory arbitration agreements and class action waivers of wage/hour issues, it would stand in contradiction to the U.S. Supreme Court’s policy of favoring arbitration agreement and class action waivers, as well as the Supreme Court’s prohibition of state laws which interfere with the FAA.

What Does this mean for Employers?:
While it remains to be seen whether or not this bill becomes law, it certainly could change the employment arbitration landscape in California, and result in even more clogging of our state courts. This law may be summarily rejected by California federal courts as well, since federal courts seem to lean towards the FAA’s objectives. As this bill rejects mandatory arbitration agreements, voluntary arbitration agreements would not be prohibited in California. If a waiver is knowing, voluntary. in writing, and expressly not made as a condition of employment, this would demonstrate the employee entered the arbitration agreement voluntarily. The bill provides a person seeking to enforce an arbitration agreement would have the burden to show the waiver was knowing and voluntary.
ABOUT THE AUTHOR
Ms. Silva is a graduate of University of the Pacific. She is the head of the firm’s Employment Practices Group. She is a former prosecutor and has considerable trial experience. Contact her at rsilva@tysonmendes.com.