Monday, April 02, 2012


The judicial tension between California and the U. S. Supreme Court is palpable.  The tension arises out of California court decisions that find arbitration agreements not meeting fairness and equitable criteria to be unenforceable as a “matter of public policy.”  The U.S. Supreme Court is responding in several decisions with its own idea of “public policy” under the Federal Arbitration Act [FAA]. 

Basically, the Supreme Court has stated that the FAA pre-empts California’s restrictions on parties’ agreements to arbitrate.  Ironically, the California Supreme Court has held that under state common law, which continues to govern the formation and existence of contracts generally, an arbitration agreement procured by fraud or overreaching economic power is no contract at all.  The logic is inescapable:  if there is no contract, then there is no conflict with federal law in the interpretation of the “alleged” contract.
This federalism tension is being played out in a wide range of commercial contracts, but within the context of an employee who signs such an agreement as a condition of being hired, or as a condition of continuing employment, the drama is found in the case of Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, which was remanded by the U. S. Supreme Court on appeal (late 2011), with directions that the California Supreme Court should reconsider its 4 to 3 decision to invalidate the employment arbitration agreement. 

Here is the stage on which the drama is played:  The California Supreme Court held that an arbitration provision that required an employee to waive his right to seek a hearing before the California Labor Commissioner was void as a “matter of public policy.” 
The California Supreme Court reasoned that the employee was at a singular disadvantage when denied the opportunity to use the resources of the Labor Commissioner to resolve his $18,000 wage dispute.  

The employee's disadvantages in being denied a Labor Commissioner hearing included the lack of a pre-hearing conference with the Commissioner to resolve the matter, the lack of an expedited hearing process, freedom from the usual rules of procedure and evidence, and the provision for an appeal bond to be posted by the unsuccessful employer on appeal.  Also, the “one way” fee rights by statute available to the employee became a “prevailing party” or “two way” fee shifting right favoring the employer in the arbitration agreement.  

Sounds plenty convincing to me!  The legal jargon used by the court, based on its prior “invalidation” decisions, included:  “procedurally and substantively unconscionable” and “contract of adhesion.” 

“Nonsense” was the U.S. Supreme Court’s response, in effect.  The U.S. Supreme Court reminded the California Court of the federal bench’s decision in AT&T Mobility LLC v Concepcion  [“Concepcion”] Concepcion was a 5-4 decision decided in April 2011, and decided along ideological grounds.  The conservative majority in Concepcion held that class action consumers were required to arbitrate their individual small consumer claims against large companies, despite the impracticality and economic hardships of doing so.  The logic seems to be: the FAA is what is, fair or unfair to individual consumers.  If the law is broken, it is for Congress to fix it.  Until then, the Courts will enforce it.

Prediction:  The clash will continue.  The Supreme Court will win this particular clash of course.  The “remand” was a nice way of saying we expect a different result.  But “Concepcion” addressed an “access to justice” issue in view of the increased costs and other disadvantages of arbitration for the employee.  The employee in Sonic-Calabasas did not create an evidentiary record on appeal that those assumed disadvantages in fact had an economic impact that prevented his access to justice.  A highly paid executive, for example, might very well not be disadvantaged by a waiver of a Labor Commissioner hearing.  

All this to say:  The California Supreme Court has a “way out” by denying the employee’s appeal on grounds other than “unconscionability.”  That is, the Court could hold maintain that its standards of “unconcscionability” still apply (despite Concepcion) but that the employee had failed to make the record on appeal that the standards were triggered. Thus, the employer wins, and the further [likely adverse] review by the U. S. Supreme Court of the more fundamental legal issues is avoided.  

The overall trend however is that more California employment law cases will be arbitrated.  The issue will be, I think, what qualifiers and burdens can the California courts place on employers in view of the Concepcion decision and the Sonic-Calabasas remand.  

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