California Supreme Court to Address Post-Concepcion Arbitration Issues
As most California employers are aware, mandatory employment arbitration agreements have taken a lot of hits in California courts. It seems that many (but certainly not all) judges will find any reason they can to refuse enforcement of the agreement. In most cases where enforcement is denied, it is on the basis of a finding that the agreement is unconscionable—meaning that the employee has no meaningful choice but to sign the agreement and the agreement contains terms that are unfair to the employee in some way. Most recently, courts began grappling with the inclusion of “class action waivers” in these agreements, often finding such waiver provisions unconscionable. A class action waiver is a provision in the agreement that makes clear that the employee will be required to arbitrate any individual claims he or she may have against the employer, but will not be permitted to pursue any type of classwide or representative relief in the arbitration. These class action waivers were, and are, common in both employment arbitration agreements and in consumer arbitration agreements. The California Supreme Court issued a decision that became known as the Discover Bank rule, providing grounds to find most class waivers in consumer contracts unconscionable. The California Supreme Court then issued a decision in a case called Gentry, which provided similarly reasoned grounds for finding class waivers in employment arbitration agreements unconscionable. Because the rules were not “bright-line” prohibitions on such waiver provision, these provisions came to be analyzed on a case-by-case basis with some being enforced and some being found unconscionable and unenforceable.
The United States Supreme Court then provided what appears to be bright line guidance on this issue in AT&T Mobility v. Concepcion, in which the Court held that the Federal Arbitration Act preempts California’s Discover Bank rule and permits class action waivers in consumer arbitration agreements. To be clear, the Court acknowledged that arbitration agreements may be found unenforceable on grounds that would apply to the enforceability of any contract (e.g. fraud, duress, unconscionability). However, the Court emphasized that these doctrines may not be used to apply special standards simply due to the fact that an arbitration agreement is at issue.
In the wake of Concepcion, there are unanswered questions about its scope and whether its reasoning applies with equal force to class action waivers in employment arbitration agreements. In other words, is Gentry still good law? There is not yet any published California state court opinion holding that Gentry has been effectively overruled by Concepcion, and many trial courts continue to apply the Gentry criteria to determine whether to enforce a class action waiver in an employment arbitration agreement.
Are employers going to get some guidance on the California Supreme Court’s take on the scope of Concepcion? Perhaps. The California Supreme Court has two cases before it that should require some guidance: Sonic Calabasas v. Moreno, and Sanchez v. Valencia Holding Co.
The Sonic Calabasas case is an interesting one because it is an employment case in which the California Supreme Court held that an arbitration agreement foreclosing an employee’s right to pursue administrative relief for unpaid wages before the DLSE, was unconscionable and unenforceable. Sonic Calabasas petitioned for review by the United Stated Supreme Court, which in turn remanded the case to the California Supreme Court with specific (and interesting) direction to reconsider its decision in light of Concepcion. As a result, the California Supreme Court will have to determine the proper application of Concepcion in this employment context.
Also relating to Concepcion, the California Supreme Court just granted review in Sanchez v. Valencia Holding Co., which involves a class action waiver in a consumer arbitration agreement (similar to the Concepcion case). In Sanchez, the trial court held that the class action waiver was unconscionable and unenforceable, notwithstanding Concepcion. The court of appeal chose a different route and dodged the issue of Concepcion by finding the arbitration agreement as a whole unconscionable, without reaching the propriety of the class action waiver. The court basically reasoned that many other terms (beyond the class waiver) were unconscionable under California state law and that this precluded enforcement of the agreement to arbitrate, even if the class waiver itself passed muster under Concepcion. The California Supreme Court granted review and may provide guidance on its interpretation of the scope of Concepcion and the extent to which it believes California unconscionability law is (or is not) preempted.
California employers should stay tuned for further developments in this important area of evolving law.