California Supreme Court Rejects Unconscionability Attack on Arbitration Agreement

In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the California Supreme Court has rejected an attempt to invalidate an agreement based on its provision for applications to a court for preliminary injunctive relief while the arbitration is pending. The provision simply reiterated a right that is conferred by statute in the absence of such a provision.

Beginning with Armendariz v. Foundation Health Psychcare, 6 P. 3d 669 (Cal. 2000), the California Supreme Court has carefully policed the use of arbitration agreements imposed as a condition of employment. It has directed California courts to refuse enforcement of such agreements if they are procedurally and substantively unconscionable. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, substantive unconscionability on overly harsh or one-sided results. Since virtually all arbitration agreements in the employment context are procedurally unconscionable, the analysis usually focuses on substantive unconscionability. The Armendariz case held that arbitration agreements forced on employees as a condition of employment are not enforceable unless they assure neutrality of the arbitrator, the provision of adequate discovery, require a written decision that will permit a limited form of judicial review, limit costs to what an employee would face in a judicial forum, and make available all remedies that the employee could pursue in court. Since then the Court has:

• Invalidated a provision that allowed appeals to a second arbitrator of awards that exceeded $50,000. Little v. Auto Stiegler, Inc., 63 P.3d 979 (2003).
• Set aside an arbitrator's award that deprived an employee of a hearing on the merits of his unwaivable statutory employment claim based on a clear error of law. Pearson Dental Supplies, Inc. v. Superior Court, 229 P.3d 83 (2010).
• Invalidated an arbitration agreement that would have barred an employee from seeking relief in an administrative hearing before the Labor Commissioner. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 121 Cal. Rptr. 3d 58, 247 P.3d 130 (2011). The Court later reversed itself after the U.S. Supreme Court directed it to reconsider. Sonic-Calabasas A, Inc. v. Moreno, 311 P.3d 184 (2013).
• Refused to enforce an arbitration agreement to the extent it would have required employees to submit PAGA claims to arbitration. Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 173 Cal. Rptr. 3d 289, 327 P.3d 129 (2014).

Its latest decision is Baltazar v. Forever 21, Inc., Case No. S208345 (Mar. 28, 2016). There, the employee had signed a take it or leave it arbitration agreement, which contained three provisions that she claimed were substantively unconscionable:

1. It allowed the parties to seek a temporary restraining order or preliminary injunctive relief in the superior court, which the employee argued the employer was more likely to take advantage of. That was not unconscionable, because it did no more than recite the procedural protections already available under Code of Civil Procedure section 1281.8(b).
2. It listed only employee claims as examples of the types of claims that were subject to arbitration. That was not unconscionable, because the agreement otherwise made clear that all employment claims were subject to arbitration.
3. It required that all necessary steps be taken to protect the employer's trade secrets and proprietary and confidential information from public disclosure. That was not unconscionable, because there was a legitimate commercial need for such protection, and the agreement did not preclude the employee from seeking similar protection for her own confidential information.

Management of PAGA Litigation after Iskanian

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court ruled that claims to enforce civil penalties under the Private Attorneys General Act (PAGA), were not waivable, and refused to enforce a predispute agreement to arbitrate that purported to impose such a waiver. (Class action waivers must be enforced under AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).) In the wage of Iskanian, the trial courts have routinely severed and retained PAGA claims, while ordering non PAGA claims to arbitration.

In Williams v. Superior Court (Pinkerton), Case No. B261007 (Cal. Ct. App. June 9, 2015), the employee's complaint asserted a single representative PAGA claim. The trial court ordered the underlying dispute over whether there had been a Labor Code violation to arbitration. The Second District Court of Appeal reversed the order as contrary to Iskanian. "[W]e conclude that petitioner’s single cause of action under PAGA cannot be split into an arbitrable 'individual claim' and a nonarbitrable representative claim."

Hence, employees who are willing to forego any individual recovery and be content with a percentage of the civil penalties under PAGA may avoid arbitration.

Arbitration Agreement May Not Preclude PAGA Representative Actions

The Labor Code Private Attorneys General Act of 2004 (Labor Code sections 2698 - 2699.5) (PAGA) allows a aggrieved employee to recover civil penalties for violations of the California Labor Code on behalf of himself or herself and other employees. 75 percent of the amount recovered goes to the State and the balance to the aggrieved employees. The Federal Arbitration Act requires all courts in the United States to enforce arbitration agreements, "save upon such grounds as exist at law or in equity for the revocation of any contract." In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court rejected a California Supreme Court ruling that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. (See Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).) The ruling stood as an obstacle to the accomplishment of the FAA's objectives.

The effect of the Concepcion case on class action waivers in the employment context is unsettled. The California Supreme Court has granted review in several cases that raise that issue. The lead case is Iskanian v. CLS Transportation of Los Angeles. Others include Franco v. Arakelian Enterprises and Flores v. West Covina Auto Group.

In Brown v. Superior Court, Case No. H037271 (Jun. 4, 2013), the Sixth District Court of Appeal has ruled that, when applied to the PAGA, an arbitration agreement that purports to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right. Concepcion does not require a different result, because a PAGA claim is asserted on behalf of the State and does not belong to the individual employee.