Arbitration Wars: The California Supreme Court Strikes Back In Sonic II

On October 17, 2013, the California Supreme Court revisited the enforceability of arbitration agreements in California. The Court released its decision Sonic-Calabasas Inc. v. Moreno (Sonic II). In that 5 – 2 ruling, the California Supreme Court reversed its prior decision to strike down an arbitration agreement on the ground of FAA preemption, but remanded the case for analysis of the enforceability of the arbitration agreement under an unconscionability analysis. 

The drama in the Sonic case began two years ago, when in Sonic 1 the California Supreme Court struck down a provision requiring an employee to arbitrate claims for failure to pay wages as unconscionable and contrary to public policy because it required the employee to waive his right to a hearing before the California Labor Commissioner (known as a “Berman hearing”). Two months later, the U.S. Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (“FAA”) preempts any state law prohibition against arbitration of a particular type of claim. The employer in Sonic I appealed to the U.S. Supreme Court, which reversed and vacated the California Supreme Court’s decision without briefing or oral argument and ordered it to reconsider its ruling in light of Concepcion.

On reconsideration in Sonic II, the California Supreme Court reversed its prior decision and held that “the FAA preempts our state law rule categorically prohibiting a waiver of a Berman hearing in a pre-dispute arbitration agreement imposed on an employee as a condition of employment.” The court noted that under Concepcion, courts cannot impose rules that interfere with the efficiency of arbitration, including by requiring administrative procedures, like Berman hearings, that would delay arbitrations.

However, the court majority recognized that “state courts may continue to enforce unconscionability rules that do not interfere with the fundamental attributes of arbitration.” The court noted that the FAA recognizes unconscionability as a defense and that courts may invalidate arbitration agreements that are “unreasonably favorable to one party, considering in context its commercial setting, purpose, and effect.” The court went so far to reason that the loss of a Berman hearing could be a factor in the analysis of whether an arbitration agreement is unconscionable, explaining in detail the advantages and efficiencies for employees in the Berman hearing process. The California Supreme Court then remanded the case back to the trial court to determine the fact-specific question of whether the defendant’s arbitration agreement was unconscionable.

A majority of the California Supreme Court seems intent on narrowing the scope and impact of Concepcion in California. As a result arbitration agreements will be subject to continuing debate in lower courts in California, with employees arguing that Sonic II affirmed that state courts can vigorously police arbitration agreements for unconscionability, and employers arguing that the Supreme Court’s string of strong rulings in favor of arbitration clauses require enforcement of these agreements. At a minimum, the Sonic II decision guarantees that the enforceability of arbitration agreements will remain a hotly contested issue in employment litigation.