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In in this blog I’ve written that both state and federal courts – even in California – seem to have gotten the U.S. Supreme Court’s memo that the Federal Arbitration Act (“FAA”) generally preempts state laws that impinge on arbitration. Two recent cases underscore that trend, but also show that, at least in California, there are limits to FAA preemption, where a party asserts that the arbitration clause is unconscionable.

 

California Supreme Court
The first case was Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Ca. Sup. Ct., 10/17/2013), where the California Supreme Court reconsidered its prior ruling refusing to enforce a predispose arbitration agreement (“PDAA”) because it unconscionably waived an employee’s right to have claims heard by the California Labor Commissioner in what is called a “Berman hearing.” What caused the court to reconsider? Shortly after the first Sonic decision was issued, the U.S. Supreme Court ruled in AT&T Mobility LLC v. Concepcion that the FAA preempts state rules of law that single out PDAAs for disparate treatment.

 

On appeal, a divided court held 5 – 2 that Concepcion required it to reverse its prior holding in Sonic I because “…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…” A key factor, the court opined, was that the delay caused by affording an employee a Berman would undermine the efficiency of arbitration, something expressly forbidden by the Supreme Court. But the court held that Concepcion allows some wriggle room a court reviewing an allegation that a PDAA is unconscionable.

 

The court noted that section 2 of the FAA 9 U.S.C. § 2 allows a court to invalidate a PDAA “… upon such grounds as exist at law or in equity for the revocation of any contract” and that unconscionability was a valid basis to revoke a contract. The key factor is whether the state applies the unconscionability test to contracts in general (permitted) or arbitration clauses in particular (forbidden). “After Concepcion, courts may continue to apply unconscionability doctrine to arbitration agreements… As the FAA contemplates in its savings clause (9 U.S.C. § 2), courts may examine the terms of adhesive arbitration agreements to determine whether they are unreasonably one-sided. What courts may not do, in applying unconscionability doctrine, is to mandate procedural rules that are inconsistent with fundamental attributes of arbitration, even if such rules are ―desirable for unrelated reasons” [citations omitted].

The court remands the matter to the trial court to hear evidence on whether the PDAA is unconscionable. It takes pains to point out that it is attempting to follow Concepcion: “The unconscionability doctrine we have stated above is not preempted by the FAA. In holding that an employee‘s surrender of Berman protections in their totality may be considered as a factor in determining whether an arbitration agreement is unconscionable, our doctrine does not facially discriminate against arbitration. It applies equally to arbitration and nonarbitration agreements that require employees to forgo the Berman protections in resolving wage claims. In addition, our unconscionability doctrine as applied does not pose an obstacle to the achievement of the FAA‘s objectives as construed in Concepcion.”

 

The Ninth Circuit Weighs In
Not to be outdone, the Ninth Circuit a little more than a week later weighed in on the unconscionability issue in another employment case, Chavarria v. Ralph’s Grocery Co., No. 11-56673 (9th Cir., 10/28/2013). This court, too, concedes the preemptive effect of the FAA, but like the Sonic II court concludes that preemption is not absolute where a court is dealing with unconscionability. The Ninth Circuit concludes that a state can apply an unconscionability standard as it applies to contracts generally, and does not have a “disproportionate impact” on PDAAs. Viewed through the prism of California’s unconscionability rules, the court found that the PDAA at hand was both procedurally and substantively unconscionable.

 

Boiled down to its essence, the holding seems to state: 1) we hear the Supreme Court loud and clear on FAA preemption; 2) but the FAA allows PDAAs to be invalidated because of unconscionability if the state’s test is applied to contracts in general and does not have a disproportionate impact on PDAAs; 3) applying those state rules in this case, this PDAA is unconscionable; and 4) this outcome is permitted by Concepcion. Or, as the court says: “The arbitration policy imposed by Ralphs on its employees is unconscionable under California law. That law is not preempted by the FAA.”

 

Whether these decisions will withstand scrutiny by the U.S. Supreme Court remains to be seen. They are both well-reasoned opinions, and seem to have been written to stay within Concepcion.