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Sonic-Calabasas A, Inc. v. Moreno

Supreme Court of California

October 17, 2013

Sonic-Calabasas A, Inc., Plaintiff and Appellant,
Frank Moreno, Defendant and Respondent

Superior Court Ct.App. 2/4 B204902, Los Angeles County Super. Ct. No. BS107161 Aurelio Munoz, Judge

Fine, Boggs & Perkins, John P. Boggs and David J. Reese for Plaintiff and Appellant.

Mayer Brown, Evan M. Tager, Archis A. Parasharami, Brian J. Wong, Donald M. Falk; National Chamber Litigation Center, Inc., and Robin S. Conrad for the Chamber of Commerce of the United States as Amicus Curiae on behalf of Plaintiff and Appellant.

Sheppard, Mullin, Richter & Hampton, Richard J. Simmons, Karin Dougan Vogel and Matthew M. Sonne for Employers Group as Amicus Curiae on behalf of Plaintiff and Appellant.

Horvitz & Levy, Lisa Perrochet, Felix Shafir and James A. Sonne for California New Car Dealers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

Locker Folberg, Miles E. Locker and Rachel Folberg for Defendant and Respondent.

Hina B. Shah; Cynthia Rice; Jose Tello; Miye Goishi; Silas Shawver; Fernando Flores and Charlotte Noss for Asian Law Caucus, Asian Pacific American Legal Center, Bet Tzedek Legal Services, California Rural Legal Assistance, Inc., Centro Legal de La Raza, Garment Worker Center, Hastings Civil Justice Clinic, Katharine and George Alexander Community Law Center, La Raza Centro Legal, Lawyers’ Committee for Civil Rights of the San Francisco Bay Area, Legal Aid Foundation of Los Angeles, Legal Aid Society-Employment Law Center, Maintenance Cooperation Trust Fund, National Employment Law Project, National Lawyers Guild Labor and Employment Committee, Neighborhood Legal Services of Los Angeles County, Wage Justice Center, Women’s Employment Rights Clinic of Golden Gate University School of Law and Worksafe Law Center as Amici Curiae on behalf of Defendant and Respondent.

McGuinn, Hillsman & Palefsky, Cliff Palefsky, Keith Ehrman; Smith & McGinty and Valerie T. McGinty for California Employment Lawyers Association and Consumers Attorneys of California as Amici Curiae on behalf of Defendant and Respondent.

William A. Reich and Anne Hipshman for California Labor Commissioner Julie A. Su as Amicus Curiae on behalf of Defendant and Respondent.


In Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I), we held as a categorical rule that it is contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a Berman hearing, a dispute resolution forum established by the Legislature to assist employees in recovering wages owed. We further held that our rule prohibiting waiver of a Berman hearing does not discriminate against arbitration agreements and is therefore not preempted by the Federal Arbitration Act (FAA). We did not invalidate the arbitration agreement at issue. Instead, we held that if one of the parties is dissatisfied with the result of the Berman hearing, it can move to arbitrate the wage dispute consistent with the arbitration agreement, just as a dissatisfied party can obtain a trial in court without such an agreement.

The United States Supreme Court granted certiorari in this case, vacated the judgment, and remanded the case to this court for consideration in light of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion). In Concepcion, the high court clarified the limitations that the FAA imposes on a state’s capacity to enforce its rules of unconscionability on parties to arbitration agreements. In light of Concepcion, we conclude that because compelling the parties to undergo a Berman hearing would impose significant delays in the commencement of arbitration, the approach we took in Sonic I is inconsistent with the FAA. Accordingly, we now hold, contrary to Sonic I, that the FAA preempts our state-law rule categorically prohibiting waiver of a Berman hearing in a predispute arbitration agreement imposed on an employee as a condition of employment.

At the same time, we conclude that state courts may continue to enforce unconscionability rules that do not “interfere[] with fundamental attributes of arbitration.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1748].) Although a court may not refuse to enforce an arbitration agreement imposed on an employee as a condition of employment simply because it requires the employee to bypass a Berman hearing, such an agreement may be unconscionable if it is otherwise unreasonably one-sided in favor of the employer. As we explained in Sonic I and reiterate below, the Berman statutes confer important benefits on wage claimants by lowering the costs of pursuing their claims and by ensuring that they are able to enforce judgments in their favor. There is no reason why an arbitral forum cannot provide these benefits, and an employee’s surrender of such benefits does not necessarily make the agreement unconscionable. The fundamental fairness of the bargain, as with all contracts, will depend on what benefits the employee received under the agreement’s substantive terms and the totality of circumstances surrounding the formation of the agreement.

The employee in this case contends that the particular arbitration scheme at issue is unconscionable, while the employer contends that its arbitration agreement offers adequate protections and advantages to facilitate the employee’s claim and is not unreasonably one-sided. Because evidence relevant to the unconscionability claim was not developed below, we remand to the trial court to determine whether the present arbitration agreement is unconscionable under the principles set forth in this opinion.


Frank Moreno is a former employee of Sonic-Calabasas A, Inc. (Sonic), which owns and operates an automobile dealership. As a condition of his employment with Sonic, Moreno signed a document entitled “Applicant’s Statement & Agreement.” The agreement set forth a number of conditions of employment, including consent to drug testing and permission to contact former employers, as well as a provision making the employment at will. The agreement also contained a paragraph governing dispute resolution, which required both parties to submit employment disputes to “binding arbitration under the Federal Arbitration Act, in conformity with the procedures of the California Arbitration Act (Cal. Code Civ. Proc. sec. 1280 et seq....).” The arbitration provision applied to “all disputes that may arise out of the employment context... that either [party] may have against the other which would otherwise require or allow resort to any court or other governmental dispute resolution forum[, ]... whether based on tort, contract, statutory, or equitable law, or otherwise.” The provision specified that it did not apply to claims brought under the National Labor Relations Act or the California Workers’ Compensation Act, or to claims before the Employment Development Department. The provision further stated that the employee was not prevented from “filing and pursuing administrative proceedings only before the California Department of Fair Employment and Housing or the U.S. Equal Opportunity Commission.”

In addition, the agreement provided that arbitration is to be conducted by a “retired California Superior Court Judge” and that “to the extent applicable in civil actions in California courts, the following shall apply and be observed: all rules of pleading (including the right of demurrer), all rules of evidence, all rights to resolution of the dispute by means of motions for summary judgment, judgment on the pleadings, and judgment under Code of Civil Procedure section 631.8.” At the request of either party, an arbitration award may be reviewed by a second arbitrator who will, “as far as practicable, proceed according to the law and procedures applicable to appellate review by the California Court of Appeal of a civil judgment following court trial.”

In December 2006, after leaving his position with Sonic, Moreno filed an administrative wage claim with the Labor Commissioner for unpaid vacation pay pursuant to Labor Code section 98 et seq. (All statutory references are to the Labor Code unless otherwise indicated.) Moreno alleged he was entitled to unpaid “[v]acation wages for 63 days earned 7/15/02 to 7/15/06 at the rate of $441.29 per day.” The filing of such a claim is the first step toward obtaining a Berman hearing.

In February 2007, Sonic petitioned the superior court to compel arbitration of the wage claim and to dismiss the pending administrative action, arguing that Moreno waived his right to a Berman hearing in the arbitration agreement. The Labor Commissioner intervened on Moreno’s behalf (§ 98.5), and Moreno adopted the Labor Commissioner’s arguments. The Labor Commissioner argued that the arbitration agreement, properly construed, did not preclude Moreno from filing an administrative wage claim under section 98 et seq. According to the Labor Commissioner, resort to a Berman hearing was compatible with the arbitration agreement because the hearing could be followed by arbitration in lieu of a de novo appeal in the superior court under section 98.2, subdivision (a). The Labor Commissioner further argued that interpreting the arbitration agreement to waive a Berman hearing would violate public policy, relying on Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 (Armendariz).

The superior court denied the petition to compel arbitration as premature. Citing Armendariz, the court said that as a matter of “basic public policy... until there has been the preliminary non-binding hearing and decision by the Labor Commissioner, the arbitration provisions of the employment contract are unenforceable, and any petition to compel arbitration is premature and must be denied.”

Sonic appealed. The Labor Commissioner did not participate in the appeal. During the briefing period in the Court of Appeal, the United States Supreme Court decided Preston v. Ferrer (2008) 552 U.S. 346 (Preston), which held that the Labor Commissioner’s original and exclusive jurisdiction under the Talent Agencies Act (§ 1700 et seq.) was preempted when the parties entered into an arbitration agreement governed by the FAA. The Court of Appeal concluded that Preston was not dispositive of Sonic’s appeal. According to the court, Preston applies when a party challenges the validity of a contract as a whole and seeks to have that challenge adjudicated by an administrative agency; it does not apply when a party challenges the arbitration clause itself as unconscionable. The Court of Appeal further concluded that the arbitration agreement, correctly interpreted, constituted a waiver of a Berman hearing. By its terms, the agreement precluded Moreno from pursuing any judicial “or other government dispute resolution forum, ” subject to certain enumerated exceptions. The court stated: “Given that neither the Division of Labor Standards Enforcement nor the Labor Commissioner was listed among the stated exceptions, we conclude, as a matter of law, that Moreno was barred from pursuing an administrative wage claim under section 98 et seq.” The Court of Appeal then held that a Berman waiver is enforceable and not contrary to public policy.

We granted Moreno’s petition for review. As discussed below, we held in Sonic I that although Moreno could be compelled to arbitrate, he could not be required to waive his right to a Berman hearing before arbitration. Accordingly, we reversed the Court of Appeal and ordered reinstatement of the trial court’s denial of Sonic’s petition to compel arbitration. Sonic then petitioned the United States Supreme Court for a writ of certiorari. The high court granted the petition, vacated our judgment, and remanded the case to this court “for further consideration in light of AT&T Mobility LLC v. Concepcion, 563 U.S. __ [131 S.Ct. 1740, 179 L.Ed.2d 742] (2011).” (Sonic-Calabasas A, Inc. v. Moreno (2011) 565 U.S. __ [132 S.Ct. 496].) We requested supplemental briefing from the parties on how Concepcion affects our decision in Sonic I.


We begin by reviewing the Berman statutes and our opinion in Sonic I.


In Sonic I, supra, 51 Cal.4th 569, we explained how Berman hearings and related statutory protections benefit employees with wage claims against their employers: “ ‘If an employer fails to pay wages in the amount, time or manner required by contract or by statute, the employee has two principal options. The employee may seek judicial relief by filing an ordinary civil action against the employer for breach of contract and/or for the wages prescribed by statute. (§§ 218, 1194.) Or the employee may seek administrative relief by filing a wage claim with the commissioner pursuant to a special statutory scheme codified in sections 98 to 98.8. The latter option was added by legislation enacted in 1976 (Stats. 1976, ch. 1190, §§ 4–11, pp. 5368–5371) and is commonly known as the “Berman” hearing procedure after the name of its sponsor.’ [Citation.]

“Once an employee files a complaint with the Labor Commissioner for nonpayment of wages, section 98, subdivision (a) ‘ “provides for three alternatives: the commissioner may either accept the matter and conduct an administrative hearing [citation], prosecute a civil action for the collection of wages and other money payable to employees arising out of an employment relationship [citation], or take no further action on the complaint. [Citation.]” ’ (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1115.) ‘If the commissioner decides to accept the matter and conduct an administrative hearing, he or she must hold the hearing within 90 days.’ (Ibid.) Moreover, prior to holding a Berman hearing or pursuing a civil action, the Labor Commissioner’s staff may attempt to settle claims either informally or through a conference between the parties. (Dept. of Industrial Relations, Div. of Labor Stds. Enforcement (DLSE), Policies and Procedures for Wage Claim Processing (2001 rev.) pp. 2–3.)

“A Berman hearing is conducted by a deputy [labor] commissioner, who has the authority to issue subpoenas. (Cal. Code Regs., tit. 8, §§ 13502, 13506.) ‘The Berman hearing procedure is designed to provide a speedy, informal, and affordable method of resolving wage claims. In brief, in a Berman proceeding the commissioner may hold a hearing on the wage claim; the pleadings are limited to a complaint and an answer; the answer may set forth the evidence that the defendant intends to rely on...; if the defendant fails to appear or answer no default is taken and the commissioner proceeds to decide the claim, but may grant a new hearing on request. (§ 98.) The commissioner must decide the claim within 15 days after the hearing. (§ 98.1.)’ [Citation.] The hearings are not governed by the technical rules of evidence, and any relevant evidence is admitted ‘if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs.’ (Cal. Code Regs., tit. 8, § 13502.) The hearing officer is authorized to assist the parties in cross-examining witnesses and to explain issues and terms not understood by the parties. (DLSE, Policies and Procedures for Wage Claim Processing, supra, at p. 4.) The parties have a right to have a translator present. (Ibid.; see § 105....)

“Once judgment is entered in the Berman hearing, enforcement of the judgment is to be a court priority. (§ 98.2, subd. (e).) The Labor Commissioner is charged with the responsibility of enforcing the judgment and ‘shall make every reasonable effort to ensure that judgments are satisfied, including taking all appropriate legal action and requiring the employer to deposit a bond as provided in Section 240.’ (Id., subd. (i).)

“Within 10 days after notice of the decision any party may appeal to the appropriate court, where the claim will be heard de novo; if no appeal is taken, the commissioner’s decision will be deemed a judgment, final immediately, and enforceable as a judgment in a civil action. (§ 98.2.) If an employer appeals the Labor Commissioner’s award, ‘[a]s a condition to filing an appeal pursuant to this section, an employer shall first post an undertaking with the reviewing court in the amount of the order, decision, or award. The undertaking shall consist of an appeal bond issued by a licensed surety or a cash deposit with the court in the amount of the order, decision, or award.’ (§ 98.2, subd. (b).) The purpose of this requirement is to discourage employers from filing frivolous appeals and from hiding assets in order to avoid enforcement of the judgment. (Sen. Com. on Labor and Industrial Relations, Analysis of Assem. Bill No. 2772 (2009–2010 Reg. Sess.) as amended Apr. 8, 2010, p. 4.)

“Under section 98.2, subdivision (c), ‘If the party seeking review by filing an appeal to the superior court is unsuccessful in the appeal, the court shall determine the costs and reasonable attorney’s fees incurred by the other parties to the appeal, and assess that amount as a cost upon the party filing the appeal. An employee is successful if the court awards an amount greater than zero.’ This provision thereby establishes a one-way fee-shifting scheme, whereby unsuccessful appellants pay attorney fees while successful appellants may not obtain such fees. [Citation.] This is in contrast to section 218.5, which provides that in civil actions for nonpayment of wages initiated in the superior court, the ‘prevailing party’ may obtain attorney fees.

“Furthermore, the Labor Commissioner ‘may’ upon request represent a claimant ‘financially unable to afford counsel’ in the de novo proceeding and ‘shall’ represent the claimant if he or she is attempting to uphold the Labor Commissioner’s award and is not objecting to the Commissioner’s final order. (§ 98.4.) Such claimants represented by the Labor Commissioner may still collect attorney fees pursuant to section 98.2, although such claimants have not, strictly speaking, incurred attorneys fees, because construction of the statute in this manner is consistent with the statute’s goals of discouraging unmeritorious appeals of wage claims. [Citation.]” (Sonic I, supra, 51 Cal.4th at pp. 672–674, fn. omitted.)

In sum, the Berman statutes provide important benefits to employees by reducing the costs and risks of pursuing a wage claim in several ways. First, the Berman hearing itself provides an accessible, informal, and affordable mechanism for lay persons to seek resolution of such claims. (See Cuadra v. Millan (1998) 17 Cal.4th 855, 858 (Cuadra).) Second, section 98.2, subdivision (c) discourages unmeritorious appeals of Berman hearing awards by providing that a party who unsuccessfully appeals an award must pay the other party’s costs and attorney fees. (See Lolley v. Campbell (2002) 28 Cal.4th 367, 376 (Lolley).) Third, section 98.2, subdivision (c) provides that an employee will not be saddled with the employer’s attorney fees and costs unless the employee appeals from a Berman hearing award and receives a judgment of zero on appeal. This rule differs from section 218.5, which provides for attorney fees for the “prevailing party” in wage actions initiated in the superior court. Fourth, section 98.4 provides that a wage claimant who is “financially unable to afford counsel” may be represented by the commissioner in the event the employer appeals and “shall” be represented by the commissioner if the employee seeks to uphold a Berman hearing award. Fifth, the Berman statutes ensure that an employee will actually collect a judgment or award by mandating that the Labor Commissioner use her best efforts to collect a Berman hearing award and by requiring the employer to post an undertaking for the amount of the award if it takes an appeal. (See Sonic I, supra, 51 Cal.4th at p. 674; § 98.2, subds. (b), (e), (i).) Finally, the Berman process ensures that employees have assistance in resolving their claims, including the use of a translator if needed. (§ 105.)


In considering whether a Berman waiver violates public policy, Sonic I first reviewed the law governing mandatory employment arbitration agreements, i.e., arbitration agreements that are conditions of new or continuing employment. As we explained, “[i]n Armendariz, supra, 24 Cal.4th 83, we concluded that such agreements were enforceable, provided they did not contain features that were contrary to public policy or unconscionable. (Id. at p. 99.) We concluded that ‘arbitration agreements cannot be made to serve as a vehicle for the waiver of [unwaivable] statutory rights, ’ such as rights under the Fair Employment and Housing Act (FEHA...). To ensure that such waiver did not occur, we held that arbitrations addressing such statutory rights would be subject to certain minimal requirements. As we later summarized these: ‘(1) the arbitration agreement may not limit the damages normally available under the statute (Armendariz, supra, 24 Cal.4th at p. 103); (2) there must be discovery “sufficient to adequately arbitrate their statutory claim” (id. at p. 106); (3) there must be a written arbitration decision and judicial review “ ‘sufficient to ensure the arbitrators comply with the requirements of the statute’ ” (ibid.); and (4) the employer must “pay all types of costs that are unique to arbitration” (id. at p. 113).’ (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1076 (Little).) We did not hold that the above requirements were the only conditions that public policy could place on arbitration agreements, and have since recognized other limitations. (See Gentry v. Superior Court (2007) 42 Cal.4th 443, 463 (Gentry) [prohibition of class arbitration contrary to public policy in some cases].)” (Sonic I, supra, 51 Cal.4th at p. 677.)

We then concluded that the protections afforded by a Berman hearing may not be waived as a condition of employment: “There is no question that the lawful payment of wages owed is not merely an individual right but an important public policy goal.... ‘Civil Code section 3513 provides, in pertinent part, that: “[a]nyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” [¶] The determination of whether a particular statute is for public or private benefit is for the court in each case (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 645, p. 586). The provisions of the Labor Code, particularly those directed toward the payment of wages to employees entitled to be paid, were established to protect the workers and hence have a public purpose. As was pointed out in In re Trombley (1948) 31 Cal.2d 801, 809: “[i]t has long been recognized that wages are not ordinary debts, that they may be preferred over other claims, and that, because of the economic position of the average worker and, in particular, his dependence on wages for the necessities of life for himself and his family, it is essential to the public welfare that he receive his pay when it is due.” [Citation.]’ [Citation.]” (Sonic I, supra, 51 Cal.4th at p. 679.)

We went on to explain: “Although the statutory protections that the Berman hearing and the posthearing procedures afford employees were added piecemeal over a number of years, their common purpose is evident: Given the dependence of the average worker on prompt payment of wages, the Legislature has devised the Berman hearing and posthearing process as a means of affording an employee with a meritorious wage claim certain advantages, chiefly designed to reduce the costs and risks of pursuing a wage claim, recognizing that such costs and risks could prevent a theoretical right from becoming a reality. These procedures, including the employer undertaking and the one-way fee provision, also deter employers from unjustifiably prolonging a wage dispute by filing an unmeritorious appeal. This statutory regime therefore furthers the important and long-recognized public purpose of ensuring that workers are paid wages owed. The public benefit of the Berman procedures, therefore, is not merely incidental to the legislation’s primary purpose but in fact central to that purpose. Nor can there be any doubt that permitting employers to require employees, as a condition of employment, to waive their right to a Berman hearing would seriously undermine the efficacy of the Berman hearing statutes and hence thwart the public purpose behind the statutes.” (Sonic I, supra, 51 Cal.4th at p. 679.)

We rejected Sonic’s argument that “even if a nonarbitration clause that required a Berman hearing waiver is contrary to public policy, an arbitration clause containing the same waiver would not be, because arbitration offers the same or similar advantages as does the Berman hearing process.” (Sonic I, supra, 51 Cal.4th at p. 680.) We explained that “the choice is not between a Berman hearing and arbitration, because a person subject to binding arbitration and eligible for a Berman hearing will still be subject to binding arbitration if the employer appeals the Berman hearing award. The choice is rather between arbitration that is or is not preceded by a Berman hearing. As discussed above, there are considerable advantages for employees to undergo the Berman hearing process before arbitration.” (Ibid.) “In contrast, arbitration, notwithstanding its advantages as a reasonably expeditious means of resolving disputes, still generally bears the hallmark of a formal legal proceeding in which representation by counsel is necessary or at least highly advantageous. The arbitration in question here, for example, is to be conducted by a ‘retired California Superior Court Judge’ and ‘to the extent applicable in civil actions in California courts, the following shall apply and be observed: all rules of pleading (including the right of demurrer), all rules of evidence, all rights to resolution of the dispute by means of motions for summary judgment, judgment on the pleadings, and judgment under Code of Civil Procedure section 631.8.’ The arbitrator’s award at either party’s request will be reviewed by a second arbitrator who will ‘as far as practicable, proceed according to the law and procedures applicable to appellate review by the California Court of Appeal of a civil judgment following court trial.’ A wage claimant undergoing arbitration will need the same kind of legal representation as if he or she were going to superior court.” (Sonic I, supra, 51 Cal.4th at pp. 680–681.)

We therefore concluded that “an employee going directly to arbitration will lose a number of benefits and advantages. He or she will not benefit from the Labor Commissioner’s settlement efforts and expertise. He or she must pay for his or her own attorney whether or not he or she is able to afford it — an attorney who may not have the expertise of the Labor Commissioner. Moreover, what matters to the employee is not a favorable arbitration award per se but the enforcement of that award, and an employee going directly to arbitration will have no special advantage obtaining such enforcement. Nor is there any guaranty that the employee will not be responsible for any successful employer’s attorney fees, for under section 218.5, an employee who proceeds directly against an employer with a wage claim not preceded by a Berman hearing will be liable for such fees if the employer prevails on appeal. In short, the Berman hearing process, even when followed by binding arbitration, provides on the whole substantially lower costs and risks to the employee, greater deterrence of frivolous employer claims, and greater assurance that awards will be collected, than does the binding arbitration process alone.” (Sonic I, supra, at p. 681, fns. omitted.)

We also rejected Sonic’s argument that because employees have the option of pursuing a Berman hearing or going directly to court (§ 218), Berman hearings must be waivable in a predispute agreement. “The purpose of the Berman hearing statutes is to empower wage claimants by giving them access to a Berman hearing with all of its advantages. Allowing an employee the freedom to choose whether to resort to a Berman hearing when a wage claim arises, after evaluating in light of the particular circumstances whether such a hearing is advantageous, is wholly consistent with the public policy behind the Berman hearing statutes. A requirement that the employee surrender the option of a Berman hearing as a condition of employment is not. As we recognized in Armendariz, our concern is with the impermissible waiver of certain rights and protections as a condition of employment before a dispute has arisen. (See Armendariz, supra, 24 Cal.4th at p. 103, fn. 8.) We therefore find the argument that, because the Legislature intended an employee to have the option of a Berman hearing when a wage claim arises, the Legislature also must have intended to permit employers to require employees to waive that option as a condition of employment, to be unpersuasive.” (Sonic I, supra, 51 Cal.4th at pp. 682–683, fn. omitted.) For the reasons above, we held that a Berman waiver in the context of a predispute arbitration agreement violates public policy. (Id. at p. 684.)


Sonic I further held that a Berman waiver is unconscionable. As we explained: “One common formulation of unconscionability is that it refers to ‘ “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” ’ [Citation.] As that formulation implicitly recognizes, the doctrine of unconscionability has both a procedural and a substantive element, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results. ‘The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, “ ‘which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ” ’ (Little, supra, 29 Cal.4th at p. 1071.)

“ ‘Substantively unconscionable terms can take various forms, but may generally be described as unfairly one-sided. One such form, as in Armendariz, is the arbitration agreement’s lack of a “ ‘modicum of bilaterality, ’ ” wherein the employee’s claims against the employer, but not the employer’s claims against the employee, are subject to arbitration. (Armendariz, supra, 24 Cal.4th at p. 119.) Another kind of substantively unconscionable provision occurs when the party imposing arbitration mandates a post-arbitration proceeding, either judicial or arbitral, wholly or largely to its benefit at the expense of the party on which the arbitration is imposed.’ (Little, supra, 29 Cal.4th at pp. 1071–1072.) In determining unconscionability, our inquiry is into whether a contract provision was ‘unconscionable at the time it was made.’ (Civ. Code, § 1670.5, subd. (a).)” (Sonic I, supra, 51 Cal.4th at pp. 684–685.)

Applying these principles, we first observed that “the arbitration agreement was a contract of adhesion indisputably imposed as a condition of employment” and that “contract terms imposed as a condition of employment are particularly prone to procedural unconscionability.” (Sonic I, supra, 51 Cal.4th at pp. 685–686.) “ ‘[I]n the case of preemployment arbitration contracts, the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.’ (Armendariz, supra, 24 Cal.4th at p. 115.) Moreover, many employees may not give careful scrutiny to routine personnel documents that employers ask them to sign. (See Gentry, supra, 42 Cal.4th at p. 471.)

“Furthermore, for reasons suggested above, significant substantive unconscionability is also present. As explained, Berman hearing and posthearing procedures were designed to provide wage claimants with meritorious claims unique protections that lower the costs and risks of pursuing such claims, leveling a playing field that generally favors employers with greater resources and bargaining power. Requiring employees to forgo these protections as a condition of employment can only benefit the employer at the expense of the employee. Nor can we say, as also explained, that the benefits the employee gains from arbitration compensates for what he or she loses by forgoing the option of a Berman hearing.

“In sum, rather than being justified by ‘legitimate commercial needs’ (see Armendariz, supra, 24 Cal.4th at p. 117), the main purpose of the Berman waiver appears to be for employers to gain an advantage in the dispute resolution process by eliminating the statutory advantages accorded to employees designed to make that process fairer and more efficient. We conclude the waiver is markedly one-sided and therefore substantively unconscionable. This substantive unconscionability, together with the significant element of procedural unconscionability, leads to the conclusion that the Berman waiver in the arbitration agreement at issue here is unconscionable.” (Sonic I, supra, 51 Cal.4th at p. 686.)


Although we found the Berman waiver unconscionable and contrary to public policy, we did not invalidate the arbitration agreement. Instead, we held that an arbitration agreement may be enforced so long as arbitration is preceded by the option of a Berman hearing at the employee’s request. If the employee chooses to have a Berman hearing, then the post-Berman hearing protections for employees would apply in arbitration: “A party to a Berman hearing seeking a de novo appeal via arbitration pursuant to a prior agreement rather than through a judicial proceeding would initially file an appeal in superior court pursuant to section 98.2, subdivision (a), together with a petition to compel arbitration. The superior court would determine whether the appeal is timely and whether it comports with all the statutory requirements, such as the undertaking requirement in subdivision (b). If so, and if the petition to compel arbitration is unopposed, or found to be meritorious, the trial court will grant the petition. The Labor Commissioner, pursuant to section 98.4, may then represent an eligible wage claimant in the arbitration proceeding. The one-way fee-shifting provisions of section 98.2, subdivision (c) will be enforced initially by the arbitrator, with such judicial review as may be appropriate.” (Sonic I, supra, 51 Cal.4th at p. 676.)

Finally, we held that the FAA does not preempt this approach because “our conclusion that Berman waivers are contrary to public policy and unconscionable does not discriminate against arbitration agreements.” (Sonic I, supra, 51 Cal.4th at p. 689.) “Rather, our conclusion that a Berman waiver is contrary to public policy and unconscionable is equally applicable whether the waiver appears within an arbitration agreement or independent of arbitration.” (Ibid.) Below we discuss in greater detail Sonic I’s analysis of the preemption issue after first examining the high court’s decision in Concepcion.


Two months after Sonic I was filed, the United States Supreme Court issued its decision in Concepcion, supra, 563 U.S. __ [131 S.Ct. 1740]. We now analyze the effect of that decision on Sonic I, beginning with a review of the state-law rule at issue in Concepcion.


In Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), this court confronted the question of whether provisions in arbitration agreements waiving class actions are unconscionable. We had previously approved of class arbitration as a means of “ ‘provid[ing] small claimants with a method of obtaining redress for claims which would otherwise be too small to warrant individual litigation.’ [Citation.] Denial of a class action in cases where it is appropriate may have the effect of allowing an unscrupulous wrongdoer to ‘retain[ ] the benefits of its wrongful conduct.’ [Citation.]” (Keating v. Superior Court (1982) 31 Cal.3d 584, 609 (Keating), overruled on other grounds in Southland Corp. v. Keating (1984) 465 U.S. 1, 16.) We held in Discover Bank that when a class arbitration waiver “is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then... the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.” (Discover Bank, at pp. 162–163.)

We further held that the FAA does not preempt this unconscionability rule. Reciting the applicable law, we said that “ ‘the text of § 2 [of the FAA] provides the touchstone for choosing between state-law principles and the principles of federal common law envisioned by the passage of that statute: An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law [citation], “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.... Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of § 2. [Citations.] A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what... the state legislature cannot.’ ” (Discover Bank, supra, 36 Cal.4th at pp. 164–165, quoting Perry v. Thomas (1987) 482 U.S. 483, 492–493, fn. 9, italics added by Discover Bank.)

We reasoned that our unconscionability rule prohibiting class waivers is not preempted because it applies equally to arbitration and nonarbitration agreements: “[T]he principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally. In other words, it applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements. (See America Online [Inc. v. Superior Court (2001)] 90 Cal.App.4th [1], 17–18.)” (Discover Bank, supra, 36 Cal.4th at pp. 165–166.) In addition, we observed that in the years since Keating was decided, class arbitration had proven to be a viable alternative to class litigation or bilateral arbitration. (Discover Bank, at p. 172 and cases cited therein.)


The high court in Concepcion held that the FAA preempts the unconscionability of class arbitration waivers in consumer contracts, thereby abrogating Discover Bank. Concepcion involved a class action filed in federal court alleging that AT&T engaged in fraud and false advertising by charging sales tax for phones it advertised as free. The value of the claim of the class representatives, Vincent and Liza Concepcion, was $30.22. AT&T moved to compel arbitration. The arbitration agreement provided that if an arbitration award was greater than AT&T’s last written settlement offer, AT&T would pay at minimum $7, 500 plus twice plaintiff’s attorney fees. The district court denied the motion to compel, holding that the class waiver made the arbitration agreement unconscionable under Discover Bank and that the $7, 500 penalty did not cure the unconscionability because AT&T could always avoid the penalty by paying the face value of the claim. As the Ninth Circuit said in affirming the district court, “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.” (Laster v. AT&T Mobility LLC (2009) 584 F.3d 849, 856.)

The Supreme Court reversed. While acknowledging that Discover Bank’s unconscionability rule applies equally to arbitration and nonarbitration contracts, the high court concluded that more is required to avoid FAA preemption: “the inquiry becomes more complex when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that disfavors arbitration.... [A] court may not ‘rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable....’ [Citation.]” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1747].)

“An obvious illustration of this point, ” Concepcion said, “would be a case finding unconscionable or unenforceable as against public policy consumer arbitration agreements that fail to provide for judicially monitored discovery. The rationalizations for such a holding are neither difficult to imagine nor different in kind from those articulated in Discover Bank. A court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing. Or the court might simply say that such agreements are exculpatory — restricting discovery would be of greater benefit to the company than the consumer, since the former is more likely to be sued than to sue. See Discover Bank, supra, at 161 (arguing that class waivers are similarly one-sided). And, the reasoning would continue, because such a rule applies the general principle of unconscionability or public-policy disapproval of exculpatory agreements, it is applicable to ‘any’ contract and thus preserved by § 2 of the FAA. In practice, of course, the rule would have a disproportionate impact on arbitration agreements; but it would presumably apply to contracts purporting to restrict discovery in litigation as well.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1747].) The high court added that “[t]he same argument might apply to a rule classifying as unconscionable arbitration agreements that fail to abide by the Federal Rules of Evidence, or that disallow an ultimate disposition by a jury (perhaps termed ‘a panel of twelve lay arbitrators’...).” (Ibid.)

Such unconscionability rules, “ ‘aimed at destroying arbitration’ or ‘demanding procedures incompatible with arbitration, ’ ” would contravene the FAA’s “overarching purpose” of “ensur[ing] the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1748].) Similarly, the high court reasoned, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (Ibid.) According to Concepcion, classwide arbitration interferes with fundamental attributes of arbitration in several ways.

First, classwide arbitration “sacrifices the principal advantage of arbitration — its informality — and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1751].) “ ‘In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.’ [Citation.]” (Ibid.) Classwide arbitration, by contrast, is a slower process because “before an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the class itself may be certified, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted.” (Ibid.)

Second, “class arbitration requires procedural formality” because of due process concerns. (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1751]; see ibid. [“The [American Arbitration Association’s] rules governing class arbitrations mimic the Federal Rules of Civil Procedure for class litigation.”].) “If procedures are too informal, absent class members would not be bound by the arbitration. For a class-action money judgment to bind absentees in litigation, class representatives must at all times adequately represent absent class members, and absent members must be afforded notice, an opportunity to be heard, and a right to opt out of the class.... [¶] We find it unlikely that in passing the FAA Congress meant to leave the disposition of these procedural requirements to an arbitrator.” (Id. at pp. __–__ [131 S.Ct. at pp. 1751–1752].)

“Third, class arbitration greatly increases risks to defendants” and “is poorly suited to the higher stakes of class litigation” because of the lack of judicial review. (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1752].) “[I]n class-action arbitration huge awards (with limited judicial review) will be entirely predictable, thus rendering arbitration unattractive. It is not reasonably deniable that requiring consumer disputes to be arbitrated on a class-wide basis will have a substantial deterrent effect on incentives to arbitrate.” (Id. at p. __, fn. 8 [131 S.Ct. at p. 1752, fn. 8].)

The high court concluded: “Because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, ’ [citation], California’s Discover Bank rule is preempted by the ...

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