Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

OTO, L.L.C. v. Kho

Supreme Court of California

August 29, 2019

OTO, L.L.C., Plaintiff and Appellant,
KEN KHO, Defendant and Respondent; JULIE A. SU, as Labor Commissioner, etc., Intervener and Appellant.

          Superior Court Alameda County No. RG15781961 Evelio M. Grillo Judge

         First Appellate District, Division One A147564

          Fine, Boggs & Perkins, John P. Boggs and Roman Zhuk for Plaintiff and Appellant.

          Fisher & Phillips, Wendy McGuire Coats and Katherine P. Sandberg for California New Car Dealers Association as Amicus Curiae on behalf of Plaintiff and Appellant.

          Fernando Flores, Miles E. Locker and Theresa Bichsel for Intervener and Appellant.

          Weinberg, Roger & Rosenfeld, David A. Rosenfeld, Caren P. Sencer and Caroline N. Cohen for Defendant and Respondent.

          Justice Corrigan authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Liu, Cuéllar, Kruger, and Groban concurred.


          CORRIGAN, J.

         Here, we again consider the enforceability of an agreement requiring arbitration of wage disputes. Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I) concluded that such arbitration agreements are categorically unconscionable because workers waive their statutory rights to a “Berman hearing” and related procedures designed to assist in the recovery of unpaid wages. (See Lab. Code, § 98 et seq.)[1] Rather than invalidating the entire agreement, however, Sonic I held that while Berman protections could not be waived, any party dissatisfied with the Berman hearing's result could move the dispute to arbitration. (Sonic I, at pp. 669, 675.) The United States Supreme Court vacated that judgment and remanded for consideration in light of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (Concepcion). Thereafter, we determined Sonic I's categorical rule of unconscionability was preempted by the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.). (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1146 (Sonic II).) We held instead that an arbitration agreement is not categorically unconscionable solely because it entails a waiver of the Berman procedure. An agreement to arbitrate wage disputes can be enforceable so long as it provides an accessible and affordable process for resolving those disputes. (Id. at p. 1146.)

         We originally granted review in this case to decide whether an arbitral scheme resembling civil litigation can constitute a sufficiently accessible and affordable process. Because the facts here involve an unusually high degree of procedural unconscionability, however, a definitive resolution of that specific question is unnecessary. Even if a litigation-like arbitration procedure may be an acceptable substitute for the Berman process in other circumstances, an employee may not be coerced or misled into accepting this trade. Considering the oppressive circumstances present here, we conclude the agreement was unconscionable, rendering it unenforceable.

         I. BACKGROUND

         The relevant facts are not in dispute. Ken Kho was hired as a service technician for One Toyota of Oakland (One Toyota) in January 2010.[2] Three years later, a human resources “porter” approached Kho in his workstation and asked him to sign several documents. Kho was required to sign them immediately and return them to the porter, who waited in the workstation. It took Kho three or four minutes to sign them all. He had no opportunity to read them, nor were their contents explained. Kho's first language is Chinese. He was not given copies of the documents in either language.

         One document was titled “Comprehensive Agreement-Employment At-Will and Arbitration.”[3] As the Court of Appeal observed, “Notwithstanding its designation as a ‘comprehensive' employment contract, the one and one-quarter page contract is merely an arbitration clause grafted onto an acknowledgment of at-will employment.”

         The contract's arbitration clause is contained in a dense, single-spaced paragraph, written in a very small typeface that fills almost an entire page.[4] Subject to limited exceptions, nearly any employment-related claim made by either party must be submitted to binding arbitration. Class or collective proceedings are generally prohibited. Arbitrations must be conducted before a retired superior court judge, pursuant to the California Arbitration Act (Code Civ. Proc., § 1280 et seq.), with full discovery permitted (see Code Civ. Proc., § 1283.05). Furthermore, “[t]o the extent applicable in civil actions in California courts, ” the agreement requires adherence to “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.”[5] The allocation of arbitration costs is not addressed explicitly. Instead, the agreement refers to Code of Civil Procedure section 1284.2, which generally provides that parties to an arbitration must bear their own expenses. But the agreement also states that “controlling case law” or statutes will prevail over Code of Civil Procedure section 1284.2 if there is a conflict.

         Kho's employment ended in April 2014. Several months later, he filed a complaint with the Labor Commissioner for unpaid wages. At a settlement conference before a deputy labor commissioner, One Toyota was represented by counsel; Kho appeared in propria persona. One Toyota contends its attorney demanded arbitration at the conference, presenting Kho with a copy of the signed arbitration agreement, but Kho and the Labor Commissioner dispute this account. Kho rejected One Toyota's settlement offer and requested a Berman hearing. The hearing was set in August 2015, some nine months later.

         On the Friday before the Monday Berman hearing, One Toyota filed a petition to compel arbitration and stay the administrative proceedings. It did not serve these papers on Kho. On the morning of the hearing, One Toyota's attorney notified the Labor Commissioner by fax of its petition and asked that the hearing be taken off calendar. The hearing officer refused. One Toyota's attorney appeared at the scheduled time but left after serving Kho for the first time with the petition to compel. Proceeding without One Toyota, the hearing officer awarded Kho $102, 912 in unpaid wages and $55, 634 in liquidated damages, interest, and penalties. One Toyota sought to vacate the award. The Labor Commissioner intervened on Kho's behalf and opposed the motions to compel and vacate. One Toyota posted the required bond to permit de novo review of the award under Labor Code section 98.2. (See post, at p. 8.)

         The trial court vacated the Labor Commissioner's award, concluding the hearing should not have proceeded in One Toyota's absence. The court did not compel arbitration, however. It found a high degree of procedural unconscionability attended the agreement's execution, which “created oppression or surprise due to unequal bargaining power.” The court also found the agreement substantively unconscionable under Sonic II because it “fails to provide a speedy, informal and affordable method of resolving wage claims and has virtually none of the benefits afforded by the Berman hearing procedure.” The court observed, “Contrary to the assumption that arbitration is intended to provide an inexpensive, efficient procedure to vindicate rights, the agreement in this case seeks, in large part, to restore the procedural rules and procedures that create expense and delay in civil litigation.” In light of this ruling, the court declined to address the Labor Commissioner's argument that One Toyota waived its right to arbitrate by waiting too long to claim it.

         The Court of Appeal reversed. Although it noted an “extraordinarily high” degree of procedural unconscionability in the agreement's execution, it concluded the agreement was not substantively unconscionable. The agreement had no objectionable terms and could be considered “ ‘harsh or one-sided' only in comparison to the various features of the Labor Code that seek to level the playing field for wage claimants.” The arbitration would be sufficiently affordable under Sonic II because laws external to the agreement require that employers pay both the costs of arbitration (see Armendariz v. Foundation Health Psychcare Service, Inc. (2000) 24 Cal.4th 83 (Armendariz)) and a successful claimant's reasonable attorney fees (see Lab. Code, § 218.5). Though the selected arbitration procedure is more complex than a Berman hearing, the court observed that those hearings are nonbinding and can progress, at either side's request, to a de novo proceeding in superior court. In specifying an arbitral process that resembles civil litigation, the agreement thus “anticipates a proceeding that is no more complex than will often be required to resolve a wage claim under the Berman procedures.” This resolution made it unnecessary for the court to address the Labor Commissioner's cross-appeal from the order vacating her award. Finally, the court held that One Toyota did not forfeit its right to arbitrate because there was no showing of prejudice from the company's delay in seeking arbitration.


         A. The Berman Process

         Before addressing Kho's unconscionability defense, we review the statutory procedures he waived by agreeing to arbitration. We also consider the significance of that waiver in light of Sonic I and Sonic II.

         1. Statutory Procedures Available to Wage Claimants

         The Labor Code provides an administrative procedure for recovery of unpaid wages. When an employer does not pay wages as required, the employee may either: (1) file a civil action in court, or (2) file a wage claim with the Labor Commissioner under sections 98 to 98.8. The administrative option was added in 1976 (see Stats. 1976, ch. 1190, §§ 4-11, pp. 5368-5371) and is commonly known as a “Berman” hearing.[6]

         If an employee files an administrative complaint, the Labor Commissioner may either accept the matter and conduct a Berman hearing (§ 98, subd. (a)); prosecute a civil action on the employee's behalf (§ 98.3); or take “no further action... on the complaint” (§ 98, subd. (a)). The commissioner's staff may try to settle the complaint before holding a hearing or filing suit. (Dept. of Industrial Relations, Div. of Labor Stds. Enforcement (DLSE), Policies and Procedures for Wage Claim Processing (2012 rev.) p. 2.) Subject to extensions of time, Berman hearings must generally be held within 90 days after a matter is accepted. (§ 98, subd. (a).)

         A Berman hearing is conducted by a deputy commissioner, who may issue subpoenas. (Cal. Code Regs., tit. 8, §§ 13502, 13506.) The procedure “is designed to provide a speedy, informal, and affordable method of resolving wage claims.” (Cuadra v. Millan (1998) 17 Cal.4th 855, 858 (Cuadra).) Pleadings are limited to a complaint and answer. There is no discovery process. (§ 98, subd. (d).) Technical rules of evidence do not apply, and all 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 may assist the parties with cross-examination and explain issues and terms involved. (DLSE, Policies and Procedures for Wage Claim Processing, supra, at p. 3.) If necessary, a translator will be provided. (Ibid.; see § 105, subd. (b).) The claim must be decided within 15 days of the hearing. (§ 98.1, subd. (a).)

         Either party may appeal the decision to the superior court, which reviews the claim de novo. (§ 98.2, subd. (a).) An employer who appeals must post an undertaking in the amount of the award. (Id., subd. (b).) On appeal, the Labor Commissioner may represent claimants “financially unable to afford counsel” and must represent any indigent claimant attempting to uphold the award while objecting to no part of it. (§ 98.4.) An unappealed decision is a final judgment, enforceable immediately. (§ 98.2, subds. (d), (e).) The commissioner is responsible for enforcement (id., subd. (i)), which is entitled to court priority (id., subd. (e)).

         If an employer's appeal fails, the court determines costs and reasonable attorney fees incurred by the successful employee and orders payment by the losing appellant. (§ 98.2, subd. (c).) Claimants represented by the commissioner may still recover fees, consistent with the statute's goal of discouraging unmeritorious appeals. (Lolley v. Campbell (2002) 28 Cal.4th 367, 376-378 (Lolley).) “An employee is successful if the court awards an amount greater than zero.” (§ 98.2, subd. (c).) The statute provides a one-way fee-shifting scheme: An unsuccessful employer must pay attorney fees but a successful one may not recover them. (See Arias v. Kardoulias (2012) 207 Cal.App.4th 1429, 1435.) This fee scheme differs from wage claims brought in superior court, where the “prevailing party” may obtain attorney fees. (§ 218.5, subd. (a).)[7]

         The Berman process is optional for both claimants and the Labor Commissioner. Aggrieved employees may take their wage claims directly to superior court. (See § 218.) Likewise, the commissioner may decline to act on a filed complaint. (See § 98, subd. (a).) However, Berman procedures can significantly reduce the costs and risks of pursuing a wage claim. They provide “an accessible, informal, and affordable” avenue for employees to seek resolution, with assistance available if necessary. (Sonic II, supra, 57 Cal.4th at p. 1129.) They discourage unmeritorious appeals through a bond requirement and a fee-shifting scheme that favors employees. (See id. at p. 1130.) They permit the commissioner to represent claimants on appeal and facilitate award collection. (See ibid.)

         2. The Sonic I and Sonic II Decisions

         Sonic I and Sonic II addressed the validity of predispute agreements requiring wage claim arbitration. Sonic I held that it is against public policy for an employer to require employees to waive their Berman rights as a condition of employment, and that an arbitration agreement effectively waiving Berman rights is substantively unconscionable as a matter of law. (Sonic I, supra, 51 Cal.4th at pp. 684-687.) However, in construing the agreement to attempt to harmonize the competing policies at issue, Sonic I also held that parties could proceed to binding arbitration after they had completed a Berman hearing. (Id. at p. 675.) In other words, instead of pursuing a de novo appeal in superior court, a party dissatisfied with the Labor Commissioner's ruling could petition to compel arbitration. (Id. at p. 676.)

         Sonic I's holdings were short-lived. Two months later, on a related question, Concepcion, supra, 563 U.S. 333 abrogated our holding from Discover Bank v. Superior Court (2005) 36 Cal.4th 148 that class arbitration waivers in consumer contracts are unconscionable. (Concepcion, at pp. 341-344.) The high court explained that the “overarching purpose of the FAA... is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” (Id. at p. 344.) Because Discover Bank's classwide arbitration rule interfered with the “fundamental attributes of arbitration, ” such as efficiency and informality, it was preempted as inconsistent with the FAA. (Concepcion, at p. 344.) Thereafter, the court vacated the Sonic I judgment and remanded for our consideration in light of Concepcion. (Sonic-Calabasas A, Inc. v. Moreno (2011) 565 U.S. 973.)

         On remand, we acknowledged the Supreme Court's admonition that states “cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” (Concepcion, supra, 563 U.S. at p. 351; see Sonic II, supra, 57 Cal.4th at p. 1141.) Because the court identified efficiency as a hallmark of arbitration under the FAA, Concepcion taught that “courts cannot impose unconscionability rules that interfere with arbitral efficiency, including rules forbidding waiver of administrative procedures that delay arbitration.” (Sonic II, at p. 1141; see Concepcion, at pp. 344-345.) Accordingly, Sonic I's categorical rule prohibiting a waiver of Berman procedures was preempted. (Sonic II, at pp. 1139-1141.)

         Nevertheless, we noted that unconscionability remains a valid defense to enforcement, even after Concepcion. The overarching unconscionability question is whether an agreement is imposed in such an unfair fashion and so unfairly one-sided that it should not be enforced. Arbitration agreements could not be deemed categorically unconscionable simply because they entail a waiver of the Berman proceedings. (Sonic II, supra, 57 Cal.4th at p. 1146.) However, we provided that an employee's Berman waiver, while not dispositive, remains a significant factor in considering unconscionability. An agreement's failure to “provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability. As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement's substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided.” (Ibid.)

         The Sonic II majority opinion focused repeatedly on the need for accessible and affordable arbitration, reasoning that these were key benefits of the Berman process that parties to an arbitration agreement had decided to forgo. We stopped short of defining the requirements for an acceptable arbitration framework, however, and emphasized that arbitration can be structured in various ways “so that it facilitates accessible, affordable resolution of wage disputes, ” without necessarily replicating Berman protections. (Sonic II, supra, 57 Cal.4th at p. 1147.) So long as the arbitral procedure is relatively “low-cost” (ibid.) and provides a forum for wage claimants “to pursue their claims effectively” (ibid.), its adoption in lieu of the Berman process will not, in itself, be considered unconscionable (id. at pp. 1147-1148). In short, when an adhesion contract requires arbitration, “the unconscionability inquiry focuses on whether the arbitral scheme imposescosts and risks on a wage claimant that make the resolution of the wage dispute inaccessible and unaffordable, ” thus effectively blocking every forum for redress including arbitration itself. (Id. at p. 1148.)

         We did not decide whether the Sonic II agreement was substantively unconscionable under this standard. Recognizing that unconscionability is a fact-specific defense, we remanded for the trial court to examine additional evidence regarding the particulars of the arbitration process set out in the agreement. (Sonic II, supra, 57 Cal.4th at pp. 1147-1148.)

         B. Unconscionability of the Arbitration Agreement

         California law strongly favors arbitration. Through the comprehensive provisions of the California Arbitration Act (Code Civ. Proc., § 1280 et seq.), “the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.' ” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9 (Moncharsh).) As with the FAA (9 U.S.C. § 1 et seq.), California law establishes “a presumption in favor of arbitrability.” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971.) An agreement to submit disputes to arbitration “is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Code Civ. Proc., § 1281; see 9 U.S.C. § 2.)

         “ ‘[G]enerally applicable contract defenses, such as... unconscionability, may be applied to invalidate arbitration agreements without contravening' the FAA” or California law. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 246 (Pinnacle); see Concepcion, supra, 563 U.S. at p. 339.) Unconscionability can take different forms depending on the circumstances and terms at issue. However, the doctrine's application to arbitration agreements must rely on the same principles that govern all contracts. (Sonic II, supra, 57 Cal.4th at p. 1133.) The degree of unfairness required for unconscionability must be as rigorous and demanding for arbitration clauses as for any other contract clause. (Ibid.)

         The general principles of unconscionability are well established. A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. (Sonic II, supra, 57 Cal.4th at p. 1133.) Under this standard, the unconscionability doctrine “ ‘has both a procedural and a substantive element.' ” (Ibid.) “The procedural element addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power. [Citations.] Substantive unconscionability pertains to the fairness of an agreement's actual terms and to assessments of whether they are overly harsh or one-sided.” (Pinnacle, supra, 55 Cal.4th at p. 246.)

         Both procedural and substantive unconscionability must be shown for the defense to be established, but “they need not be present in the same degree.” (Armendariz, supra, 24 Cal.4th at p. 114.) Instead, they are evaluated on “ ‘a sliding scale.' ” (Ibid.) “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to” conclude that the term is unenforceable. (Ibid.) Conversely, the more deceptive or coercive the bargaining tactics employed, the less substantive unfairness is required. (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 487 (A & M Produce); see Carlson v. Home Team Pest Defense, Inc. (2015) 239 Cal.App.4th 619, 635; Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 85 (Carmona).) A contract's substantive fairness “must be considered in light of any procedural unconscionability” in its making. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 912 (Sanchez).) “The ultimate issue in every case is whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, that a court should withhold enforcement.” (Ibid.)

         The burden of proving unconscionability rests upon the party asserting it. (Sanchez, supra, 61 Cal.4th at p. 911; Sonic II, supra, 57 Cal.4th at p. 1148.) “Where, as here, the evidence is not in conflict, we review the trial court's denial of arbitration de novo.” (Pinnacle, supra, 55 Cal.4th at p. 236.)

         1. Procedural Unconscionability

         The Court of Appeal observed that the arbitration agreement's execution involved an “extraordinarily high” degree of procedural unconscionability. We agree.

         A procedural unconscionability analysis “begins with an inquiry into whether the contract is one of adhesion.” (Armendariz, supra, 24 Cal.4th at p. 113.) An adhesive contract is standardized, generally on a preprinted form, and offered by the party with superior bargaining power “on a take-it-or-leave-it basis.” (Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1245 (Baltazar); see Armendariz, at p. 113.) Arbitration contracts imposed as a condition of employment are typically adhesive (see Armendariz, at pp. 114-115; Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704), and the agreement here is no exception. The pertinent question, then, is whether circumstances of the contract's formation created such oppression or surprise that closer scrutiny of its overall fairness is required. (See Baltazar, at pp. 1245-1246; Farrar v. Direct Commerce, Inc. (2017) 9 Cal.App.5th 1257, 1267-1268.) “ ‘ “Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.”' ” (Pinnacle, supra, 55 Cal.4th at p. 247, italics added; see De La Torre v. CashCall, Inc. (2018) 5 Cal.5th 966, 983.) This record reveals both oppression and surprise.

         “The circumstances relevant to establishing oppression include, but are not limited to (1) the amount of time the party is given to consider the proposed contract; (2) the amount and type of pressure exerted on the party to sign the proposed contract; (3) the length of the proposed contract and the length and complexity of the challenged provision; (4) the education and experience of the party; and (5) whether the party's review of the proposed contract was aided by an attorney.” (Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. (2015) 232 Cal.App.4th 1332, 1348, fn. omitted.) With respect to preemployment arbitration contracts, we have observed that “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.) This economic pressure can also be substantial when employees are required to accept an arbitration agreement in order to keep their job. Employees who have worked in a job for a substantial length of time have likely come to rely on the benefits of employment. For many, the sudden loss of a job may create major disruptions, including abrupt income reduction and an unplanned reentry into the job market. In both the prehiring and posthiring settings, courts must be “particularly attuned” to the danger of oppression and overreaching. (Armendariz, at p. 115; see Baltazar, supra, 62 Cal.4th at p. 1244.)

         The circumstances here demonstrate significant oppression. The agreement was presented to Kho in his workspace, along with other employment-related documents. Neither its contents nor its significance was explained. One Toyota admits that Kho was required to sign the agreement to keep the job he had held for three years. Because the company used a piece-rate compensation system, any time Kho spent reviewing the agreement would have reduced his pay. Moreover, as the Court of Appeal explained, “Not only did One Toyota provide no explanation for its demand for his signature, it selected a low-level employee, a ‘porter,' to present the Agreement, creating the impression that no request for an explanation was expected and any such request would be unavailing.” By having the porter wait for the documents, One Toyota conveyed an expectation that Kho sign them immediately, without examination or consultation with counsel. One Toyota protests that Kho did not ask questions about the agreement, but there is no indication that the porter had the knowledge or authority to explain its terms. (See Carmona, supra, 226 Cal.App.4th at pp. 84-85.) Similarly, although One Toyota is correct that Kho did not attempt to negotiate, a complaining party need not show it tried to negotiate standardized contract terms to establish procedural unconscionability. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 244; see Sanchez, supra, 61 Cal.4th at p. 914.) By its conduct, One Toyota conveyed the impression that negotiation efforts would be futile. Finally, Kho was not given a copy of the agreement he had signed.[8]

         The facts also support the trial court's finding of surprise. The agreement is a paragon of prolixity, only slightly more than a page long but written in an extremely small font. The single dense paragraph covering arbitration requires 51 lines. As the Court of Appeal noted, the text is “visually impenetrable” and “challenge[s] the limits of legibility.”

         The substance of the agreement is similarly opaque. The sentences are complex, filled with statutory references and legal jargon. The second sentence alone is 12 lines long. The arbitration paragraph refers to: the California Fair Employment and Housing Act; title VII of the Civil Rights Act of 1964; other unspecified “local, state or federal laws or regulations”; the National Labor Relations Act; the California Workers' Compensation Act; “California Small Claims” actions; the Department of Fair Employment and Housing; the Employment Development Department; the “Equal Opportunity Commission”; the federal and California arbitration acts; and six different sections of California's Civil Code and Code of Civil Procedure. A layperson trying to navigate this block text, printed in tiny font, would not have an easy journey.

         With respect to arbitration costs, the agreement states: “If CCP § 1284.2 conflicts with other substantive statutory provisions or controlling case law, the allocation of costs and arbitrator fees shall be governed by said statutory provisions or controlling case law instead of CCP § 1284.2.” Code of Civil Procedure section 1284.2 states a default rule that, unless the agreement specifies otherwise, parties to an arbitration will bear their own expenses. However, Armendariz created an exception to this general rule for arbitrations of employment-related disputes. (See Armendariz, supra, 24 Cal.4th at pp. 110-111.)[9] Although the agreement anticipates that the “controlling case law” of Armendariz would prevail over the statutory default rule, One Toyota's obligation to pay arbitration-related costs would not be evident to anyone without legal knowledge or access to the relevant authorities. It is difficult to envision that Kho would have had any idea what the cited code section says or that a 13-year-old case creates a relevant exception to it. This example illustrates the difficulty a layperson would have in deciphering key terms. It would have been nearly impossible to understand the contract's meaning without legal training and access to the many statutes it references. Kho had neither. Under these circumstances, Kho's signature attesting to have read and understood the agreement appears formulaic rather than informed. We agree with the Court of Appeal that the agreement appears to have been drafted with an aim to thwart, rather than promote, understanding.

         The document itself and the manner of its presentation did not promote voluntary or informed agreement to its terms. “Arbitration is favored in this state as a voluntary means of resolving disputes, and this voluntariness has been its bedrock justification.” (Armendariz, supra, 24 Cal.4th at p. 115; see Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233, 252.) Arbitration contracts are vigorously enforced out of respect for the parties' mutual and voluntary agreement to resolve disputes by this alternative means. (See, e.g., Moncharsh, supra, 3 Cal.4th at pp. 10-11.) However, an inference of voluntary assent can be indulged only so far and must yield in the face of undisputed facts that undermine it. Where an employee is induced to sign an arbitration agreement through “sharp practices” and surprise (see Gentry v. Superior Court (2007) 42 Cal.4th 443, 469 (Gentry)), [10] the consent rationale carries less force. “[A]rbitration ‘is a matter of consent, not coercion.' ” (Stolt-Nielsen S. A. v. AnimalFeeds Int'l Corp. (2010) 559 U.S. 662, 681; see Lamps Plus, Inc. v. Varela (2019) __ U.S. __, __ [139 S.Ct. 1407');">139 S.Ct. 1407, 1415].) On this record, it is virtually impossible to conclude that Kho knew he was giving up his Berman rights and voluntarily agreeing to arbitration instead.

         2. Substantive Unconscionability

         Substantive unconscionability examines the fairness of a contract's terms. This analysis “ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as ‘ “ ‘overly harsh' ”' (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1532), ‘ “unduly oppressive”' (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925), ‘ “so one-sided as to ‘shock the conscience' ”' (Pinnacle[, supra, ] 55 Cal.4th [at p.] 246), or ‘unfairly one-sided' (Little [v. Auto Stiegler, Inc. (2003)] 29 Cal.4th [1064, ] 1071.) All of these formulations point to the central idea that the unconscionability doctrine is concerned not with ‘a simple old-fashioned bad bargain' [citation], but with terms that are ‘unreasonably favorable to the more powerful party.' ” (Sonic II, supra, 57 Cal.4th at p. 1145.) Unconscionable terms “ ‘impair the integrity of the bargaining process or otherwise contravene the public interest or public policy' ” or attempt to impermissibly alter fundamental legal duties. (Ibid.) They may include fine-print terms, unreasonably or unexpectedly harsh terms regarding price or other central aspects of the transaction, and terms that undermine the nondrafting party's reasonable expectations. (Ibid.; see Sanchez, supra, 61 Cal.4th at p. 911.) These examples are illustrative, not exhaustive.

         Substantive terms that, in the abstract, might not support an unconscionability finding take on greater weight when imposed by a procedure that is demonstrably oppressive. Although procedural unconscionability alone does not invalidate a contract, its existence requires courts to closely scrutinize the substantive terms “to ensure they are not manifestly unfair or one-sided.” (Gentry, supra, 42 Cal.4th at p. 469.) We hold that, given the substantial procedural unconscionability here, even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable. (Carmona, supra, 226 Cal.App.4th at p. 85; A & M Produce, supra, 135 Cal.App.3d at p. 487; see Armendariz, supra, 24 Cal.4th at p. 114.)

         Kho and the Labor Commissioner do not focus on the fairness of specific, isolated terms in the agreement. Rather, they contend One Toyota's arbitral process is so inaccessible and unaffordable, considered as a whole, that it does not offer an effective means for resolving wage disputes. (See Sonic II, supra, 57 Cal.4th at p. 1146.)[11] This is a close question, which cannot be resolved in the abstract. It is important to stress that the waiver of Berman procedures does not, in itself, render an arbitration agreement unconscionable. However, a substantive unconscionability analysis is sensitive to “the context of the rights and remedies that otherwise would have been available to the parties.” (Sanchez, supra, 61 Cal.4th at p. 922.) We must examine both the features of dispute resolution adopted as well as the features eliminated. (Sonic II, supra, 57 Cal.4th at p. 1146.)

         As to accessibility, Kho first observes that, unlike in Berman proceedings, the agreement does not explain how to initiate arbitration. Industrial Welfare Commission (IWC) wage orders, required by law to be posted at the jobsite (Lab. Code, § 1183, subd. (d)), direct employees to contact the Labor Commissioner about wage-related violations, providing for this purpose both the Department of Industrial Relations website and a list of local labor commissioner offices. (See, e.g., IWC wage order No. 4-2001 (Cal. Code Regs., tit. 8, § 11040); IWC wage order No. MW-2019 (Cal. Code Regs., tit. 8, § 11000).) An employee can start the Berman process by filling out a simple form found on the website and in local offices. The form is rendered in many languages, and detailed instructions explain how to complete and file it. In contrast, One Toyota's agreement does not mention how to bring a dispute to arbitration, nor does it suggest where that information might be found.[12] Commercial arbitration providers, for example, frequently provide standardized forms to start the process. Employees can also contact the provider for information on claim initiation. The agreement here, however, identifies no commercial providers. In fact, it does not mention that such providers exist. It mandates that the arbitrator be a “retired California Superior Court Judge” but gives no indication how an employee might find such a person, let alone one willing to arbitrate a wage claim. Although some employees might pursue other avenues for relief and reach arbitration after encountering a motion to compel, these additional steps will inevitably increase the delay and expense involved. Other employees may be so confused by the agreement that they are deterred from bringing their wage claims at all.[13]

         Kho also contends it would be difficult for an unsophisticated, unrepresented wage claimant to effectively navigate the agreement's arbitral procedure. In the Berman process, a claimant need only fill out a complaint form, possibly assisted by a deputy labor commissioner, then attend a settlement conference and, in some cases, a hearing. (See Sonic II, supra, 57 Cal.4th at p. 1128.) By contrast, in the arbitration provided for here, the complaint must be framed in a legal pleading, and the claimant must respond to discovery demands and dispositive motions. Whereas a Berman hearing is conducted by a deputy labor commissioner, who can explain terminology and assist with witness examination (see ibid.), the arbitration here must be conducted by a retired superior court judge, with procedures similar to a formal civil trial. Evidence must conform to technical rules of evidence, whereas all relevant evidence is typically admitted in Berman hearings. (See ibid.; Cal. Code Regs., tit. 8, § 13502.)[14] Collection is also simplified in the Berman context because the Labor Commissioner is responsible for enforcing the judgment. (§ 98.2, subd. (i).) Or, if the employer unsuccessfully appeals the Labor Commissioner's award, the claimant can collect on a posted bond. (§ 98.2, subd. (b).) In arbitration, a successful claimant must petition to confirm the award and reduce it to an enforceable judgment. (Code Civ. Proc., §§ 1285, 1287.4.)

         The Berman process was specifically designed to give claimants a “speedy, informal, and affordable method” for resolving wage disputes. (Cuadra, supra, 17 Cal.4th at p. 858.)[15] The process advances “the very objectives of ‘informality,' ‘lower costs,' ‘greater efficiency and speed,' and use of ‘expert adjudicators' that the high court has deemed ‘fundamental attributes of arbitration.' ” (Sonic II, supra, 57 Cal.4th at p. 1149; see Concepcion, supra, 563 U.S. at pp. 344, 348.)[16] By contrast, the arbitration provided for here incorporates the intricacies of civil litigation. An employee must surrender the benefits and efficiencies of the Berman process but does not gain in return any of the efficiencies or cost savings often associated with arbitration.

         We observed in Little v. Auto Stiegler, Inc., supra, 29 Cal.4th at page 1075, footnote 1, that litigation-like procedures, on their own, are not necessarily so one-sided as to make an arbitration agreement unconscionable. We certainly do not now suggest that a system of statutory and common law carefully crafted to ensure fairness to both sides, and subject to continuous review, is per se unfair.[17] However, that carefully crafted process can be costly, complex, and time-consuming. It is the opportunity to expedite and simplify the process that can motivate informed parties to agree to arbitration. Furthermore, Little's observation was made in the context of a suit alleging wrongful demotion and discharge. (Id. at p. 1069.) For such claims, it may well be that an arbitration process closely resembling civil litigation can be as advantageous for the employee as for the employer. (See id. at p. 1075, fn. 1.) There is no Berman-like administrative process for wrongful discharge claims.

         Our cases have taken a different approach in evaluating the compelled arbitration of wage claims, as compared to the arbitration of other types of disputes. Employees who agree to arbitrate claims for unpaid wages forgo not just their right to litigate in court, but also their resort to an expedient, largely cost-free administrative procedure. We explained repeatedly in Sonic II that, while the waiver of Berman procedures does not in itself render an arbitration agreement unconscionable, the agreement must provide in exchange an accessible and affordable forum for resolving wage disputes. (Sonic II, supra, 57 Cal.4th at pp. 1146, 1147-1148, 1150.) No specific procedures are required. (See id. at pp. 1147, 1170-1171.) But the arbitral scheme must offer employees an effective means to pursue claims for unpaid wages, and not impose unfair costs or risks on them or erect other barriers to the vindication of their statutory rights. (See id. at pp. 1142, 1147-1148, 1157-1158.) When imposed in a procedurally unconscionable fashion, such barriers to the vindication of rights may become unenforceable.

         It is true, as One Toyota notes, that the results of a Berman hearing are nonbinding. An appeal by either party will bring the parties to the superior court for de novo review, where litigation formalities may apply.[18] But, as Sonic II explained, the prospect of an appeal does not negate the efficiency or accessibility of the Berman process. (Sonic II, supra, 57 Cal.4th at pp. 1160-1162, 1167.) Appeals are discouraged by the requirement that employers post a bond (§ 98.2, subd. (b)) and pay the costs and attorney fees on appeal of any employee who recovers even a minimal amount (see § 98.2, subd. (c); Lolley, supra, 28 Cal.4th at p. 376). If the employer does appeal, Berman claimants who cannot afford counsel may be represented by the Labor Commissioner. Representation in a de novo appeal is guaranteed for indigent claimants who do not object to the commissioner's final order. (§ 98.4.) Absent the agreement, Kho may well have been represented by the Labor Commissioner in any de novo appeal. Moreover, all claimants will have a better understanding of how to support their wage claims as a result of having the commissioner's assistance during the Berman process.

         Because the complexity of One Toyota's arbitral process effectively requires that employees hire counsel, there is also force to Kho's argument that the procedure is not an affordable option. An arbitration procedure may not impose such costs or risks on wage claimants that it “ ‘effectively blocks every forum for the redress ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.