February 21, 2014

Recent developments in California arbitration appeals

Back in 2007, the California Supreme Court’s decision in Gentry v. Superior Court held that where employees assert unwaivable state statutory wage claims subject to an arbitration agreement that precludes any attempt to pursue those claims on a classwide basis, this waiver of a class procedure is unenforceable if individual arbitration could not as effectively vindicate the employee’s substantive rights under California’s Labor Code.

Subsequently, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, which imposed significant restrictions on state contract defenses (like unconscionability and public policy) that limit the enforceability of arbitration agreements governed by the Federal Arbitration Act (FAA).  In 2012, the California Supreme Court granted review in Iskanian v. CLS Transportation of Los Angeles, an arbitration appeal that calls on the court to decide whether the FAA preempts Gentry under Concepcion.

Today, the U.S. Supreme Court is scheduled to decide whether to take up the same question in CarMax Auto Superstores, LLC v. Fowler.  In CarMax, the California Court of Appeal concluded that Gentry remains good law after Concepcion—the same question squarely presented in the Iskanian appeal.  Nonetheless, the California Supreme Court declined to grant review and hold the unpublished CarMax decision pending its resolution of Iskanian.  Consequently, the employer filed a cert. petition with the U.S. Supreme Court challenging Gentry’s continuing vitality.  That petition was distributed for the Court’s conference today and we may know as early as Monday whether or not the U.S. Supreme Court will once again step in, as it has done in the past, to decide the extent to which the FAA preempts California arbitration law.

The U.S. Supreme Court is also set to consider yet another California arbitration appeal next week: Sonic-Calabasas A, Inc. v. Moreno.  Several years ago, the California Supreme Court concluded that the arbitration agreement in Sonic-Calabasas could not be enforced as written on public policy and unconscionability grounds because the agreement waived advantages consisting of certain procedures that California laws made available to employees who pursue wage claims before the Labor Commissioner’s office through a so-called “Berman” administrative process.  But, at the time of this decision, the California Supreme Court did not have the benefit of Concepcion and, in response to an earlier cert. petition, the U.S. Supreme Court vacated and remanded Sonic-Calabasas I for reconsideration in light of Concepcion.

On remand, the California Supreme Court issued its first decision addressing the impact of Concepcion and its progeny on California arbitration law.  The employer has since filed a cert. petition challenging the California Supreme Court’s new unconscionability ruling in Sonic-Calabasas II, and that petition has been distributed for the U.S. Supreme Court’s conference on February 28, 2014.

In the meantime, the California Supreme Court this week called for supplemental briefing in Sanchez v. Valencia Holding Co., an arbitration appeal in which the court will have a chance to examine California’s unconscionability doctrine and perhaps the extent to which it is preempted by the FAA after Concepcion.

This new order in Sanchez states: “The parties and interested persons and entities are invited to file supplemental briefing on the following questions. In formulating the standard for determining whether a contract or contract term is substantively unconscionable, this court has used a variety of terms, including ‘unreasonably favorable’ to one party (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145); ‘so one-sided as to shock the conscience’ (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246); ‘unfairly one-sided’ (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071-1072; ‘overly harsh’ (Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, 114; and ‘unduly oppressive’ (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925). Should the court use only one of these formulations in describing the test for substantive unconscionability and, if so, which one? Are there any terms the court should not use? Is there a formulation not included among those above that the court should use? What differences, if any, exist among these formulations either facially or as applied? The parties are directed to serve and file simultaneous letter briefs on this issue on or before March 12, 2014. If any party or existing amicus curiae chooses to reply to the points raised in the supplemental briefs, the supplemental reply is to be served and filed on or before March 19, 2014. In addition, any interested person or entity is invited to serve and file an application to file an amicus curiae brief, and that brief itself, by March 12, 2014. Any party may serve and file a reply to such a brief on or before March 19, 2014.”

[Full disclosure: Horvitz & Levy has filed amicus briefs in support of the parties who moved to compel arbitration in Sonic-Calabasas, Sanchez, and Iskanian—including an amicus brief in support of Sonic-Calabasas’ recent cert. petition—and presented oral argument in support of the employer in Sonic-Calabasas.]

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