Arbitration Insight No. 28



OTO, LLC v. Kho (Cal. Supreme Court, August 2019) No. S244630; 2119 Cal. Lexis 6241 does not change the standards for determining unconscionability in an arbitration agreement, but it is very important nevertheless because of how it applies the existing standards to the facts at hand, particularly if the employee’s claim involves unpaid wages. In OTO, a human resources porter for One Toyota of Oakland (One Toyota), approached Ken Kho, a company service technician, at his workstation and asked him to sign several documents, while the porter waited. One of the documents was a one and one-quarter page arbitration clause, which included the waiver of a Berman hearing. (When a California employer does not pay wages as required, the employee may either file a civil action in court or file a wage claim with the Labor Commissioner, which is called a Berman hearing.) Kho exercised his right to a Berman hearing after his employment ended. One Toyota moved to compel arbitration before the Berman hearing began and then did not appear at that hearing, in which a commissioner ordered that Kho receive certain wages. Thereafter, the trial court found the arbitration agreement to be unconscionable. The appellate court reversed, finding the agreement not to be substantively unconscionable. OTO found the agreement to be one-sided and unenforceable.

The court in OTO first reminded that it had held in Sonic I (51 Cal.4th 659) that the enforceability of an agreement requiring arbitration of wage disputes and the waiver of a Berman hearing to be categorically unconscionable but, thereafter, backed off  from that ruling in Sonic II (57 Cal.4th 1109) and held that Sonic I‘s categorical rule of unconscionability had been preempted by the Federal Arbitration Act, after AT&T Mobility LLC v. Concepcion (563 U.S. 333) vacated Sonic I. Nevertheless, Sonic II provided that an employee’s Berman waiver, while not dispositive, remained a significant factor in considering unconscionability. (Id. at p. 1146.) OTO now adds that “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. (Authority deleted.) When imposed in a procedurally unconscionable fashion, such barriers to the vindication of rights may become unenforceable.” (Id. at 30.)

OTO then looked at the instant facts under procedural and substantive unconscionability analysis, which “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.) “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.)” (OTO at 17-18.) 

Pursuant to the first step of procedural unconscionability, where “The pertinent question … is whether circumstances of the contract’s formation created such oppression or surprise that closer scrutiny of its overall fairness is required,” (Id. at 18), OTO found the following facts to demonstrate “significant oppression”: Neither the contents nor the significance of the agreement’s terms had been explained; the use of a low-level Toyota employee to present the agreement created the impression that no request for an explanation was expected; by having the porter wait for the documents, One Toyota conveyed an expectation that Kho should sign them immediately, without examination or consultation with counsel; Kho was not given a copy of the agreement which was in extremely small font and filled with statutory references and legal jargon and One Toyota’s obligation to pay arbitration-related costs would not be evident to anyone without legal knowledge or access to the relevant authorities. “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.” (Id. at 23.) The majority concluded that “Although the same contract terms might pass muster under less coercive circumstances, a worker who is required to trade the Berman process for arbitration should at least have a reasonable opportunity to understand the bargain he is making. Had One Toyota set out the terms of its agreement in a legible format and fairly understandable language, or had it given Kho a reasonable opportunity to  seek clarification or advice, this would be a different case.” (Id. at 34-35.)

As to substantive unconscionability, OTO noted that while the waiver of Berman procedures did not, by itself, render an arbitration agreement unconscionable, “substantive unconscionability analysis is still sensitive to “the context of the rights and remedies that otherwise would have been available to the parties.” (Id. at 25.) In this phase of the analysis, OTO found that the agreement did not explain how to initiate arbitration; as contrasted to a Berman hearing, the agreement did not mention how to bring a dispute to arbitration; did not suggest where that information might be found; that it would be difficult for an unsophisticated, unrepresented wage claimant to effectively navigate the agreement’s arbitral procedure; the intricacies of civil litigation, when contrasted with the Berman process, is neither speedy nor informal and the complexity of the arbitral process effectively requires that employees hire counsel, which is not an affordable option when compared to the Berman process where counsel is provided without charge by the Labor Commissioner. Accordingly, OTO concluded, “Kho surrendered the full panoply of Berman procedures and assistance we have described. What he got in return was access to a formal and highly structured arbitration process that closely resembled civil litigation if he could figure out how to avail himself of its benefits and avoid its pitfalls. Considering the unusually coercive setting in which this bargain was entered, we conclude it was sufficiently one-sided as to render the agreement unenforceable.” (Emphasis in the original; id. at 17.)

OTO expresses the clear intent that cases involving wage claims subject to arbitration agreements should be more “closely scrutinized” than those involving other employment claims. “For (other employment claims) claims, it may well be that an arbitration process closely resembling civil litigation can be as advantageous for the employee as for the employer. (Citation.) … 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.” (Id. at 29-30.) 

MDM’s observation:  

By extrapolating what OTO found was “one-sided,” it would seem that an arbitration agreement concerning wage claims to satisfy procedural and substantive unconscionability analysis should provide employees with the opportunity to read the agreement and consult with a knowledgeable third party concerning its terms, which terms are legible and in understandable language, including advising how arbitration is initiated and that the employer has the obligation at arbitration to pay arbitration-related costs. OTO leaves unanswered the standard for evaluating arbitration agreements when they are being applied to both wage and non-wage claims by the same employee. Will that analysis result in a total denial of arbitration or in a bifurcated process (such as PAGA claims), with the non-wage claims being arbitrated and the wage claims proceeding through a Berman hearing or directly in superior court? 

Judge Michael D. Marcus (Ret.)

ADR Services, Inc.

1900 Avenue of the Stars, Suite 250

Los Angeles, California 90067

(310) 201-0010

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