Oto, L. L.C. v. Kho

Decision Date29 August 2019
Docket NumberS244630
Citation8 Cal.5th 111,251 Cal.Rptr.3d 714,447 P.3d 680
CourtCalifornia Supreme Court
Parties OTO, L.L.C., Plaintiff and Appellant, v. Ken KHO, Defendant and Respondent; Julie A. Su, as Labor Commissioner, etc., Intervener and Appellant.

Fine, Boggs & Perkins, John P. Boggs, Half Moon Bay, and Roman Zhuk, Long Beach, for Plaintiff and Appellant.

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

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

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

Opinion of the Court by 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, 121 Cal.Rptr.3d 58, 247 P.3d 130 ( 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, 121 Cal.Rptr.3d 58, 247 P.3d 130.) 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, 131 S.Ct. 1740, 179 L.Ed.2d 742 ( 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, 163 Cal.Rptr.3d 269, 311 P.3d 184 ( 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, 163 Cal.Rptr.3d 269, 311 P.3d 184.)

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 , 251 Cal.Rptr.3d at pp. 722–723, 447 P.3d at p. 687.)

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, 99 Cal.Rptr.2d 745, 6 P.3d 669 ( 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.

II. DISCUSSION
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,...

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