Sonic–calabasas a Inc. v. Moreno, No. S174475.

• Court: United States State Supreme Court (California)
• Writing for the Court: West Codenotes
• Citation: 11 Cal. Daily Op. Serv. 2462,17 Wage & Hour Cas.2d (BNA) 457,121 Cal.Rptr.3d 58,51 Cal.4th 659,2011 Daily Journal D.A.R. 2937,247 P.3d 130
• Parties: SONIC–CALABASAS A, INC., Plaintiff and Appellant,v.Frank MORENO, Defendant and Respondent.
• Docket Number: No. S174475.
• Decision Date: 24 February 2011

51 Cal.4th 659
247 P.3d 130
121 Cal.Rptr.3d 58
161 Lab.Cas. P 61,121
17 Wage & Hour Cas.2d (BNA) 457
11 Cal. Daily Op. Serv. 2462
2011 Daily Journal D.A.R. 2937

SONIC–CALABASAS A, INC., Plaintiff and Appellant,
v.
Frank MORENO, Defendant and Respondent.

No. S174475.

Supreme Court of California

Feb. 24, 2011.

West CodenotesRecognized as PreemptedWest's Ann.Cal.Labor Code § 229.[121 Cal.Rptr.3d 62] Fine, Boggs & Perkins, David J. Reese and John P. Boggs, Half Moon Bay, for Plaintiff and Appellant.Locker Folberg, Rachel Folberg and Miles E. Locker, San Francisco, for Defendant and Respondent.McGuinn, Hillsman & Palefsky, Cliff Palefsky, Keith Ehrman, San Francisco; Law Office of Daniel U. Smith and Valerie T. McGinty for California Employment Lawyers Association as Amicus Curiae on behalf of Defendant and Respondent.Hina B. Shah; Cynthia Rice; Jose Tello; Miye Goishi; and Silas Shawver 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 & 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, 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.MORENO, J.

[247 P.3d 133 , 51 Cal.4th 668]

Under Labor Code section 98 et seq., an employee with a claim for unpaid wages has a right to seek an informal hearing in front of the [51 Cal.4th 669] Labor Commissioner, a so-called “Berman” hearing. If the employee obtains an award at the Berman hearing, the employer may request de novo review of the award in the superior court, which the statute calls an “ appeal.” As explained at greater length below, the statutory regime of which the Berman hearing is part contains a number of provisions designed to assist employees during this process and to deter frivolous employer defenses. These provisions include the Labor Commissioner's representation in the superior court of employees unable to afford counsel, the requirement that the employer post an undertaking in the amount of the award, and a one-way attorney fee provision that requires an employer that is unsuccessful in the appeal to pay the employee's attorney fees.

In this case, we must decide whether a provision in an arbitration agreement that the employee enters as a condition of employment

[247 P.3d 134]

requiring waiver of the option of a Berman hearing is contrary to public policy and unconscionable. We conclude that it is, and therefore reverse the Court of Appeal's contrary judgment. We nonetheless conclude that arbitration agreements may be enforced after a Berman [121 Cal.Rptr.3d 63] hearing has taken place, i.e., the appeal from such a hearing may be made, pursuant to a valid arbitration agreement, in front of an arbitrator rather than in court.

Furthermore, we must decide whether a state law rule that a Berman waiver in an arbitration agreement is unconscionable and contrary to public policy is preempted by the Federal Arbitration Act (FAA; 9 U.S.C. § 1, et seq.). In arguing this issue, the parties particularly focus on a recent United States Supreme Court case, Preston v. Ferrer (2008) 552 U.S. 346, 128 S.Ct. 978, 169 L.Ed.2d 917 ( Preston ), holding that a provision in this state's Talent Agencies Act vesting original jurisdiction of all disputes under that statute with the Labor Commissioner was preempted by the FAA. We conclude, as did the Court of Appeal below, that Preston is distinguishable and that our holding is not preempted by the FAA.

I. FACTS AND PROCEDURAL HISTORY

The facts are not in dispute. 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. Critically for our case, the agreement contained a paragraph governing dispute resolution. The agreement required both parties to submit their employment disputes to “binding arbitration under the Federal Arbitration Act, in conformity with the procedures of the California Arbitration [51 Cal.4th 670] Act (Cal.Code Civ. Proc. sec. 1280 et seq....).” The agreement 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 agreement 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. Furthermore, the agreement provided 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.”

At some point, Moreno left his position with Sonic. In December 2006, Moreno filed an administrative wage claim with the Labor Commissioner for unpaid vacation pay pursuant to Labor Code section 98 et seq.¹ Moreno alleged that 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 this 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 dismiss the pending administrative action. (Code Civ. Proc., § 1281.2.) Sonic argued Moreno waived his right to a Berman hearing in the arbitration agreement.

The Labor Commissioner intervened below 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[121 Cal.Rptr.3d 64] from filing an administrative wage claim under section 98 et seq. The Labor Commissioner argued that 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 to the superior court that is provided in section 98.2, subdivision (a). The Labor Commissioner contended that a contrary interpretation of the arbitration agreement to waive a Berman

[247 P.3d 135]

hearing would violate public policy, relying on our decision regarding mandatory employment arbitration agreements in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669 ( Armendariz ).

The superior court denied the petition to compel arbitration as premature. Citing Armendariz, the superior court stated that, as a matter of “basic public policy ... until there has been the preliminary non-binding hearing and [51 Cal.4th 671] 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 from the order of denial. (Code Civ. Proc., § 1294, subd. (a).) The Labor Commissioner did not participate in the appeal, nor in proceedings before this court. During the briefing period, the United States Supreme Court decided Preston, which held that the Labor Commissioner's original and exclusive jurisdiction under the Talent Agencies Act (Lab.Code, § 1700 et seq.) was preempted when the parties entered into an arbitration agreement governed by the FAA. ( Preston, supra, 552 U.S. 346, 128 S.Ct. 978.)

The Court of Appeal concluded at the threshold that Preston was not dispositive of the appeal, reasoning that Preston applied to cases in which a party was challenging the validity of a contract as a whole and seeking to have that challenge adjudicated by an administrative agency; it did not apply to cases in which the party was challenging 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. “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 concluded, for reasons explained below, that a Berman waiver was not contrary to public policy. Moreno petitioned for review, contending the Court of Appeal decided this question incorrectly. Sonic, in its answer to the petition, contended the Court of Appeal was correct, and renewed its argument that a holding invalidating a Berman waiver would be preempted by the FAA, as construed in Preston. We granted review to decide these questions.

II. DISCUSSION A. The Berman Hearing and Posthearing Procedures

As we have explained: “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...