Opinion ID: 6107706
Heading Depth: 1
Heading Rank: 6

Heading: Federal Law - The FAA

Text: The final reason I do not join the majority opinion is that its analysis is inconsistent  with - and thus preempted by - the FAA, as the high court has construed that law. The high court cases applying the FAA authoritatively establish at least two principles that are fatal to the majority's analysis and conclusion. First, an arbitration agreement's enforceability may not turn[ ] on a state's judgment concerning the forum for enforcement of [a] state-law cause of action. ( Buckeye Check Cashing , Inc. v. Cardegna (2006) 546 U.S. 440 , 446, 126 S.Ct. 1204 , 163 L.Ed.2d 1038 ( Buckeye ).) Thus, as the Sonic II majority stated, the FAA precludes a court from finding an arbitration agreement unconscionable based on the fact that arbitration supplants an administrative hearing. ( Sonic II , supra , 57 Cal.4th at p. 1146, 163 Cal.Rptr.3d 269 , 311 P.3d 184 .) Second, judges may not declare an arbitration agreement to be unenforceable based on their subjective view that the arbitration procedure would not provide  'effective vindication'  of a statutory right, unless the agreement goes so far as to forbid[ ] the assertion of certain statutory rights, and perhaps if it imposes filing and administrative fees ... that are so high as  to make access to the forum impracticable. ( American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. 228 , 235-236 [ 133 S.Ct. 2304 , 2310-2311], 186 L.Ed.2d 417 ( Italian Colors ).) The majority's analysis and conclusion violate both of these binding FAA principles. Again, the majority, though recognizing that the arbitration procedure here was carefully crafted to ensure fairness to both sides (maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695) and is not per se unfair, unaffordable, or inaccessible ( ibid. ), nevertheless invalidates the arbitration agreement based on its view that the procedure is not as advantageous for Kho and other employees as the Berman procedure. In other words, contrary to high court precedent, the majority makes the agreement's enforceability turn[ ] [entirely] on a state court's judgment that the Berman procedure provides a better forum for enforcement of [a] state-law cause of action ( Buckeye , supra , 546 U.S. at p. 446, 126 S.Ct. 1204 ), and that the arbitration procedure supplants that more advantageous administrative forum ( Sonic II , supra , 57 Cal.4th at p. 1146, 163 Cal.Rptr.3d 269 , 311 P.3d 184 ). Also contrary to high court precedent, the majority expressly has rested its conclusion on the view that the arbitration procedure, as compared to the  Berman procedure, erect[s] ... barriers to the vindication of [employees'] statutory rights. (Maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 696.) Under binding high court case law, the FAA does not permit invalidation of the arbitration agreement on these grounds. It is true that under the FAA, enforcement of an arbitration agreement is subject to such grounds as exist at law or in equity for the revocation of any contract. ( 9 U.S.C. § 2 .) It is also true that under this clause - which is known as the saving clause - unconscionability, as a  'generally applicable contract defense[ ],'  may be the basis for declining to enforce an arbitration agreement. ( Concepcion , supra , 563 U.S. at p. 339, 131 S.Ct. 1740 .) However, the FAA imposes substantial limits on what a court may do in the name of unconscionability. To begin with, [a] court may not ... construe [an arbitration] agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. ( Perry v. Thomas (1987) 482 U.S. 483 , 493, fn. 9, 107 S.Ct. 2520 , 96 L.Ed.2d 426 ( Perry ).) Nor may a court apply the unconscionability doctrine in a fashion that disfavors arbitration or  'rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable.'  ( Concepcion , supra , 563 U.S. at p. 341, 131 S.Ct. 1740 .) In short, the saving clause establishes an equal-treatment principle: A court may invalidate an arbitration agreement based on 'generally applicable contract defenses' like fraud or unconscionability, but not on legal rules that 'apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.'  ( Kindred Nursing Centers Ltd. Partnership v. Clark (2017) --- U.S. ----, [ 137 S.Ct. 1421 , 1426], 197 L.Ed.2d 806 ( Kindred Nursing ).) As this court has explained, this equal treatment principle mandates that our unconscionability standard be ... the  same for arbitration and nonarbitration agreements ( Sanchez , supra , 61 Cal.4th at p. 912, 190 Cal.Rptr.3d 812 , 353 P.3d 741 ) and that we enforce our unconscionability rules evenhandedly ( Sonic II , supra , 57 Cal.4th at p. 1143, 163 Cal.Rptr.3d 269 , 311 P.3d 184 ). It preempts any rule of unconscionability that discriminat[es] on its face against arbitration. ( Kindred Nursing , at p. 1426.)  But the equal treatment principle extends beyond overt discrimination, displac[ing] any [state] rule [of unconscionability] that covertly accomplishes the same objective ( Kindred Nursing , supra , --- U.S. ---- [137 S.Ct. at p. 1426] ) or that employs more subtle methods to target arbitration ( Epic Systems Corp. v. Lewis (2018) --- U.S. ----, [ 138 S.Ct. 1612 , 1622], 200 L.Ed.2d 889 ( Epic )). Thus, as this court has explained, the FAA preempts even a 'generally applicable' state law contract defense if that defense (1) is 'applied in a fashion that disfavors arbitration' [citation], or (2) 'interferes with fundamental attributes of arbitration' [citation], such as ' lower costs, greater efficiency and speed, and the ability to choose expert  adjudicators to resolve specialized disputes. '  ( McGill v. Citibank , N.A. (2017) 2 Cal.5th 945 , 964, 216 Cal.Rptr.3d 627 , 393 P.3d 85 ( McGill ).) In other words, although the FAA's saving clause preserves generally applicable contract defenses, it does not preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives. ( Concepcion , supra , 563 U.S. at p. 343, 131 S.Ct. 1740 ). Nor does it permit state courts, in addressing the concerns that attend contracts of adhesion, to take steps under the rubric of unconscionability that conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms. ( Id. at p. 347, fn. 6, 131 S.Ct. 1740 .) Thus, [t]he 'grounds'  for invalidating an arbitration agreement that the saving clause preserves do not  'include a State's mere preference for procedures that are incompatible with arbitration and that would wholly eviscerate arbitration agreements. '  ( Id. at p. 343, 131 S.Ct. 1740 .) By refusing to enforce the arbitration agreement based on its view that the arbitration procedure is less advantageous for Kho and other employees than the Berman procedure, the majority runs afoul of these governing principles. Given the majority's recognition that the arbitration procedures have been carefully crafted to ensure fairness to both sides (maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695), and are not per se unfair, unaffordable, or inaccessible (maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695), the majority's comparative benefit basis for invalidating the agreement constitutes nothing more than a  'mere preference'  for the  'procedures'  prescribed by the Berman statutes. ( Concepcion , supra , 563 U.S. at p. 343, 131 S.Ct. 1740 .) By insisting that the arbitration agreement have more features comparable to those of the Berman procedure, the majority is frustrat[ing] the FAA's purpose to ensure that private arbitration agreements are enforced according to their terms. ( Id. at p. 347, fn. 6, 131 S.Ct. 1740 .) The majority's effort to disguise this obvious preference for the Berman procedure under the cloak of unconscionability does not render its analysis and conclusion valid under the FAA; as explained above, the FAA's equal treatment principle extends beyond overt discrimination, displac[ing] any [state] rule [of unconscionability] that covertly accomplishes the same objective ( Kindred Nursing , supra , --- U.S. ---- [137 S.Ct. at p. 1426] ) or employs more subtle methods to target arbitration ( Epic , supra , --- U.S. ---- [138 S.Ct. at p. 1622] ). But the majority's effort is perhaps not as subtle or covert as it might at first appear. The high court, in discussing the  'great variety' of 'devices and formulas'  that judges hostile to arbitration have used to invalidate arbitration agreements, has expressly not[ed] that California's courts have been more likely to hold contracts to arbitrate unconscionable than other contracts. (  Concepcion , supra , 563 U.S. at p. 342, 131 S.Ct. 1740 .) Any reader of this court's opinions would surely be able to confirm the high court's observation. Any such reader would also be able to discern that the unconscionability analysis and contract principles this court applies in arbitration cases - including  the  majority's comparative benefit rationale for invalidating the arbitration agreement here, its insistence that there be separate consideration for Kho's agreement to arbitrate claims covered by the Berman procedure, its failure to consider the parties' overall bargain and the detriment OTO suffered in determining what Kho received in return for his agreement to arbitrate, and its reliance on factors to find procedural unconscionability that our precedents hold are not factors - are indeed very different from the analysis and principles the court applies in nonarbitration cases. Indeed, a majority of this court long ago expressly announced that with respect to arbitration agreements, it would apply the ordinary principles of unconscionability ... in forms peculiar to the arbitration context. ( Armendariz , supra , 24 Cal.4th at p. 119, 99 Cal.Rptr.2d 745 , 6 P.3d 669 .) Here, the majority again explicitly acknowledges that the approach it uses in evaluating the unconscionability of compelled arbitration of wage claims otherwise subject to the Berman procedure is different from the approach this court uses in evaluating other unconscionability claims. (Maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695.) This unique, Berman-specific approach - and the majority's analysis and conclusion in this case - violate, and are thus preempted by, the FAA and its equal treatment principle, which preclude a court from constru[ing an arbitration] agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law ( Perry , supra , 482 U.S. at p. 493, fn. 9, 107 S.Ct. 2520 ), from applying the unconscionability doctrine in a fashion that disfavors arbitration, and from  'rely[ing] on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable'  ( Concepcion , supra , 563 U.S. at p. 341, 131 S.Ct. 1740 ). As this court has held, the FAA's equal treatment principle mandates that our unconscionability standard be ... the same for arbitration and nonarbitration agreements ( Sanchez , supra , 61 Cal.4th at p. 912, 190 Cal.Rptr.3d 812 , 353 P.3d 741 ) and that we enforce our unconscionability rules evenhandedly ( Sonic II , supra , 57 Cal.4th at p. 1143, 163 Cal.Rptr.3d 269 , 311 P.3d 184 ). In this case, the majority, once again, fails to heed this court's own pronouncements. Moreover, this case confirms my view, as set forth in Sonic II , that the unique unconscionability analysis a majority of this court applies to compulsory arbitration of Berman claims is incompatible with, and therefore preempted by, the FAA for another reason: it  ' stand[s] as an obstacle to the accomplishment and execution of [Congress's] full purposes and objectives  ' in passing the FAA. ( Sonic II , supra , 57 Cal.4th at p. 1187, 163 Cal.Rptr.3d 269 , 311 P.3d 184 (conc. & dis. opn. of Chin, J.).) In Italian Colors , supra , 570 U.S. at pages 237, 238 [ 133 S.Ct. 2304 , 2311-2312], the high court rejected an approach that would  'require courts to proceed case by case to tally the costs and burdens to particular plaintiffs in light of their means'  and  'the size of their claims.'  Such a preliminary litigating hurdle, the court explained, would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure. The FAA does not  sanction such a judicially created superstructure. ( Id. at p. 239 [133 S.Ct. at p. 2312 ].) As I explained in Sonic II , the  unconscionability inquiry the Sonic II majority set forth - by requiring a minitrial in superior court on the comparative costs and benefits of arbitration and the Berman procedure for a particular employee and possible appellate review of the trial court's decision - creates the very type of 'superstructure'  that, according to the high court, the FAA prohibits. ( Sonic II , at p. 1188, 163 Cal.Rptr.3d 269 , 311 P.3d 184 (conc. & dis. opn. of Chin, J.).) In rejecting my view, the Sonic II majority confidently responded that its approach would not erect a 'preliminary litigating hurdle' of the sort prohibited by Italian Colors . ( Sonic II , supra , 57 Cal.4th at p. 1167, 163 Cal.Rptr.3d 269 , 311 P.3d 184 .) To support its view, the majority asserted that a wage claim is simpler than the antitrust claim at issue in Italian Colors , that courts have routinely decided whether arbitration is affordable in a given case, and that applicable statutes would facilitate summary  disposition of unconscionability claims. ( Id. at p. 1157, 163 Cal.Rptr.3d 269 , 311 P.3d 184 .) The facts and the majority's conclusion in this case validate my analysis. OTO moved to compel arbitration in August 2015. The trial court denied the motion four months later, in December 2015. OTO then appealed, and in August 2017 - two years after OTO moved to compel arbitration - the Court of Appeal disagreed with the trial court and ordered the motion granted. Now, after another two years of litigation , a majority of this court is reversing the Court of Appeal based on a different assessment of the arbitration procedure's benefits relative to a Berman procedure. Thus, as the majority acknowledges, the [l]itigation in this case just to apply Sonic II 's unique unconscionability test has  consumed ... four years . (Maj. opn., ante , 251 Cal.Rptr.3d at p. 730, fn. 12, 447 P.3d at pp. 693-694, fn. 12, italics added.) Even still, says the majority, its decision does not settle the question of whether an identical arbitration agreement would be enforceable under less coercive circumstances. (Maj. opn., ante , 251 Cal.Rptr.3d at p. 735, 447 P.3d at p. 697.) The length of this litigation and the majority's case-specific limitation on its holding confirm my view that the unconscionability analysis this court has prescribed for agreements to arbitrate claims the Berman procedure covers creates a preliminary litigating hurdle that, according to Italian Colors , is incompatible with, and thus preempted by, the FAA. The majority's response - that this inordinate delay in arbitration is permissible under the FAA because unconscionability is a generally applicable contract defense that has long been recognized as a permissible ground for invalidating arbitration agreements under the FAA's savings clause (maj. opn., ante , 251 Cal.Rptr.3d at p. 736, 447 P.3d at p. 699) - is simply incorrect. Under high court precedent, the unconscionability defense does not qualify for protection under the saving clause if it is applied so as to interfere[ ] with a fundamental attribute of  arbitration. ( Epic , supra , --- U.S. ---- [138 S.Ct. at p. 1622].) Consistent with this precedent, we unanimously stated just two years ago that the FAA preempts even a 'generally applicable' state law contract defense if that defense ... 'interferes with fundamental attributes of arbitration,'  including  ' lower costs [and] greater efficiency and speed. '  ( McGill , supra , 2 Cal.5th at p. 964, 216 Cal.Rptr.3d 627 , 393 P.3d 85 , italics added.) Because the extended litigation made necessary by a majority of this court's unique approach to unconscionability in the Berman waiver context substantially interferes with these fundamental attributes of arbitration, the FAA preempts that approach notwithstanding the fact  that unconscionability is otherwise a generally applicable contract defense. 6 The majority opinion here also confirms another aspect of my FAA preemption analysis in Sonic II . There, I explained that the Sonic II majority's unconscionability analysis is inconsistent with the FAA, as the high court construed it in Southland ,  because it is not a ground that exists at law or in equity for the revocation of any contract, but is ... merely a ground that exists for the revocation of arbitration provisions in contracts subject to the Berman statutes or to other statutes that 'legislatively' afford to 'a particular class ... specific protections in order to mitigate the risks and costs of pursuing certain types of claims.'  ( Sonic II , supra , 57 Cal.4th at p. 1190, 163 Cal.Rptr.3d 269 , 311 P.3d 184 (conc. & dis. opn. of Chin, J.).) Consistent with my analysis, the majority, in finding unconscionability here, concedes that it is using a different approach in evaluating the compelled arbitration of wage claims, as compared to the arbitration of other types of disputes. (Maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695.) That approach, the majority continues, is not appropriate for wrongful demotion and discharge claims because [t]here is no Berman-like administrative process for such  claims (maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695) and no provision for free legal assistance ( id. at p. 733, 447 P.3d at p. 696) as there is with the Berman procedure; [w]hile all employees would likely benefit from having a lawyer in the litigation-like arbitration process here, wage claimants present a somewhat special case because only [they] have to pay for representation that was otherwise available to them for free ( ibid. ). Thus, although arbitration with litigation-like procedures is permissible for some employment claims, it is unacceptable as a substitute for [the Berman] administrative procedure. (Maj. opn., ante , 251 Cal.Rptr.3d at p. 727, 447 P.3d at p. 691.) These statements reinforce the view I stated in Sonic II : This court's rule of unconscionability for agreements requiring arbitration of unpaid wage claims otherwise eligible for the Berman procedure is inconsistent with the FAA because it is not a ground that exists at law or in equity for the revocation of any contract, but is ... merely a ground that exists for the revocation of arbitration provisions in contracts subject to the Berman statutes.'  ( Sonic II , supra , at p. 1190, 163 Cal.Rptr.3d 269 , 311 P.3d 184 (conc. & dis. opn. of Chin, J.).) Under the FAA, [p]arties may generally shape [arbitration] agreements to their liking by specifying with whom they will arbitrate, the issues subject to arbitration, the rules by which they will arbitrate, and the arbitrators who will resolve their disputes. [Citation.] Whatever they settle on, the task for courts and arbitrators at bottom remains the same: 'to give effect to the intent of the parties.'  ( Lamps Plus , Inc. v. Varela , supra , --- U.S. ---- [139 S.Ct. at p. 1416].) California law embodies a similar principle; as this court has explained, by enacting the California Arbitration Act, the Legislature has determined that the parties shall have considerable leeway in structuring the dispute settlement arrangements by which they are bound .... (  Graham , supra , 28 Cal.3d at p. 825, 171 Cal.Rptr. 604 , 623 P.2d 165 .) This leeway ... permit[s] the establishment of arrangements which vary to some extent from the dead-center of 'neutrality,'  so long as they meet certain 'minimum levels of integrity.'  ( Ibid. ) In light of the public policy strongly favoring arbitration, those arrangements should be enforced - and the matter should be permitted to proceed to arbitration - absent a clear[ ] showing that they essentially preclude the possibility of a fair hearing. ( Id. at p. 826, fn. 23, 171 Cal.Rptr. 604 , 623 P.2d 165 .) If, in the course of arbitration proceedings, the resisting party is actually denied a fair opportunity to present his position, ample means for relief are available through a subsequent petition to vacate the award. ( Ibid. ) The majority violates these federal and state law principles by invalidating the arbitration rules to which the parties in this case agreed - even though those rules have been carefully crafted to ensure fairness to both sides (maj. opn., ante , 251 Cal.Rptr.3d at p. 732, 447 P.3d at p. 695) and do not make arbitration per se unfair, unaffordable, or inaccessible ( ibid .) - because they are not, in the majority's view, as advantageous for Kho as the Berman procedure. This conclusion is both inconsistent with California law and preempted by the FAA. For the foregoing reasons, I dissent.