California Court of Appeal Upholds Car Dealership’s “Disturbing” Arbitration Agreement Over the California DLSE Process for Unpaid Wages
California Court of Appeal Upholds Car Dealership’s “Disturbing” Arbitration Agreement Over the California DLSE Process for Unpaid Wages
On August 21, 2017, the First Appellate District in California issued a decision in OTO, LLC. v. Ken Kho, granting a car dealership’s petition to compel arbitration of a complaint filed by a former employee.
In OTO, LLC v. Kho, the California Labor Commissioner challenged a car dealership’s mandatory arbitration agreement. The agreement required employment disputes to be arbitrated under normal civil litigation rules, before a retired superior court judge, and waived the right to submit wage claims to the Labor Commissioner. The Court of Appeal expressed that it was “disturbed” by the way the employer had drafted and presented the agreement to employees. Despite this proclamation and the fact the agreement bypassed the Labor Commissioner hearing process, the Court upheld the arbitration agreement.
Ken Kho was employed as an auto mechanic for a car dealership. Three years into his employment, he was given a one and one-quarter page agreement entitled, “Employment At-Will and Arbitration.” The agreement was drafted in seven-point font and the entire agreement was contained in a single, dense paragraph. The agreement required the parties to arbitrate their disputes before a retired superior court judge under ordinary pleading, discovery, and evidence rules. Kho received the agreement at his desk from a Human Resource employee, who did not explain the meaning of the agreement or the consequences of signing the agreement to him. Kho claimed to have signed the agreement within approximately three to four minutes.
One year after receiving the arbitration agreement, Kho filed a wage claim with the Division of Labor Standards Enforcement (DLSE), which is regulated by the Labor Commissioner. The dealership filed a petition to compel Kho to arbitrate his wage claim in the Superior Court. The Labor Commissioner intervened to oppose the petition and to uphold Kho’s right to pursue his wage claim before the DLSE.
The trial court denied the dealership’s petition because the arbitration agreement was “highly” unfair and deprived Kho of the advantages an employee has in an informal hearing before the DLSE. That informal hearing, called a “Berman Hearing,” permits employees to avoid court proceedings by trying to resolve wage claims in a speedy, informal, and affordable method for employees. The dealership appealed.
The Court of Appeal’s Decision
Written agreements to arbitrate employment disputes are typically enforceable unless there is something specifically unfair about the agreement’s terms and presentation. These two types of unfairness are called procedural unconscionability and substantive unconscionability. If both forms of unfairness exist to some degree, then a court may find an arbitration agreement invalid.
The Court of Appeal agreed with the trial court that the arbitration agreement was procedurally unconscionable. Kho received the agreement on a take-it-or-leave-it basis; he could not negotiate the terms; and he was presented with it years after he had started working for the dealership. He reasonably assumed he had no choice but to sign it or quit. In addition, the agreement appeared in seven-point font within a block format and had legalistic terms that were difficult to understand without legal training. Further, Kho was not provided with a copy of the arbitration agreement after signing it and did not receive a copy of the arbitration agreement in his first language, which is Chinese. All this together made the degree of procedural unconscionability “extraordinarily high.”
The appellate court closely reviewed the agreement and ultimately ruled in favor of the employer. The Court determined the agreement was not substantively unconscionable because the arbitration clause was not one-sided and did not overly favor the dealership. All claims between the parties were subject to arbitration and the proceeding would resemble ordinary litigation. Further, although the agreement did not explicitly state that the dealership would have to pay for arbitration, prevailing law requires such a result.
Therefore, although the Court of Appeal was “disturbed” by the way the dealership wrote the arbitration agreement and felt the way it was presented to Kho for signing was “coercive,” the agreement did allow him to pursue his wage claim in an accessible and affordable forum that resembled normal civil litigation. Those features made the agreement substantively conscionable and therefore, enforceable.
Practical Tips for Employers
-Arbitration agreements continue to be a vital tool for companies to speed up the litigation process and reduce fees and costs. However, as discussed above, enforceability of arbitration agreements remains an evolving and complex area of law and a poorly worded arbitration agreement can lead to extensive litigation over the legitimacy of the agreement itself. In order to avoid finding yourself in a prolonged legal battle over an arbitration agreement, it is crucial for employers to maintain up-to-date arbitration agreements that are consistent with recent case law.
-Employers should work closely with expert legal counsel when implementing an arbitration agreement to ensure procedural fairness. If you have questions about your current arbitration agreement or introducing an arbitration agreement at your company, contact the attorneys at Palmer Kazanjian Wohl Hodson LLP.
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Arbitration has become a widely used mechanism for resolving legal disputes, due in part to the increased efficiency and cost-effectiveness it affords employers. The Federal Arbitration Act (“Act”) embodies the “liberal federal policy of favoring arbitration agreements,” and at its core, provides a medium by which disputes can be privately resolved through a neutral third party. The Act also establishes the legal framework for an enforceable and valid arbitration agreement as well as the grounds upon which an award is vacated or enforced. The steady increase in the use of mandatory arbitration agreements in employment contracts has been met with controversy, particularly surrounding the enforceability of class action claim waiver clauses.
Enforceability of Class Action Waivers in Arbitration Agreements Not Subject to the NLRB
For over a decade, the courts have grappled with the question of whether a state law that restricts the enforcement of an arbitration agreement is preempted by the Act. In Conception, the United States Supreme Court endorsed the enforceability of a customer’s agreement to waive the right to file a class action. Specifically at issue was whether the Act preempted a California state law that deemed class action waivers in adhesive consumer arbitration agreements unenforceable on the basis of unconscionability. Two AT&T customers brought suit against AT&T mobility alleging that the company had “engaged in false advertising and fraud by charging sales tax on phones it advertised as free.” The lower courts applied the unconscionability argument articulated in Discover Bank v. Superior Court and ruled that enforcement of the waiver would not allow for appropriate adjudication. On review, the United States Supreme Court disagreed, concluding that Discover Bank’s rule “interfere[ed]” with fundamental attributes of arbitration” and was therefore preempted by the Act.
California aligned itself with Conception in 2014 when it confirmed that under state law, express class action waivers in employment arbitration agreements are enforceable and specifically that refusal to enforce waivers on grounds of public policy or unconscionability is preempted by the Act. (Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 359, 327 P.3d 129, 133 (2014)). Turning to the issue of whether an employee’s right to bring a representative action under the Private Attorneys General Act of 2004 (PAGA) may be waived, the court determined that such waivers are “contrary to public policy and unenforceable as a matter of state law.” Recall that PAGA allows employees to bring an action on behalf of the state for Labor Code violations committed against the employee and other similarly situated employees. It is not a class action, but rather a representative action. The court was unpersuaded by the contention that PAGA disturbed “the principle of separation of powers under the California Constitution” and maintained that PAGA representative actions fall outside the scope of disputes that the Act seeks to protect.
Enforceability of Class Action Waivers in Arbitration Agreements Subject to the NLRB
Independently of case law to the contrary, the National Labor Relations Board (“NLRB”) has long held that arbitration agreements requiring employees to waive their right to file a class action as a condition of employment are in violation of Section 7 of the National Labor Relations Act and are invalid. (D.R Horton (2012). Murphy Oil USA, Inc.). However, for the most part, federal courts have taken a different stance, with the 5th, 2nd, and 8th Circuit Courts ruling contrary to D.R Horton. In addition, the California Supreme Court in Iskanian specifically rejected the argument that the act of participating in a “class proceeding to address wage violations” amounts to “concerted activity under section 7 of the NLRA.” In light of the disparity between federal and state courts and the NLRB, it is only a matter of time before the issue is taken to the United States Supreme Court.
Class Action Waivers Falling Outside the Scope of the Act
Gentry, the controlling authority in California prior to these rulings, may still have some limited application. It held class action waivers to be invalid where allowance of the class action leads to “a less comprehensive enforcement of overtime laws” for aggrieved employees. Gentry considered four factors in making that determination: “ the modest size of the potential individual recovery,  the potential for retaliation against members of the class,  the fact that absent members of the class may be ill informed about their rights, and  other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.” While the court in Iskanian referenced Gentry’s holding as having been “abrogated by recent United State Supreme Court precedent,” it is important to note that Gentry may still be good law in situations where the arbitration agreement is not governed by the Act.
For example, in Garrido v. Air Liquide Industrial, an employee truck driver brought an action against Air Liquide Industrial (ALI) alleging that the company committed a series of wage-related labor code violations and unfair business practices. The employee opposed ALI’s motion to compel arbitration under reasoning that the Act was not applicable to “transportation workers under 9 United States Code section 1.” The Court of Appeals concluded that while the ADR was not governed by the Act there was nothing to prohibit governance by the California Arbitration Act. This was of particular significance in that “Gentry could still apply.” Accordingly, the court applied the four factors set forth in Gentry and concluded that a class proceeding in this case would “be a significantly more effective way of allowing employees to vindicate their statutory rights.” Thus, the court affirmed the trial courts order denying Air Liquid’s motion to compel individual arbitration.
What This Means for Employers
This area of the law remains in a state of flux. Employers who are not subject to the NLRB can rest assured that arbitration agreements barring class actions will likely hold, since class waivers have been deemed enforceable by both, the United States Supreme Court in Conception and the California Supreme Court in Iskanian. It is also important to note that while state laws prohibiting class action claim waivers in an arbitration agreement are preempted by Act, PAGA representative action waivers are not. Already, the Ninth Circuit has issued a decision in which it upheld the rule established in Iskanian. As case law on the enforceability of PAGA waivers continues to evolve, employers may wish to err on the side of caution by excluding any representative PAGA action waivers from their arbitration agreements or limiting their application through appropriate language in the arbitration agreement.
Finally, employers subject to the NLRB who are unwilling to absorb the potential costs of litigating matters at the federal administrative and appellate levels may consider excluding the class waiver provision from their arbitration agreements or, again, limiting its application through appropriate language in the arbitration agreement. However, please recognize that as discussed in a previous article (“Growing Section 7 & 8(a) (1) Violations Pose A Threat To Arbitration Employment Agreements”), recent NLRB decisions demonstrate that a provision making the class waiver optional does not necessarily safeguard the provision.
Still, despite the instability currently demonstrated by the administrative agencies and courts on this issue, arbitration agreements remain a viable option for employers to seriously consider as a means of limiting employment-related claims and actions to a forum that permits more privacy and to a process that is more expeditious and cost-effective.