Alternative Procedure Preempted By The FAA

Petitioner is an auto dealership. Respondent Kho worked at the dealership as a service technician. During his employment Kho and petitioner entered an arbitration agreement that provided that all disputes arising from Kho’s employment, including wage disputes, would be resolved through arbitration. The agreement also provided that the arbitration would be conducted by a retired California Superior Court judge in accordance with certain provisions of the California Code of Civil Procedure and Code of Evidence applicable to civil litigation. Under the agreement, the employee was entitled to “full discovery.” Under California law, petitioner, as the employer, would cover most arbitration costs and, potentially, attorney’s fees. 

In the absence of an arbitration agreement, California law allows for an administrative procedure to resolve unpaid wage disputes called a Berman hearing, after which either party may apply to the California Superior Court for de novo review. After Petitioner terminated Kho, he initiated a Berman review to resolve an unpaid wage dispute rather than the procedure described in the arbitration agreement.

The California Superior Court denied the petition for arbitration holding that the agreement was procedurally and substantively unconscionable because of unequal bargaining power. The California Court of Appeal reversed. While the court agreed that Kho had established procedural unconscionability, it held that the agreement was not substantively unconscionable because the procedures specified in the arbitration agreement provided a suitable process for resolving wage disputes.

A divided California Supreme Court reversed the Court of Appeal. App. 1a-91a. It held that the arbitration agreement was both procedurally and substantively unconscionable. There was procedural unconscionability, based principally on the size of the agreement’s print and the manner in which the document was presented to Kho. ​​As to substantive unconscionability, the court explained that, in the unique context of “compelled arbitration of wage claims,” the “substantive unconscionability of an arbitration agreement” must be “viewed in the context of the rights and remedies that otherwise would have been available.” 

The court below concluded that unconscionability is derived from the employees loss of a speedy process that the Berman hearing facilitates, whereas civil litigation and arbitration are expensive and time consuming. Justice Chin, dissenting, argued that that this analysis violates the Federal Arbitration Act.

Issue Areas:

Free Enterprise

Case:

Oto, L.L.C. v. Ken Kho, No. 19-875 (Supreme Court) (petition stage)

Read the Amicus Brief:

Question(s) Presented:

Whether the Federal Arbitration Act preempts a State from invalidating an arbitration agreement as substantively unconscionable on the ground that it provides procedural protections similar to those provided in civil litigation, rather than a streamlined administrative proceeding that would be available under state law in the absence of the agreement.

Additional Background:

The petition should be granted to correct and, hopefully, deter the very “judicial hostility towards arbitration” Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam); Concepcion, 563 U.S. at 339; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) on the part of California appellate courts which the FAA was intended to foreclose. This Court has recently stated that it would “be alert to new devices and formulas” used to effect “judicial antagonism toward arbitration.” Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018).

In AT&T Mobility LLC v. Concepcion, 131S.Ct.1740 (2011), this Court held that the FAA requires courts to “place arbitration agreements on an equal footing with other contracts.” Courts may not apply “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 Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1426 (2017) (quoting Concepcion, 563 U.S. at 339). 

The California courts, including the state’s supreme court, nevertheless reaffirm and continue to apply the reasoning of apply a pre-Concepcion precedents such as Armendariz v. Foundation Health Psychare Services, Inc., 6 P.3d 669 (Cal. 2000) that are plainly contrary to Concepcion.

ALF’s Amicus Brief:

In an amicus brief ALF argues that the FAA and Supreme Court precedent require arbitration agreements to be treated on equal footing with all other contracts, and that California has repeatedly placed unique burdens on arbitration. The federal law of arbitration does not countenance rules that frustrate the FAA’s purposes. Just as Concepcion held that the FAA preempts state-law rules that require class arbitration as a condition of enforcement, California’s “substantive unconscionability”rule also violates the federal substantive law of arbitrability. The Supreme Court has not hesitated in granting review in the past to ensure that state courts enforce arbitration agreements according to their terms. ALF asks this Court to once again do so to enforce the Federal policy in favor of arbitration. 

Status:

On June 8, 2020, The Supreme Court denied certiorari.