by Robert Ferrier
In OTO, LLC v. Kho, the California Court of Appeals enforced a binding arbitration clause that a former employer provided the employee as a condition of employment.
Here, the plaintiff brought an unpaid wage claim against his former employer. After subsequent settlement negotiations failed, the employer tried to invoke the arbitration clause. In this particular case, the arbitration would resemble traditional litigation, including adoption of many provisions of the California Evidence Code and Civil Procedure Codes.
The trial court denied the employer’s petition to compel, finding that the arbitration procedure violated the standards established in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1100 because it effectively required the plaintiff to retain an attorney, therefore failed to provide the employee with an affordable and accessible forum, and thus, was legally unconscionable. Sonic provides that an employee can waive his or her rights to the judicial process in the context of a wage claim, but that the substituted forum must be reasonably accessible and affordable. Otherwise, such a clause is substantively unconscionable. Typically, California courts have required both procedural and substantive unconscionability to find a contractual provision unenforceable.
The Court of Appeals reversed. While the Court agreed that the arbitration provision was a contract of adhesion, and therefore procedurally unconscionable, it further held that it was not substantively unconscionable under the Sonic rule. The Court noted that both the employer and employee were bound to arbitration, and that, as long as the arbitration process was reasonably affordable and accessible, compelled arbitration was not per se unconscionable.
The Court noted that under California law, the employer was already bound to bear all costs of arbitration. See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83. Because of that requirement, the Court held that the arbitration process was affordable to the plaintiff, and therefore did not violate the Sonic rule. It further stated that the necessity of counsel was simply not a factor to be considered under the Sonic rule, as the Sonic court did not specifically address that issue. The Court also noted that the decision to hire counsel is one that every civil litigant faces, regardless of specific context. The Court further held that arbitration was no less accessible to the plaintiff than regular civil litigation.
In short, the Court held the arbitration provision enforceable and ordered the trial court to compel arbitration.
The lesson of the case is clear: the Devil is in the details. Arbitration provisions are generally upheld if: (1) they bind both parties; (2) the costs are shifted to the party most able to bear them; and (3) the process itself is reasonably affordable and accessible. If you are unsure whether an arbitration provision makes sense for your business, contact a legal professional to discuss and potentially draft such a provision.
DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.