Sliding Scales and Points of Comparison

OTO, LLC v. Kho, No. S244630 (Cal. Aug. 29, 2019)

A little late on this one. As I noted in my write up of the Court of Appeal decision in this case, the result—upholding an arbitration clause in an employment contract in the face of an unconscionability challenge—felt a little sideways with a Supreme Court decision generally referred to as Sonic II. So I was hardly surprised by the grant of review.

These are all wage-and-hour cases where an employee is entitled to an administrative remedy called a Berman hearing, which is “designed to give claimants a ‘speedy, informal, and affordable method’ for resolving wage disputes.” Sonic II suggested, but did not decide, that the waiver of a Berman hearing in a wage and hour case would be substantively unconscionable unless the arbitration procedure itself incorporated procedural elements of a Berman hearing.

The agreement in this case foresees an arbitration that would be very much like a state court trial. Indeed, it provides for full discovery and adopts a number of law and motion and trial procedures that are not required in an arbitration. But it does not incorporate the elements that make a Berman hearing easy for an employee to litigate. As the Court explains in an opinion by Justice Corrigan, in isolation, a trial-like arbitration isn’t substantively unconscionable. But an analysis of substantive unconscionability needs to look to the parties’ options but for the arbitration as a point of comparison. Here, that’s not a court trial, it’s a Berman hearing.

The agreement here was a “paragon of prolixity”—“only slightly more than a page long but written in an extremely small font.” (The parties fight over whether it was 7 or 8.5 point.) It made numerous opaque and sometimes ambiguous references to legal jargon such that a lay person would have difficulty in deciphering key terms.” It was offered on a take it or leave it basis, the employee was given only a few minutes to sign, and he wasn’t even provided a copy. Given the overwhelming procedural unconscionability entailed, the Court—using a “sliding scale”—finds that although giving up the Berman procedures is close call on substantive unconscionability, it is enough to make the agreement unenforceable. 

Court of Appeal reversed.

Justice Chin dissents, at length. He dissented in Sonic II too. Among other things, he generally believes that the standard set up by the Court is discriminatory against arbitration and thus preempted by the FAA under the logic of U.S. Supreme Court cases like AT&T v. Concepcion. He also takes issue with the sliding scale approach, as applied here. Although a high degree of substantive unconscionability might require only a small amount of procedural unconscionability, he says the scale shouldn’t slide the other way. And Justice Chin also doesn’t agree that the contract is quite so procedurally unconscionable as the majority does.