by Deepak Gupta
In a 70-page opinion by Justice Goodwin Liu, the California Supreme Court on Thursday issued its eagerly anticipated decision in Sonic-Calabasas v. Moreno. Addressing the impact of both AT&T Mobility v. Concepcion and American Express v. Italian Colors for the first time, the court makes clear that unconscionability -- focused on whether a contract is unfairly one-sided -- remains a viable defense to individual arbitration agreements in California. Both the majority opinion and dissent are long and dense; what follows are just some initial impressions. (Moreno is not a putative class action and the decision has little to say about class-action waivers.)
In an earlier 4-3 ruling in this case, just two months before Concepcion, the California high court had held "as a categorical rule" that it was "contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a Berman hearing, a dispute resolution forum established by the Legislature to assist employees in recovering wages owed." In short order, the U.S. Supreme Court granted, vacated, and remanded that decision following Concepcion.
Justice Liu's new opinion carefully explains both the reach and the limits of Concepcion and Italian Colors, holding that the Federal Arbitration Act preempts the categorical state-law rule announced in the court's earlier opinion, but fully preserves defenses available under generally applicable state contract law, including unconscionability, so long as state law doesn't discriminate against arbitration or mandate procedures "inconsistent with the fundamental attributes of arbitration." The opinion emphasizes that the unconscionability defense turns on whether the contract is "unfairly one-sided" and that a trial court's assessment of the defense may require consideration of evidence about the specific arbitral scheme at issue -- evidence that, here, will have to be considered for the first time on remand.
The vote was 5-2 to remand for further proceedings on the plaintiff's unconscionability defense, with a concurring opinion by Justice Corrigan and a concurring and dissenting opinion by Justice Chin. Justice Chin's dissent takes issue with many aspects of the majority's decision. As a procedural matter, he says, the court shouldn't have even considered the unconscionability defense because the plaintiff forfeited it. But the central thrust of the dissent is to accuse the court of adopting a "vague" and "unworkable" test for unconscionability that, in his view, is prempted under both Concepcion and Italian Colors. Justices Corrigan, Chin, and Baxter would limit unconscionability to the 19th-century "shocks the conscience" test rather than the modern one-sidedness test.
Interestingly, the concurrence and dissent characterize California's generally applicable one-sidedness inquiry as too vague and insufficiently deferential to arbitration. But the whole point of the FAA is that state court's aren't supposed to modify the state's common law of contracts to account for the fact that an arbitration agreement is at issue. Short of parroting the indeterminate "shocks the conscience" standard, it's quite unclear what an unsconsionability defense would look like under the dissenters' approach.
Predicatably, defense lawyers are already criticizing Justice Liu's opinion for preserving even the limited, generally applicable unconscionability defense outlined in the opinion. But they seem to acknowledge that the case would be a poor candidate for Supreme Court review at this stage: "It is unclear if there is a suitable federal basis for the U.S. Supreme Court to take up the case," one defense firm observes, "nor is it clear that the defendant will even seek review in advance of a ruling upon remand that the arbitration agreement is, in fact, unconscionable."