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Arbitration agreement’s waiver of “Berman” hearing contrary to public policy, unconscionable

The California Supreme Court, in a 4-1 decision, ruled that a provision in an arbitration agreement that required an employee to waive the option of a “Berman” hearing was contrary to public policy and unconscionable (Sonic-Calabasas A, Inc v Moreno, February 24, 2011, Moreno, C). However, the court concluded that the arbitration provision could be enforced after a Berman hearing has taken place, so that the appeal from the hearing may be made before an arbitrator rather than in court.

As a condition of employment, an employee of an automobile dealership signed an agreement containing a dispute resolution procedure that required both parties to submit their employment disputes to binding arbitration. In December 2006, after leaving his employment, the employee filed an administrative wage claim with the Labor Commissioner for unpaid vacation pay. Under the California Labor Code, Sec. 98, an employee with a claim for unpaid wages has a right to seek an informal hearing in front of the Labor Commissioner, a so-called Berman hearing. If the employee obtains an award, the employer may request de novo review of the award in superior court. However, in this instance, the employer petitioned a superior court to compel arbitration of the wage claim and dismiss the administrative action, arguing that the employee waived his right to a Berman hearing. The superior court denied the petition to compel arbitration as premature. The court of appeals concluded that the arbitration agreement constituted a waiver of a Berman hearing, and that such a waiver was not contrary to public policy. The state supreme court granted review.

Although Berman’s nonbinding dispute resolution procedure contemplated a de novo appeal to the superior court, the supreme court interpreted that language to provide that either party may pursue judicial action unless the parties had agreed to binding arbitration. Thus, a party to a Berman hearing seeking de novo appeal via arbitration would initially file an appeal in superior court together with a petition to compel arbitration. The superior court would determine whether the appeal was timely and comported with statutory requirements. If so, and if the petition to compel arbitration is unopposed, or found to be meritorious, the trial court will grant the petition. The supreme court majority held that the Labor Commissioner’s position in the lower courts that the Berman hearing was merely preliminary to, rather than preemptive of, binding arbitration supported its conclusion that the statutory schemes for the Berman hearing and the California Arbitration Act (CAA) were compatible and that having the Berman hearing precede arbitration was workable.

Public policy. Next, the supreme court concluded that an employee’s statutory right to seek a Berman hearing is itself an unwaivable right that an employee cannot be compelled to relinquish as a condition of employment. The lawful payment of wages owed is not merely an individual right but an important public policy. Thus, the statutory scheme embodied by the Berman procedures furthers a long-recognized public purpose of ensuring that workers are paid wages owed. Permitting employers to require employees to waive their right to a Berman hearing would seriously undermine its efficacy and thwart the public purpose behind the statutes. The fact that the Berman hearing is merely an option for employees does not alter the nonwaivability of such protections.

Further, the majority observed, contract terms imposed as a condition of employment are particularly prone to procedural unconscionability. Here, the arbitration agreement was a contract of adhesion indisputably imposed as a condition of employment. Additionally, the waiver in the arbitration agreement was markedly one-sided and therefore substantively unconscionable. This substantive unconscionability, together with the significant element of procedural unconscionability, led the court ultimately to conclude that the arbitration agreement was unconscionable.

FAA preemption. Finally, the majority ruled that its holding was not preempted by the Federal Arbitration Act. According to the majority, its conclusion that Berman waivers were contrary to public policy and unconscionable did not discriminate against arbitration agreements. Rather that conclusion was equally applicable whether the waiver appeared in an arbitration agreement or independent of arbitration. The majority declined to read the FAA to preempt a state’s authority to impose various preliminary proceedings that may delay both the adjudication and the arbitration of a cause of action in order to pursue important state interests.

Dissent: Justice Chin argued that the majority’s decision was inconsistent with both California and federal law, which strongly favor enforcement of arbitration agreements, and that the arbitration provision in this instance was fully enforceable. According to the dissent, the majority’s decision improperly disregarded the well-established principle that courts should not declare a contractual provision to be void as against public policy unless that conclusion is free from doubt, and the party resisting arbitration bears the burden of showing that the provision was contrary to public policy or unconscionable.