Oto, L.l.c. v. Kho: Employee's Perspective

• Citation: Vol. 34 No. 2
• Publication year: 2020
• Author: By David A. Rosenfeld

OTO, L.L.C. v. Kho: Employee's Perspective

By David A. Rosenfeld

David Rosenfeld received his law degree in 1973 from Berkeley Law, where he developed his interest in labor law. He is a partner with Weinberg, Roger & Rosenfeld, which has offices statewide. He has taught various courses at Berkeley Law since 2005, when he developed a seminar entitled "Representing Low Wage Workers." He is a co-author of California Workers Rights, published by the Institute for Research on Labor and Employment at U.C. Berkeley. Mr. Rosenfeld was counsel for the defendant and respondent Ken Kho, and argued the case to the California Supreme Court.

Introduction

On August 29, 2019, the California Supreme Court decided OTO, L.L.C. v. Kho ("OTO").¹ It is the third of three cases² decided by that court dealing with the relationship between arbitration and the Berman hearing process.³

The Berman hearing process has been in effect since 1976⁴ and has been the subject of numerous cases in the California Supreme Court and lower courts. It is an important part of the process to prevent wage theft in California. Nonetheless, the auto dealers subject to Sonic I, Sonic II, and now OTO continued to resist the Berman process by imposing arbitration agreements on their employees and, in particular, their technicians. The California Supreme Court's decision should put an end to that effort.

Oral Argument

The California Supreme Court signaled the direction in which it was headed in OTO during oral arguments. OTO's counsel began his oral argument by arguing about the size of the font of the arbitration agreement. Counsel claimed that the arbitration agreement was in 8.5 font, although he conceded that that fact was not in the record.⁵ The court of appeal noted that the agreement was in 7 point font.⁶

It was evident that OTO was in further trouble when Chief Justice Cantil-Sakauye pointed out that the second sentence in the arbitration agreement contained 189 words. The length of the sentence was not only unwieldly, it also contained complex legal concepts.⁷ OTO had no meaningful answer when the Chief Justice asserted that it appeared to her that this language was "meant to discourage them [employees] from reading it at all."⁸

Finally, OTO spent roughly seven minutes arguing that an arbitrator, upon reading the agreement, could have imposed procedures similar to the Berman hearing process.⁹ The problem with that argument was that, as the court noted, the employer had never advanced that argument before and it was difficult to read that authority into the agreement, which guaranteed all the rights of civil litigation.¹⁰

That point is relevant to this article because, if the employer had explained from the beginning that its procedures did not apply to wage claims subject to the Berman process, or that the arbitrator was instructed to create procedures comparable to the Berman hearing process, the case would not have resulted in this important precedent or it would have proceeded in arbitration. The employer chose the opposite tack by attempting to enforce its agreement in toto, whether it was in 7 or 8.5 point font. It ended up with the decision discussed in this article.

Sonic I and Sonic II

In OTO , the California Supreme Court reaffirmed that an employer can implement an arbitration procedure which waives the Berman hearing process, so long as that arbitration procedure is "affordable and accessible." The court left open, however, precisely what contours such an arbitration agreement would assume. It did so for two reasons. First, it found the procedural unconscionability so extreme that a small amount of substantive unconscionability would render the arbitration agreement unenforceable. On the issue of substantive unconscionability, the arbitration procedure itself took away the benefits of the Berman hearing process and imposed the more severe requirements of civil litigation. It was thus unconscionable.

The two cases that preceded OTO are instructive. In Sonic I, the court held that an arbitration agreement could not categorically waive the right of a worker to proceed through the Berman hearing process. The U.S. Supreme Court vacated that decision and remanded for consideration in light of AT&T Mobility LLC v. Concepcion.¹¹ As stated in OTO, the court on remand in Sonic II held "that an arbitration agreement is not categorically unconscionable solely because it entails a waiver of the Berman procedure."¹²

The court described its holding in Sonic II: "An agreement to arbitrate wage disputes can be enforceable so long as it provides an accessible and affordable process for resolving those disputes."¹³ The issue of what was accessible and affordable was remanded to the court below in Sonic II, but the matter was settled, so there was no resolution of that problem.

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OTO was the first case in which a court confronted what is "accessible and affordable," and the court of appeal held that the agreement was accessible and affordable, even though it was procedurally unconscionable. As a result, it directed the trial court to enforce the arbitration agreement.¹⁴ Review was granted on that issue.¹⁵

Procedural Unconscionability

As the court made clear, again, there are always two aspects to unconscionability under California law. "A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party."¹⁶ "Both procedural and substantive unconscionability must be shown for the defense to be established, but 'they need not be present in the same degree.'"¹⁷ "The burden of proving unconscionability rests upon the party asserting it."¹⁸

All the courts that reviewed the evidence found that the procedural unconscionability was unmistakable. The court of appeal held that the arbitration agreement's execution involved "an 'extraordinarily high' degree of procedural unconscionability."¹⁹ The California Supreme Court agreed, but noted that there are two aspects to procedural unconscionability. Either one of those aspects, "oppression or surprise," may create procedural unconscionability.

Here, Ken Kho was working on a car when he was suddenly approached by a low-level clerical employee who demanded his signature on the arbitration agreement and a separate agreement regarding his employer's piece-rate compensation system. Because Kho was working under a piece-rate compensation system, if he took any time to read and review the document, he would lose pay because time spent studying the agreement was time spent not getting his work done. The low-level person who required that he sign the document waited while he signed and returned it and then left.

As noted above, the document Kho signed is in a small font, with prolix legalese, and one sentence contains 189 words.²⁰ "The sentences are complex, filled with statutory references and legal jargon."²¹

Given these circumstances, the court found that there was both oppression and surprise. Either would have been sufficient to establish procedural unconscionability.

OTO had no significant argument to rebut the finding of procedural unconscionability. The court importantly noted that:

[w]ith respect to preemployment arbitration contracts, we observe that "the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement."²²

The repetition of the pre-employment language is important, even though this was a post-employment contract presented to Kho while he was...