Posts belonging to Category Caselaw Developments

Sanchez v. Valencia Holding Co.: Cal. Supreme Court Justices Spar over Substantive Unconscionability, But Provide Little Guidance

Last week, the California Supreme Court issued its much-anticipated opinion in Sanchez v. Valencia Holding Co., addressing whether state law concerning unconscionability in contract formation is preempted by the Federal Arbitration Act, 9 U.S.C. § 2, as interpreted by AT&T Mobility LLC v. Concepcion, 563 U. S. 321 (2011).  See Sanchez v. Valencia Holding Co., LLC, No. S199119 (Aug. 3, 2015) (slip opinion available here).  Many observers expected Sanchez to clarify the standard for determining unconscionability; however, that was not the case.

Prior to the issuance of the U.S. Supreme Court’s landmark Concepcion decision, the Sanchez trial court had determined that the class action waiver contained within the at-issue consumer auto sale contract was unconscionable, rendering the entire agreement unenforceable.  The Second District Court of Appeal came to the same result, but on the basis that the arbitration provision was so one-sided as to be unconscionable, punting on the class waiver issue.  The California Supreme Court was then tasked with synthesizing the prior holdings with Concepcion, and found that, while Concepcion does not affect California’s defenses to contract formation, including unconscionability, it still requires enforcement of the contract’s class action waiver.  The California Supreme Court’s opinion reversed the Court of Appeal on the issue of unconscionability, finding that the agreement was not inordinately one-sided.  Slip op. at 2.   

The basic framework for finding unconscionability is well-established, and is the same standard for arbitration and non-arbitration agreements.  Procedural and substantive unconscionability must both be present for a court to refuse to enforce a contract or clause.  However, they need not be present in the same degree; rather, a “sliding scale” is invoked.  While procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, the standard for substantive unconscionability is more amorphous and has variously been described as requiring a finding that terms are “overly harsh,” “unduly oppressive,” “unfairly one-sided,” unfair “beyond a simple old-fashioned bad bargain,” and, most drastically, “so one-sided as to ‘shock the conscience.’”  Slip op. at 8.

In Sanchez, the California Supreme Court made the somewhat shocking pronouncement that the multiple formulations for substantive unconscionability “all mean the same thing.”  This is not particularly helpful when attempting to apply the standard to a particular agreement.  Does an agreement have to “shock the conscience” to be unconscionable or will “overly harsh” terms suffice?  How can these formulations really mean the same thing?  Sanchez provides no bright-line rule for litigants.  Rather, this case demonstrates that evaluating unconscionability is a fact-intensive process, highly dependent upon context, that requires inquiry into the “commercial setting, purpose, and effect” of an agreement, as the court demonstrates as it painstakingly analyzes the contract at issue.  Slip op. at 9.

The court addressed the fairness of each provision in turn, noting that much of the analysis is specific to the consumer sales context.  For example, the at-issue agreement in Sanchez allows for fee-shifting to the consumer in some situations, although the seller must advance arbitration fees.  Slip op. at 18.  The court held the allocation of costs and fees to be valid in the context of a luxury auto purchase, while noting that this would not be allowed in the employment context under the more rigorous standard of Armendariz v. Foundation Health Psychare Services, Inc. (Cal. 2000).  Slip op. at 20-21.  The court further distinguished the consumer and employment settings, noting that jobseekers are at a distinct disadvantage in terms of bargaining power due to economic pressures, while the purchaser of a luxury automobile, such as Mr. Sanchez, can not only afford any fees that may be imposed, but is also in a better position to negotiate contract terms.  Id.

The Sanchez opinion likely won’t change much for litigants.  It merely reaffirms the holdings in Concepcion and Armendariz, stating that: (1) contracts remain subject to state unconscionability law and (2) even if an agreement is deemed fair in the consumer context, it still may not pass muster under the more rigorous standard applied to employment agreements, due to greater pressure on employees and the lack of meaningful alternatives in negotiating.  Rather than formulating a bright-line rule for unconscionability, the Sanchez court instead demonstrated that courts should carefully scrutinize arbitration agreements on a case-by-case basis in order to determine if they are manifestly unfair to one party.

While the defense bar is claiming a victory in Sanchez, the case has an unexpected upside for plaintiffs: while the majority notes that many courts use what they perceive as the harsher “shock the conscience” standard as a default, the Court’s holding that unconscionability standards such as “unfairly one-sided” and “overly harsh” mean the same thing may prompt courts on the stricter end of the spectrum to develop more flexible standards for unconscionability in arbitration agreements.

Authored By:
Robert Friedl, Senior Counsel

Uber Driver is an Employee, California Labor Commission Rules

In a decision that could have reverberating effects in the so-called “sharing economy,” the California Labor Commission recently ruled that a driver for Uber Technologies, Inc. is an employee and not an independent contractor.

Hearing Officer Stephanie Barrett’s decision, issued on June 3, 2015, ordered Uber to reimburse Barbara Ann Berwick more than $4,000 (including interest) for mileage and other expenses incurred during her stint as an Uber driver last year. Rejecting Uber’s argument that the company is “nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the Commissioner held that Uber is “involved in every aspect of the operation” and exercises significant control over drivers. See Order, Decision or Award of the Labor Commissioner, Berwick v. Uber Technologies, Inc., Case No. 11-46739 (June 3, 2015) (available here). The ruling was made public after Uber filed an appeal to the Labor Commissioner’s order in the San Francisco County Superior Court (available here).

Applying the 11-factor test enumerated by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341 (1989), the Commissioner found that Uber retained “all necessary control over the operation as a whole,” which was an overriding factor that established the existence of an employee-employer relationship. See Order at 8. The Commissioner also emphasized that the work done by drivers was “an integral part of the regular business” of Uber and that “[w]ithout drivers such as [Berwick], [Uber’s] business would not exist.” Id.

Although the Berwick decision is purely administrative, it may have significant implications for Uber’s labor model, which continues to utilize independent contractors as drivers. Given the Commissioner’s findings that Uber is “in business to provide transportation services to passengers,” and that drivers for Uber do “the actual transporting of those passengers,” Order at 8, it appears that Uber’s primary arguments regarding its role as a “mere platform” rather than an employer will not succeed in any future litigation. Such findings will likely have a lasting impact on businesses providing passenger transportation services that use an independent contractor labor model.

The debate over employee classification is likely to escalate as the sharing economy continues to grow exponentially, with the majority of such companies classifying workers as independent contractors—exempt from many wage-and-hour laws and protections—rather than employees. So long as these companies continue to classify workers as independent contractors, they risk facing misclassification claims, a growing trend in class action litigation nationwide.

Authored by: 
Suzy Lee, Associate

CA Supreme Court Grants Cert. in Augustus v. ABM

Employees and plaintiffs seeking rest breaks free from employer control received some good news from the California Supreme Court recently. On April 29, 2015, the California Supreme Court granted the plaintiffs’ petition for review in Augustus v. ABM Security Services, Inc. (“Augustus”). See 2015 Cal. LEXIS 2460 (April 29, 2015) (briefing available here and here).

As previously covered by the ILJ here, the California Court of Appeal, Second Appellate District, had affirmed the trial court’s certification of a class of security guards, but reversed the summary judgment and summary adjudication granted for rest break violations under the California Labor Code. Augustus v. ABM Security Services, Inc., 233 Cal. App. 4th 1065 (Cal. Ct. App. Dec. 31, 2014) (available here). In doing so, the Court of Appeal rejected the trial court’s view that an “on-call” rest break where an employee must respond to emergencies and calls is not a legally-compliant rest break under Industrial Welfare Commission (“IWC”) Wage Order No. 4. The Court of Appeal found that remaining available to work during a rest break “is not the same as performing work,” since the guards were freed from most of their work responsibilities during their rest breaks. Id. at 1082. This is a stark departure from previous Division of Labor Standards Enforcement (“DLSE”) opinion letters, the California Supreme Court’s previous definition of “work” under Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000), the California Supreme Court’s analysis of “providing” meal breaks in Brinker Rest. Corp. v. Superior Court, 53 Cal. 4th 1004, 1021 (2012), and the California Supreme Court’s analysis of “on-call time” in Mendiola v. CPS Security Solutions, 60 Cal. 4th 833 (2015).

The granting of the petition for review is significant for two reasons. First, pursuant to California Rules of Court 8.1105(e) and 8.1115, the Augustus decision is now depublished, so employers can no longer cite the Court of Appeal ruling as a basis for dismissing rest break claims in which the employee was “on-call” or otherwise subject to the employer’s control. Second, given the recent California Supreme Court decisions in this area, there is a significant likelihood that it will finally put to rest the argument that employers can continue to maintain control over employees during rest breaks merely because they remain on the clock during this time.

This is expected to be a closely-watched case by both the plaintiffs’ bar and defense counsel, as it implicates substantive wage-and-hour law.

Authored by: 
Arnab Banerjee, Associate

High Court Hands CA Truckers Second Win in 2015

In a victory for truck drivers throughout California, the U.S. Supreme Court recently declined to review a Ninth Circuit ruling finding that California’s meal and rest break laws are not preempted by the Federal Aviation Administration Authorization Act (“FAAAA”). Dilts v. Penske Logistics, LLC, 769 F.3d 637 (9th Cir. Cal. 2014) (cert. denied by Penske Logistics LLC v. Dilts, 2015 U.S. LEXIS 2990 (U.S. May 5, 2015)).

This news should come as no surprise to transportation companies operating in California. While Penske insists in its petition for certiorari that the Dilts ruling is “rogue” and not in keeping with precedent, it is fully consistent with recent Ninth Circuit and California Supreme Court opinions on this issue—including Campbell v. Vitran Express Inc., No. 12-56250 (9th Cir. July 9, 2014), which was related to Dilts, and People ex rel. Harris v. Pac Anchor Transportation, Inc., 59 Cal. 4th 772 (Cal. 2014) (previously covered by the ILJ here and here).

Earlier this year, the U.S. Supreme Court also declined to review Harris v. Pac Anchor (see 2015 U.S. LEXIS 1326 (U.S., Feb. 23, 2015)), which held that California’s Unfair Competition Law (“UCL”) is not preempted by the FAAAA, and that motors carriers are therefore subject to injunctive relief under the UCL. Harris and Dilts share a similar fact pattern and reasoning, and, in both cases, the respective courts held that California labor and employment laws are not significantly related to and/or do not significantly affect motor carrier price rates, routes, or services, and therefore are not the types of state laws Congress set out to preempt when enacting the FAAAA. See Harris at 785, Dilts at 650.

Now that the U.S. Supreme Court, Ninth Circuit Court of Appeals, and California Supreme Court have all definitively ruled on this issue, perhaps employers will cease their fruitless attempts to circumvent state labor law in this manner.