Oto, L. L.C. v. Kho
251 Cal. Rptr. 3d 714
| Cal. | 2019Background
- Ken Kho, a longtime One Toyota service technician, was presented a one-page arbitration clause in tiny, dense type and required to sign on the spot to keep his job; he was not given a copy or a translation.
- The clause compelled nearly all employment disputes to binding arbitration before a retired superior court judge, adopted litigation-like procedures (pleadings, discovery, motions, rules of evidence), and referenced CCP §1284.2 without explicitly allocating arbitration costs.
- Kho filed a wage claim with the Labor Commissioner; a Berman hearing proceeded after One Toyota's counsel left (having served a petition to compel arbitration that morning), and the deputy awarded Kho substantial back pay and penalties.
- One Toyota appealed de novo and separately moved to vacate the Labor Commissioner’s award and to compel arbitration; the trial court found the arbitration agreement procedurally and substantively unconscionable and denied enforcement.
- The Court of Appeal reversed, concluding procedural unconscionability was high but substantive unconscionability was lacking because external law (Armendariz and Labor Code fee statutes) would make arbitration affordable; the Supreme Court granted review.
- The California Supreme Court reversed the Court of Appeal, holding the particular agreement unenforceable based on extreme procedural unconscionability combined with substantive unfairness in context (the loss of Berman protections without a realistic, accessible, and affordable arbitral alternative) and remanded for the de novo appeal to proceed.
Issues
| Issue | Plaintiff's Argument (Kho / Labor Commissioner) | Defendant's Argument (One Toyota) | Held |
|---|---|---|---|
| Enforceability of arbitration clause waiving Berman procedures | Waiver coerced by oppressive presentation; arbitration scheme is litigation-like, inaccessible, and unaffordable for wage claimants | FAA and precedent permit arbitration; external law (Armendariz, Lab. Code §218.5) protects employees from arbitration costs; clause valid | Clause unenforceable: extreme procedural unconscionability + contextual substantive unfairness made waiver invalid |
| Procedural unconscionability of formation | Presented on a take-it-or-leave-it basis, rushed, no opportunity to read, small font, no translation or copy | Standard adhesive employment arbitration practice; employee didn’t request explanation or negotiate | Procedural unconscionability found extraordinarily high due to oppression and surprise |
| Substantive unconscionability (accessibility & affordability) | Arbitration replicated civil litigation, requiring pleadings, discovery, motions, likely counsel and costs, depriving Berman's low-cost remedies and Labor Commissioner assistance | Litigation-like arbitration is not per se unfair; statutes and case law require employer to pay arbitration costs and prevailing-party fee rules apply | Given the procedural coercion, the litigation-like arbitral scheme was sufficiently one-sided to render the agreement substantively unconscionable |
| Preemption by the FAA (ability to apply state unconscionability) | State unconscionability doctrine can invalidate arbitration agreements when generally applicable and not preempting FAA | Invoking Sonic II and Concepcion, defendant argued FAA preempts rules that disfavour arbitration or require Berman protections | Court held analysis consistent with FAA: applied generally applicable unconscionability doctrine, not categorical Berman waiver rule, and limited decision to these oppressive circumstances |
Key Cases Cited
- Sonic-Calabasas A, Inc. v. Moreno, 51 Cal.4th 659 (Cal. 2011) (held Berman-waiver categorical rule; judgment later vacated and reconsidered in light of Concepcion)
- Sonic-Calabasas A, Inc. v. Moreno, 57 Cal.4th 1109 (Cal. 2013) (held FAA preempted categorical Berman-waiver rule; arbitration may be enforceable if it provides accessible, affordable forum)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (U.S. 2011) (FAA preemption of state rules that interfere with arbitration's fundamental attributes)
- Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal.4th 83 (Cal. 2000) (limits on employee cost-shifting in mandatory employment arbitration)
- Italian Colors Restaurant v. American Express Co., 570 U.S. 228 (U.S. 2013) (courts should not invalidate arbitration agreements based on speculative inability to vindicate statutory rights absent extreme barriers)
- Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (Cal. 2012) (unconscionability requires procedural and substantive elements; sliding-scale analysis)
- Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899 (Cal. 2015) (unconscionability inquiry focuses on overall bargain and reasonable expectations)
- Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (Cal. 2003) (litigation-like arbitration procedures are not per se unconscionable)
- Gentry v. Superior Court, 42 Cal.4th 443 (Cal. 2007) (adhesive contracts enforceable absent substantive one-sidedness; caution against sharp practices)