SONIC-CALABASAS A, INC. v. MORENO

Respondent’s Supplemental Brief

Cal.March 13, 2012

S174475 IN THE SUPREME COURTOF CALIFORNIA SONIC-CALABASASA,INC., SUPREME COURT Plaintiff and Appellant, FILED v. MAR 1 3 2012 FRANK MORENO, Freaenct #. Gnincn Olerk a Gepuyae Defendant and Respondent Following a Decision ofthe Court ofAppeal, Case No. B204902 SecondAppellate District, Division Four Appealfrom an orderofthe Superior Court ofCalifornia, County ofLos Angeles Case No. BS107161, Hon. Aurelio N. Munoz, Judge INITIAL BRIEF FOLLOWING REMAND FROM UNITED STATES SUPREME COURT LOCKER FOLBERG LLP Miles E. Locker (Bar No. 103510) Rachel Folberg (Bar No. 209143) 235 Montgomery Street, Suite 835 San Francisco, CA 94104 Telephone: 415-962-1626 Facsimile: 415-962-1628 Attorneys for Defendant and Respondent, FRANK MORENO ” S174475 IN THE SUPREME COURT OF CALIFORNIA SONIC-CALABASASA,INC., Plaintiff and Appellant, v. | FRANK MORENO, Defendant and Respondent Following a Decision ofthe Court ofAppeal, Case No. B204902 Second Appellate District, Division Four Appealfrom an orderofthe Superior Court ofCalifornia, County ofLos Angeles Case No. BS107161, Hon. Aurelio N. Munoz, Judge INITIAL BRIEF FOLLOWING REMAND FROM UNITED STATES SUPREME COURT LOCKER FOLBERG LLP Miles E. Locker (Bar No. 103510) ' Rachel Folberg (Bar No. 209143) 235 Montgomery Street, Suite 835 San Francisco, CA 94104 Telephone: 415-962-1626 Facsimile: 415-962-1628 Attorneys for Defendant and Respondent FRANK MORENO TABLE OF CONTENTS I. INTRODUCTION... 0.00. c ccc cece ccccccecvececeeee. 1 Il. FACTS OF THE CASE AND PROCEDURALHISTORY...... 3 Il. ARGUMENT...........000.00 00.ole vveueetevveeece, 15 A. Concepcion Has No Effect On This Court’s Determination That a Predispute Berman Waiver, Imposed as a Condition Of Employment, Is Unconscionable And Contrary to Public Policy... 15 B. Concepcion Has No Effect On This Court’s Determination That the Federal Arbitration Act Does Not Preemptthe State Law Rule Denying Enforcement to Predispute Berman Waivers .. 17 1. The State Law Rule Denying Enforcementto Predispute Berman Waivers Does Not Prohibit Outright the Arbitration Of a Particular Type of Claim, So It Is Not Subject to Categorical Preemption............... 00000 cc eee eee 19 2. The State Law Rule Denying Enforcementto Predispute Berman Waivers Does Not Stand As An Obstacle to the Accomplishment of the Purposes of the Federal Arbitration Act In That It Does Not Interfere With the Fundamental Attributes of Arbitration .........0.0..0.00 00000. cc eee eee 26 IV. CONCLUSION .. 0...cece teens 33 TABLE OF AUTHORITIES Federal Cases AT&TMobility LLC v. Concepcion (2011) S63 US., 131 S.Ct.1740 oeee, passim Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440 .... 12, 14 Cuadra v. Millan (1998) 17 Cal4th 855 ........0.00.0..... veeeeee 30 Doctor’s Associates, Inc. v. Cassarotto (1996) 517 U.S. 681 ...... 9,17 Kilgore v. KeyBank National Ass’n (9" Cir. 3-7-2012) —__ F.3d, 2012 WL 718344 1.0... ee, 25, 26 Marmet Health Care Center v. Brown (2-21-2012) —US., 2012 WL 538286 .... 2... 25 Perry v. Thomas (1987) 482 U.S. 483 0.0.0.0... cc eee 9, 21-22 Preston v. Ferrer (2008) 52 U.S. 346......0..0....00..0 0000008. passim Rent-A-Center West, Inc. V. Jackson (2010) S61US.130 S.Ct. 2772.0ee 31 Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. (2010) 130 S.Ct. 1758. .18 State Cases Broughton v. Cigna Healthplans ofCalifornia (1999) 21 Cal.4th 1066.00.00... ceecets 25 Cruz v. Pacificare Health Systems, Inc. (2003) 30 Cal.4th 303 ....... 25 Discover Bank v. Superior Court (2005) 36 Cal.4th 148 ........... 15, 16 Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, cert. granted, vacated and remanded at 132 S.Ct. 496....... passim il Statutes Federal Arbitration Act..........00. 00.00.00... e eeeeeeeee passim Labor Code § 98.1 0...ccccece ene eeees 30 Labor Code § 98.2 ................00..eee e ence eee eee eas 4, 6, 24 Labor Code § 98.4 1.0.0... cece cee cee eee neeens 6, 24 Labor Code § 218.5 ........eee cece ecteneeneeees 6 Labor Code § 229 .........on eet eee. Dooce ec eee ee. 21 Labor Code § 1700, et seq. 2.0.0... cece cece cece ees 4, Labor Code § 1700.44 20...ccc cece eee 23 ill I. INTRODUCTION In this proceeding on remand from the United States Supreme Court, “for further consideration in light ofAT&TMobility LLC vy. Concepcion, 563 U.S. (2011) [131 S.Ct. 1740],” the only issue for determination is whether, and if so, how, Concepcion requires modification of this Court’s now vacated decision — a decision which was issued on February 24, 2011, some two monthsprior to the issuance of Concepcion. Inits prior decision, this Court held that while binding arbitration is an enforceablealternative to de novo superior court appeal of a “Berman award” (the Labor Commissioner’s decision following an administrative hearing on a claim for unpaid wages), a provision in an employment agreementthat waives access to the Labor Commissioner's Berman hearing process is unconscionable and a violation ofpublic policy, as a matter of California law. This Court further held, pursuant to savings clause contained in Section 2 of the Federal Arbitration Act (“FAA”), which requires enforcementofarbitration agreements “save upon such groundss exist at law orin equity for the revocation of any contract,” that the FAA does not preemptthis state law rule denying enforcementto a pre-dispute contractual provision, whether or not contained in anarbitration agreement, that denies an employee access to the Labor Commissioner’s Berman process. Concepcion does not put into question the standard for determining whether a contractual provision is unconscionable or a violation of public policy under state law. Rather, the import of Concepcion goes to whether a particular contractual provision, having been found to be unconscionable or contrary to public policy under state law, may nonetheless be enforceable as a result ofFAA preemption ofthe state law rule denying enforcement to the challenged contractual provision, when that contractual provision is contained within an arbitration agreement. Concepcion doesset out the method to be followed for analyzing the question of whether the FAA preempts state law rule denying enforcement of a provision in an arbitration agreement. In this brief, we first review the facts and proceduralhistory ofthis case, carefully following this Court’s prior decision, so that the reasoning andrationale for that decision can be considered against the test that has now been set out in Concepcion. As we demonstrate below, whatever effect Concepcion has had on other state laws or state law rules with respectto other issuesrelated to arbitration, the rule that had been adoptedin this case is unaffected by Concepcion. Following the preemption analysis set out in Concepcion results in the same conclusion that this Court reached over one year ago — the state law rule adopted by this Court, precluding the enforcement ofpredispute Berman waivers, is not preempted under Concepcion. Il. FACTS OF THE CASE AND PROCEDURAL HISTORY Respondent Frank Moreno (“Moreno”) was employedby Petitioner Sonic-Calabasas A,Inc. (“Sonic”) at its automobile dealership. As a condition of employment, Morenosigned an agreement to submit employmentdisputes to binding arbitration under the Federal Arbitration Act (“FAA”). Subject to exceptions not relevant here, the agreement applied to “all disputes that may arise out of the employmentcontext... that either [party] may have against the other which would otherwise require or allow resort to any court or other governmental dispute resolution forum...” (Sonic-Calabasas A v. Moreno (201 1) 51 Cal.4th 659, 669-670.) After resigning from his position with Sonic, Moreno filed an administrative wage claim with the California Labor Commissioner for unpaid vacation wagesandpenalties. In February 2007, Sonicfiled a petition to compelarbitration of Moreno’s claim, contending that by signing the arbitration agreement, Moreno waived his right to a Berman hearing. The Labor Commissioner intervened in the superior court proceedings on Moreno’sbehalf, arguing, inter alia, that resort to a Berman hearing was compatible with the arbitration agreement because the Berman hearing could be followed by de novo arbitration in lieu of a de novo appealto the superior court that is provided by Labor Code § 98.2(a); and that enforcementofthe arbitration agreement to preclude preliminary access to the Berman hearing process would violate public policy. (U/d., at 670.) The superior court denied the petition to compelarbitration as premature, stating that, as a matter of “basic public policy,” an employee must be permitted to proceed with a wage claim before the Labor Commissioner, and that “until there has been the preliminary non-binding hearing and decision by the Labor Commissioner, the arbitration provisions of the employment contract are unenforceable, and any petition to compel arbitration is premature and must be denied.” (/d., at 670-671.) Sonic appealed from the order denyingits petition to compel arbitration. During the pendency of the appeal, the United States Supreme Court decided Preston v. Ferrer (2008) 552 U.S. 346, which held that the Labor Commissionet’s original and exclusive jurisdiction under the Talent Agencies Act (Labor Code §1700, et seq.) was preempted when the parties are subject to an arbitration agreement governed by the FAA. Asa threshold matter, the Court of Appeal concluded that Preston was not dispositive, reasoning that although Preston is not applicable to cases in whichtheparty resisting arbitration brings a discrete challenge to the arbitration clause as unconscionable or contrary to public policy. Nonetheless, the Court of Appeal reversed the order denying thepetition to compel arbitration, holding that by signing the arbitration agreement, Moreno waivedhis right to pursue his wage claim before the Labor Commissioner, and that this “Berman waiver” wasnot contrary to public policy. Ud., at 671.) Morenopetitioned for review, contending that the Court of Appeal decided this question incorrectly. Sonic, in its answerto the petition for review, argued that the Berman waiver was enforceable, and renewedits argument that a court ruling invalidating a Berman waiver contained within an arbitration agreement would be preempted by the FAA,as construed in Preston. Review wasgrantedto decide these two questions -- the enforceability of a Berman waiver, and the applicability of Preston. Id.) In the decision that issued one year ago, this Court explained: “the choice is not between a Berman hearing andarbitration, because a person subject to binding arbitration and eligible for a Berman hearing will still be subject to binding arbitration if the employer appeals the Berman hearing award. The choice is rather between arbitration that is or is not preceded by a Berman hearing.” (/d., at 680.) The Court then considered the import of the numerousstatutory protections that are provided to employees under the Bermanhearing and post-hearing process, including significant protections that come into play if the employer choosesto file a de novo appeal of the Labor Commissioner’s decision. For example, the Court noted that only by first proceeding before the Labor Commissioner could an employee avoid the risk of exposure for employer's attorney fees under Labor Code § 218.5, which requires an award ofattorneys’ fees to the prevailing party “[i]n any action brought for the nonpayment of wages,” as any de novo appeal from a Labor Commissionerdecision is instead governed by the one-way fee shifting provisions of Labor Code § 98.2(c). Likewise, only by first proceeding before the Labor Commissioner would an employee unable to afford counsel obtain the benefits, stemming from Labor Code § 98.4, of no-cost representation by an attorney provided by the Labor Commissioner to represent the employee in an employerfiled de novo appeal. Also, only by first proceeding before the Labor Commissioner would an employee obtain the protection of an employer posted undertaking in the amount of the Labor Commissioner’s award, required by Labor Code §98.2(b), as a means of ensuring paymentto the employeeifthe employeeultimately prevails in the de novo proceedings. (/d., at 680.) These statutory protections “are contingent on the Labor Commissioner’s findings in a Bermanhearing that an employee’s claim is Meritorious,” so any waiver of the right to a hearing before the Labor Commissioner necessarily results in a waiverofthe right to these protections. (/d., at 682.) The Court reasoned that the above-enumerated protections, along with various others that flow from the Labor Commissioner hearing process, “represent[] a legislative judgment about the special protections and procedural rights that should be afforded to persons with wage claims in order to ensure that such claimsbe fairly resolved.” (/d., at 683.) The Court observedthat these protectionsshared an evident “common purpose,” to wit: “Given the dependence of the average worker on prompt payment of wages, the Legislature has devised the Berman hearing and posthearing process as a means... to reduce the costs andrisks ofpursuing a wage claim, recognizing that such costs and risks could prevent a theoretical right from becoming a reality.” (Ud., at 679.) The Court therefore concluded that a pre-dispute Berman waiver, imposed as a condition of employment, is contrary to public policy. (/d., at 684.) The Court further concluded that the Berman waiver contained in Sonic’s arbitration agreement was unconscionable, both procedurally (because it was indisputably a contract of adhesion imposed as a condition of employment) and substantively (because the Berman waiveris unfairly one-sided). (/d., at 685-686.) The conclusion of substantive unconscionability was expressly premised on the Court’s finding that “[rJequiring employees to forego these [Berman] protections as a condition of employment can only benefit the employerat the expense of the employee.” (/d.) “[B]ecause the Berman hearing statutes accomplish their public policy goal of ensuring prompt payment of wages by according employees special advantagesin their effort to obtain such payment, a provision in a contract of adhesion that requires the employee to surrender such advantages as a condition of employmentis oppressive and one-sided, and therefore unconscionable.” (/d., at 687.) The Court next considered whether the FAA preemptsits holding that a predispute waiver of a Berman hearing, contained in an arbitration agreement, is contrary to public policy and unconscionable. This analysis began with the Court’s observation that although federal and California law “favors enforcement of valid arbitration agreements .... such enforcementis limited by certain general contract defenses at law or in equity for the revocation of any contract.” (/d. [internal citations and quotation marks omitted].) The Court noted that the United States Supreme Court has recognized that the FAA itself explicitly preserves these contract defenses to enforceability: “[U]nder section 2 of the FAA, a state court may refuse to enforce an arbitration agreement based on ‘generally applicable contract defenses, such as fraud, duress, or unconscionability.’” (/d., at 687-688, quoting Doctor’s Associates, Inc. v. Cassarotto (1996) 517 U.S. 681, 687.) To be sure, the Court acknowledged that the doctrine of unconscionability cannot be used in a waythat discriminates against arbitration agreements: “[S]tate law, whether of legislative or judicial _ origin, is applicable ifthat law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of § 2 [of the FAA].” (Ud., at 688, quoting Perry v. Thomas (1987) 482 U.S. 483, 492- 493, fn.9.) Thus, “in assessing the rights oflitigants to enforce an arbitration agreement,” a court may not “construe that agreement in a mannerdifferent from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable for this would enable the court to effect what... the state legislature cannot.” (/d.) The Court explained that under Perry, there is no preemption of the Court’s conclusion that Berman waivers are contrary to public policy and unconscionable, as this conclusion “does not discriminate against arbitration agreements. We neither construe the arbitration agreementin a manner different from that in which we would construe nonarbitration agreements nor do werely on the uniqueness of an agreementto arbitrate as a basis for a state-law holding that enforcement would be unconscionable.” (Ud., at 688-689 [internal quotation marks omitted].) Rather, the Court noted, “our conclusion that a Berman waiveris contrary to public policy and unconscionable is equally applicable whether the waiver appears within an arbitration agreement or independentofarbitration.” U/d., at 689.) This Court then considered, and rejected, Sonic’s argumentthat Preston compels a finding that a state law rule precluding a waiverofthe right to access the Labor Commissioner’s Berman process is preempted by the FAA. The Court carefully examined the facts that distinguish Preston from this case, identifying two distinct reasons why Preston is inapplicable to the instant matter, and does not mandate FAA preemption ofa state law rule denying enforcement to Berman waivers on the grounds that such waivers violate public policy and are unconscionable. First, the Court noted that in Preston, the party resisting arbitration based his opposition to arbitration not on a discrete challenge to the arbitration clause of the parties’ agreement, but rather, on an attack on the validity of the agreement as a whole, founded uponhis claim that the agreement (between a television personality and his attorney) was void 10 under the Talent Agencies Act (“TAA”) in that the attorney, seeking paymentoffees allegedly owed under the agreement, had been acting as a talent agent without the license that is required under the TAA. The television personality sought to adjudicate the issue of whetherthe attorney had acted as a talent agent without a required license (and if so, whether the parties’ agreement was void) before the Labor Commissioner, with whom the TAA vests exclusive primary jurisdiction to adjudicate disputesarising underthat statute. The attorney sought instead to compelarbitration, pursuant to an arbitration clause in the parties’ agreement, arguing that the arbitrator should decide the merits of the challenge to the validity of the entire contract as part of the arbitration over the fee dispute. In its decision, the U.S. Supreme Court held that the TAA’s grant of primary jurisdiction to the Labor Commissioner, inasmuchasit thwarted the arbitration agreement, violated Section 2 of the FAA, which requires enforcementofarbitration agreements “save upon such groundsas exist at law or equity for the revocation of any contract.” (/d.) In analyzing the reasoning behind the Preston decision, this Court observed that Preston was simply the latest of a line of U.S. Supreme Court cases holding that “‘attacks on the validity of an entire contract, as distinct from attacks aimed at the arbitration clause .... are within the province of 11 the arbitrator to decide.” (/d., at 689-690, citing Preston, supra, 552 U.S.at 353. See also, Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440 [plaintiffs brought court challenge to contracts they signed, which contained arbitration clauses, alleging that contracts as a whole wereillegal understate law and void ab initio; U.S. Supreme Court heldthat challenge to whole contract, unlike discrete attack on validity of arbitration clause,is subject to arbitration.]) Like Buckeye, Preston involveda litigant seeking “invalidation of the contract as a whole.... [making] no discrete challenge to the arbitration clause.” (Sonic-Calabsas A, Inc., supra, 51 Cal.4th at 690, citing Preston, supra; 552 U.S. at 354.) This Court thus distinguished Preston from the instant discrete challenge to the Berman waiver contained within an arbitration agreement that is itself contained within an employment agreement: “Preston is distinguishable. In this case, unlike in Buckeye and Preston, the challengeis to a portion of the arbitration agreement — the Berman waiver— as contrary to public policy and unconscionable, rather than to contract as a whole. Buckeye therefore does not apply.” (/d., at 692.) Second, the Court distinguished Preston “not merely because of the nature ofthe litigants’ challenges, but also because of the fundamental differences between the twostatutory regimes at issue. Thestatute in 12 Preston, the TAA, merely lodges primary jurisdiction in the Labor Commissioner, and does not come with the sametype ofstatutory protections as are found in the Berman hearing and post hearing procedures.” (/d.) Forthat reason, a predispute agreementthat provides for arbitration rather than Labor Commissionerresolution ofTAA disputes, “cannot be unconscionable or contrary to public policy concerns,” unlike a waiverofthe right to a Berman hearing. (/d.) Finally, this Court addressed Sonic’s contention that any delay to arbitration occasioned by allowing an employee’s wageclaim tofirst be heard by the Labor Commissionerprior to de novoarbitration necessarily runs afoul of the FAA. To be sure, Preston reasonedthat in the context of a controversy under the TAA between parties covered by an arbitration agreement, “TrJequiring initial reference of the parties’ dispute to the Labor Commissioner would, at the least, hinder speedy resolution of the controversy.” (/d., at 691, quoting Preston, supra, 552 U.S. at pp. 357- 358.) Such delay, according to Preston, would frustrate “[a] prime objective of an agreementto arbitrate,” namely “streamlined proceedings and expeditiousresults.” (/d.) This Court urged a narrow reading of Preston in this regard: “This statement [in Preston] cannot be read, as Sonic urges, to mean that any state 13 law procedure that delays the commencementofarbitration is preempted by theFAA. Rather, the Preston court’s statement, read in context, is quite narrow.” (Id.) It is narrow in the sense that it is merely directed at violations of the Buckeye rule — i.e., there can be nojustification for delay when, under Buckeye, the challengeto.the validity of the entire agreement must be decided bythe arbitrator. But where, as here, Buckeye does not apply —i.e., where there is a discrete challengeto the validity of the arbitration clause, the resulting delay in arbitration does not run afoulofthe ~ FAA. (/d.) Summarizing its reasoning, this Court explained that its holding invalidating a waiver of the right to access the Labor Commissioner’s Berman process “neither falls within the purview of Preston and Buckeye, norrelies on rules of contract law that particularly disfavor arbitration, but rather is based on the generally applicable contract defenses of unconscionability and violation of public policy” and therefore, “is not preempted by the FAA.” (/d.., at 695.) This Court thus concluded that arbitration would be premature until the Berman hearing is held and the Labor Commissionerissues a decision on the wage claim. (Id.) The issuance of the Berman decision,if it is in favor of the wage claimant, provides the claimant with special protections for enforcing his or 14 her right to payment ofwages, including one wayfee shifting in any employer-filed de novo appeal, the requirement that the employerfile an undertaking in the amount of the Labor Commissioner’s award, and free legal counsel provided by the Labor Commissionerto represent the claimant in such de novoproceedings if the Commissioner determines the claimantis unable to afford private counsel. With these protections thus made available upon issuance of the Labor Commissioner’s decision finding the claim to have merit, the employer maythenfile its appeal and compel arbitration of the de novo proceedings. (/d., at 676.) il. ARGUMENT A. CONCEPCIONHAS NO EFFECT ON THIS COURT’S DETERMINATION THAT A PREDISPUTE BERMAN WAIVER, IMPOSED AS A CONDITION OF EMPLOYMENT,IS UNCONSCIONABLE AND CONTRARY TO PUBLIC POLICY UNDER CALIFORNIA LAW The issue that was considered and decided by the United States Supreme Court in Concepcion was “whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.” (AT&T Mobility LLC v. Concepcion, supra, 131 S.Ct. at 1744.) The state law rule at issue, regarding the enforceability of class action waivers, had beenset out in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 162: “When the 15 waiver is found in a consumercontract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and whenit is alleged that the party with the superior bargaining powerhascarried out a schemeto deliberately cheat large numbers of consumers out of individually small sums of money,then.... the waivers are unconscionable under California law,” and for that reason, should not be enforced. (Concepcion, supra, 131 S.Ct. at 1746, citing Discover Bank, supra, 36 Cal.4th at 162.) The U.S. Supreme Court, in its decision, never once questioned this Court’s holding that such class action waivers are unconscionable under California law. Not one iota of analysis in Concepcion focused onthetest for unconscionability, or the determination of public policy, under California law. Rather, Concepcion and any analysis of potential FAA preemption pursuant to Concepcion starts from the premise that State legislatures and State courts are the ultimate authorities on whatconstitutes an unconscionable agreement, or what constitutes a violation of public policy, under the law of that State. Potential FAA preemption comesinto play only in the subsequent analysis of whether the State’s determination that an arbitration agreement is unenforceable (whether due to unconscionabilty, violation of public policy, or any other doctrine of state 16 contract law) conflicts with the FAA or stands as an obstacle to the accomplishment of the FAA’s objectives. (Concepcion, supra, 131 S.Ct. at 1746-1748.) B. CONCEPCIONHAS NO EFFECT ON THIS COURT’S DETERMINATION THAT THE FEDERAL ARBITRATION ACT DOES NOT PREEMPTTHE STATE LAW RULE DENYING — ENFORCEMENT TO PREDISPUTE BERMAN WAIVERS The U.S. Supreme Court beganits analysis by acknowledging that despite the federal policy favoring arbitration, “[t]he final phrase of § 2 [of the FAA] ... permits arbitration agreements to be declared unenforceable ‘upon such groundsas exist at law or in equity for the revocation of any contract.’ This saving clause permits agreementsto arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreementto arbitrate is at issue.” | (Concepcion, supra, 131 S.Ct. at 1746, citing Doctor ’s Associates, Inc., supra, 517 U.S. at 687.) With that as a backdrop, the Court then set out a two part test for determining whether a state law rule denying enforcementof an arbitration agreementis preempted by the FAA. First, “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis 1s straightforward: The conflicting rule is displaced by the FAA.” 17 (Concepcion, supra, 131 S.Ct. at 1747.) A second, more complex inquiry is required “when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashionthat disfavors arbitration.” (/d.) In that case, it is necessary to determine whether the state law rule “stand[s] as an obstacle to the accomplishment of the FAA’s objectives,” which are principally to “ensure that private arbitration agreements are enforced according to their terms.” (/d., at 1748; see also Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. (2010) 130 S.Ct. 1758, 1763.) The U.S. Supreme Court explained that “this purposeis readily apparent from the FAA’s text. Section 2 makesarbitration agreements ‘valid, irrevocable, and enforceable’ as written (subject, of course, to the saving clause).” (Concepcion, supra, 131 S.Ct. at 1748, emphasis added.) Thus, the second inquiry under Concepcion looksto whetherthe state law rule “interferes with fundamentalattributes of arbitration and thus creates a schemeinconsistent with the FAA.” (Id.) If it does, the state law rule is preempted by the FAA;if it does not, it is not preempted. Wehave no quarrel with this central teaching of Concepcion: “States cannot require a procedure that is inconsistent with the FAA,evenifit is 18 desirable for other reasons.” (/d., at 1753.) Although westart from the premisethatit is the public policy of California to allow wage claimants access to the Labor Commissioner’s Berman process, and that as a matter of state law, Berman waivers are unconscionable and contrary to public policy, we acknowledgethat this premise does not provide an answerto the question of whetherthis state law rule is preempted by the FAA. The question of preemption must be answered by application of Concepcion’s two part test. In applying that test, infra, we reach the same conclusion previously reachedbythis Court in its prior decision in the instant matter — the FAA does not preemptthe state law rule denying enforcement of a predispute Berman waiver. 1. THE STATE LAW RULE DENYING ENFORCEMENT TO PREDISPUTE BERMAN WAIVERSDOES NOT PROHIBIT OUTRIGHT THE ARBITRATION OF A PARTICULAR TYPE OF CLAIM, SO IT IS NOT SUBJECT TO CATEGORICAL PREEMPTION The state law rule adopted by this Court in its prior decision in this matter, denying enforcementto a predispute Berman waiver on the ground that such waiver is unconscionable and contrary to public policy, was _ correctly found to “not discriminate against arbitration agreements. We neither construe the arbitration agreement in a mannerdifferent from that in which we would construe nonarbitration agreements nor do werely on the 19 uniqueness of an agreementto arbitrate as a basis for a state-law holding that enforcement would be unconscionable.” (Sonic-Calabasas A, Inc., supra, 688-689 [internal quotation marks omitted].) Rather, “our conclusion that a Berman waiveris contrary to public policy and unconscionable is equally applicable whether the waiver appears within an arbitration agreement or independentofarbitration.” (U/d., at 689.) Moreover, this Court’s prior decision makes abundantly clear that the reason for not enforcing the particular arbitration agreementat issue herein is not becauseit is an arbitration agreement, but rather, becauseit deprives the employee ofthe special protections that flow from the Berman process. The Court expressly acknowledged the possibility that an arbitration agreement could be devised that provides wage claimants with those protections, and that such an agreement would be enforced: “It may be possible for an arbitration system to be designedso that it provides an employee all the advantages of the Berman hearing and posthearing protections. But there is no indication that the present arbitration system is so designed.” (Sonic-Calabasas A, Inc., supra, 51 Cal.4th at 681, fn. 4.) As such, this Court’s prior decision cannot be characterized as one that “prohibits outright” arbitration. The classic example ofa state law preempted by the FAA because 20 the state law discriminated against arbitration agreementsis provided in Perry v. Thomas, supra, 482 U.S. 483, which held Labor Code § 229 preempted by the FAA. Section 229 states: “Actions to enforce the provisionsofthis article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreementto arbitrate.” As the Supreme Court observed in Concepcion, this prong of the FAA preemption analysis applies notjust to legislative enactments, but also, to rules of law adopted by courts: “[A] court may notrely on the uniqueness of an agreementto-arbitrate as a basis for a state-law holding that enforcement would be unconscionable,for this would enable the court to effect what ... the state legislature cannot.” (Concepcion, supra, 131 S.Ct. at 1747, quoting Perry v. .homas, 482 U.S. at 493, fn. 9.) Labor Code § 229 is preempted underthe “prohibits outright” prong in Concepcion precisely because it precludes arbitration of wage claims without regard to whetherthe arbitration provisions implicate any unconscionability or independent public policy concerns that would come within the savings clause ofFAA § 2. The only public policy articulated by Section 229is a preference forlitigation rather than arbitration of wage claims. Section 229 provides no grounds recognized by FAA § 2 to deny 21 enforcementto an arbitration agreement. It thus runs plainly afoul of the FAA, Arguably, Preston also can be considered as an example ofa case decided,at least in part, under the “prohibits outright” prong,as it concerned application of the provision within the TAA, Labor Code§ 1700.44(a), giving the Labor Commissioner exclusive primary jurisdiction over disputes betweenartists and persons alleged to be acting as “talent agents” within the meaning of the Act. Preston does not provide a perfect fit for this prong ofpreemption analysis, in that the TAA does not purport to forever prohibit an arbitration of the dispute, but merely requires that the parties first have their dispute heard and decided by the Labor Commissioner, with the decision then subject to de novo review. Butlike Perry v. Thomas, the challengeto arbitration in Preston was not founded upon any generally applicable state law grounds recognized by the FAA’s savings clause. Andit is this, more than anythingelse, that makes Preston utterly inapplicable to the question of whethera state law rule prohibiting Berman waiversis similarly subject to FAA preemption. This could not have been expressed any moreclearly by the United States Supreme Court: “[I]t bears repeating that Preston’s petition [to compelarbitration] presents precisely and only a question concerning the forum in whichthe parties’ 22 dispute will be heard.... Ferrer relinquishes no substantive rights the TAA or other California law may accord him.” (Preston v. Ferrer, supra, 558 U.S. at 359.) Thus, under the FAA “he cannot escaperesolution of those rights in an arbitral forum.” (/d.) The contrast between a Berman waiverand a waiverofthe rightto have a TAA controversy heard by the Labor Commissioner could not be more stark. What is missing from Preston is any claim that the agreement was procured by fraud or duress, or any contention that waiver of the Labor Commissioner’s jurisdiction over disputes arising under the Talent Agencies Act brings about any harm that implicates unconscionability or public policy concerns. The absence of such claim is not surprising, as the role of the Labor Commissioner, in a proceeding under the Talent Agencies Act, is purely adjudicatory — i.e., the parties get nothing more out of the proceeding than an non-binding adjudication of their dispute. (Labor Code § 1700.44; Preston, supra, 552 U.S. at 359.) In contrast, the Labor Commissioner’s Berman proceduresare structuredin a waythat the Commissioner is more than a mere adjudicator of a private dispute. Ina wage claim adjudication, a Labor Commissioner decision in favor of the employeetriggers critical employee rights that would otherwise not be available to the employee, including one way fee shifting (and thus, no 23 exposure for the employer’s attorneys’ fees) in any subsequent employer- filed de novoarbitration or court proceeding, and no-cost representation by the Commissioner’s attorneys for employees unable to afford private counsel in any such proceeding. (Labor Code §§ 98.2, 98.4.) There are no equivalent rights for parties under the Talent Agencies Act, under which Labor Commissioner adjudications have no effect on exposureto attorneys’ fees, if any, in subsequent de novo proceedings, andthereis representation provided by counsel for the Labor Commissionerto any party that prevails in a Labor Commissioner proceeding under the TAA. Thus, Preston could not, and did not, involve a discrete challengeto the arbitration agreement underthe § 2 savings clause. Since the challengeto arbitration in Preston, based on a challenge to the validity of the contract as a whole, was not insulated from preemption under the savings clause, it necessarily came into conflict with the FAA. Post-Concepcion, the U.S. Supreme Court has already madeclear that even whena state law rule is subject to preemption becauseit “prohibits outright” the arbitration of a particular type of claim, enforcement of arbitration may be denied under the independent, generally applicable groundsset out in the FAA’s savings clause. In a per curiam decision, the Court held that West Virginia’s prohibition against predispute 24 agreements to arbitrate personal injury or wrongful death claims against nursing homes was “a categorical rule prohibiting arbitration of a particular type of claim,” that is preempted under the “prohibits outright” prong of Concepcion. (Marmet Health Care Center v. Brown (2/21/2012) U.S. _>_ S.Ct. , 2012 WL 538286 * 2.) However, in noting that the West Virginia court proposed an alternative holding that the particular arbitration provisions were unconscionable, the Supreme Court remandedthe cases for consideration whetherthe arbitration clauses ... are unenforceable under state commonlaw principles that are not specific to arbitration and preempted bythe FAA.” (/d.) Finally, within the past week the Ninth Circuit issued a decision holding that the state law rule set out in Broughton v. Cigna Healthplans of California (1999) 21 Cal.4th 1066, and Cruz v. Pacificare Health Systems, Inc. (2003) 30 Cal.4th 303, “does not survive Concepcion becausethe rule ‘prohibits outright the arbitration of a particular type of claim’ — claimsfor broad public injunctive relief.”. (Kilgore v. KeyBank National Association (9" Cir. 3/7/2012) _—- F.3d___, 2012 WL 718344 * 10, quoting Concepcion, 131 S.Ct. at 1747.) It is worth noting that in this decision, the Ninth Circuit then went on to consider whether enforcement should be denied to the arbitration provision at issue on the ground of 25 unconscionabiltiy — i.e., on independent grounds recognized by Section 2 of the FAA. The Ninth Circuit explained: “Concepcion did not overthrow the commonlaw contract defense of unconscionabilty wheneveran arbitration clause is involved. Rather, the Court reaffirmed that the savings clause _ preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not applied in a fashion that disfavors arbitration.” (Kilgore, supra, 2012 WL 718344 *13, citing Concepcion, 131 S.Ct. at 1747.) 2. THE STATE LAW RULE DENYING ENFORCEMENT TO PREDISPUTE BERMAN WAIVERS DOES NOT STAND AS AN OBSTACLE TO THE ACCOMPLISHMENT OF THE PURPOSES OF THE FEDERAL ARBITRATIONACTIN THAT IT DOES NOT INTERFERE WITH THE FUNDAMENTAL ATTRIBUTES OF ARBITRATION Ananalysis of the reasonsset out by the U.S. Supreme Court forits holding, in Concepcion, that a state requirement for classwide arbitration procedures for a broad range of consumerdisputes is inconsistent with the FAA points to only one conclusion with respect to the state law rule considered herein — that the state law rule that had been adoptedbythis Court, denying enforcement of a waiver of an employee’s right to access the Labor Commissioner’s Bermanprocessis not inconsistent with the FAA; and hence, not preempted. In explaining the reasonsforits central holding that “[r]equiring the 26 availability of classwide arbitration interferes withfundamentalattributes of arbitration and thus creates a scheme inconsistent with the FAA” (Concepcion, supra, 131 S.Ct. at 1748, emphasis added), the U.S. Supreme Court noted: “First, the switch from bilateral to class arbitration sacrifices the principal advantageof arbitration — its informality — and makesthe process slower, more costly, and morelikely to generate procedural morass than final judgment. . . . [B]efore an arbitrator may decide the merits of a claim in classwide procedures, he mustfirst decide, for example, whether the class itself may be certified, whether the namedpartiesare sufficiently representative and typical, and how discovery for the class should be conducted.” (/d., at 1751.) “Second, class arbitration requires procedural formality.... If procedures are too informal, absent class members would not be boundbythearbitration.” (/d.) “Third, class arbitration greatly increasesrisks to defendants. . .. Defendants are willing to accept the costs of [uncorrected] errors in arbitration, since their impactis limited to the size of individual disputes, and presumably outweighed by savings from avoiding the courts. But when damagesallegedly owedto tens of thousands - of potential claimants are aggregated and decided at once,the risk of an error will often become unacceptable. Faced with even a small chance of a devastating loss, defendants will be pressured into settling questionable 27 claims.” (/d., at 1752.) In short, “[a]rbitration is poorly suited to the higher stakes ofclass litigation.” (/d.) Noneofthe considerations and concernsarticulated by this Court in Concepcion are applicable, even remotely, to the state law rule that had been adoptedin this case. The state rule at issue herein does notalter or modify the structure of arbitration in any way; it does not rob arbitration of its informality; it does not superimpose formal procedural rules on arbitration; and it does not plunge arbitration into a high stakessetting that poses unreasonable risks to defendants. This Court’s prior decisionleft the arbitration process completely intact, so that once the Berman processis concluded, arbitration may proceedprecisely in the mannerenvisioned by the FAA. In short, this state law rule does not interfere with any ofthe “fundamental attributes of arbitration.” The Court’s analysis in Concepcion necessarily distinguishes between those generally applicable contract defenses that lose their FAA § 2 insulation from preemption, and those that do not. Defenses cognizable under the § 2 savings clause implementpolicies that are designed to ensure that enforcementofthe arbitration agreement will not be unfair. What Concepcion makesclearis that the source of the unfairness being addressed by the generally applicable contract defense cannot be someperceived 28 deficiency in the core fabric of arbitration as conceived by the FAA. Such an impermissible focus on the inadequacy of the basic and uniquefeatures of arbitration targets and disfavors arbitration and causes the generally applicable rule to run afoul of the FAA. By contrast, generally applicable contract rules that address a source of unfairness externalto the arbitration process itself are preserved from FAA preemption by the § 2 savings clause. Thestate law rule at issue in this case plainly falls into this latter category. It is not focused on any deficiency in arbitration. Rather,it is designed to ensure that employees are not denied access to a non-binding, pre-arbitration or pre-court litigation administrative process before the State Labor Commissioner, through which certain rights are made available to those employees who,in the determination of the Commissioner have meritorious wage claims, so as to assist those employees in subsequently vindicating their wage claimsin the arbitral or judicial forum. None of these rights — one way fee shifting and the resulting immunization from liability for the employer’s attorneys’ fees in de novo proceedingsinitiated by an employer’s appeal from a Labor Commissionerdecision, the employee’s right to no-cost representation by an attorney provided by the Commissioner, and the employer’s obligation to post a bond or undertaking with a superior court in the amount of the Commissioner’s award in order to 29 proceed with a de novo appeal — require the restructuring of any agreed upon arbitration hearing procedure or interfere in any manner with the “fundamentalattributes ofarbitration.” Underthe rule adopted by this Court’s prior decision, arbitration must be temporarily postponed while the employee accesses the Labor Commissioner’s Berman process. Sonic has contended, and will no doubt continue to contend, that because the rule requires a delay in the commencementof arbitration, the rule is preempted. Regarding this delay, it is noteworthy that this Court has already concluded that the time between filing a complaint with the Labor Commissioner and a Berman hearing date is usually between four and six months. (Sonic-Calabasas A, Inc., supra, 51 Cal.4th at 681, citing Cuadra v. Millan (1998) 17 Cal.4th 855, 860-862 & fn. 7.) To this we may add another 15 days, the statutory deadline for the Labor Commissioner’s issuance of a decision following the Berman hearing. (Labor Code§ 98.1) Boiled downto its essence, Sonic argues that this delay, or presumably, any delay (no matter how insignificant) caused by any state law rule of general application (no matter the reason for the rule) “interferes with the fundamentalattributes of arbitration” so as to mandate FAA preemption of the state law rule. This argumentis deeply flawed. 30 While the facilitation of streamlined proceedings is an important purpose of the FAA,it is unequivocally clear that requiring arbitration proceedings to go forward at once, without any postponement or delay, regardless of the existence of generally applicable state contract law grounds supporting a discrete challenge to the enforceability of an arbitration agreement,is not a “fundamental attribute” of arbitration. Thus, a defense of fraud, duress or unconscionability as to some specific provision of the arbitration agreementwill require the postponementofarbitration while the validity of the defense is adjudicated. “If a party challenges the validity under §2 of the precise agreementto arbitrate at issue, the federal court must consider the challenge before ordering compliance with that agreement under § 4.” (Rent-A-Center West, Inc. v. Jackson, 561 US. _, 130 S.Ct. 2772, 2778 (2010).) Thus, the policy of promoting streamlined arbitration proceedings mustyield to the assertion of a ground for revocation of a contract under the § 2 savings clause. This is necessary because the § 2 savings clause recognizes that implementation of a state policy aimed at preventing the unfairness of enforcing an arbitration agreement procured by fraud or duress, or a provision within the agreement that is unconscionableor that violates public policy, trumps the purpose of facilitating streamlined arbitration proceedings. 31 As Concepcion makesclear, the “fundamental attributes of arbitration” are by definition impermeable — they do not yield to countervailing considerations — andthat is why those “fundamental attributes” override § 2 defenses that might otherwise be saved from FAA preemption. By contrast, the policies of the FAA related to avoiding the postponementanddelay ofarbitration are not impermeable and doyield to countervailing considerations asserted pursuantto defenses under § 2; and consequently, such policies are not fundamentalattributes of arbitration. Because the Labor Commissioner’s exclusive primary jurisdiction under the TAA does not implicate Section 2 defenses under the FAA, any resulting delay of arbitration could not be justified under the FAA. Neither Preston nor Concepcion supports Sonic’s contention that a generally applicable contract defense under § 2 can be preempted merely on the basis that its implementation will result in a postponementor some delay of arbitration. Indeed, that precise issue was not before the Court in either case. Preston stands only for the proposition that where a delay in arbitration is causedby a state law rule that is not based on a generally applicable groundarising underthe § 2 savings clause,the rule will be preemptedas in conflict with the FAA. Thereis nothing in Concepcion that would support extending this proposition in Preston to apply to a 32 discrete § 2 challenge to the enforceability of an arbitration provision where the challenge, if successful, as here, does not interfere with any of the fundamentalattributes of arbitration. ‘Preston, therefore, has absolutely no bearing on defenses asserted under the § 2 savings clause. It is only to the extentthat any such defense may interfere with the “fundamental attributes” of arbitration that Concepcion requires preemption, and Concepcion cannot possibly be read to meanthat the delays occasioned by discrete challengesto the enforceability of an arbitration agreement under the § 2 savings clause poses a threat to a fundamentalattribute of arbitration. Indeed, such a reading of Concepcion would essentially nullify the savings clause. IV. CONCLUSION Application of the test for FAA preemption set out in Concepcion compels the conclusionthat the state law rule that had been adopted by this Court, barring the enforcement of a predispute waiver of an individual employee’s right to access the Labor Commissioner’s Berman process, neither “prohibits outright” the arbitration of wage claims, nor discriminates against arbitration agreements, nor stands as an obstacle to the accomplishmentofthe purposes of the Federal Arbitration Act, nor interferes with the “fundamental attributes of arbitration.”” Under every 33 formulation of every test announced in Concepcion, this state law rule is not preempted by the FAA. Assuch, we respectfully request that this Court reaffirm its prior decision in this matter, and hold that Concepcion does not warrant any change in the conclusions reached by this Court in its prior decision. Dated: March 12, 2012 LOCKER FOLBERG LLP if CY j /Ul b. bs Lf- Miles E. Locker Attorneys for Defendant/Respondent 34 CERTIFICATION OF WORD COUNT (Cal. Rules of Court, Rule 8.204) The text of this Initial Brief Following Remand from the U.S. Supreme Court consists of 7,224 words as counted by the Corel Word Perfect X4 word processing program used to generate this document. Dated: March 12, 2012 By: A é ‘Cue Miles E. Locker Attorneys for Defendant and Respondent FRANK MORENO PROOF OF SERVICE (CCP Section 1013a(2)) I, Miles E. Locker, hereby certify that I am an active memberofthe State Bar of California, and I am not a party to the within action. My business address is Locker Folberg LLP, 235 MontgomeryStreet, Suite 835, San Francisco, CA 94104. | 2. Onthe date hereof, I caused to be served the following document: INITIAL BRIEF FOLLOWING REMAND FROM U.S. SUPREME COURT on the interested parties in this action by addressing true copies thereofas follows: David J. Reese Fine, Boggs & Perkins, LLP 330 Golden Shore, Suite 410 Long Beach, CA 90802 John P. Boggs Fine, Boggs & Perkins, LLP 80 Stone Pine Rd., Suite 210° HalfMoon Bay, CA 94019 William Reich State of California, Department of Industrial Relations Division of Labor Standards Enforcement 1000 South Hill Road, Suite 112 Ventura, CA 93003 Clerk of the Superior Court Los Angeles County Superior Court Stanley Mosk Courthouse Los Angeles County Superior Court — Central District 111 North Hill Street Los Angeles, CA 90012 Cliff Palefsky Keith Ehrman McGuinn, Hillsman & Palefsky 535 Pacific Avenue San Francisco, CA 94133 Valerie T. McGinty Smith & McGinty 220 16th Avenue, Apt. 3 San Francisco, CA 94118 Hina B. Shah Women’s Employment Rights Clinic Golden Gate University School of Law 536 Mission Street’ San Francisco, CA 94105-2968 _ Cynthia Rice California Rural Legal Assistance, Inc. 631 HowardStreet San Francisco, CA 94105-3907 Jose Tello Neighborhood Legal Services of Los Angeles County 9354 Telstar Avenue El Monte, CA 91731 Miye Goishi . Hastings Civil Justice Clinic UC Hastings College of the Law 100 McAllister Street, Suite 300 San Francisco, CA 94102 Fernando Flores Director, Wage and Hour EnforcementLitigation Program Legal Aid Society-Employment Law Center 180 Montgomery Street, Suite 600 San Francisco, CA 94104 ByFirst Class Mail: I am readily familiar with the firm’sbusinesspractice of collection and processing of correspondence for mailing with the United States Postal Service and said correspondence is deposited with the United States Postal Service the same day, postage-prepaid, in a sealed envelope. I declare under penalty of perjury under the laws of the State of California that the aboveis true and correct. Executed at San Francisco, California, on Monday, March 12, 2012. Miles E. Locker