Kannon Shanmugam of Paul Weiss speaks at a Federalist Society event. Photo: Diego M. Radzinschi/ALM

A California Supreme Court ruling in a wage dispute threatens to undermine "millions of arbitration agreements" and more broadly highlights the state's "recalcitrance" against allowing employers and their workers to resolve some workplace complaints out of court, lawyers for an auto dealer asserted in a new U.S. Supreme Court petition on Monday.

The petition, filed by a team from Paul, Weiss, Rifkind, Wharton & Garrison, said a series of California rulings against arbitration agreements have made the state a "serial offender" of U.S. Supreme Court decisions upholding mandates of the Federal Arbitration Act.

"The message has not gotten through," Paul Weiss partner Kannon Shanmugam told the justices on behalf of OTO LLC, which does business as One Toyota of Oakland. Paul Weiss represents the auto dealer with the law firm Fine, Boggs & Perkins.

The Supreme Court over the last decade has issued a number of rulings strengthening the Federal Arbitration Act, and the new petition gives the justices a fresh opportunity to weigh the contours of the law. The justices last term passed up a chance to take a California arbitration case, as the high court, without comment, refused to touch a state ruling that said a former Winston & Strawn partner could sue the firm for alleged bias.

The auto dealer's petition challenges a divided California Supreme Court opinion that invalidated an arbitration agreement in a dispute involving a former service technician. The auto dealer's lawyers unsuccessfully tried to stop a California labor agency hearing, and the company also lost its bid to compel arbitration through the courts. The California Labor Commission awarded the former employee, Ken Kho, $150,000 in unpaid wages, liquidated damages, interest and penalties.

The California Supreme Court concluded the arbitration agreement at question was "substantively unconscionable." Arbitration, the court said, "is premised on the parties' mutual consent, not coercion."

The justices in the majority said that by signing the arbitration agreement, Kho surrendered a "full panoply" of administrative procedures and assistance and got in return access "to a formal and highly structured arbitration process that closely resembled civil litigation if he could figure out how to avail himself of its benefits and avoid its pitfalls."

"Employees who agree to arbitrate claims for unpaid wages forgo not just their right to litigate in court, but also their resort to an expedient, largely cost-free administrative procedure," the California Supreme Court said. The ruling described Kho's arbitration agreement as "opaque." Sentences in the agreement "are complex, filled with statutory references and legal jargon. The second sentence alone is 12 lines long."

Kho's lawyer in the California Supreme Court, David Rosenfeld of Weinberg, Roger & Rosenfeld, described the arbitration agreement at issue as "full-on litigation" and not informal and accessible.

The ruling in Kho's case attracted widespread attention in labor and employment circles. Lawyers at the management-side firm Fisher & Phillips said in a blog post that the decision "casts doubt on—and in some cases even condemns—some of the most common practices used by employers in drafting and presenting arbitration agreements to their employees."

The Paul Weiss lawyers argued in their petition that the California Supreme Court ruling, left to stand, "will have an enormous practical impact on California employers and employees." The petition asserted that California employers "must either accept the risk that their existing agreements will not be enforced, or renegotiate the terms of those agreements to comply with the California Supreme Court's decision."

"In its zeal to undercut arbitration, the California Supreme Court reached a preposterous result—deeming an arbitration agreement substantively unconscionable on the perverse ground that it offered too many of the protections of civil litigation," Shanmugam wrote. He argued the decision, if it remains in place, "will undermine millions of arbitration agreements in the most populous state in the nation."

Shanmugam told the justices: "The California Supreme Court once again thumbed its nose at the Federal Arbitration Act and this court, ignoring the court's clear and repeated mandates that the FAA preempts state rules that discriminate against arbitration."

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