California Court of Appeal Upholds Car Dealership’s "Disturbing" Arbitration Agreement

California Court of Appeal Upholds Car Dealership’s "Disturbing" Arbitration Agreement Over the California DLSE Process for Unpaid Wages

On August 21, 2017, the First Appellate District in California issued a decision in OTO, LLC. v. Ken Kho, granting a car dealership’s petition to compel arbitration of a complaint filed by a  former employee.

In OTO, LLC v. Kho, the California Labor Commissioner challenged a car dealership’s mandatory arbitration agreement. The agreement required employment disputes to be arbitrated under normal civil litigation rules, before a retired superior court judge, and waived the right to submit wage claims to the Labor Commissioner. The Court of Appeal expressed that it was “disturbed" by the way the employer had drafted and presented the agreement to employees. Despite this proclamation and the fact the agreement bypassed the Labor Commissioner hearing process, the Court upheld the arbitration agreement.


Ken Kho was employed as an auto mechanic for a car dealership. Three years into his employment, he was given a one and one-quarter page agreement entitled, “Employment At-Will and Arbitration.” The agreement was drafted in seven-point font and the entire agreement was contained in a single, dense paragraph. The agreement required the parties to arbitrate their disputes before a retired superior court judge under ordinary pleading, discovery, and evidence rules. Kho received the agreement at his desk from a Human Resource employee, who did not explain the meaning of the agreement or the consequences of signing the agreement to him. Kho claimed to have signed the agreement within approximately three to four minutes.

One year after receiving the arbitration agreement, Kho filed a wage claim with the Division of Labor Standards Enforcement (DLSE), which is regulated by the Labor Commissioner. The dealership filed a petition to compel Kho to arbitrate his wage claim in the Superior Court. The Labor Commissioner intervened to oppose the petition and to uphold Kho’s right to pursue his wage claim before the DLSE.

The trial court denied the dealership’s petition because the arbitration agreement was “highly” unfair and deprived Kho of the advantages an employee has in an informal hearing before the DLSE. That informal hearing, called a “Berman Hearing,” permits employees to avoid court proceedings by trying to resolve wage claims in a speedy, informal, and affordable method for employees. The dealership appealed.

The Court of Appeal’s Decision

Written agreements to arbitrate employment disputes are typically enforceable unless there is something specifically unfair about the agreement’s terms and presentation. These two types of unfairness are called procedural unconscionability and substantive unconscionability. If both forms of unfairness exist to some degree, then a court may find an arbitration agreement invalid.

The Court of Appeal agreed with the trial court that the arbitration agreement was procedurally unconscionable. Kho received the agreement on a take-it-or-leave-it basis; he could not negotiate the terms; and he was presented with it years after he had started working for the dealership. He reasonably assumed he had no choice but to sign it or quit. In addition, the agreement appeared in seven-point font within a block format and had legalistic terms that were difficult to understand without legal training. Further, Kho was not provided with a copy of the arbitration agreement after signing it and did not receive a copy of the arbitration agreement in his first language, which is Chinese. All this together made the degree of procedural unconscionability “extraordinarily high.”

The appellate court closely reviewed the agreement and ultimately ruled in favor of the employer.  The Court determined the agreement was not substantively unconscionable because the arbitration clause was not one-sided and did not overly favor the dealership. All claims between the parties were subject to arbitration and the proceeding would resemble ordinary litigation. Further, although the agreement did not explicitly state that the dealership would have to pay for arbitration, prevailing law requires such a result.

Therefore, although the Court of Appeal was “disturbed” by the way the dealership wrote the arbitration agreement and felt the way it was presented to Kho for signing was “coercive,” the agreement did allow him to pursue his wage claim in an accessible and affordable forum that resembled normal civil litigation. Those features made the agreement substantively conscionable and therefore, enforceable.

Practical Tips for Employers

-Arbitration agreements continue to be a vital tool for companies to speed up the litigation process and reduce fees and costs. However, as discussed above, enforceability of arbitration agreements remains an evolving and complex area of law and a poorly worded arbitration agreement can lead to extensive litigation over the legitimacy of the agreement itself. In order to avoid finding yourself in a prolonged legal battle over an arbitration agreement, it is crucial for employers to maintain up-to-date arbitration agreements that are consistent with recent case law.

-Employers should work closely with expert legal counsel when implementing an arbitration agreement to ensure procedural fairness.  If you have questions about your current arbitration agreement or introducing an arbitration agreement at your company, contact the attorneys at Palmer Kazanjian Wohl Hodson LLP.