Contract Conflict |
Los Angeles Daily Journal
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In four sentences, the California Supreme Court summarized its decision precluding waiver of classwide arbitration agreements included in employment contracts. “[I]n some cases prohibition of classwide relief would undermine vindication of employees’ unwaivable statutory rights.” Gentry v. Sup.Ct., 42 Cal.4th 443 (2007); Labor Code 1194. Accordingly, such “class arbitration waivers should not be enforced … if the trial court finds classwide arbitration ineffective to vindicate statutory rights.” The dissent replied, “[T]here is more than one way courts can show hostility to arbitration as a simpler, cheaper, and less formal alternative to litigation. They can simply refuse to enforce the parties’ agreement. Or, more subtly, they can alter the arbitral terms to which the parties agreed.” Although the California Supreme Court had endorsed classwide arbitration in Keating v. Sup.Ct., 31 Cal.3d 584 (1982), reversed on other grounds, and Southland Corp. v. Keating, 465 U.S. 1 (1984), several federal courts had refused to consolidate multiple arbitrable claims. But in Green Tree Financial Corp. v. Bazzle, 539 U.S. 1029 (2003), a splintered Supreme Court majority apparently approved classwide arbitration if state courts or legislatures either permitted consolidation or did not prohibit classwide arbitration. Employers, service providers and franchisers trying to impose a format for individual arbitration claims wrote classwide arbitration waivers into contract clauses of employees, consumers and franchisees as exemplified in Gentry. The majority opinion in Gentry does not find the classwide arbitration waiver signed by the employee automatically unenforceable but remands to the trial court with instructions to determine whether the specific terms of the arbitration agreement in question enable an employee to vindicate statutory rights as outlined in the Labor Code. The Gentry court instructs the trial court to consider several factors in reaching its conclusion: the modest size of the potential recovery; employer retaliation against class members; inability to inform absent class members of their rights; and other real-world obstacles to vindication of alleged Labor Code violations through individual arbitration. According to the Gentry court, this analysis coincides with rules applicable to class actions in general, that is, predominant questions of law and fact; typical claims of class members; numerous class members; and adequate representation of absent and nonclass members. The Gentry majority requires trial courts to compare classwide arbitration with alternative individual arbitration clauses offered by the employer in specific cases instead of merely comparing individual arbitration with classwide litigation in general. Gentry also challenges arbitrability of the arbitration agreement as procedurally unconscionable despite an optout agreement for employees. The court notes the agreement accelerates timelines to file employee claims, contradicts the conventional statute of limitations, limits damages (back pay), eliminates punitive damages and allocates costs and fees. These conditions qualify as terms potentially unconscionable, a decision for trial-court resolution. The list of factors cited in Gentry that a court should consider in determining whether to prohibit classwide arbitration waivers or, in the alternative, a finding of unconscionability of the arbitration agreement, guarantees an analytic framework that draws no bright lines and assures more litigation. Gentry and Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005), an earlier California Supreme Court case invalidating waiver of classwide arbitration in consumer cases, open the door to permit class waivers “in some cases.” The majority in Discover Bank explained that “the law in California is that class action waivers in consumer contracts of adhesion are unenforceable under some circumstances.” If an adhesive consumer contract is unconscionable or the complaint alleges small damages incurred by a scheme to cheat large numbers of consumers and disabling them from vindicating statutory rights, the classwide arbitration waiver becomes potentially vulnerable. Civil Code 1688; 1670.5. Gentry and Discover Bank are superficially synonymous in linking the right of employees and consumers to vindicating their statutory rights. In both cases, the contracts are adhesive and usually involve small damages, but the theoretical base for treating them similarly ignores the legal characterization between the parties. Employee and employer relationships are, to some extent, “personal” in that each person individually signs a contract to perform services for another, although disproportionate bargaining power and economic necessity are foremost for only one party not in a position to negotiate. Service providers and consumer relationships are impersonal in every sense of the word. Selling a product or providing service to a consumer is a single transaction involving exchange of money with nominal interaction between the parties. But a consumer can reject an offer because the market frequently offers an alternative source for purchase and sale of a product or provision for service. But the service provider, unlike employees who lack alternative sources, can insulate itself from fraud, cognizant that the small damages involved diminish incentives for recompense and discourage judicial recourse. Consistent with its Discover Bank decision, the court majority in Gentry constitutes a significant minority among federal- and state-court decisions upholding classwide arbitration waivers in consumer cases. Iberia Credit Bureau Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004). The justices in Gentry cited only a handful of U.S. District Court decisions in support of its position. The dissent identifies numerous state and federal appellate-court employment decisions conflicting with the Gentry majority. In state-court cases removed to federal court on grounds of diversity jurisdiction, employers and service providers also filed motions to compel arbitration of individual claims citing the classwide waiver in contracts of employees or consumers. A federal court applying state contract law as required under the Federal Arbitration Act (9 U.S.C. 1-16; FAA) could refuse to enforce a classwide arbitration waiver on grounds the adhesive nature of the contractual clause fails to vindicate statutory rights or is unconscionable although severance of the unenforceable clause is an option. Kristian v. Comcast Corp., 446 F.3d 251 (1st Cir. 2006). The 9th Circuit, historically unsympathetic to arbitration of employment cases until reversed by the Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), had held classwide arbitration waivers in adhesive employment contracts unconscionable in Ingle v. Circuit City Stores Inc., 328 F.3d 1165 (9th Cir. 2003), and in consumer contracts. Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003). Citing Gentry, the 9th Circuit panel in Shroyer v. New Cingular Wireless Services Inc., 498 F.3d 976 (9th Cir. 2007), also refused to enforce a classwide arbitration waiver in a consumer contract on grounds the adhesive contract was unconscionable but without the Gentry caveat of possible exceptions. Despite that, the 9th Circuit endorsed classwide arbitration in principle as an alternative to litigation enabling arbitrators to resolve contractual disputes by introducing resolution techniques unavailable in federal trial courts. Shroyer discusses the effect of the Consumers Legal Remedies Act, a California consumer-based statute, that defines an unconscionable provision in a contract as an unlawful business practice. Civil Code 1770 (a)(19). Although the pleadings in Shroyer alleged an unlawful business practice, the trial court certified a national class, citing invalidity of the classwide arbitration waiver. A federal court’s certification of a national class based on the innumerable laws of multiple jurisdictions on classwide waiver would defeat the purpose of Rule 23, requiring procedural superiority before class certification. The 1st Circuit has confronted challenges to classwide arbitration waivers in a trilogy of cases illustrating the difficulty of conforming to Supreme Court insistence on eliminating judicial hostility to arbitration. In Kristian, the classwide waiver of the arbitration clause included a remedy stripping provision precluding a party from collecting statutorily mandated damages for violation of federal antitrust law. In the language of the court, the classwide arbitration waiver disabled the plaintiffs from vindicating their federal statutory rights to obtain treble damages. Yet the court salvaged the arbitration clause by severing the unenforceable damages clause and permitting classwide arbitration under a “savings clause” in the contract. In Anderson v. Comcast Corp., 500 F.3d 66 (1st Cir. 2007), the court disposed of the argument against the classwide arbitration bar under a Massachusetts statute permitting class actions. Citing Kristian, the court held that, as long as the state permits class actions or, inferentially, class arbitration, the parties can agree to waive that right. But this decision is not for the court to resolve, the clause not involving formation of the contract, or, in the language of arbitration, not a judicial question of “arbitrability.” The arbitrator must decide. In Skirchak v. Dynamics Corp., 508 F.3d 49 (1st Cir. 2007), the 1st Circuit commented that the classwide arbitration bar is arguably unconscionable but also severable. In an interesting jurisdictional question, the parties specifically solicited the court rather than the arbitrator to decide issues of unconscionability or inability to vindicate statutory rights. The court confirmed its jurisdiction conferred by the parties. Undoubtedly, the parties were aware of the Anderson decision. The 1st Circuit has attempted to retain classwide arbitration by severing unconscionable clauses or clauses disabling a party from vindicating statutory rights. In California, the Gentry court and the 9th Circuit have cloaked a policy position in legal garments by refusing to enforce waivers of classwide arbitration in employment and consumer contracts, in each case on different grounds, but paradoxically endorsing the process per se. *** |