Classwide Arbitration Waivers (California)

In four sentences the California Supreme Court summarizes its decision invalidating waiver of classwide arbitration agreements in employment contracts. Paraphrasing, “[i]n some cases prohibition of classwide relief would undermine vindication of employees’ unwaivable statutory rights . . . Accordingly, such class arbitration waivers should not be enforced . . . if the trial court finds class wide arbitration ineffective to vindicate statutory rights;” Gentry v. Sup.Ct., 42 Cal.4th 443 (2005).

To which the dissent replied, “. . . there 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 subtley they can alter the arbitral terms to which the parties agreed . . . ”

The majority opinion does not find the classwide arbitration waiver signed by the employee in Gentry specifically unenforceable but remands to the trial court to determine whether the employee can vindicate statutory rights under the terms of the agreement. The Gentry court instructs the trial court to consider several factors in reaching its conclusion: the modest size of the potential recovery; potential employer retaliation against class members; the inability to inform absent class members of their rights; other real world obstacles to vindicate the right to overtime pay through individual arbitration.

According to the Gentry court, this analysis compares with rules of class actions in general, i.e., predominant common questions of law and fact; typical claims of class members; class members who can adequately represent absent and non-class members; CCP 382. The Gentry majority requires trial courts to compare classwide arbitration with individual arbitration methods the employer offers in specific cases instead of comparing individual arbitration with classwide litigation in general.

The California Supreme Court also challenges the arbitrability of the arbitration agreement as procedurally unconscionable despite an “opt-out” agreement for employees. Finding the accelerated time in the arbitration agreement to file employee claims contradicts the conventional statute of limitations, the limitation on damages (back pay) and punitive damages, and allocation of costs and fees all qualify as potential procedurally unconscionable terms, the court remands this issue to the trial court.

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. An earlier California Supreme Court case invalidating classwide arbitration in consumer cases, Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005) and Gentry both open the door, albeit slightly, to permit class action waivers “in some cases.”

The Gentry court majority has cloaked a policy position in legal garments. Consistent with its Discover Bank decision conceding its ruling constituted a significant minority among federal and state court decisions upholding classwide arbitration waivers in consumer cases, the majority in Gentry can cite only a handful of U.S. District Court decisions in support of its position in employment cases. The dissent identifies numerous state and federal court decisions conflicting with the majority in employment cases. Including the Ninth Circuit; Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (9th Cir. 2002); Circuit City Stores, Inc. v. Najd, 294 F.3d. 1104 (9th Cir. 2002). The majority in Gentry finds neither case “persuasive.”

Both Gentry and Discover Bank are arguably counter to the FAA requirement that state courts not disfavor arbitration. Citing a state statute reflecting public policy does not automatically insulate arbitration agreements from enforcement; Perry v. Thomas, 482 U.S. 483 (1987. Although the California Supreme Court rejected application of the FAA in Discover Bank, their decision is a minority view.