Gentry: Class Action Arbitration Bans Not Always Enforceable in Wage Cases

In a 4-3 decision, the Supreme Court has reversed an appellate decision upholding a ban on class actions in wage and hour arbitrations, holding that, in certain cases, class action waivers/bans are unenforceable, even if the arbitration agreement itself was not procedurally unconscionable as a whole. The holding in Gentry v. Superior Court (Circuit City Stores) provides:

[C]lass arbitration waivers should not be enforced if a trial court determines, based on [certain] factors ... that class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration. We therefore reverse the judgment of the Court of Appeal upholding the class arbitration waiver and remand for the above determination.

On the second issue, the court held that

[A] finding of procedural unconscionability is not required to invalidate a class arbitration waiver if that waiver implicates unwaivable statutory rights. But such a finding is a prerequisite to determining that the arbitration agreement as a whole is unconscionable. ... Contrary to the Court of Appeal, we conclude the present agreement has an element of procedural unconscionability notwithstanding the opt-out provision, and therefore remand for a determination of whether provisions of the arbitration agreement were substantively unconscionable.

Thought equivocal in the holding, it would appear that the factors that the Supreme Court requires the lower courts to consider would favor permitting class arbitrations in the vast majority of wage and hour cases. The majority opinion discussed, at length, three factors that favor permitting arbitrations to proceed as class actions.

• According to the DLSE’s report in response to Gentry’s Public Records Act request, the average award from its wage adjudication unit for 2000-2005 was $6,038. (See also Asian Pacific American Legal Center et al., Reinforcing the Seams: Guaranteeing the Promise of California’s Landmark Anti-Sweatshop Law, An Evaluation of Assembly Bill 633 Six Years Later (Sept. 2005) p. 2 [average claim for overtime and minimum wage violations submitted to DLSE ranged from $5,000-$7,000, and settlement ranged from $400-$1,600].)
• A second factor in favor of class actions for these cases, as noted in Bell, is that a current employee who individually sues his or her employer is at greater risk of retaliation. We have recognized that retaining one’s employment while bringing formal legal action against one’s employer is not “a viable option for many employees.” (Richards v. CH2M Hill, Inc. (2001) 26 Cal.4th 798, 821; see also Mullins v. Rockwell Internat. Corp. (1997) 15 Cal.4th 731, 741.) Richards and Mullins involved high-level managerial and professional employees. The difficulty of suing a current employer is likely greater for employees further down on the corporate hierarchy. As one court observed: “ ‘Although there is only plaintiff’s suggestion of intimidation in this instance, the nature of the economic dependency involved in the employment relationship is inherently inhibiting.’ ” (O’Brien v. Encotech Const. Services, Inc. (2001) 203 F.R.D. 346, 351.) ... “[I]t needs no argument to show that fear of economic retaliation might often operate to induce aggrieved employees quietly to accept substandard conditions.” (Mitchell v. Robert DeMario Jewelry, Inc. (1960) 361 U.S. 288, 292.)
• Third, some individual employees may not sue because they are unaware that their legal rights have been violated. The New Jersey Supreme Court recently emphasized the notification function of class actions in striking down a class arbitration waiver in a consumer contract: “[W]ithout the availability of a class-action mechanism, many consumer-fraud victims may never realize that they may have been wronged. As commentators have noted, ‘often consumers do not know that a potential defendant’s conduct is illegal. When they are being charged an excessive interest rate or a penalty for check bouncing, for example, few know or even sense that their rights are being violated.’ ” (Muhammad v. County Bank of Rehoboth Beach, Delaware (N.J. 2006) 912 A.2d 88, 100.) Similarly, it may often be the case that the illegal employer conduct escapes the attention of employees. Some workers, particularly immigrants with limited English language skills, may be unfamiliar with the overtime laws. (See Ha, An Analysis in Critique of KIWA’s Reform Efforts in the Los Angeles Korean-American Restaurant Industry (2001) 8 Asian L.J. 111, 122-123.) Even English-speaking or better educated employees may not be aware of the nuances of overtime laws with their sometimes complex classifications of exempt and nonexempt employees. (See Ramirez v. Yosemite Water Co., supra, 20 Cal.4th at pp. 796-798.) The likelihood of employee unawareness is even greater when, as alleged in the present case, the employer does not simply fail to pay overtime but affirmatively tells its employees that they are not eligible for overtime. Moreover, some employees, due to the transient nature of their work, may not be in a position to pursue individual litigation against a former employer. (Ansoumana v. Gristede’s Operating Corp. (S.D.N.Y. 2001) 201 F.R.D. 81, 86-87.)

The trial court will be required to consider these factors and decide whether to invalidate the waiver on public policy grounds, in which case the parties may proceed to class arbitration, unless the trial court invalidates the arbitration agreement altogether. On remand, however, the dice seem to be loaded in favor of Gentry, not Circuit City.

We do not foreclose the possibility that there may be circumstances under which individual arbitrations may satisfactorily address the overtime claims of a class of similarly aggrieved employees, or that an employer may devise a system of individual arbitration that does not disadvantage employees in vindicating their rights under section 1194. But class arbitration waivers cannot, consistent with the strong public policy behind section 1194, be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees’ prosecution of those claims.

Whether Gentry will be able to proceed in court, rather than be sent to a class arbitration, is much less clear. Before discussing the many factors that the lower court could consider in determining whether the Circuit City arbitration agreement had sufficient procedural unconscionability to render the entire agreement invalid, the court made this interesting observation.

We believe that severance is particularly appropriate in the case of class arbitration waivers because, unlike limitations on remedies or other limitations that are invalid on their face (see Armendariz, supra, 24 Cal.4th at pp. 103-104), such waivers will only be invalidated after the proper factual showing, as discussed above.

The opinion then focuses on the procedural issues, and here, the majority's discussion of procedural unconscionability and the distinction between unconscionability analysis and the enforcement and protection of unwaivable rights will be applicable not only to class cases, but individual cases as well.

[T]he validity of a class arbitration waiver was analyzed in the previous part of this opinion in terms of unwaivable statutory rights rather than unconscionability. (See Armendariz, supra, 24 Cal.4th at p. 113.) Because the statutory rights under section 1194 at issue in this case are not waivable, the minimal requirements imposed on arbitration agreements to ensure their vindication cannot be waived by the employee in a prelitigation agreement. (Armendariz, supra, 24 Cal.4th at p. 103, fn. 8.) As we clarified in Armendariz, such waiver could only occur “in situations in which an employer and an employee knowingly and voluntarily enter into an arbitration agreement after a dispute has arisen.

In the end, we are left not knowing the forum in which Gentry will ultimately be sent to litigate his overtime class action against Circuit City. The Supreme Court disagreed with most of Circuit City's arguments that carried the day in the Court of Appeal, but kept quite open the possibility that the trial court could sever [additional] parts of the arbitration agreement and enforce the rest.

Justice Moreno wrote the majority opinion, joined by Chief Justice George and Justices Kennard and Werdegar; Justice Baxter wrote a dissent, joined by Justices Chin and Corrigan. For a change, we came pretty close to predicting the outcome of this one.

We think Justices Moreno, Werdegar, Kennard and George, who were all in the 4-3 majority that decided Discover Bank, will join in a majority opinion that will hold class action prohibitions to be substantively unconscionable under California law. If forced to guess further, we would wager that the Court will find sufficient procedural unconscionability to render the Circuit City arbitration agreement completely unenforceable under Calfornia law.

We got the majority right, but the opinion did not go quite as far as we anticipated and hoped. Nonetheless, the opinion strongly favors the rights of employees in wage and hour class actions and in wage cases generally. The language in Gentry v. Superior Court is so interesting that it instantly becomes one of those cases that every wage and hour practitioner should keep in a Word file with a shortcut to it on their desktop. For the next 60 days or so, you can download the full text here in pdf or Word format.