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By a 4-3 majority, the California Supreme Court reversed an order compelling arbitration and remanded the case to the trial court with instructions to use a multi-factor test in determining the enforceability of a class action waiver. The ultimate question for the trial court is whether class-wide proceedings would be “a significantly more effective practical means of vindicating the [statutory] rights” of the employees who belong to the putative class. Parties who prefer the simplicity of one-on-one arbitration should not be overly concerned by the majority holding because this decision has no application outside of the employment context.
In Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), Gentry filed a class action against Circuit City, his former employer, alleging that Circuit City improperly classified him as an exempt employee and thus deprived him of his statutory right to overtime pay.
Circuit City moved to compel arbitration pursuant to an arbitration agreement that the parties had entered into when Gentry was hired. The arbitration agreement contained two provisions of particular significance: (1) an opt-out provision that gave Gentry thirty days to reject the agreement; and (2) a prohibition on class-wide proceedings (i.e., a class action waiver).
In opposing the motion to compel arbitration, Gentry argued that the class action waiver rendered the agreement unconscionable and therefore unenforceable. The trial court disagreed and issued an order compelling arbitration. On appeal, the court of appeal likewise rejected Gentry’s unconscionability argument, reasoning that (1) the opt-out provision precluded the requisite finding of procedural unconscionability and (2) the class action waiver had no exculpatory effect because the extent of Gentry’s alleged damages warranted individual arbitration. See Gentry v. Superior Court, 37 Cal. Rptr. 3d 790 (Cal. Ct. App. 2006).
The California Supreme Court (the Court) granted review and reversed the order compelling arbitration. In the first part of the opinion, the Court addressed the enforceability of the class action waiver. However, instead of applying the doctrine of unconscionability, the Court analyzed the enforceability of the class waiver solely on the basis of public policy.
More precisely, the Court applied the principles that it enunciated in Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83 (Cal. 2000). There, the Court held that a statutory claim of employment discrimination is arbitrable so long as the arbitration agreement contemplates or permits “such procedures as are necessary to vindicate that claim.”
In this case, despite its reliance on Armendariz, the Court dispensed with the “necessary to vindicate” standard in favor of a standard the can only be described as nebulous. Specifically, the Court held that the class action waiver cannot be enforced if the trial court concludes, based on a multi-factor test, “that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations.” The Court remanded the case with instructions to use that test in determining the enforceability of the class waiver.
The Court next turned to the court of appeal’s holding that the opt-out provision precluded a finding of procedural unconscionability. Given the Court’s reliance on Armendariz, the unconscionability question was not relevant to the enforceability of the class waiver, but the Court still addressed the issue because Gentry had raised an unconscionability challenge to other parts of the agreement – namely, an abbreviated statute of limitations and some remedial limitations.
On this issue, the Court held the arbitration agreement was “not entirely free from procedural unconscionability” in light of two factors: (1) the employee handbook touted the benefits of arbitration while omitting any mention of the remedial limitations or abbreviated statute of limitations; and (2) “it is likely that Circuit City employees felt at least some pressure not to opt out of the arbitration agreement.” (Emphasis added.)
There was a dissenting opinion – joined by three justices – which highlighted the lack of any precedent or legal authority for the theory of invalidation set forth in the majority opinion. Moreover, in the view of the dissenting justices, the majority opinion runs afoul of the Federal Arbitration Act (FAA) by demonstrating “hostility to arbitration as a simpler, cheaper, and less formal alternative to litigation.”
Even though Circuit City argued the issue, the majority opinion devoted almost no analysis to the whether the FAA preempted the Court’s ruling that the class waiver may be unenforceable. Instead, the Court simply referred to its analysis of that issue in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).
However, in sidestepping the preemption question, the Court neglected a crucial distinction between Discover Bank and this case. Discover Bank rested on the doctrine of unconscionability, which is a principle of general application. Conversely, this case rests on an arbitration-specific rule that was crafted under the rubric of public policy – namely, whether litigation or some alternate procedure is “a significantly more effective practical means” of vindicating statutory rights than the arbitration procedure agreed to by the parties.
Carried to its logical conclusion, the Court’s analysis implies that the FAA would permit California courts to refuse to enforce an arbitration agreement that did not contemplate the use of a jury so long as the use of a jury “is likely to be a significantly more effective practical means” of vindicating an employee’s statutory rights. After all, the use of multiple arbitrators and the service of laypersons as arbitrators have a much longer history than class arbitration.
Fortunately, for parties who prefer a simplified form of arbitration, the Gentry decision has no application outside of the employment context. This limitation is clear from the underlying precedent (e.g., Armendariz) and the Court’s analysis – most notably, footnote 8 and the Court’s reference to the “economic power” that employers “wield” over their employees.
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