California Supreme Court Tackles Issue of First Impression in Gentry v. Superior Court

Many employers routinely require new employees to sign binding arbitration agreements upon hire as a condition of employment. Such agreements must be mutual in application, and must meet other important criteria in order to be enforceable. Although this Alert addresses the latest developments in this arena in California, all employers should take note, as California courts often set the stage for what happens elsewhere around the country.

In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the California Supreme Court laid out the criteria for enforceability of arbitration agreements, including:

• the agreement must be mutual in application,
• the agreement must be embodied in a standalone document,
• the agreement cannot limit the employee's substantive rights, i.e., damages cannot be limited, nor can statutes of limitations be shortened,
• the employee must be allowed to conduct reasonable discovery,
• the arbitrator must issue a written ruling with specific findings of fact and law supporting the decision, and
• the employee may not be required to pay costs and arbitration fees in excess of those which he or she would bear in litigation.

Gentry v. Superior Court

Recently, many employers have included within their standard arbitration agreements a clause stating that the employer and employee waive their rights to address their claims as part of a class action. In Gentry v. Superior Court, 2007 Cal. LEXIS 93786 (August 30, 2007), the California Supreme Court held that a class action waiver contained in an employee's arbitration agreement might be unenforceable. The Court provided guidance concerning the elements required for enforceability, and then remanded the case to the trial court for a determination pursuant to its guidance.

The case involved an employee of Circuit City Stores, Inc. Gentry had signed an arbitration agreement at the beginning of his employment that provided he and the company would resolve any and all employment-related disputes through arbitration. The agreement also provided that the claims of multiple employees could not be combined into a class action.

The lawsuit began when, despite the arbitration agreement, Gentry filed a class action lawsuit in superior court against the company on behalf of himself and others. The lawsuit claimed Circuit City improperly classified the plaintiffs as exempt employees and failed to pay them overtime pay. Two procedural issues were presented. The first question was whether Gentry could maintain a class action at all — whether in court or in arbitration — given the fact that the arbitration agreement prohibited all class actions. The second question was whether Gentry could continue his case in court, given that the arbitration agreement provided that arbitration would be the sole means of dispute resolution. Gentry argued that for a variety of reasons the arbitration agreement was entirely unenforceable.

Enforcement of Waiver of Class Action

The California Supreme Court first considered whether the class action waiver was enforceable. It concluded that it might not be. After discussing various legal precedents, the Court noted that in other cases in which individual claims are small in monetary value and the cost to each plaintiff of maintaining an individual lawsuit or arbitration is burdensome when considered against the amount at stake, courts have held that the class action is the most reasonable means of addressing such claims. The Court observed that when individual amounts at stake are small, and the cost of maintaining one's own lawsuit (or arbitration) is high, these factors can discourage individuals from pursuing their claims. A likely result is that the wrongdoer benefits from its wrongdoing because individuals do not sue.

Considering the specific class action waiver in Gentry, the Supreme Court observed that the plaintiffs' claims arose under the Labor Code. Quoting Labor Code section 1194, the Court noted that nonexempt employees who are made to work without being compensated for overtime, and even those who agree to do so, are entitled to recover in a civil action. The Court stated that the legal rights to minimum wage and overtime compensation are unwaivable rights. The Court further observed that although wage and hour claims may be raised in an administrative action before the Department of Labor Standards Enforcement, the private civil action is a statutorily protected form of redress.

The California Supreme Court did not rule that all class action waivers in overtime cases are unenforceable. The Court suggested that the trial court consider the following factors:

• the modest size of the potential individual recovery,
• the potential for retaliation against members of the class,
• the fact that absent members of the class may be poorly informed about their rights, and
• other real-world obstacles to the vindication of class members' rights to overtime pay through individual arbitration.

Class Arbitration

If a trial court concludes, based upon these factors, that a class arbitration is likely to be a significantly more effective way of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the denying a 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, it must invalidate the class arbitration waiver to ensure that these employees can "vindicate [their] unwaivable rights in an arbitration forum." The Court noted that any class arbitration still would need to meet the "community of interest" requirement necessary for the maintenance of any class action.¹

The Court stated that employees also have the right to address their wage and overtime claims in administrative actions before the Labor Commissioner. However, the Court stated that this administrative process does not displace the right to pursue a civil action.

The Supreme Court did not actually decide whether the arbitration waiver clause in Gentry was enforceable. Instead, it sent the case back to the trial court for consideration in light of the factors identified above.

The Court also remanded to the trial court the question of whether the entire arbitration agreement was unenforceable. The Court expressed concern with the one-sided nature of the arbitration agreement itself, as well as the fact that Circuit City's written materials failed to inform the employees of some of the disadvantages of arbitration.

What Does This Mean For Employers?

The lesson for employers, especially those in California, is clear. Extreme caution should be used in drafting arbitration agreements. Employees should not be required to waive any statutorily created rights. A blanket prohibition on class arbitration may not be enforceable, and might put the enforceability of the entire agreement at risk, depending upon the wording. Even if an employer has been using an arbitration agreement without employee challenges, it may be prudent to have these agreements reviewed in light of the Gentry holding.

For Further Information

If you have questions or would like more information, please contact Eve I. Klein, one of the other members of the Employment & Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Footnote

1. This encompasses three factors: predominant common issues of fact and/or law; class representatives who have claims or defenses typical of all class members and a class representative who can adequately represent the class.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.