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Circuit City Class Action Defense Case-Gentry v. Superior Court: California Supreme Court Invalidates Class Action Waiver In Arbitration Clause As Against Public Policy And Concludes Arbitration Clause Procedurally Unconscionable Despite Right To Opt Out

Class Action Lawsuits are More Effective in Redressing Employee Labor Law Claims thus Rendering Class Action Waiver in Arbitration Clause Unenforceable, and Arbitration Clause was Procedurally Unconscionable Despite 30-Day Window to Opt Out of Entirely Voluntary Dispute Resolution Program California Supreme Court Holds

Plaintiff filed a putative class action in California state court against Circuit City alleging violations of the state’s unfair and deceptive business practices statutes and labor code arising out of its misclassifying employees as exempt in order to deny them overtime pay. Gentry v. Superior Court, ___ Cal.4th ___, 64 Cal.Rptr.3d 773, Slip Opn., at 2-3 (Cal. August 30, 2007). Defense attorneys moved to dismiss the class action and compel arbitration pursuant to an arbitration clause with a class action waiver. The trial court found the arbitration clause and the class action waiver to be fully enforceable, and granted the defense motion. The Court of Appeal agreed with the trial court’s reasoning, but the California Supreme Court reversed.

At the time Circuit City hired plaintiff, he was provided with written materials that included the company’s “Dispute Resolution Rules and Procedures”; the program gave employees “various options, including arbitration, for resolving employment-related disputes” and provided that if the employee elected arbitration – a choice that was subject to a class action arbitration waiver – then the company could compel the employee to dismiss any civil action in favor of arbitration. Gentry, at 3. As the Supreme Court explained, “The packet included a form that gave the employee 30 days to opt out of the arbitration agreement. [Plaintiff] Gentry did not do so.” Id. Both the trial court and the appellate court were influenced by the fact that plaintiff failed to opt out of the arbitration program within the 30-day window, despite the fact that there would have been no adverse employment ramifications had he done so. Id., at 3-4. The Supreme Court, however, disagreed.

In a strangely vague and sharply split opinion, the Supreme Court held that class action arbitration waiver provisions in overtime cases “may be contrary to public policy,” Gentry, at 5 (italics added). But despite all of its hedging, the Court seems to be clear that anything short of an attorney-supervised waiver would not withstand scrutiny, explaining at page 12:

Discover Bank was an application of a more general principle: that although “[c]lass action and arbitration waivers are not, in the abstract, exculpatory clauses” [citation], such a waiver can be exculpatory in practical terms because it can make it very difficult for those injured by unlawful conduct to pursue a legal remedy. Gentry argues persuasively that class action waivers in wage and hour cases and overtime cases would have, at least frequently if not invariably, a similar exculpatory effect for several reasons, and would therefore undermine the enforcement of the statutory right to overtime pay. (Italics added.)

The majority opinion then proceeds to explain why, for a variety of reasons, class action arbitration clauses are not enforceable. Gentry, at 13-20. The discussion conflicts with certain observations, such as the recognition that – despite the Court’s conclusion that without class action treatment employers would never be held accountable for mistreatment of employees – “some 40 published cases over the last 70 years in California have involved individual employees prosecuting overtime violations without the assistance of class litigation or arbitration,” id., at 20-21. At bottom, the Supreme Court simply believes that it would be “more efficient” to redress alleged labor law violations through the use of class action lawsuits, holding at pages 21 and 22:

Not all overtime cases will necessarily lend themselves to class actions, nor will employees invariably request such class actions. Nor in every case will class action or arbitration be demonstrably superior to individual actions. Nonetheless, when it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above: 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 ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, 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, it must invalidate the class arbitration waiver to ensure that these employees can “vindicate [their] unwaivable rights in an arbitration forum.” [Citation.]

The dissent characterizes the majority opinion as result-oriented, based on “a mere judicial affinity for class actions,” Gentry (dissenting opn.), at 6; it is difficult to fault that reasoning as it is difficult to imagine a situation where an individual action will lead to more “comprehensive enforcement of overtime laws” than a class action. This is manifest in the instructions given to the trial court “to determine in light of the above discussion whether, in this particular case, class arbitration would be a significantly more effective means than individual arbitration actions of vindicating the right to overtime pay of the group of employees whose rights to such pay have been allegedly violated by Circuit City.” Id., at 26-27 (italics added). This analysis is to be conducted with knowledge that the Supreme Court believes “the prohibition of classwide relief would undermine the vindication of the employees’ unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state’s overtime laws,” id., at 1.

In an equally surprising part of the opinion, the majority holds that the arbitration clause is procedurally unconscionable despite the fact that employees were given a 30-day no-risk window within which to opt out of the arbitration program. Preliminarily, the Supreme Court had no difficulty finding that plaintiff manifested an intent to agree to the arbitration program as he “signed an easily readable, one-page form” clearly assenting to an entirely voluntary arbitration program for resolution of disputes. Gentry, at 29-30. The Court further concurred that California law requires both substantive and procedural unconscionability if the contract is not to be enforced, id., at 31-32. Essentially, the Supreme Court found that Circuit City misled its employees into believing that arbitration was advantageous for them, without highlighting the significant labor law rights they would otherwise have if they pursued actions outside the arbitral forum. Id., at 32-35. Thus, they received “a highly distorted picture of the arbitration Circuit City was offering,” id., at 34-35. In reaching its conclusion, it rejected two Ninth Circuit opinions that held just the opposite, id., at 36.

NOTE: The dissent is blunt, noting that despite the fact that the majority claims that it is not “hold that all class action waivers are necessarily unconscionable,” thus leaving the door open to the validity of class action arbitration waivers, the reasoning of the majority opinion renders this difficult to believe: “The majority denies that class action waivers in arbitration agreements are necessarily invalid in suits to vindicate overtime-wage rights, but that is the practical effect of the majority’s holding.” Slip Opn. (Baxter, J., dissenting), at 5 n.2. The dissent continues, “Thus, the majority holds in effect that whenever, in an overtime-wage case, the court could otherwise find a class proceeding appropriate, it may do so notwithstanding a free and fair agreement for individual arbitration. Nor is there any realistic limitation in the majority’s suggestion that its rule applies to cases where ‘systematic[]’ denial of overtime pay to a ‘class of employees’ is alleged. [Citation.] Such assertions would appear, by necessity, in any complaint seeking to litigate overtime-pay claims in a class proceeding.” Id. We do not here summarize the dissent in greater detail, the author simply notes his concurrence with the reasoning therein.

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