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Class Action Defense Cases-Murphy v. Check ‘N Go: California Appellate Court Upholds Trial Court Order That Class Action Waiver Rendered Arbitration Clause Unenforceable

Class Action Waiver Unconscionable and Contractual Provision Requiring Arbitrator to Determine Enforceability of Class Action Waiver and Arbitration Provision also Unconscionable California Court Holds

Plaintiff filed a class action lawsuit against his employer, a payday lending company, for violations of state labor laws alleging “failure to pay…overtime…, accurate itemized wage statements, adequate meal and rest periods, and wages upon termination.” Murphy v. Check ‘N Go of Cal., Inc., ___ Cal.App.4th ___, 67 Cal.Rptr.3d 120, 2007 WL 3016414, *1 (Cal.App. 2007). Defense attorneys moved to compel arbitration and dismiss the class action complaint on the grounds that plaintiff had signed a “Dispute Resolution Agreement” that included an arbitration provision and a class action waiver, id. The trial court refused to compel arbitration, concluding that the class action waiver rendered the arbitration agreement unconscionable, id. Defense attorneys appealed, contending that the class action waiver is not unconscionable and that whether the class action waiver was unconscionable should be decided by the arbitrator, not by the trial court. Id. The Court of Appeal rejected the defense arguments and affirmed the trial court order.

Plaintiff spent 7 years as a “salaried retail manager” for defendant; her class action complaint alleged that defendant misclassified salaried retail managers as exempt employees and thus failed to pay overtime, failed to provide accurate wage statements, failed to provide required meal and rest periods, and failed to provide wages due on termination. Murphy, at *1. The class action complaint alleged that every employee had to sign the arbitration agreement, which covered “all claims arising from or relating to plaintiff’s employment,” including any claim that the arbitration agreement was “substantively or procedurally unconscionable.” Id. As noted above, the arbitration agreement contained a class action waiver, requiring that any dispute be maintained as an individual action only, id. Defense attorneys moved to dismiss the class action complaint and compel arbitration, arguing in part that the agreement expressly vests in the arbitrator the power to decide whether the class action waiver is unconscionable. Id., at *2. The Court of Appeal summarized the trial court’s order at page *2 as follows: “the court determined that : (1) it had the power to rule on the unconscionability issues; (2) the parties’ agreement…was a contract of adhesion; (3) the agreement’s class action waiver was substantively unconscionable under Discover Bank v. Superior Court (2005) 36 Cal.4th 148…; (4) the agreement’s provisions for arbitration of unconscionability issues and pre-existing claims were also substantively unconscionable; and (5) the unconscionability terms would not be severed from the agreement.”

The Court of Appeal affirmed. The appellate court’s decision was simplified greatly by the intervening California Supreme Court decision in Gentry v. Superior Court, 42 Cal.4th 443 (Cal. 2007), discussed in a prior article that can be found here. Gentry essentially holds that class action waivers are unenforceable in California, and while the Supreme Court opinion claims that no per se rule applies, its reasoning leaves no doubt that this statement was made in the hope that it would insulate the Court’s ban on class action waivers from federal review under the Federal Arbitration Act (FAA). The class members in Murphy were required to sign the arbitration agreement, including the class action waiver; the class members in Gentry were provided a 30-day risk-free window to opt out of the arbitration clause. In light of Gentry, the Murphy court had no alternative but to find the class action waiver unconscionable. See Murphy, at *5-*6.

With respect to the provision in the agreement that required issues of unconscionability be resolved by the arbitrator, the appellate court held that this begged the question because that provision, too, was unconscionable. Murphy, at *3-*5. In so holding, the Court of Appeal rejected the defense argument that plaintiff is essentially challenging the agreement “as a whole, not just the arbitration provisions” and is asserting the claim that the arbitration provision is unconscionable as “‘a subterfuge for a challenge that the entre agreement (in which the arbitration clause is only a part) is unconscionable.’” Id., at *5 (quoting Higgins v. Superior Court, 140 Cal.App.4thh 1238, 1249 (Cal.App. 2006)). Under Higgins, “[t]hat contention must be presented to the arbitrator.” Higgins, at 1249. The Murphy court noted that the defense failed to raise this argument below and so it was waived, but also rejected the claim on its merits because California law requires both procedural and substantive unconscionability in order to find a contract unenforceable and plaintiff’s substantive unconscionability claims were directed solely to the arbitration provisions. Murphy, at *5. Accordingly, the appellate court affirmed the trial court order denying the motion to compel arbitration, id., at *7.

NOTE: The Court’s discussion of the severability issue may be found at page *7.

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