Questioning the continuing viability of a California Supreme Court’s decision in light of recent U.S. Supreme Court holdings, the California Court of Appeal has vacated an order directing the parties to engage in a class arbitration of wage-hour claims, finding the employees, in any event, failed to satisfy the State Supreme Court’s standards for prosecuting class claims.  Truly Nolen of Am. v. Superior Court, No. D060519 (Cal. Ct. App. Aug. 13, 2012). The Court returned the case to the trial court to determine whether, in the first instance, the parties impliedly agreed to permit class arbitration.

Background

Alvaro Miranda worked for Truly Nolen of North America as a pest control technician.  Miranda signed a conflict resolution agreement providing that all employment-related claims against the employer would be resolved by binding arbitration before the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. The agreement did not include a class action waiver or state that class arbitration was permitted.

Miranda filed a class action against his employer for alleged unpaid overtime, meal and rest period violations and wage statement violations under the California Labor Code.  The employer asked the trial court to compel arbitration on an individual basis because the arbitration agreement did not include a provision permitting class arbitration.  Miranda argued the agreement was unconscionable under California law.  He also argued that, if arbitration was ordered, it should be on a class basis.  He relied on the California Supreme Court’s 2007 decision in Gentry v. Superior Court, 42 Cal. 4th 443, holding that in certain cases, class action waivers in arbitration agreements would interfere with employees’ non-waivable statutory rights to seek legal redress for unpaid overtime.  Finally, he argued that an order requiring individual arbitration would violate the National Labor Relations Act under D.R. Horton, Inc., 357 NLRB No. 184 (2012).  There, a divided National Labor Relations Board said such waiver clauses could impermissibly interfere with employees’ NLRA rights to engage in protected concerted activity to vindicate other statutory rights.

The trial court granted the employer’s motion to compel arbitration, but denied its request to order individual arbitration.  It found that Miranda satisfied the Gentry test.  The employer appealed the trial court’s refusal to order individual arbitration.

Applicable Law

Section 2 of the Federal Arbitration Act makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  According to the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011), arbitration agreements are enforced according to their terms, in the same manner as other contracts.  Thus, it determined in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1775 (2010), “a party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that both parties agreed to do so.”  (Emphasis in original.)

However, the FAA’s “savings clause” permits revocation of an arbitration agreement if “generally applicable contract defenses, such as fraud, duress, or unconscionability” apply.  In Concepcion, the U.S. Supreme Court directly addressed whether the FAA prohibited California’s rule conditioning enforceability of certain consumer arbitration agreements on the availability of classwide arbitration procedures.  (These were described in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).)  It found that, although the savings clause preserved generally applicable contract defenses, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”  Discover Bank was overruled.  The Supreme Court held it was preempted because it interfered with the FAA’s overarching purpose: “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”

Addressing whether a class action waiver in an employment arbitration agreement was enforceable where the employee sought to recover alleged unpaid overtime, the California Supreme Court in Gentry found that, under certain circumstances, a class action waiver would “impermissibly interfere with employees’ ability to vindicate unwaivable rights and to enforce the overtime laws.”  The Court held that a trial court must invalidate a class action waiver if, after examining certain factors, the court determines 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.”  These factors include: (1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent members of the class may be ill informed about their rights; and (4) other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.  The employees must offer factual proof establishing these factors.

Order Directing Class Arbitration Waived

As an initial matter, the Court in Truly Nolen examined whether Gentry remained valid following the U.S. Supreme Court’s subsequent rulings on class action waivers.  Based on the expansive language in the U.S. Supreme Court’s decisions, the Court said that “it is questionable whether courts can validly invoke Gentry to require an objecting party to engage in classwide arbitration.”  It concluded, however, “Although we agree with Truly Nolen that Concepcion implicitly disapproved the reasoning of the Gentry court, the United States Supreme Court did not directly address the precise issue presented in Gentry. Under the circumstances, we decline to disregard the California Supreme Court’s decision without specific guidance from our high court.”  Thus, the Court, deferring to the California Supreme Court, examined whether Miranda had established the Gentry factors. 

Miranda submitted declarations from two of his attorneys, both of whom had substantial experience in representing employees in wage-hour class actions.  While each declaration generally discussed the Gentry factors and the policy reasons supporting them, no specific facts supporting application of the factors to the particular circumstances of this case was presented.  The Court explained, “Assuming the Gentry standard survives the United States Supreme Court holdings, the factual analysis as to whether the Gentry factors apply in any particular case must be specific, individualized, and precise.”  Thus, the declarations, the Court determined, were too generalized to support a finding that the Gentry factors had been met.

Miranda next argued that, because the arbitration agreement did not include a class action waiver, the parties impliedly agreed to permit class arbitration.  The employer argued that class arbitration required an express provision permitting the procedure.  The Court rejected both contentions, noting that Stolt-Nielsen did not require an express provision permitting class arbitration.  Rather, as stated in Stolt-Nielsen, it is “generally a matter of state law” whether an implied agreement existed. But the Court also could not determine that an implied agreement existed.  Accordingly, the Court returned the case to the trial court for further proceedings to determine whether the parties impliedly agreed to permit class arbitration.

Finally, the Court rejected Miranda’s argument that individual arbitration would violate the NLRA, declining to follow D.R. Horton as unpersuasive and unsupported.

Implications

To the extent Gentry remains good law in California, employees seeking to rely on it must produce specific, precise factual support warranting class arbitration.  Arbitration agreements, including those with class action waivers, will continue to be challenged in California and in other forums, including before the NLRB.  Therefore, employers should consult with their legal counsel when reviewing the enforceability of arbitration agreements.