Employment arbitration agreements have long provided employers with advantages. Such agreements generally will be upheld as long as they were not substantively or procedurally unconscionable. In dispute, however, is whether employers may include in employment arbitration agreements a provision waiving class and other representative actions as a means to avert the cost and risk of such collective action, including wage and hour class actions.  

In 2007, in Gentry v. Superior Court (Circuit City) (2007) 42 Cal. 4th 443, the California Supreme Court invalidated most class action waivers in employee arbitration agreements. Four years later, however, in AT&T Mobility v. Concepcion (2011) 131 S.Ct. 1740, the U.S. Supreme Court held that consumer class action waivers are generally valid. Though the U.S. Supreme Court’s reasoning in Concepcion would seem to be inconsistent with the California Supreme Court’s prior decision in Gentry, the Concepcion decision did not mention, let alone overrule, the Gentry decision rendered in a different context.  

Since Concepcion, California courts have struggled with whether, and how, to apply the logic of Concepcion, given the prior decision in Gentry rendered by the State’s highest court. Two recent rulings of the California Court of Appeal -- Iskanian (June 4, 2012) and Truly Nolen (August 9, 2012) -- have attempted to resolve the apparent conflict between Concepcion and Gentry. But they have reached opposite conclusions. One view is that Gentry has been replaced as the rule of the State (Iskanian); another is that until the California Supreme Court says otherwise, Gentry reigns in California despite the contrary logic that the U.S. Supreme Court applied to consumer agreements (Truly Nolen).  

On balance, it appears Gentry is dead, or is dying a slow death. But it is unclear who may make any such pronouncement. Though high court intervention seems inevitable given the conflict and magnitude of the issue, we may face a considerable wait (consider the wait for the Brinker decision). In the interim, many employers will find that the benefits of a class action waiver outweigh the risk that it may be invalidated. Particularly during this interim period, however, class waivers should be scrupulously drafted to avoid any question of procedural unconscionability or technical infirmity -- the known pitfalls in this otherwise muddled field of play -- as we believe that many courts with policy views similar to those expressed in Gentry may broadly embrace such arguments, in lieu of resolving the more basic question posed by the juxtaposition of Gentry with Concepcion. A brief history of this area of law follows.

  1. Discover Bank Invalidates Most Class Waivers in Consumer Agreements

In Discover Bank v. Superior Ct. (Boehr)(2005) 36 Cal. 4th 148, the California Supreme Court held that class action waivers found in consumer arbitration agreements often are unenforceable:  

We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party “from responsibility for [its] own fraud, or willful injury to the person or property of another.” (Civ. Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.  

Id. at 162-163 (regarding credit card holders’ agreements to arbitrate disputes). Discover Bank also rejected the argument that the Federal Arbitration Act preempted the state public policy arguments upon which it was decided.

  1. Gentry Invalidates Virtually All Class Waivers in Employment Agreements

In August 2007, the California Supreme Court extended the public policy considerations that were the basis of the Discover Bank holding to the employment arena, holding in the context of an unpaid overtime case that class waivers often were unconscionable. Gentry v. Superior Court (Circuit City) (2007) 42 Cal. 4th 443. Gentry set forth four employment-specific factors to consider when analyzing whether a class waiver is unconscionable: (1) individual awards in wage and hour cases tend to be modest and usually involve workers at the lower end of the pay scale; (2) a current employee who individually sues his or her employer is at greater risk of retaliation; (3) some employees may not sue individually because they are unaware that their legal rights have been violated; and (4) the cost to employers of paying occasional judgments may be outweighed by the cost savings of general non-compliance. Id. at 457-463.  

The conclusion reached in Gentry was that, if a court 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.’” Id. at 463. In other words, and in short, Gentry held that if the trial court would be inclined to certify a class, it should invalidate the class waiver -- effectively invalidating all class waivers where a class action would lie. The Court in Gentry also rejected the argument that the FAA precluded the invalidation arguments, citing Discover Bank. Id. at 465.

  1. Concepcion Overrules Discover Bank

Until the U.S. Supreme Court’s decision in April 2011 in AT&T Mobility v. Concepcion (2011) 131 S. Ct. 1740, Gentry appeared to be the end of class waivers in employment arbitration in California. Concepcion, however, expressly overruled the decision in Discover Bank discussed above, “[b]ecause it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’” as embodied by the FAA. Id. at 1742. Among other things, the Court found that the Discover Bank rule interferes with fundamental attributes of arbitration embraced by the FAA: “the switch from bilateral to class arbitration sacrifices the principle advantage of arbitration -- its informality -- and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” Id. at 1751. The U.S. Supreme Court reasoned that given the FAA’s “liberal federal policy favoring arbitration,” agreements could only be invalidated by “generally applicable contract defenses,” but not by defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue. As such, Concepcion rejected arguments against class waiver specifically aimed at arbitration agreements, not contracts in general (a fine distinction). Id. at 1755.  

The question now is, because Concepcion overruled Discover Bank, and Gentry’s “four-part test” was largely based on the reasoning in Discover Bank, what does Concepcion mean for Gentry going forward?

  1. Immediate Aftermath of Concepcion

Soon after Concepcion, California Courts were faced with the issue of how to handle employment arbitration agreements containing class waivers. In the first post-Concepcion decisions, the courts avoided the issue of Gentry’s continued viability, choosing instead to strike down the agreements as unconscionable on relatively minor procedural grounds, such as font size, being contained in the middle of an employee handbook (as opposed to a separate document), and failing to attach the rules of procedure for the arbitration forum (JAMS or AAA). See, e.g. Mayers v. Volt Management Corp., 203 Cal. App. 4th 1194 (February 2, 2012); Samaniego v. Empire Today LLC, 205 Cal. App. 4th 1138 (April 5, 2012).  

In addition, the National Labor Relations Board (“NLRB”) weighed on the question in the D.R. Horton case, and administrative proceeding. There, the NLRB held that the fundamental rights provided by the National Labor Relations Act (a federal statute that arguably carries equal weight with the FAA), and which protects the right of employees to act in furtherance of their mutual aid and protection, mandate that an employer who forces its employees to sign, as a condition of employment, an agreement that precludes the employee from filing joint, class or collective claims addressing his/her wages, hours or other working conditions, violate the National Labor Relations Act. This administrative ruling is now being reviewed by the Fifth Circuit in D.R. Horton Inc. v. NLRB, Case No. 12-60031.

  1. Iskanian

The first California case to expressly address Concepcion was the Second Appellate District’s ruling in Iskanian v. CLS Transportation Los Angeles LLC (June 4, 2012) 206 Cal. App. 4th 949. Iskanian rejected all arguments advanced to invalidate the employment arbitration class waiver. Moreover, the Court specifically rejected application of Gentry in light of Concepcion, holding that “[t]he sound policy reasons identified in Gentry for invalidating certain class waivers are insufficient to trump the far-reaching effect of the FAA,” as expressed in Concepcion. Id. at 960. “[W]hen parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA. Because this matter involves analysis of the effect of a federal law, the FAA, on a state rule, we must follow the United States Supreme Court's lead.” Id. at 960-961 [Internal citations omitted]. The Iskanian decision also rejects the NLRB’s effort to carve employment agreements from the reach of AT&T Mobility, reasoning that “[i]n reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion (which is binding authority) made no exception for employment-related disputes.” Id. at 962.

  1. Truly Nolen

On August 9, 2012, the Fourth Appellate District disagreed with their peers in the Second District who issued the Iskanian decision, and ruled that Gentry was still good law that must be followed. Truly Nolen of America v. San Diego County Superior Court, (Aug. 9, 2012) 2012 Cal. App. LEXIS 871. Although Truly Nolen speaks at length about the logic of Gentry being rejected by the U.S. Supreme Court in Concepcion, it ultimately declined to follow it:

Although Concepcion's reasoning strongly suggests that Gentry's holding is preempted by federal law, the United States Supreme Court did not directly rule on the class arbitration issue in the context of unwaivable statutory rights and the California Supreme Court has not yet revisited Gentry.  

Id. at *2-3. The court continued:  

On federal statutory issues, intermediate appellate courts in California are absolutely bound to follow the decisions of the California Supreme Court, unless the United States Supreme Court has decided the same question differently. 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.  

Id. at *33-34. In short, Truly Nolen holds that Gentry, though of dubious logic, must be followed until the California Supreme Court says otherwise.  

* * *  

In sum, it appears that Gentry is dead (Iskanian) or is dying (Truly Nolen), but we will not know which for some time. The Supreme Court has not yet granted review of any of these cases. And though high court intervention seems inevitable, its prognosis may take some time. Particularly during this interim period, class waivers must be drafted to meticulously avoid any question of procedural unconscionability or technical infirmity, as courts with policy views similar to those expressed in Gentry may broadly embrace such arguments, in lieu of resolving the more basic question posed by the juxtaposition of Gentry with Concepcion.