On March 10, 2009, the California Second District Court of Appeal in Franco v. Athens Disposal Company, Inc., B203317 held that an arbitration agreement with class action waiver and Private Attorneys General Act (PAGA) waiver is unenforceable.

Following the termination of his employment, the plaintiff, a former garbage truck driver for Athens Disposal Company, filed a class action complaint against Athens alleging denial of meal and rest periods, overtime, and violation of the California Labor Code and Business and Professions Code. Plaintiff also sought civil penalties under the PAGA, which provides an aggrieved employee the right to recover civil penalties "on behalf of himself ... and other current or former employees." In response, Athens filed a motion to dismiss and a petition to compel arbitration pursuant to an arbitration agreement signed by the plaintiff. The arbitration agreement contained a provision waiving class arbitrations and also precluded an employee from acting in “a private attorney general capacity,” which would bar plaintiff’s enforcement of the Labor Code on behalf of other employees.

The California Court of Appeal concluded that the class action arbitration wavier was unconscionable. After explaining that the California Supreme Court's decision in Gentry v. Superior Court applied not only to the overtime claims, but to meal and rest period claims (because of an employee’s “unwaivable statutory right” to meal and rest periods), the Court found that the preclusion of the ability to proceed as a class would cause individuals to have difficulty obtaining counsel because potential damages would be modest, would increase the potential for retaliation against employees that proceeded individually, and employees might be unaware of their legal rights under California's Labor Code. The Court also found that a class action would serve to enforce important statutory policies and prevent further Labor Code violations.

The Court further held that the arbitration clause was unconscionable because it sought to prevent plaintiff from serving as a private attorney general, in conflict with PAGA. The Court explained that an action under PAGA is inherently a law enforcement action designed to protect the public and penalize the employer for past illegal conduct. Because Athens sought to nullify PAGA and preclude the employee from seeking civil penalties on behalf of other current and former employees, the agreement impeded Gentry’s goal of “comprehensive[ly] enforc[ing]” a statutory scheme through the imposition of “statutory sanctions” and “fines,” and thus the prohibition of PAGA was unconscionable. The Court noted that the class action waiver in the arbitration agreement by itself was unenforceable, which may have been severed from the arbitration agreement. However, when coupled with the employee’s waiver of action as a private attorney general, the entire agreement was unenforceable.

This case is one of several recent California cases in which the court has refused to enforce an arbitration agreement that precluded class arbitration. On March 17, the Second District again refused to enforce an employment arbitration agreement that required individual rather than class arbitration. See Sanchez v. Western Pizza Enters., Inc., Case No. B203961. In light of Franco, Sanchez (and Gentry), California employers with arbitration agreements should carefully examine those agreements and speak with an attorney regarding whether modifications to their arbitration agreements are warranted.