Deepening a split among California courts, the Second District Court of Appeal, in Franco v. Arakelian Enterprises, No. B232583 (Nov. 26, 2012), has held that the California Supreme Court's anti-arbitration decision in Gentry v. Superior Court remains good law despite U.S. Supreme Court cases confirming that the Federal Arbitration Act ("FAA") preempts state laws that discriminate against arbitration agreements. Franco thus holds that an employer could not enforce an arbitration agreement that banned class actions and that banned representative actions under California's Private Attorney General Act of 2004 ("PAGA").
By way of brief background, the U.S. Supreme Court has repeatedly applied the FAA to repudiate state judicial and legislative efforts to impede the enforcement of arbitration agreements. A frequent target of the Supreme Court's censure has been the California Supreme Court. That court in recent years has issued two particularly prominent anti-arbitration decisions—Discover Bank (2005) and Gentry (2007). In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements were unconscionable and thus unenforceable. In Gentry, the court held that class action waivers were also unconscionable in arbitration employment agreements whenever the facts indicated that an inability to pursue a class action waiver would frustrate the plaintiff's ability to enforce statutory rights.
The Discover Bank rule fell by the wayside in 2011, when the U.S. Supreme Court reaffirmed the preemptive power of the FAA to ensure that arbitration agreements are enforced according to their terms. In AT&T Mobility v. Concepcion, the Court expressly overruled the Discover Bank rule, because "it interferes with arbitration." The rationale of Concepcion also drew Gentry's fate into question, but the Concepcion Court, addressing a consumer contract, did not have the occasion to address Gentry.
Franco, like Gentry, is an employment case. The employer, which was sued in a class action for denying meal and rest breaks, moved to compel arbitration. The trial court denied the motion. The Court of Appeal, before Concepcion, affirmed this denial of the motion to compel, but then, after Concepcion, took the case again to see if Gentry remained good law.
After Concepcion, some supposed that Gentry was dead, but if that were ever so, Franco and other decisions have now bewitched it back to life. And Franco has done so not only by invoking a theory that plaintiffs need class actions to "vindicate[e] statutory rights," but also by inventing a new theory: Gentry survives—even if other anti-arbitration decisions do not—because Gentry invalidates class action waivers only on a case-by-case basis, and not on a categorical basis.
Franco borrowed its "statutory rights" theory from decisions refusing to enforce arbitration agreements in cases involving federal rights. That theory, now before the U.S. Supreme Court in American Express Co. v. Italian Colors Restaurant, posits that a plaintiff can avoid an arbitration agreement if the nature of the statutory rights at issue cannot be vindicated through arbitration. The Franco decision fails, in our view, to realize that while federal statutory rights can in some circumstances be litigated, notwithstanding the FAA, state statutory rights (such as those involved in Franco) are fully subject to the preemptive force of the FAA.
Franco's other basis for declaring that Gentry survives Concepcion is an argument that Concepcion invalidated the Discover Bank rule only because it was "a categorical rule against class action waivers in consumer contracts, thereby disfavoring arbitration." Franco reasons that Gentry, by contrast, created only a case-by-case test for unconscionability, which should avoid Concepcion's censure. We believe that the Franco decision in this respect misreads Concepcion, which held that the FAA preempts any state rule—categorical or not—that applies greater scrutiny to an arbitration agreement than to any other contract, regardless of state public policy consequences. This fundamental point is why other California courts and federal district courts have recognized that Concepcion effectively did overrule Gentry.
Gentry may in fact be dead, then. But until a higher authority corrects Franco, Gentry will walk among us, as the living dead, imposing obstacles to enforcing arbitration agreements in which the parties have waived resort to class actions and to representative proceedings such as PAGA claims.