Notwithstanding the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, California courts continue to muddle through whether a court can mandate classwide arbitration, particularly in the context of arbitration agreements between employer and employee.  Truly Nolen of America v. Superior Court, decided this week by California’s Fourth District Court of Appeal, may at first blush appear to be just one more contradictory opinion on this issue.  However, while the Truly Nolen court declined to follow the broad precedential scope of Concepcion, it gave the California Supreme Court a clear road map for overturning Gentry v. Superior Court.  At the same time, the court raised the evidentiary bar for employees seeking classwide arbitration.

Case Background

Alvaro Miranda and Danny Luna filed a wage and hour class action against their former employer, Truly Nolen, a nationwide provider of pest control services.  Truly Nolen moved to compel individual arbitration of the plaintiffs’ claims on the grounds that both Miranda and Luna had signed agreements to arbitrate their employment-related claims.

The one-page arbitration agreement provided four mandatory dispute resolution steps: (1) discussions with employee’s immediate manager; (2) HR involvement; (3) mediation; and (4) binding arbitration.  The agreement granted the arbitrator wide latitude to award any remedy, including all remedies that would be available if the matter were heard in court.  The agreement forbade Truly Nolen from retaliating against employees for reporting to a governmental agency or requesting arbitration.  Truly Nolen agreed to bear all administrative costs of the arbitration, including arbitrator fees.  Finally, the agreement stated that if an employee opted not to have legal counsel at the arbitration hearing, then Truly Nolen would forgo legal representation as well.  The agreement was silent as to whether class arbitrations were permissible.

The trial court granted Truly Nolen’s motion to compel arbitration.  But, relying on Gentry (holding that class-action waivers in arbitration agreements should not be enforced if certain factors indicate that class arbitration would be more effective than individual arbitration), the trial court refused to order that the arbitration proceed on an individual, rather than class, basis.  Truly Nolen filed a petition for a writ of mandate on the issue of classwide arbitration.

The Court of Appeal’s Holding

The Court of Appeal vacated the trial court’s denial of Truly Nolen’s motion to order individual arbitration and ordered the trial court to consider whether the parties had a mutual intent to permit classwide arbitration.

The Court of Appeal comprehensively reviewed state and federal laws affecting arbitration agreements in California.  The Court of Appeal discussed the split among the California courts regarding whether Gentry remains viable after Concepcion, which expressly overruled the California “Discover Bank Rule” that class-action waivers in arbitration agreements are unenforceable in some contexts.  The Court of Appeal sided with the majority of courts which recognize that Concepcion implicitly overruled Gentry, in that Discover Bank and Gentry rely on the same discredited rationale.  Under Concepcion, courts must not disregard the clear terms of the parties’ arbitration agreement.  But the Court of Appeal nonetheless held that it was obliged to follow Gentry because Concepcion did not expressly repudiate Gentry and the California Supreme Court has not yet held that Gentry is no longer good law.

The Court of Appeal then applied Gentry, concluding that the plaintiffs had failed to produce enough evidence to satisfy Gentry’s four-factor test.  Gentry permits the trial court to order class arbitration only if it would be a more effective means of vindicating employee rights in light of four factors: (1) modest potential recovery amount, (2) potential for retaliation, (3) extent to which absent class members are informed of their rights, and (4) “real world obstacles” to individual arbitration.  The plaintiffs here, rather than presenting evidence regarding their individual circumstances, simply submitted attorney declarations that generally discussed how similar cases satisfied the Gentry factors.  Indeed, the protective provisions of the arbitration agreement – the prohibition against retaliation, Truly Nolen’s assumption of arbitration costs, and the aggrieved employee’s option to exclude lawyers from the hearing – negated the concerns reflected in the Gentry factors.  The Court of Appeal held if Gentry continues to survive, it requires a “specific, individualized and precise” factual analysis, and that the plaintiffs had failed to show the Gentry factors were satisfied.

The Court of Appeal then addressed the trial court’s failure to determine whether the parties had implicitly agreed to class arbitration despite the agreement’s silence on the issue.  The Court of Appeal held that the trial court must address this issue before applying Gentry, in a case where the arbitration agreement is silent as to class-action waiver.  The Court of Appeal reasoned that Gentry would apply only if the parties did not agree to contract for class arbitration because if there is agreement to arbitrate on a classwide basis, then the court need not look to Gentry to effectuate the same result.

In remanding this issue, the Court of Appeal provided explicit instructions.  Applying the principles set forth by the U.S. Supreme Court in Stolt-Nielsen v. AnimalFeeds International Corp., the Court of Appeal held that if the trial court found mutual agreement to classwide arbitration, then the trial court should deny Truly Nolen’s motion to preclude class arbitration and refer the matter to arbitration, where the arbitrator will decide whether to certify the class.  But, if there is no mutual agreement to classwide arbitration, then the trial court should order the matter to arbitration on an individual basis.

What Truly Nolen Means

Until the California Supreme Court or the U.S. Supreme Court expressly resolves the continuing validity of Gentry, expect to see Truly Nolen frequently cited.  The case presents both sides of the argument as to whether and how Gentry applies in a post-Concepcion world.  The Court of Appeal’s discussion, in dicta, as to why Concepcion should overturn Gentry provides a well-articulated roadmap for a future Supreme Court opinion on the issue.

Truly Nolen also clarifies the evidentiary hurdle that employees face in seeking classwide relief under Gentry.  Mere generalities will no longer suffice; now plaintiffs invoking Gentry must present evidence that specifically addresses the circumstances of their case.  Moreover, Truly Nolen teaches that an effective defense to a Gentry argument includes provisions within the arbitration agreement itself that take Gentry concerns into account.