State & Federal Appeals Courts Rule on Class Arbitration Waivers
The California Supreme Court held on Aug. 31, 2007, that waivers of classwide proceedings in employment arbitration agreements should not be enforced if, after considering certain factors, they undercut the statutory rights of workers to bring overtime claims.
Robert Gentry v. Superior Court (165 P.3d 556) involved a claim for overtime pay under Labor Code § 510, which guarantees such pay to non-managerial workers, and § 1194, which provides a private right of action to enforce violations of overtime pay laws. Circuit City's Dispute Resolution Procedures call for arbitration but they expressly ban arbitrations that involve class claims.
A majority of the California Supreme Court held that classwide arbitration may be needed to ensure the effective enforcement of statutory policies even though some claims are large enough to provide an incentive for individual action. In light of this conclusion, the court remanded the case to the trial court with instructions to determine whether class arbitration would be significantly more effective than individual arbitration in vindicating employee rights to statutory overtime pay. In making this decision, the trial court is to consider: (1) the modest size of the potential individual recovery, (2) the potential for retaliation against members of the class, (3) whether class members may be ill informed about their rights, and (4) "other real world obstacles" to vindicating the overtime pay rights of class members through individual arbitration. Then the trial court should invalidate the waiver if it concludes that a class arbitration is best suited to the claims and that enforcement of the waiver "will likely lead to a less comprehensive enforcement of overtime laws" for the affected employees.
The California Supreme Court considered it significant that § 1194 permits employees to sue for violations "notwithstanding any agreement to work for a lower wage." This language made clear that lawmakers intended the overtime laws to be enforced in part through private actions.
The ruling also clarified an aspect of Discover Bank v. Superior Court (36 Cal. 4th 148, 2005). The Gentry court said Discover was not intended to mean that consumer actions involving minuscule damages were the only actions in which class action waivers would not be enforced. Rather, Discover stood for the broader principle that a waiver of class proceedings could be exculpatory "in practical terms" because it could make it very difficult for injured consumers to pursue a legal remedy.
Washington Supreme Court
On July 12, 2007, the Washington Supreme Court ruled that Cingular Wireless could not enforce a waiver of classwide proceedings in its arbitration agreement with customers because the provision was unconscionable. In Scott v. Cingular Wireless (161 P.3d 1000), the court found that by prohibiting customers from participating in classwide proceedings, Cingular undermined the intent of the state Consumer Protection Act to authorize citizens to function as private attorneys general. The waiver was "an unconscionable violation of this State's policy to protect the public and foster fair and honest competition ... because it drastically forestall[ed] attempts to vindicate consumer rights," the court wrote.
Next, the court held that since the waiver barred all class actions in arbitration or in court, it exculpated Cingular from liability for a broad range of undefined wrongful conduct, and this was substantively unconscionable.
Finally, the court ruled that the Federal Arbitration Act did not preempt state law in this case. …