A recent decision from a California court of appeals reflects a growing, if at times reluctant, acceptance by California courts of employment arbitration. In Outland v. Macy’s Department Stores, Inc., Case No. A133589 (Ct. Cal. App. Jan. 16, 2013) a former group sales manager for defendant Macy’s Department Stores filed a class action for overtime and missed meal and rest periods on the basis that she and putative class members were misclassified as exempt employees. She sought to represent all California residents employed as group sales managers for Macy’s during the prior four years. The plaintiff, however had signed an arbitration provision precluding class relief and, on this basis, the trial court  dismissed her claims and ordered arbitration pursuant to the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S .Ct. 1740 (2011).

On appeal, the plaintiff attempted to limit Concepcion to consumer claims. She contended that the California Supreme Court’s decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), and the NLRB’s decision in D.R. Horton, Inc. (Jan. 3, 2012), precluded dismissal of her claims under Concepcion. As discussed below, the California Court of Appeal for the First Appellate District stood firm with respect to the application of Concepcion and affirmed the trial court’s decision.

A.         Gentry and Concepcion

Eight years ago, in Gentry, the California Supreme Court held that a class action arbitration waiver in the employment context was unconscionable and unenforceable on the basis that it would “lead to a de facto waiver” and “make it very difficult for those injured by unlawful conduct to pursue a legal remedy.” The Gentry court noted that its decision was based on the same principles articulated in its decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005),where it found a class action arbitration waiver in a consumer contract of adhesion was unconscionable and unenforceable.

In Concepcion, the Supreme Court held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context, thereby effectively overruling Discover Bank. 

The plaintiff argued that Concepcion’s ruling was confined to the context presented by Discover Bank only and that Gentry remained good law. The Court rejected this argument and held that Concepcion stood for the more general principle that the unconscionability rationale was insufficient to overcome FAA preemption.[1]  The Court noted that two recent decisions of the California Court of Appeal - Franco v. Arakelian Enterprises, Inc., 211 Cal. App. 4th 314 (2012) (Second Appellate District) , and Truly Nolen of America v. Superior Court, 208 Cal. App. 4th 287 (2012) (Fourth Appellate District) – did not affect its decision. In Franco, the Second District concluded that Concepcion did not overrule Gentry because Gentry did not establish a categorical rule that invalidates class action waivers, “the type of rule that Concepcion condemns.” However, the plaintiff in that case presented no evidence on the issue of unconscionability under Gentry and, therefore, the Court held that it would “have no basis on this record for finding the class action waiver [at issue] unconscionable,” even if it accepted the Franco holding. In Truly Nolen, the Fourth District has elected to follow Gentry until the California Supreme Court weighs in on Concepcion.

B.         D.R. Horton

The plaintiff in [the Macy’s case] had also encouraged the Court to follow the decision by the National Labor Relations Board (“NLRB”) in D.R. Horton, Inc., 357 NLRB No. 184 (2012). In Horton, the NLRB held that requiring employees to file pre-employment waivers of class actions or other joint or collective claims violated employees’ rights under Section 7 of the National Labor Relations Act (“NLRA”) to engage in protected concerted activity.

In a rather prescient decision, the Court declined to follow Horton. The Court was not persuaded that the NLRA represented a more important federal policy than the FAA. The Court was also skeptical of the precedential weight of Horton, not only because it the Court is not bound by decisions of federal administrative bodies, but also because Horton reflected the will of less than a majority of NLRB members. Indeed, describing the NLRB’s interpretation of the NLRA in Horton as “novel,” the Court noted that at least two federal district courts had rejected Horton.

Ten days after Outland was decided, the United States District Court of Appeals for the District of Columbia Circuit determined that the President Obama’s recess appointments in January 2012 were illegal and therefore NLRB has not had a working quorum since the end of Member Becker’s term at the end of December, 2011. See Noel Canning v. NLRB – F.3d. – (D.C. Cir. 2013).

The Court of Appeals’ decision casts doubt upon the effect of Horton, decided in January, 2012, until there is some certainty about the NLRB’s lawful ability to act.

Incidentally, in the context of wage and hour claims under PAGA, at least two California federal district courts have relied on Concepcion to find that allowing plaintiffs to proceed with representative claims under PAGA when they have executed conscionable arbitration agreements with class action waivers would be inconsistent with the FAA and thus preempted. See Grabowski v. Robinson, 817 F. Supp. 2d 1159 (S.D. Cal. 2011); see also Quevedo v. Macy's, Inc., 798 F. Supp. 2d 1122 (C.D. Cal. 2011).   

The Outland decision adds to the developing body of California law interpreting Concepcion and comes on the heels of a recent post-Brinker trend of refusing to certify putative class actions asserting meal and rest period claims. See, e.g., Daniel Ordonez v. Radio Shack et al., Case No. 2:10-cv-07060 (C.D. Cal. Jan. 17, 2013). 

The bottom line: Even California state courts are coming to accept arbitration of class employment claims on an individual basis in the wake of Concepcion.