California Court of Appeal Denies Wage-and-Hour Class Claims and Enforces Arbitration Agreement under Concepcion

Employers in California have been watching closely to see how courts will apply the United States Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act (FAA) preempted state law concerning the enforceability of class action waiver provisions, in which a party waives his or her right to arbitrate claims on a class basis.

A California Court of Appeal recently held that under Concepcion, a trial court’s dismissal of class claims and an order compelling arbitration in a putative wage-and-hour class action were proper. The Court of Appeal, First District, in Outland v. Macy’s, Inc. (Cal. Ct. App. Jan. 16, 2012), refused to revive the class claims brought by a former employee of Macy’s, Inc. Plaintiff Jennifer Outland, a former group sales manager, filed suit in 2009, claiming that Macy’s improperly classified her and other group sales managers in California as exempt. Macy’s filed a motion to compel arbitration based on its employee dispute resolution program which contained a class action waiver provision.

The court rejected Outland’s argument that Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), in which the California Supreme Court articulated a four-factor test for invalidating class arbitration waivers in employment contracts, remains good law. The court also rejected Outland’s argument that her class claims were protected by the 2012 D.R. Horton, Inc. ruling (357 NLRB No. 184), in which the National Labor Relations Board held that requiring individual arbitrations of employment-related claims violated employees’ statutory right to collective actions.

With respect to Gentry’s survival post-Concepcion, the court noted that although Concepcion did not mention this case specifically, the reasoning of Concepcion applies as equally to Gentry as it does to Discover Bank, 36 Cal.4th 148 (2005), the California Supreme Court decision that Concepcion effectively overruled. Therefore, the court found that Concepcion “directly and conclusively undercuts Gentry’s rationale.”

The Outland court acknowledged that its holding regarding Gentry is contrary to that of an earlier appellate court opinion, Franco v. Arakelian Enterprises, Inc., (2012) 211 Cal.App.4th 314. In Franco, the appellate court concluded that Concepcion did not overrule Gentry; therefore, in order to prove that a class action waiver is unconscionable under Franco, a plaintiff must provide evidence of the “Gentry factors.” These factors include: (1) “the modest size of the potential individual recovery”; (2) “the potential for retaliation” against class members; (3) a lack of information among absent class members concerning their rights; (4) the fact that a class action “may be needed to assure the effective enforcement of statutory policies”; and (5) “other real world obstacles to the vindication of class members’ rights…”.

The court noted that Outland did not submit evidence concerning the Gentry factors, so even if it accepted Franco’s rationale, it had no record on which to find Macy’s class action waiver unconscionable.

The court also declined to follow the NLRB’s ruling in D.R. Horton, following a line of federal district court cases holding that under the FAA, a federal statute will not override an arbitration agreement unless there is clear evidence of such intent in the language of the statute or the legislative history. And with respect to the NLRA, no such intent can be shown in the statute’s language or legislative history.

Although Outland provides some further understanding of how the California courts are applying Concepcion in the wage-and-hour class action context, this is far from the last word on these questions. The legal issues raised in this case, and the larger question of whether Concepcion overruled Gentry, are currently before the California Supreme Court, as it reviews Iskanian v. CLS Transportation Los Angeles, LLC (2012) 206 Cal.App.4th 949, (where the Court of Appeal, Second District held that Concepcion invalidated Gentry) review granted September 6, 2012, S204032.

The case is Jennifer Outland et al. v. Macy’s Inc., case number A133589 in the California Court of Appeal for the First Appellate District.