Appellate Panel Tries to Draft a Roadmap for the California Supreme Court to Save California's Prohibition of Class Action Waivers from U.S. Supreme Court Precedent

by Sheppard Mullin Richter & Hampton LLP

[author: Thomas Kaufman]

The battle for how the landmark arbitration decision Concepcion v. AT&T Mobility (“Concepcion”) should be construed in California continues with Monday’s issuance of Franco v. Arekelian Enterprises, Inc. (“Franco II”). Division One of the Second District Court of Appeal (in Los Angeles) has developed a troubling reputation among the class action defense bar because it has issued a series of decisions that stake out pro-plaintiff positions in Labor Code class action cases, including such decisions as Jaimez v. Daiohs USA, Inc., 181 Cal. App. 4th 1286 (2010) (reversing denial of class certification in a wage hour case) and the two depublished Harris v. Superior Court decisions (attempting to establish an exceedingly narrow administrative exemption in California).

The Franco II panel labors mightily to construe Concepcion narrowly and to work around numerous precedents to establish a rule that will allow trial courts to strike down employment arbitration agreements with class action waivers in the great majority of class action cases. The opinion holds that the California Supreme Court’s anti-waiver decision in Gentry v. Superior Court (“Gentry”) remains good law despite Concepcion. Franco II is at sharp odds with Iskanian v. CLS Transporation Los Angeles, LLC (“Iskanian”), an appellate decision currently on review in the California Supreme Court that held that Gentry was implicitly overruled by Concepcion. Division One appeared aware that their decision will meet the same fate, and crafted a roadmap for the California Supreme Court to follow to reaffirm Gentry.

As explained below, although Franco II is more than sixty pages long and purports to undertake an overview of the entire history of arbitration law, it appears disingenuous in its treatment of relevant precedent, especially Concepcion, and it ignores key cases that contradict the conclusions the panel wants to reach. Whether or not this case is persuasive to a majority of California Supreme Court justices (which it might be), there is a good chance that the United States Supreme Court as currently composed would grant review and reject the arguments set forth in Franco II.

The Facts

This action addresses whether a class/collective action waiver within an arbitration agreement between Mr. Franco and his employer is enforceable. The agreement at issue in Franco II required the employer and employee to arbitrate “any and all claims and disputes that are related in any way to [the employee’s] employment or the termination of [that] employment” but further required both sides to “forego any right . . . to bring claims on a representative or class basis.” The agreement went on to state that the employee waived “any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity.” (emphasis added). The agreement clarified that “no remedies that otherwise would be available to [the employee] individually or to the Company in a court of law, however, will be forfeited by virtue of this agreement.” The apparent intent of these provisions was to ensure the employee’s right to sue individually but to preclude employees from asserting class actions, collective actions, or representative actions under the Labor Code, Unfair Competition Law (“UCL”) or California Labor Code Private Attorney General Act (“PAGA”). The Court of Appeal was tasked with determining whether this agreement was enforceable and, more specifically, whether the California Supreme Court’s Gentry decision remained good law that would render the class action waiver unenforceable even in light of more recent U.S. Supreme Court precedent.

The Reasoning of the Court of Appeal In Refusing to Compel Arbitration

Unlike the 2011 decision, Brown v. Superior Court, where the appellate court simply held that it had no power to refuse to follow Gentry because Gentry is an opinion of a higher state court, the Franco II panel took on the issue of deciding whether Gentry, in fact, survived Concepcion. In doing so, the panel attempted to justify the continued vitality of Gentry and to harmonize Gentry, Discover Bank (upon which Gentry relied), and the more recent U.S. Supreme Court precedents with an apparent intent to severely limit the enforceability of class action waivers in California. The panel’s overview of the history of arbitration law is excessively long and addresses a lot of irrelevant case law before getting to the heart of the opinion. The core of the Franco II panel’s reasoning was as follows:

First, the panel recognized that the 2010 U.S. Supreme Court Stolt-Nielsen decision precluded class arbitration where the employer never agreed to class arbitration. Accordingly, where a class action waiver is deemed unenforceable, the remedy is simply to order the action to proceed as a class action in court, not to order the case to class arbitration.

Second, the panel recognized that Concepcion had expressly overruled Discover Bank on the ground that Discover Bank had rendered class action waivers in consumer arbitration agreements “categorically” unenforceable. The panel noted, however, that AT&T’s arbitration agreement in Concepcion had pro-consumer features that gave the consumer meaningful remedies for the small dollar claims that were likely to arise, even if the consumer would often choose not to go through the effort to recover them even in meritorious cases. The panel thus interpreted Concepcion as invalidating state laws and rules that create a categorical bar to class action waivers in arbitration agreements, even when the agreement allows the plaintiff meaningfully to vindicate his or her individual rights in arbitration. The panel attempted to bolster this interpretation by noting that, after Concepcion, the U.S. Supreme Court reversed a West Virginia Supreme Court decision that purported to enforce a state-law categorical bar on certain types of elder abuse actions from being sent to arbitration.

Third, the panel distinguished Gentry from the expressly rejected Discover Bank case on the ground that, while the Discover Bank decision had created a categorical bar on class action waivers, Gentry purported to bar class action waivers only in a limited universe of situations that required individual findings by a court to establish. The panel described the required court finding to invalidate a class action waiver as follows:

“[that] a class . . . is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and . . . the disallowance of the class action will likely lead to a less comprehensive enforcement of [wage and hour] laws for the employees alleged to be affected by the employer’s violations .”

The Franco II panel deemed this standard to be something less than Discover Bank’s “categorical bar.”

With this framework established, the panel found that there was ample evidence in the record that, under this Gentry standard, Franco’s arbitration agreement was not enforcable:

  • Plaintiff submitted a declaration attesting that he was unaware of his rights, he believed other employees who ever complained were looked down upon and harassed into quitting, and he felt insecure that if he complained he would be fired. All of this dissuaded him from bringing an individual wage/hour claim.
  • Plaintiff’s lawyers submitted declarations stating that they wouldn’t find it lucrative enough for them to take individual wage cases to arbitration with stakes like Plaintiff’s (which they estimated at just over $10,000) and that in their experience the class action device is necessary to get employers to follow wage and hour laws.
  • The panel noted that the agreement barred “private attorney general” actions, which the panel construed as barring even an individual PAGA claim, thus effectively precluding Franco and his co-workers from suing under PAGA.
  • The panel noted that the amount in dispute in Plaintiff’s individual case of $10,250 was too small to entice his lawyers to take the case to arbitration, particularly given that his central claims for meal and rest period did not provide for the recovery of attorney’s fees. The court concluded that the Plaintiff could not enforce his rights given the costs involved in doing so and the unavailability of competent counsel to take the case.

For those reasons, the panel deemed the arbitration agreement unenforceable and ordered the case to proceed as a regular court action.

The Flaws in The Division One’s Analysis

Franco II’s least persuasive premise is that there is anything more categorical about the bar to consumer class action waivers in Discover Bank than the bar to employment class action waivers in Gentry. While the two cases used slightly different reasoning to invalidate their respective class action waivers, both cases purported to craft exceptions to their announced anti-waiver rule that could exist depending on the facts of the underlying case. Indeed, the Franco II panel appears to misapprehend what “categorical” means where, in describing Discover Bank as a categorical rule, it explains that Discover Bank “would invalidate ‘most’ of those waivers.” Something that happens often, but not always, is not “categorical.”

If categorical simply means that most often the waivers will not be enforceable, the Gentry test is “categorical” indeed, especially given the low evidentiary bar the court sets to challenging a waiver. Franco’s showing was that (1) he claimed ignorance of the wage/hour laws and stated he worried he might be retaliated against based on vague allegations that he believed his employer had retaliated against unspecified others; (2) his lawyers attested that they would not bother taking the case, but not that no lawyer would take Franco’s individual case; and (3) the meal and rest period claims did not carry a right to attorney’s fees. A similar showing could be made in most wage and hour class actions and probably in every meal and rest period class action, creating a bar to mandatory individual arbitration of those actions that is just as “categorical” as the rejected Discover Bank rule. Furthermore, if the employee were allowed to bring an overlapping individual PAGA claim with the meal and rest period claim, he arguably could recover attorney’s fees, because PAGA has an attorney’s fees provision and the work performed might be the same for both claims.

The panel also seemed to be reaching for an excuse to strike down the agreement where it concluded that the arbitration agreement barred the plaintiff from pursuing even an individual PAGA claim, notwithstanding the language in the agreement that the employee did not forfeit “any remedies that otherwise would be available to you individually.” The language in the agreement that the employee could not sue as a private attorney general was part of a paragraph forbidding class, collective, and representative claims, so if the Franco II panel had wanted to do so, it could have construed the agreement to allow individual PAGA claims, but not representative PAGA claims (which I expect was the intent of the employer’s counsel who crafted the provision). The panel also could have severed the provision as unconscionable since it purported to take away substantive rights from the employee, not just limit them to individual relief.

As for the notion that individuals have no ability to assert a meal period claim in arbitration, the panel also shut its eyes to reality. Remember, the panel acknowledged that Concepcion rejected the argument that an individual arbitration agreement is unenforceable merely because plaintiffs are unlikely to pursue small claims individually. The Franco II panel was going a step further and asserting that an individual employee could not pursue the claims at issue here even if it wanted to do so because he couldn’t find a lawyer to take them. But even adopting the dubious premise that no attorney’s fees would be recoverable in a $10,000 wage and hour case, Franco’s agreement still required the employer to pay all costs of arbitration, including arbitrator fees. Franco thus had the power to force his employer to incur thousands of dollars in arbitration expenses, which would put pressure on the employer to settle the case early. Furthermore, the panel is mistaken that no lawyer would take a case with a possible recovery of $10,250. Indeed, there are many published individual wage and hour cases where the amounts in controversy are quite small and the parties not only litigated the case, but took it up on appeal. See, e.g., Mitchell v. Yoplait, 122 Cal. App. 4th Supp. 8 (2003) (limited jurisdiction appeal from award of $5,600 in unpaid wages).

Finally, the panel ignored precedents that are closely on point but run contrary to its conclusions. Most notably, earlier this year in Nelsen v. Legacy Partners Residential, Inc. and Truly Nolan of America v. Superior Court, the First and Fourth Appellate Districts, respectively, held that if Gentry survived Concepcion, it would have to be interpreted to require a significant showing to avoid arbitration. Both cases rejected the weak showing the plaintiff made. Indeed, in Truly Nolan the court rejected a showing as inadequate that was virtually identical to what Franco offered. The Truly Nolan court required a showing that “in any particular case must be specific, individualized, and precise.” It was not sufficient simply to state in conclusory fashion “I was ignorant of my rights and my employer scares me” and to have a lawyer attest how he believes employers will not follow the law without the threat of class actions. Neither of these two published analogous precedents garnered any mention, except that Truly Nolen was cited for an unrelated point with no further discussion.

Takeaways From The Decision

This is a bad decision for employers that will allow any trial court so inclined to have a case to cite to strike down a class action waiver, so long as the plaintiff submits some boilerplate declarations along the lines Franco submitted. The silver lining here is that the California Supreme Court will likely grant review and hold the case given that Franco II is totally at odds with Iskanian, which is already on review.

The biggest downside to this decision is that it provides a roadmap to the California Supreme Court for how to construe Gentry going forward to try to keep it alive in some form notwithstanding Concepcion. There is a reasonable chance that there are four votes on the California Supreme Court to follow the route that roadmap provides. Fortunately, if the California Supreme Court affirms the decision before any of the five Concepcion majority justices leaves the bench, there is a good chance the U.S. Supreme Court will grant cert and reverse, much as they have reversed other state Supreme Courts that refused to follow Concepcion.


Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

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