California Appellate Court Continues the Trend of Accepting Concepcion Standards in California

by Sheppard Mullin Richter & Hampton LLP

[author: Thomas Kaufman]

On August 13, 2012, the California Court of Appeal for the Fourth District (San Diego), published its decision from a few days earlier in Truly Nolen of America v. Superior Court. The case is yet another example where an appellate court considered the impact of the landmark United States Supreme Court decision in Concepcion v. AT&T Mobility on California courts. The Truly Nolen court did not go so far as to say that Concepcion reversed the California Supreme Court's decision in Gentry v. Superior Court, which had effectively required that arbitration agreements provide for class arbitration to be enforceable, but it reinterpreted Gentry to try to make it consistent with Concepcion, and did so in a manner that is likely to make arbitration agreements containing class action waivers enforceable in most cases. Moreover, it did so with creating any sort of circuit split with the execrable Brown v. Ralphs decision, that would be likely to trigger review from the California Supreme Court.

The Facts

In April 2011, plaintiffs filed a complaint against Truly Nolen seeking relief on behalf alleging that Truly Nolen had violated various wage and hour laws with respect to a proposed class of non-exempt pest control employees. The claims included an off-the-clock claim, meal and rest period claims, a wage statement claim, and a waiting time penalties claim. Truly Nolen promptly sought to compel arbitration under its mandatory employment arbitration agreement. The agreement did not contain an express class action waiver. Rather, Truly Nolen argued that the agreement was silent on the availability of class actions, which would effectively preclude class arbitration under the United States Supreme Court's Stolt-Neilsen decision.

In addition to making the typical unconscionability arguments (which the trial court rejected and which were not issue on appeal), the plaintiff argued that Gentry v. Superior Court survived Concepcion and that class arbitration had to be available in California where the four "Gentry Factors" could be established: (1) the amount each class member could recover is small, (2) the employees will likely be chilled from enforcing their rights because of the potential for retaliation, (3) the absent class members lack knowledge of their rights, and (4) class arbitration will more adequately vindicate the employee's rights than individual arbitrations would. To satisfy that showing, Plaintiff's counsel, Norm Blumenthal, submitted a declaration describing generally his years of experience as a class action lawyer and how, in his experience, all the Gentry factors are typically met in class actions. The declaration did not, however, apply Mr. Blumenthal's accumulated wisdom to the specific circumstance of the Truly Nolen pest controllers.

Truly Nolen argued that Gentry was implicitly overruled by Concepcion, such that the Gentry factor discussion was irrelevant. In addition, Truly Nolen argued that Gentry applied only to agreements containing an express class action waiver, not silent agreements like the one at issue. Truly Nolen argued that the case should be compelled to arbitration and, because the agreement was silent on the availability of class actions, the order should be to compel individual arbitration only.

The trial court agreed with the Plaintiff on the Gentry issue, and deemed Mr. Blumenthal's declaration to be sufficient support for the Gentry factors. Accordingly, it compelled arbitration, but not on an individual basis. Rather, it compelled arbitration with the availability of class action (assuming an arbitrator found the prerequisites for class certification). Truly Nolen petitioned the Court of Appeal for a writ, which the Court of Appeal accepted.

The Court of Appeal's Decision

The Court of Appeal surveyed the relevant decisions governing arbitration agreements and class actions and attempted to harmonize, to the extent possible, California Supreme Court precedent with the United States Supreme Court decisions in Concepcion and Stolt-Neilsen that unquestionably altered the legal landscape in this area.

Unlike the Iskanian decision from earlier this year which simply rejected the validity of Brown v. Ralphs (which had deemed Gentry alive and well), the Court appeared to take pains to give full effect to the obvious holding of Concepcion while preserving what it could of Gentry until the California Supreme Court itself finally rules whether Gentry is dead.

A nuance in Brown and similar cases is that, while they have refused to deem Gentry defunct, they have enforced arbitration agreements that are either silent on the availability of class actions or that have expressly barred class arbitration on the ground that the Plaintiff did not make a showing on the four Gentry Factors. Interestingly, before Brown, Gentry had usually been interpreted in the same manner as Discover Bank-- i.e., it announced what appeared on its face to be a limited set of circumstances where class action waivers were permissible, but no case ever seemed to pass the test to allow a class action waiver. Both cases effectively set up a rule in California that class action waivers ere impermissible.

In earlier published cases, the plaintiffs had failed to make any showing on the Gentry Factors (which is why the agreements were enforced notwithstanding Gentry), but this time Plaintiff's counsel made a showing that the trial court, in its discretion, deemed adequate. The Court of Appeal reversed the trial court and did so on the ground that the trial court had used too lenient of a standard on the Gentry Factors-- effectively ruling that the Factors had to be given some bite if Gentry were to survive Concepcion.

"Assuming the Gentry standard survives the United States Supreme Court holdings, the factual analysis as to whether the Gentry factors apply in any particular case must be specific, individualized, and precise."

Put another way, it is difficult to avoid that Concepcion announced a rule that states cannot, as a matter of state public policy, deem certain claims to be non-arbitrable. Furthermore, it ruled that mandating class arbitrations was contrary to the FAA because class arbitration eliminates the streamlined nature of arbitration. If Gentry were interpreted as allowing any plaintiff to force class arbitration where it had not been agreed simply by noting as a general matter that class actions are more effective at vindicating employee rights than individual arbitrations, Gentry would effectively set forth a rule 180 degrees the opposite of Concepcion-- something that federal preemption precludes.

If, however, the Gentry Factors required a specific individualized showing to avoid individual arbitration that, given the facts of the case, the employees' rights would not be vindicated without the availability of a class action, that arguably set up a rule that was not fully addressed by Concepcion. In effect, the Court reinterpreted Gentry in order to save it.

Why This Case Is Important

The beauty of the Court's approach in Truly Nolen is that it does not contradict any other decision (making review less likely), but it creates a rule that will probably lead to the enforcement of arbitration agreements in most wage/hour class actions. In most of those cases, individual plaintiffs have the potential to recover substantially when one factors in all the possible penalties and their right to attorney's fees if they prevail. Moreover, given the limited time for discovery before the defendant moves to compel arbitration, plaintiffs will have a hard time building a sufficient record to meet the bolstered Gentry test. The effect should be to give employers greater confidence that their arbitration agreements that are either silent on the availability of class arbitration or expressly preclude it will nonetheless be enforced.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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