CIRCUIT CITY CANNOT ENFORCE CLASS
ARBITRATION WAIVER TO PREVENT WAGE AND HOUR CLASS ACTION
On August
30th, the California Supreme Court reversed a lower court ruling enforcing Circuit City’s arbitration agreement, which
included a waiver of the right to class arbitration. Gentry
v. Circuit City Stores, Inc., 2007 Cal.
LEXIS 9376 (August 30, 2007). The Gentry
decision all but forecloses the use of class arbitration waivers in arbitration
agreements covering employment-related claims.
In 2002,
plaintiff Robert Gentry filed a class action lawsuit against Circuit City,
alleging various wage and hour violations.
Circuit City moved to dismiss the court case and
compel arbitration on the grounds that Gentry had executed a binding agreement
during his term of employment that required arbitration of all
employment-related claims. The
arbitration agreement executed by Gentry contained a class arbitration “waiver”
prohibiting the consolidation of employment-related claims into class actions.
The arbitration agreement contained limitations on recoverable damages,
attorneys’ fees and costs, as well as a shortened statute of limitations on
employment claims. The arbitration
agreement also included a 30 day “opt out” form, which gave employees the
option to revoke the agreement within 30 days of its execution. The plaintiff in Gentry did not exercise this
option.
The lower
court granted Circuit
City’s motion to compel
arbitration. In so doing, the lower
court rejected the plaintiff’s argument that Circuit City’s
arbitration agreement was unconscionable because it limited employees’
substantive and procedural rights, including the right to seek class-based
relief. The Supreme Court reversed the
lower court’s ruling, and remanded the case for reconsideration in light of the
principles announced in its decision.
Turning first
to the issue of class arbitration waivers, the court offered several reasons
why such waivers are inherently “unconscionable.” The court explained that “when … a class
action is requested notwithstanding an arbitration agreement that contains a
class arbitration waiver, the trial court must consider … the modest size of
the potential individual recovery, the potential for retaliation against
members of the class, the fact that absent members of the class may be ill
informed about their rights, and other real world obstacles to the vindication
of class members’ right to overtime pay through individual arbitration. If it
concludes, based on these factors, that a class arbitration is likely to be a
significantly more effective practical means of vindicating the rights of the
affected employees than individual litigation or arbitration, and finds that
the disallowance of the class action will likely lead to a less comprehensive
enforcement of overtime laws for the employees alleged to be affected by the
employer’s violations, it must invalidate the class arbitration waiver to
ensure that these employees can vindicate [their] unwaivable rights in an
arbitration forum.”
In the second
part of the Gentry decision, the
court explained that other aspects of Circuit City’s
arbitration agreement raised issues of both substantive and procedural
unconscionability. Citing its recent
decision in Little v. Auto Stiegler, Inc.
(2003) 29 Cal.
4th 1064, the court noted that arbitration agreements covering
employment-related claims must meet the following standards:
• The arbitration agreement cannot limit
damages normally available by statute
• There must be discovery sufficient to
adequately arbitrate the statutory claim
• The agreement must require a written
arbitration decision and judicial review sufficient to ensure the arbitrators
comply with the requirements of the statute
• The employer must ‘pay all types of
costs that are unique to arbitration’
The Gentry court questioned the validity of Circuit City’s arbitration agreement on several
of these grounds. The court commented on
the “additional significant disadvantages that this particular arbitration
agreement had compared to litigation.”
According to
the court, these were: “First, the agreement provided for a one-year statute of
limitations as opposed to the three-year statute for recovering overtime wages
and a four-year statute of limitations for the unfair competition claim…
Second, the agreement provided a limitation of remedies to backpay ‘only up to
one year from the point at which the [employee] knew or should have known of
the events giving rise to the alleged violation of the law,’ whereas an
employee filing suit could potentially recover backpay for a three-year period
from the date the cause of action actually accrued. Third, the agreement
imposed a maximum of $5,000 in punitive damages. Although exemplary damages are
not available in overtime suits … Circuit
City’s agreement applied
to ‘any and all employment-related legal disputes,’ including violation of the
FEHA and discharges in violation of public policy, for which punitive damages
without any such limitation would be available.
Fourth, the agreement contained a provision that parties will
‘generally’ be liable for their own attorney fees, with the arbitrator having
the ‘discretion’ to award the employee attorney fees, as opposed to [Labor Code
§1194’s] provision that a prevailing employee ‘is entitled to’ reasonable
attorney fees and costs.
Practical Tips
Although Gentry does not expressly invalidate all
class arbitration waivers, the court’s decision makes it clear that such
provisions will rarely, if ever, be enforced.
According to the Los Angeles Times,
Circuit City “expects that when the Superior
Court considers this case in light of the Supreme Court's new decision, it will
once again fully enforce [its] arbitration agreement.” Most observers interpret Circuit City’s
comments as either spin or denial. In
all likelihood, Gentry appears to mark the end of class arbitration waivers in
employment agreements.
To the extent
that Gentry contains any good news for California
employers, the court does recognize the viability of properly drafted
arbitration agreements that do not bar class actions and that meet other legal
requirements. Employers currently
utilizing arbitration agreements that cover employment-related claims are
advised to consult with employment law counsel, and to review their arbitration
policies for compliance with the Gentry requirements.
