California Supreme Court Issues Class Action Arbitration Decision

August 30, 2007

Today, the California Supreme Court decided the Gentry v. Superior Court case [click here to view this opinion]. In it, the Court ruled that, in some situations, an employer may not deny employees the ability to bring a arbitration class action to recover overtime pay even though the employees may have individually waived their right to bring aggregated or class claims. In a second, more narrow, section of the decision, the Court also reexamined the procedural requirements for a valid pre-dispute, employment-related arbitration agreement.

Summary

The main issue in this case was relatively straightforward: If an employee has agreed, in a pre-dispute arbitration agreement, that his or her claims may not be combined with other employees’ claims (in other words, that they cannot be brought as a class action), is that class action waiver enforceable? The Court answered that question, but only in the context of potential arbitral class actions for unpaid overtime. In doing so, the Court essentially ruled that prohibiting arbitral class actions would violate California public policy because it could make it too difficult, or unlikely, for overtime claim plaintiffs to individually bring actions. In the end, the Court ruled that the trial court must decide whether “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 “whether the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws.” If so, the trial court should invalidate the class action waiver and allow the employees to pursue a class action in an arbitration setting.

In the second, and even more narrow, portion of the decision, the Court examined whether an employee’s ability to “opt-out” of the arbitration program was sufficient to make the agreement enforceable, irrespective of the underlying arbitration terms. In issuing its decision on this front (as it did in the initial, primary section of its decision), the Court overruled the Court of Appeal, and held that even relatively slight, theoretical hints of procedural unfairness – here, the employer’s alleged failure to fully explain all the possible downsides to an employee pursuing an arbitration versus filing a regular, in-court lawsuit – could subject the agreement to a full-scale review of all its substantive terms. The Supreme Court once again remanded the case back to the trial court for a more extensive factual review.

What This Means

This decision demonstrates no small degree of hostility toward employment-related arbitrations, although its new rules regarding overtime arbitrations are arguably very narrow. But in a more global context, the Court has now gone out of its way to create additional ways for employees to challenge (both in a big-picture policy sense, and in an individual contract term by contract term sense), the enforceability of employer-employee pre-dispute arbitration agreements.

Employers who presently have these types of agreements with their employees may wish to revisit them to ensure the fairness of the terms, because those terms are now potentially subject to additional scrutiny. Employers who do not have such programs, but who wish to implement them, should take heed of the Court’s seemingly very strict requirements for an employer to carefully explain all aspects of the arbitration program.

This E-Update was authored by E. Joseph Connaughton. For more information, please contact Mr. Connaughton or any Paul, Plevin attorney at 619-237-5200.

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