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Second District Upholds Another Class Action Waiver

In a published 2-1 decision, the Second District Court of Appeal has again upheld a class action waiver in an employment arbitration agreement. In Konig v. U-Haul Company of California (2006) ___ Cal.App.4th ___, the court holds that a class action waiver in an employment contract’s arbitration clause is not unconscionable where the class action would have involved more than "predictably...small amounts" of damages to individual class members, which would otherwise render the waivers unenforceable under the standards set forth in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 156-174. The holding is unremarkable, in that it comes from the same district that also upheld such waivers in Gentry v. Superior Court (2006) 135 Cal.App.4th 944, review granted April 26, 2006, S141502 (Gentry is fully briefed by the parties, but various amicus briefs, including this one just filed on behalf of the plaintiff by CELA and various employee unions.)

Konig involves a claim for overtime, vacation pay and other wage-related causes of action brought on behalf of employees classified as outside sales associates. In March 2006, the trial court granted a motion to compel arbitration and dismiss class allegations, citing Gentry as authority validating a class action waiver. The plaintiff appealed and this opinion resulted less than nine months after the trial court entered its order.

The court focused its analysis upon the plaintiff's failure to present evidence to the trial court that each class member's claim would be predictably small.

[P]laintiff failed to establish “predictably . . . small amounts” of damages payable to class members are at issue as required under the Discover Bank test. Thus, plaintiff failed to sustain his burden of proving substantive unconscionability. The complaint in this case alleges defendant has engaged in a scheme to defraud its employees out of overtime compensation. Plaintiff presented no evidence in the trial court the potential damages and penalties payable to class members would be “predictably . . . small.” Thus, plaintiff failed to establish that the class action waiver was substantively unconscionable under the Discover Bank test. In the absence of any evidence the potential damages payable to class members would be predictably small, the trial court reasonably could have found plaintiff failed to sustain his burden of proving the class action waiver was procedurally unconscionable.

On appeal, the plaintiff presented evidence of the average amount of claims recovered by the United States Department of Labor, Wage and Hour Division in 2003 ($212,537,544 in back wages for 342,358 employees, for an average award of $620.80 per aggrieved employee), but the Court of Appeal found this information irrelevant for two reasons: first, it was never presented to the trial court; and second, it was not indicative of the amount of these particular claims. To the contrary, the court considered the potential exposure to the employer under Labor Code § 558 and found that each employee's claims could reached into the thousands of dollars.

Oddly enough, the opinion fails to point out that there is no private right of action under Section 558 since Caliber Bodyworks, Inc. v. Superior Court (2005) 134 Cal.App.4th 365, so those claims actually had a value of $0 to each class member.

We certainly hope that the Supreme Court reviews Konig, and not just because it went against the employee. The decision leaves litigants with literally no idea what standard must be met to show that a class action waiver is unconscionable, or what evidence must be presented to prove it. Must you show that each plaintiff's claim is less than a certain amount? If so, what amount? There was a reference to the plaintiff's claims being claims of "general jurisdiction" which means more than $25,000. Is $25,000 the threshold? Or must you show that each claim is under $7,500 -- the small claims limit? Or lower? Or worse, is the standard subjective and case-by-case? Must you show that, in this particular case, the amount is low enough that few claimants would be motivated to enforce their rights? How do you prove that, especially when these motions are generally brought at the onset of a case, depriving the opposing party of any meaningful opportunity to conduct discovery to obtain the facts and evidence needed to oppose the motion? The odd practicality of any answer to these questions (unless the answer is that no common and widespread wage violations are subject to class action waivers) is that employers would escape responsibility for large claims, but not small ones. The advice to employers would be: if you are going to rip off your workers, do so on a grand scale.

Because of Gentry (which already has two companion cases), we believe that a grant of review by the Supreme Court is inevitable. The interesting question will be whether the cases will be heard separately, or whether there will be a "grant and hold" order issued. There is one significant issue present in Gentry which is not present in Konig, and if Gentry is decided on that issue -- whether an option to opt out of the arbitration agreement destroys the procedural prong of the unconscionability test -- Konig could become an important case. However, the order granting review in Gentry suggests that the Supreme Court will address the larger issue of enforcing class action waivers in wage and hour class actions whether or not the opt-out provision matters. If so, this week's buzz about Konig will be brief and meaningless.

You can download the full text of Konig from these links to the court's website in pdf or Word format.

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