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On Gentry

Yesterday's oral argument in Gentry v. Superior Court, no. S141502, had something for everyone. It appeared that the panel was sharply divided on the key issue of whether a pre-dispute arbitration agreement that prohibits classwide arbitrations in wage and hour cases should be enforceable. Several of the justices had trouble with at least some part of each side's arguments, and both sides presented well-assembled arguments. Michael Rubin and Cliff Palefsky argued on behalf of the employees, while Rex Berry argued for real party in interest Circuit City. The hearing was well-attended. The crowd overflowed into not one, but a pair of overflow rooms. Arriving less than ten minutes before the 2:00 p.m. hearing, I was part of the crowd invited to the overflow rooms, but I passed on the opportunity to watch from one of those two rooms, and instead waited outside until there was space inside the courtroom. As a result, I missed Mr. Rubin's argument, but was escorted in to take an empty chair about 15 to 20 minutes into the hearing.

From what some observers told me, the first few minutes included some questions and comments from Justice Moreno (the author of the majority opinion in Discover Bank) that suggested a swing-vote mentality. I was also told that the court didn't seem quite as interested in the debate about whether arbitration mandates and class action prohibitions were inherently exculpatory.

Right around the time I arrived, Justice Moreno asked whether employees should be presumed to always fear retaliation for refusal to sign a pre-dispute arbitration agreement. Mr. Palesky said that the court has long recognized this fear and the employer's superior bargaining position. Justice Moreno also asked whether Circuit City gave up its rights in any way in the agreement. Palefsky replied that it did not. The class action prohibition and other substantively unconscionable terms were all unilateral, benefitting only the employer, and that the employer gave up nothing. The defense later argued that Circuit City gave up rights just as important as those Gentry gave up.

Justices Werdegar and Kennard asked whether the class action prohibition must always be invalid, or whether the court should look at the issue more narrowly. She and Justice Kennard seemed to find it important that this particular "prohibition" (one of the justices pointed out that this wasn't exactly a "waiver") arises in the context of a claim for unpaid wages, and even more specifically, overtime wages. When Justice Kennard asked whether the class action waiver is always invalid, or determined on a case by case basis, Mr. Palefsky said that it is always invalid, and then discussed reasons why this case illustrated the reasons to invalidate such prohibitions. During that response, he began a point by saying “in a wage case,” and Justice Kennard interrupted him, saying "You just said the magic words ... 'in this case' ... 'in a wage case'." Earlier, she had mentioned a statistical average of $6,000 in individual wage cases, and asked whether the court should take into consideration the comparatively small amounts in wage and hour cases. This seemed to be the most telling line of questioning we observed.

Mr. Palefsky later switched to the qualifying phrase, “in an employment case,” but Justice Kennard repeatedly brought the focus back to the issue of wages, pointing out during one exchange that the competing public policies were not just those favoring class actions and those favoring arbitration, but also those favoring employees being paid for overtime. When Justices Baxter and Chin framed the issue as one to determine whether "the public policy in favor of class actions should trump the public policy in favor of arbitration,” she added that there was a third important public policy to consider. In light of her comments during the Murphy argument, and the importance of the wage & hour policies that were emphasized in the subsequent opinion, it seemed that the policy of making sure employees are able to fairly adjudicate all of their wage claims was an important consideration to the panel.

Werdegar also asked if the particulars, such as whether a class action prohibition was in bold face, on the front page, etc., was important. Mr. Palefsky said no, but in any event, here, the particulars did not favor Circuit City. She also asked what would have happened in Gentry had opted out. Mr. Palefsky responded that retaliation was foreseeable.

Mr. Berry then stepped up for Circuit City. He started by arguing that there are two flaws to Gentry’s arguments. Before he finished his first point, Justice George asked about the “voluntariness” of the agreement, and whether it was a contract of adhesion. Berry responded that it was not, and that a fear of retaliation should never be presumed, and particularly not in this case, where the opposition was not supported by any declaration from Gentry saying that he had feared retaliation.

Justice Werdegar asked: “We’ve been told that Labor Code § 923 prohibits class action waivers. Is that correct?” Berry said it does not, and said arbitration is perfectly acceptable, and as for the plaintiff's claim that arbitration is somehow harmful to the employee, "We know that's not true." Justice Werdegar interrupted him and noted that the opposing party focused on the class action issue, not just the arbitration issue. She asked: “Are we not talking about class action waivers?” Berry said it was both. Gentry is asking this court to render the agreement unenforceable because there was a class action waiver. He argued that this is not a commercial contract of adhesion. He indicated that employees were given a presentation about the terms of the agreement and an opportunity to opt out. Baxter helped him out by adding that Circuit City even advised the employees to get advice from their own counsel, and Justice Corrigan pointed out that Gentry got a package that gave him the right to opt out (the defense did a nice job of pointing out that opting out is a central part of class action procedures).

Justice Chin said that he sees this as a tension between class action policy verses the arbitration policy. He asked if they are both legislative policies. Berry said that the policy concerning arbitration is a legislation policy, but the policy concerning class actions is a “judicial” policy. Justices Chin and Baxter both seemed to be in agreement there, and both seemed to consider that distinction important.

Justice Kennard then quickly pointed out that the policy concerning overtime wages is a legislative concern. Mr. Berry said something about being in dangerous territory there, and Justice Kennard really came alive. "I am lost as to why we are in dangerous territory. ... To borrow one of your phrases, there is nothing sinister about this court determining the various policies" and deciding whether a class waiver is valid. Arbitration is not disfavored, but "the legislature is also concerned about the protection of employees ... regarding payment of their overtime wages." She also added that "the opposing side [Gentry] pointed out that it is very clear that the employer very much favored arbitration" and asked what is or is not in the employment handbook about the disadvantages an employee is accepting under the Circuit City agreement. The employee has no idea about "significant disadvantages, such as the reduction of the statute of limitation from four to one year and the the restriction of back pay to one year," she said. At first, Mr. Berry dodged the question and said, essentially, that the court should look at the criteria in the holding under Discover Bank and determine that this case is "not such a claim."

Justice Kennard pressed him to answer the question: "What about the reduction of the statute of limitations from four years to one?" He responded that California law allows parties to enter into such agreements. Justice George interjected: "But were the employees told that?" And Justice Kennard asked again "Was that in the handbook?" Berry said said, "yes," there was a receipt for the handbook that the employees signed, acknowledging the presentation, the video, a brochure, etc.

Justice Moreno then asked Mr. Berry to address to the issue regarding reciprocity of the contractual terms, specifically whether Circuit City gave up some rights. “Absolutely,” said Berry. He noted that the employer is surrendering its right to a jury and appellate review (tired arguments that do not answer the question, as this is inherent in every unilateral arbitration agreement), and added that Circuit City arbitrates all of its claims against employees who resigned before "earning" their relocation expense bonuses. That ended Circuit City's argument.

Justice Kennard still showed a keen interest in whether the provisions of the agreement were all in the handbook, and particularly, whether the handbook advised employees that they were agreeing to limit their claims from four years to one year. Her first question to Mr. Rubin on rebuttal addressed this issue. Mr. Rubin then focused his argument on specific pages of the record, pointing out that what the employees were given never mentioned reducing the statute of limitations, or eliminating punitive damages. He also pointed out that the record didn't support the contention that Circuit City had taken employees to arbitration, and added that the plaintiff had no chance to conduct discovery to determine whether there were any such cases. He also referenced a page in the handbook which expressly bars lawsuits “brought by associates.”

Justice Chin asked about Labor Code § 923 and how Circuit City claimed this section only applies to a collective bargaining situation. Justice Moreno asked about the term “concerted activity” being a term of art. Mr. Rubin responded by saying that federal courts have permitted people to apply the term “concerted activity” to consolidate cases.

For your reference, section 923 provides:

In the interpretation and application of this chapter, the public policy of this State is declared as follows: Negotiation of terms and conditions of labor should result from voluntary agreement between employer and employees. Governmental authority has permitted and encouraged employers to organize in the corporate and other forms of capital control. In dealing with such employers, the individual unorganized worker is helpless to exercise actual liberty of contract and to protect his freedom of labor, and thereby to obtain acceptable terms and conditions of employment. Therefore it is necessary that the individual workman have full freedom of association, self-organization, and designation of representatives of his own choosing, to negotiate the terms and conditions of his employment, and that he shall be free from the interference, restraint, or coercion of employers of labor, or their agents, in the designation of such representatives or in self-organization or in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.

The last sentence, the plaintiff argued, as well as the broad descriptions under federal law of what constitutes "concerted activity", draws class action litigation into the scope of Section 923. Justices Chin and Baxter were particularly skeptical of this analysis, and as usual, Justice Chin wanted to know what legislative history could guide the court in its determination of whether Section 923 sets forth the legislature's policy favoring class action litigation (none), and whether the court was being asked to declare that the public policy supporting class litigation was more important than the public policy favoring arbitration.

The argument wrapped up with a reiteration of Gentry's position. Mr. Rubin articulated that a class action bar in pre-dispute employment cases (as in Gentry’s case) is unenforceable “if it is reasonably foreseeable that the effect would be to eliminate non-waiveable statutory claims.” Justice Werdegar then asked: "if this court were to agree ... would they have to say that class action arbitration would not be permissible?” Mr. Rubin said no; this court was correct when it decided Keating and said that classwide arbitration was not disfavored. Werdegar then clarified Gentry's his first position that the court should strike the entire agreement, and that his fallback position is that any arbitration should proceed without the class action prohibition being recognized. She then framed the question one final time, as being one which leaves open the possibility that a class action ban is sometimes enforceable. Mr. Rubin responded that it should be unenforceable in a pre-dispute situation in which it is reasonably foreseeable that absent class members would lose non-waiveable statutory rights. The matter then stood submitted.

In general, Justices Baxter and Chin, the two remaining dissenters from Discover Bank (former Justice Janice Rogers Brown was the third) seemed least inclined to invalidate the class action prohibition. They seem to give great weight to the legislative mandate to favor arbitration, which perhaps "trumps" any competing judicial precedent. Justice Corrigan said very little, but her few comments seemed to encourage Circuit City just a bit. She seemed unimpressed with the overall unconscionability of the agreement, and seemed more impressed with the right (at least technically) of the employee to mail in an opt-out form within 30 days.

Justice Moreno didn't seem to agree wholeheartedly with all of Gentry's arguments, especially on the Labor Code § 923 issue, but he did not seem hostile to the more important issues regarding the overwhelming substantive unconscionability and the existence of some procedural unfairness. Justice George had few questions, but they tended to challenge the defense position regarding voluntariness and fair disclosure. Justices Werdeger and Kennard both seemed overwhelmingly opposed to enforcing what they appeared to consider oppressive terms that served only to permit an employer to prohibit employees from vindicating important rights, particularly under an unfair agreement imposed without full and fair disclosure.

Having learned, over the past three years of writing this blog, that it is impossible to guess where this panel stands, we shouldn't even hazard a guess, but we'll do so anyway. We think Justices Moreno, Werdegar, Kennard and George, who were all in the 4-3 majority that decided Discover Bank, will join in a majority opinion that will hold class action prohibitions to be substantively unconscionable under California law. If forced to guess further, we would wager that the Court will find sufficient procedural unconscionability to render the Circuit City arbitration agreement completely unenforceable under Calfornia law. Whether Justices Chin, Baxter and Corrigan join the majority to present another unexpected unanimous opinion is even more impossible to tell. Although Justices Chin and Corrigan were part of the three member dissent in Discover Bank, that dissent was based significantly upon their assertion that Delaware law governed the underlying agreement. At one point in the hearing, Justice Baxter suggested that the outcome might be different if the facts involved, for example, a large law firm hiring a labor law attorney who understood what was in the agreement. Perhaps this comment suggests that there will be a unanimous decision as long as the opinion isn't too sweeping in its condemnation of class action prohibitions, barring them, for example, only in the wage & hour context, and only among unsophisticated employees, leaving for another day the question of whether and when they can be enforced against other plaintiffs, even in the employment context. If the opinion runs against Gentry, we expect it to be Moreno who makes the switch, with George, Kennard and Werdegar signing a dissent.

We'll know in a month or two.

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