Class Conflict
Published in
The Daily Journal, Forum Column,
January 24, 2007
By Douglas N. Silverstein and Alexandra M. Steinberg
Last month, the 2nd District Court of Appeal published a decision
upholding an employee’s class action waiver in arbitration with his
employer. Konig v. U-Haul Company of California, 2006 DJDAR
16494 (Dec. 19). The California Supreme Court had already granted
review of a remarkably similar case decided by the 2nd District,
Gentry v. Superior Court, 135 Cal.App.4th 944 (2006)(rev.
granted, April 26, 2006). In Konig, the feisty appellate
court capitalized on the opportunity to, at least temporarily, trump
the grant of review and once again make its rule in Gentry the rule
in the 2nd District.
But before the ink dries on the Konig decision’s “filed”
stamp, the Supreme Court will probably take the case up for review
and decide, once and for all, that prospective class action waivers
in employment arbitrations are unenforceable.
Does Size Matter?
In Gentry and Konig, the 2nd District
interpreted Discover Bank v. Super. Ct., 36 Cal.4th 148
(2005), to require that each putative class member’s claim be
“predictably small” for a class action waiver to be invalidated in
an employment case. In Konig, it took that reasoning a leap
further, going into painstaking detail to show that wage and hour
claims can add up to amounts that it would not consider to be
“predictably small.” Further, it put the burden on plaintiff to
limit the class’s recovery by establishing, without the benefit of
conducting discovery, that the class members’ claims are all small.
Surely the California Supreme Court did not intend such illogical
results. In fact, in Discover Bank the court emphasized that the
class action mechanism is not just based upon the amount at stake
for each class member; rather, the courts must consider whether
denial of the class action would permit the defendant to benefit
from its wrongful conduct and continue it with impunity.
Non-Waivable Remedies
In Gentry and Konig, the 2nd District
overlooked an important point made by the California Supreme Court:
Discover Bank did not involve claims under either the
Consumer Legal Remedies Act ( which contains an antiwaiver
provision) or “any other California statute as to which a class
action remedy is essential.” Importantly, the court cited to
Armendariz v. Foundation Health Psychcare Services, Inc., 24
Cal.4th 83 (2000), as an example of where a class action remedy is
essential. Armendariz did not deal with a class action at
all, but rather dealt with the minimum standards necessary for
arbitration of employees’ statutory rights.
Konig and Gentry, on the other hand, both involve
statutory employment claims that must adhere to the minimum fairness
standards set forth in Armendariz. Class action waivers
fail to adhere to the Armendariz requirements because they
are exculpatory and by their very nature deprive employees of their
legal remedies. Moreover, wage and hour class actions typically
involve non-waivable minimum labor standards that provide yet
another basis why the main procedural device for vindicating such
claims — the class action — cannot be waived. Barrentine v.
Arkansas Best Freight System, 450 U.S. 728 (1981) (minimum
labor standards are non-negotiable and non-waivable); Zavala v.
Scott Brothers Dairy, Inc., 143 Cal.App.4th 585 (2006) (same
under California law).
Waivers Are Exculpatory
The California Supreme Court has condemned class action waivers that
“may have the effect of allowing an unscrupulous wrongdoer to retain
the benefits of its wrongful conduct.” Keating v. Super. Ct.,
31 Cal.3d 584 (1982). Employment agreements whose objective, even
indirectly, is to exculpate the employer are unenforceable as
against public policy under Civil Code Section 1668 . Further, under
Armendariz, a law established for a public reason cannot be
contravened by a private agreement. Employment laws by their very
nature are for a public reason, and thus they may not be waived.
Through class action waivers, employers insulate themselves from
punishment for violations of their employees’ statutory rights by
denying the employees an effective method of redress. Discover
Bank. The decisions in the non-citable Gentry and now
Konig cases would make size of utmost importance in a class
action, when what the Supreme Court really intended with
Discover Bank was to ensure that a defendant would not avoid
redress for its wrongful conduct.
In Discover Bank, the court found the class action waiver
to be unconscionable not just because the amount of the claim was
small, but rather because “the class action is often the only
effective way to halt and redress such exploitation.”
Employment class actions have different factors that likewise make
class action waivers exculpatory. Employees have powerful
disincentives against bringing individual actions against their
employers that have nothing to do with the size of their claims.
Employees face the risk of being fired and losing their income and
means of support. In the context of undocumented workers, they are
entitled to their wages (Labor Code Section 171.5), but they may not
bring an individual action for fear of deportation and separation
from their families. Discover Bank allows for class action
waivers to be invalidated as exculpatory for non-monetary reasons.
Class action prohibitions always work as exculpatory clauses and
will therefore always be void as against public policy.
Unconscionability
One difference between Konig and Gentry is that in
Gentry, the court found that there was no procedural
unconscionability because the arbitration agreement contained an
opt-out provision. Given that there are other grounds upon which the
California Supreme Court will likely strike down class action
waivers in employment, it is unlikely that it will rule upon the
issue of whether opt-out provisions vitiate any procedural
unconscionability. However, to the extent it reaches the issue, the
court should hold that an opt-out provision does not vitiate
procedural unconscionability.
Arbitration agreements containing such provisions are often fraught
with many other infirmities. In the employment context, even
assuming that employees are fully aware of and understand both the
class action waiver and the opt-out procedure, they may not exercise
that option for fear of angering their employers. The opt-out
procedures themselves may be defective, and the vastly different
bargaining power of the parties is procedurally unconscionable.
While procedural unconscionability is only one of the two prongs,
the exculpatory nature of class action waivers renders them
substantively unconscionable in addition to providing an independent
basis for not enforcing them.
Right to Concerted Activity
One significant issue that was not reached in Discover Bank,
Gentry or Konig is that class action waivers
should be ruled unenforceable because they violate both state and
federal laws protecting employees’ rights to engage in concerted
activity. Discover Bank touched briefly upon this where it
recognized that antiwaiver statutes such as the one contained in the
Consumer legal Remedies Act render class action waivers
unenforceable.
Like the CLRA, the Labor Code makes class actions unwaivable.
Section 923 states that it is the public policy of this state that
employees shall be free from the interference, restraint, or
coercion of employers in concerted activities for the purpose of
mutual aid or protection. The statute is not limited to collective
bargaining of union contracts, although those are covered by the
statute as well. Similarly, concerted activity is protected by the
National Labor Relations Act, 29 U.S.C. Section 157.
Class action waivers are directly targeted at the concerted activity
of employees who engage in the mutual aid of their fellow employee
class members, and thus such waivers violate the public policies
embodied in the Labor Code and the NLRA. See Eastex, Inc. v.
NLRB, 437 U.S. 556 (1978) (pursuing legal remedies in court is
a form of protected concerted activity). Because class action
waivers violate public policy, they are unenforceable under those
statues as well as under Civil Code Section1668.
The Future
The high court will almost certainly grant review in
Konig. And when it does, it will have another opportunity to
decide the issue of arbitration class action waivers and rule, once
and for all, that they are unenforceable in the employment context.