Court Approves Waiver of Class Actions in Arbitration Agreements
Arbitration of employment related disputes has many advantages. It is often (but not always) a faster, cheaper and more confidential way to resolution a dispute. Another advantage for defendants is eliminating the need for a jury -- and hence the risk of a "runaway jury" delivering a grossly excessive verdict. For these reasons alone, an increasing number of employers have instituted arbitration programs in recent years. Another potential advantage currently being debated in the Courts is the extent to which the parties may craft their arbitration agreement to exclude class actions.
Under federal law, such class action exclusions are generally enforceable. Under California law, by contrast, such class arbitration waivers are often, but not always, struck down as unconscionable and unenforceable. The recent case of Gentry v. Superior Court (Circuit City Stores, Inc.), however, demonstrated that such class action waiver agreements can be enforceable in California if they are properly drafted and implemented.
Under California law, a contract is unenforceable when one party is both forced to enter into the agreement under one-sided circumstances (known as "procedural" unconscionability) and the agreement is also unfairly one-sided in its substantive terms (known as "substantive" unconscionability). For example, in Discover Bank v. Superior Court (Szetla), the court struck down a provision waiving class arbitration that had been sent to consumers in the "bill stuffer" that came with their credit card statements. The Court found that this waiver was procedurally unconscionable because it had been buried in fine print. The Court also found the provision to be substantively unconscionable because most consumer claims would be so small that they would never be enforced by individuals.
In Gentry, however, the Court found that the facts were different. First, the arbitration program had not been imposed under procedurally unconscionable circumstances. The employer, Circuit City, had "clearly spelled out" the pros and cons of arbitration to its employees in written materials and a videotape presentation and had given them the choice to "opt out" of the program for up to 30 days. Second, the provision waiving class actions was held not to be substantively unconscionable because, unlike the small claims of individual credit card consumers, Gentry's claims were for substantial amounts of unpaid overtime as a result of allegedly being misclassified as a salaried-exempt manager. The Court reasoned that these claims provided a sufficient incentive for individual enforcement and that class-wide arbitration was therefore not the only feasible means of enforcement. For all these reasons, the Court upheld the arbitration agreement, including Gentry's agreement to waive any right to prosecute a class-wide arbitration.
Gentry is thus an extremely significant decision for California employers. It shows that a well-crafted arbitration program can prevent individual claims from mushrooming into expensive, time-consuming class actions.
UPDATE: The California Supreme Court granted review of the Gentry case in April 2006.