Court Invalidates Class Action Waiver Where Arbitration Agreement Not Governed by FAA
Earlier this week, a California Court of Appeal issued its published opinion in Garrido v. Air Liquide Industrial U.S., holding that a class action waiver in an employment arbitration agreement was unconscionable and unenforceable. You're thinking, “Wait, I thought the California Supreme Court ruled in Iskanian that class action waivers are enforceable.” Well, you are right, but this court found a way around Iskanian.
In Garrido, the plaintiff was an interstate truck driver for Air Liquide, a company that produces and distributes industrial gases throughout the country. After plaintiff's employment was terminated, he filed a wage and hour class action against Air Liquide. The company moved to compel arbitration based on an arbitration agreement Garrido had signed in connection with his employment. That arbitration agreement contained a class action waiver and a provision stating that the agreement was governed by the Federal Arbitration Act (“FAA”).
As employers will recall, the United States Supreme Court in AT&T Mobility v. Concepcion held that class action waivers in arbitration agreements are enforceable under the FAA. The California Supreme Court had previously rejected this view of categorical enforceability in favor of a rule suggesting that class action waivers in some instances may be enforceable and in other instances may not, depending on the claims at issue and whether enforcement of the class waiver would be unjust. The California Supreme Court's rule in this regard was set forth in a case called Gentry v. Superior Court.
After the U.S. Supreme Court issued its opinion in Concepcion, the California Supreme Court was forced to revisit its rule for invalidating class aciton waivers. In Iskanian v. CLS Transportation, the California high court held, consistent with Concepcion, that class action waivers are enforceable, repudiating Gentry.
Notwithstanding the foregoing, the Garrido court held that the class action waiver in Garrido's arbitration agreement was not enforceable. To reach its desired result, the court held that the arbitration agreement was not governed by the FAA (even though it expressly said it was). This is because the FAA contains an exclusion from its coverage for certain truck drivers. Based on its finding that the FAA did not apply to the agreement and that the agreement was instead governed by California law, the court held that Concepcion and Iskanian did not apply to the issue of the enforceability of the class action waiver because, in its view, those cases only apply to arbitration agreements that are, in fact, covered by the FAA. The court held that where an agreement is not governed by the FAA, and is instead governed by California law, Gentry is still good law and its multi-factor test for determining whether a class action waiver in a wage and hour case is unconscionable, still applies. Applying that test, the court held that the class action waiver was unconscionable and unenforceable based on evidence that putative class members may not be informed of their rights and may not have incentive to sue individually based on the modest size of individual recovery ($11,000 per class member). As such, the court held that the class action waiver was an unlawful exculpatory clause.
This likely is not the last of this type of decision from a California court. It is expected that more and more plaintiffs' attorneys opposing motions to compel arbitration will focus more on arguments that the FAA does not apply to the arbitration agreement at issue, not necessarily because of the limited truck driver exclusion from the FAA's coverage, but because the FAA generally limits its coverage to employers engaged in interstate commerce. More and more plaintiffs' attorneys are starting to argue that a particular employer is not engaged in interstate commerce within the meaning of the Act (and/or that the employer did not submit evidence of its involvement in interstate commerce in support of its motion to compel arbitration) and therefore the FAA does not apply. This is a good reminder to California employers to (1) ensure that their arbitration agreements reference the FAA; and (2) when moving to compel arbitration, submit affirmative evidence of involvement in interstate commerce. The test for interstate commerce is very broad under the FAA and most employers should qualify.