On August 30, 2007, in a 4-3 decision, the California Supreme Court opined that courts may invalidate arbitration agreements that purport to waive the employee’s right to pursue class actions. In Gentry v. Circuit City Stores, Inc., 07 CDOS 10363 (Aug. 30, 2007), the court directed the lower courts to invalidate such clauses if class arbitration would be a significantly more effective means than individual arbitration actions of vindicating the employee’s subject statutory rights. The court also held that providing the employee 30 days after hire to opt out of an arbitration clause did not preclude a finding that the clause was unconscionable.
Upon hire, Circuit City had presented Gentry with an Associate Dispute Resolution Package which contained an arbitration agreement. The arbitration agreement provided that the arbitrator could not consider the claims of more than one employee concurrently or otherwise adjudicate class actions. The Package also contained a form which employees could submit within 30 days of hire indicating that they declined the agreement. Gentry did not submit this "opt out" form. Years later he filed a class action against Circuit City for overtime wages. Circuit City sought to dismiss the action based upon Gentry’s consent to the agreement.
The California Supreme Court found that employment agreements to waive class actions are invalid if they effectively preclude employees from pursuing their statutory rights. Here, the court expressed concern that individually pursuing overtime claims was impractical because individual damages would often be too small. The court also advised that only class actions could assure that employees would be informed of their potential overtime rights. The court suggested that employers may be able to devise individual arbitration systems that overcame these concerns, but found no such mitigation in the present case. It directed that the lower court invalidate the class action waiver unless it found that individual actions in this situation were not a significantly less effective means for adjudicating the overtime issue.
The court also found that the 30-day opt-out did not shield the arbitration agreement from scrutiny as an "adhesion contract." While acknowledging that the ability to opt out reduced the compulsory nature of an employee arbitration agreement, the court determined that the opt-out did not make the agreement truly voluntary for two reasons.
First, the Package had not comprehensively explained all disadvantages of the arbitration agreement, including a reduced statute of limitations and reduced damages availability.
Second, the Package’s promotion of arbitration created pressure upon employees (particularly new employees) to accept the agreement. Thus, the agreement was "procedurally" an adhesion contract subject to the limitations previously dictated by the court in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).
Employers may take several lessons from the Gentry decision. While suggesting that the class action waiver was invalid, the court did not find that such invalidity would destroy the entire agreement. Rather, the class action waiver could be severed from the agreement. The court also did not find that class action waivers are invalid per se. So, employers may include such waivers in hopes of enforcing them without placing at risk enforceability of their entire arbitration agreement. On the other hand, the decision makes clear that employers will have great difficulty arguing that an arbitration agreement offered during employment has been entered voluntarily and is thus not subject to the Armendariz limits.
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