On January 19, 2006, California's Second District Court of Appeal published its opinion in Gentry v. Superior Court (Case No. B169805). Gentry potentially is of major significance to all employers in California, as it upheld a clause contained in a pre-dispute arbitration agreement that precluded class arbitrations. The clause, as applied, required all employees bound by the arbitration agreement to (a) bring their covered disputes to arbitration instead of court and (b) bring those disputes only as individuals and not as part of or representing a class. Effectively, therefore, the impact of the clause was to eliminate class actions entirely.

The Supreme Court's Discover Bank Decision

Gentry is particularly significant because it is the first employment class action case following the California Supreme Court's decision in Discover Bank v. Superior Court (2005) 36 Cal. 4th 148. Discover Bank involved a class action waiver clause contained in a mandatory pre-dispute credit card agreement. The clause prohibited class actions. In Discover Bank, the plaintiff tried to bring a class action on behalf of all credit card holders. The plaintiff claimed that Discover Bank committed fraud by not disclosing adequately that credit card holders making payments on the date they were due nonetheless would be subject to an additional $29.00 late fee if the payments were received by Discover Bank after a certain time that day.

The California Supreme Court held that the class action waiver clause in that case was unenforceable because, if applied, it would have the effect of insulating Discover Bank from all liability. Basically, the reasoning of the Supreme Court was that virtually no one would challenge a $29.00 credit card fee individually in the absence of the ability to make the challenge on a classwide basis, and, therefore, Discover Bank in effect could "get away with" mass fraud because it would never be held accountable for the alleged fraud unless a class action was available.

The Supreme Court, however, left open the possibility that class action waiver clauses contained in arbitration agreements might yet be enforceable. In fact, it made particular reference to cases alleging age discrimination in employment, where it observed that the median verdict was in excess of $200,000. This, the Supreme Court reasoned, likely would be high enough so that the class action remedy was not necessary to hold an employer accountable. Stated another way, individuals and their attorneys would have adequate incentive to bring such cases on an individual basis and, therefore, the absence of a class remedy would not insulate an employer from accountability for its wrongdoing.

Application in the Employment Context

While Discover Bank provided support for enforcement of class action waivers in cases in which employment discrimination was alleged, it was unclear how the case would be applied to wage and hour claims. In Gentry, the plaintiff claimed that the employer, Circuit City, had misclassified salaried customer service managers as exempt when instead they should have been classified as non-exempt employees entitled to overtime. The plaintiff filed a pleading alleging a class action for violations of the California Labor Code and Business and Professions Code, and tortious misconduct.

The court applied the Discover Bank holding and concluded that the class action waiver clause was enforceable. The court analyzed the class action waiver clause in accordance with general principles of unconscionability. In California, a contract will be deemed unconscionable and thus unenforceable if it is both procedurally and substantively unconscionable. The court first addressed the issue of procedural unconscionability and concluded that the arbitration agreement provided employees who might initially be bound by it a thirty (30) day opt-out period. Thus, once an employee becomes initially bound by the arbitration agreement, he or she would have thirty (30) days to decide to opt out. The court therefore concluded that signing the arbitration agreement was not made an absolute condition of an employee's employment. In this case, the plaintiff chose not to opt out. In addition, the court noted that employees were presented with clearly written materials that identified both advantages and disadvantages of arbitration.

Critically, however, and of great importance to employers whose agreements do not have opt-out provisions, the court found that the class action waiver clause also was not substantively unconscionable. The court held that the case before it was not the type that predictably involved small amounts of damages (as in the case of the $29.00 late fee challenged in Discover Bank). The court stated:

Here, Gentry has alleged statutory violations that could result in substantial damages and penalties should he prevail on his individual claims. In fact, the Supreme Court acknowledged in Discover Bank that in some employment cases, large individual awards are commonplace.

Because agreements have to be both procedurally and substantively unconscionable in California, if, as Gentry holds, a class action waiver clause in cases involving wage and hour claims is not substantively unconscionable, these clauses should be enforceable even if the underlying agreement is deemed a procedurally unconscionable mandatory pre-dispute agreement.

While employers can be encouraged by Gentry, there is a caveat. The case applies only to arbitration agreements containing express class action waivers. If an agreement is silent, a California court is likely to hold that it permits class arbitrations. If the matter is referred to arbitration, then the arbitrator would have to interpret the agreement to determine whether it permits or forbids class arbitrations. In short, unless the agreement is drafted to expressly forbid class arbitrations, an employer should not assume that the agreement will preclude class actions.

It is expected that the plaintiff in Gentry will seek California Supreme Court review or at least request that the case be depublished. Nonetheless, Gentry as of this writing is the only post-Discover Bank appellate authority that expressly addresses the enforceability of class action waiver clauses in employment wage/hour class action litigation, and it is binding precedent in all lower California courts.

Finally, in light of Gentry, employers should consider the following:

(1) If you have previously elected not to have an alternative dispute resolution (ADR) system culminating in binding arbitration of employment disputes, reevaluate that decision; (2) If you have an ADR system culminating in binding arbitration, consider amending the language to specifically exclude class actions; (3) Recognize that while the law is continuing to become more supportive of properly developed ADR systems, the law is still in formation regarding class actions in employment law matters; (4) Assign a member of your legal department to monitor the fast moving developments in this area of law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.