United States: California Court Of Appeal Holds Certain Class Action Waivers May Be Unenforceable

Class action waivers have become common in consumer contracts, including sales agreements to purchase newly constructed residences and employment agreements, which may also contain arbitration clauses. After last year's California Supreme Court decision in Iskanian v. CLS Transportation (2014) 59 Cal.4th 348, it's clear that a class action waiver is not unenforceable when combined with an arbitration clause, nor can it by itself render an arbitration clause unconscionable. But that's only because the California Supreme Court had to knuckle under to US Supreme Court authority interpreting the Federal Arbitration Act (FAA).

On October 26, the Second District of the California Court of Appeal declared the law when the FAA does not apply. The case is Garrido v. Air Liquide Industrial, No. B254490, 2015 WL 6451011 (Cal. Ct. App. Oct. 26, 2015). In Garrido, the FAA did not apply because of its categorical exemption of transport workers. The court held that California's pre-Iskanian law governs when the FAA does not preempt it. That means that, when an arbitration clause is not subject to the FAA, a class action waiver will likely be found unenforceable by California courts under a four-part test that is easy for consumers to meet, and it can by itself render an arbitration clause unconscionable. This is not a surprising result, but Garrido is the first published decision to articulate the rationale.

Garrido emphasizes the need to analyze whether a consumer contract will be governed by the FAA. In the employment agreement context, categorical exemptions appear impossible to avoid; a clause that says "this agreement is governed by the FAA" will be interpreted to include the FAA's categorical exemptions. Since there are no categorical exemptions applicable to real estate sales transactions, questions about whether such transactions involve interstate or foreign commerce are more amenable to drafting solutions, such as statements that the contract involves interstate commerce and is therefore subject to the FAA.

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