A California Court of Appeal recently considered the enforceability of a class-action waiver that was contained in the arbitration portion of an employment contract. The court found that the waiver was procedurally, but not substantively unconscionable and was, therefore, enforceable because the plaintiff failed to show that the proposed class action involved a predictably small amount of damages. (Konig v. U-Haul Company of California, (— Cal.Rptr. 3d –, 2006 WL 3720248, Cal.App. 2 Dist., Dec. 19, 2006).)
Facts
Ron Konig (“Konig”), a former employee of U-Haul Company of California (“U-Haul”), filed a proposed class action against U-Haul alleging various violations of the Labor Code and the Business and Professions Code. Konig alleged U-Haul failed to pay overtime and accrued vacation to its employees and also failed to allow employees to take rest and meal breaks. U-Haul asked the trial court to dismiss the class action claims and compel arbitration of Konig’s claims. U-Haul claimed that Konig acknowledged and signed U-Haul’s arbitration policy which provides that it covers all employees and all disputes “relating to or arising out of an employee’s employment . . . or the termination of that employment” with U-Haul. The policy further provides that an employee’s acceptance or continuation of employment constitutes an agreement to be bound by the policy. The policy provides that both the employee and U-Haul “forego and waive any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in private attorney general capacity.” Konig asserted that the class action waiver was unenforceable because it was unconscionable.
The trial court held that the arbitration agreement was enforceable under federal law and that the class action waiver did not in and of itself render the arbitration agreement unconscionable.
Decision
The Court of Appeal found that the class action waiver is not unconscionable and that it is enforceable. Generally, before an arbitration agreement will be found unconscionable, the person alleging unconscionability must show that the agreement is both procedurally and substantively unconscionable. Procedural unconscionability is found where there is “‘oppression’ arising from an inequality of bargaining power or ‘surprise’ from buried terms in a complex printed form.” The court found that the class action waiver here was procedurally unconscionable because it was part of an arbitration agreement that was imposed as a condition of employment, there was no opt-out provision, and there was no real opportunity to negotiate its terms.
The substantive element of unconscionability “addresses the existence of overly-harsh or one-sided terms.” The court noted that the California Supreme Court had previously found that a class action waiver in a consumer agreement was unconscionable under California law. The Supreme Court found that class action waivers are unconscionable if they are contained in a “consumer contract of adhesion in a setting in which the disputes between the contracting parties predictably involve small amounts of damages” and the party with superior bargaining power allegedly tried to carry out a deliberate scheme to cheat a large number of consumers out of small amounts of money. (Szetela v. Discover Bank, (2002) 97 Cal.App. 4th 1094.)
Konig argued that the rule set out in Discover Bank should apply to the arbitration agreement at issue here. The court noted that the unconscionability provisions “find their statutory basis in Civil Code section 1670.5, [and] apply to all contracts including arbitration clauses in employment and other agreements.” However, the court declined to “decide the exact applicability of the Discover Bank test to this case.” Instead, the court assumed for the purposes of argument that the test should be applied and then concluded Konig failed to meet the test because he failed to show that his claims and the claims of the proposed class were for a predictably small amount of damages. The court noted that Konig presented no evidence that the potential damages and penalties would be predictably small. Therefore, the court concluded that Konig failed to establish substantive unconscionability. Accordingly, the court affirmed the trial court’s order compelling arbitration and dismissing Konig’s class action claims.
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