In Robert Gentry v. The Superior Court of Los Angeles County (— Cal.Rptr.3d —, 2006 WL 137228, Cal.App. 2 Dist., Jan. 19, 2006), a California Court of Appeal considered whether a class action waiver in Circuit City’s employment contract is enforceable in light of a recent decision in Discover Bank v. Superior Court (2005 Daily Journal D.A.R. 14,069, Cal.App. 2 Dist., Dec. 7, 2005). The court found that the ruling in Discover Bank did not apply to the facts in the matter at hand and that the class action waiver in Circuit City’s employment contract is enforceable.
Facts
Employee, Robert Gentry, filed a class action lawsuit against Circuit City on August 29, 2002 to compel Circuit City to arbitrate. He alleged that Circuit City improperly classified himself and other salaried managers as “exempt managerial/executive employees” not entitled to overtime pay when they were instead “non-exempt non-managerial employees” entitled to overtime pay. However, during his employment with Circuit City, Gentry received an “Associate Issue Resolution Package” (AIRP) and a copy of Circuit City’s “Dispute Resolution Rules and Procedures” where employees are permitted various options (including arbitration) for resolving employment-related disputes. Enclosed in the packet, as a part of an agreement to arbitrate, was a class action waiver that read, in part: “…the Arbitrator [shall not] have the power to hear arbitration as a class action.” The packet of material also included a form giving the employees 30 days to opt out of the arbitration agreement, and Gentry did not turn the form in and opt out.
At the time of filing the lawsuit in August 2002, California courts were divided on the enforceability of class action waivers in contracts. On February 28, 2003, the trial court granted Gentry’s request to compel Circuit City to arbitrate but ordered Gentry to “arbitrate his claims on an individual basis and submit to the class action waiver.” Gentry appealed the ruling of the trial court, but the appellate court dismissed the appeal on the grounds that the trial court’s order to arbitrate is not appealable. On September 9, 2003, Gentry filed the claim again through an alternative legal avenue. The issue was appealed to the Supreme Court of California, who ordered the California Court of Appeal to consider whether the recent holding in Discover Bank rendered Circuit City’s class action waiver unenforceable.
Decision
The California Court of Appeal analyzed the ruling in Discover Bank that held that certain class action waivers are “unconscionable” (i.e. unreasonable) and therefore unenforceable. However, the Court of Appeal found the facts in Discover Bank to be distinguishable from the facts in the case before it.
In order to determine whether a contract provision is enforceable under law, the Court of Appeal applied the standard of “unconscionability” that contains both procedural and substantive elements. The procedural element of unconscionability generally refers to the terms “contract of adhesion” that “signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” A contract of adhesion is, in other words, an agreement that is a condition of employment. In Discover Bank, the class action waiver was a contract of adhesion and the waiver in Gentry was not. Gentry was given 30 days to reject the arbitration agreement which included the class action waiver, and he opted not to do so. Therefore, the court deemed Circuit City’s class action waiver procedurally conscionable and appropriate.
In Discover Bank, the class action waiver was found to also be substantively unconscionable for a variety of reasons. Some of the reasons included how the class action waiver appeared as a “bill stuffer” in the envelope that the average person would not read and how the disputes between the contracting parties would involve small amounts of money. It was “‘alleged that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.'” The court found here in Gentry that the employer Circuit City was not attempting to cheat large numbers of people out of small amounts of money. The court wrote that “Gentry has alleged statutory violations that could result in substantial damages and penalties should he prevail on his individual claims.” The class action waiver in Gentry was found to be substantially conscionable and appropriate under the law.
Because Circuit City’s class action waiver was both procedurally and substantively conscionable and reasonable under law, the court determined that Circuit City’s class action waiver portion of their arbitration agreement was enforceable. Accordingly, Gentry could not file a class action lawsuit before an Arbitrator.
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