TWO COURT DECISIONS FURTHER UNDERMINE THE ENFORCEABILITY OF CLASS ACTION WAIVERS AND THREATEN ARBITRATION AGREEMENTS THAT INCLUDE THEM

In our Autumn 2007 newsletter, we reported the California Supreme Court's holding in Gentry v. Superior Court that employees could not, by signing pre-employment agreements, give up their ability to represent a class of employees in a suit affecting "unwaivable statutory rights" if a class action would be a "significantly more effective way of vindicating the rights of affected employees" than individual arbitration or litigation. Gentry v. Superior Court, 42 Cal. 4th 443 (2007). This holding of the Gentry decision was based on public policy grounds alone, not the principles of unconscionability that are often used by courts to evaluate arbitration agreements. On April 27, 2009, a California appellate court confirmed that principles of unconscionability can still be used to invalidate class action waivers. Earlier, on March 10, 2009, another appellate court determined that an employee's class claims for alleged missed meal and rest breaks could not be waived based on the public policy grounds expressed in Gentry.

The April decision, Olvera v. El Pollo Loco, Inc., concerned a class action waiver contained in an arbitration agreement distributed to employees as part of an updated set of policy materials. The novelty of Olvera is that the Court acknowledged that it could apply Gentry to assess whether the waiver was enforceable as a matter of public policy, but decided it did not need to apply Gentry since it had already determined that the waiver could not be enforced based on the principle of unconscionability, i.e., the principle that agreements will not be enforced if they contain unacceptable levels of both substantive and procedural unfairness. This means employees can challenge class action waivers under both the public policy analysis in Gentry and principles of unconscionability.

In the March decision, Franco v. Athens Disposal Co., Inc., a different appellate court considered another class action waiver contained in an arbitration agreement. Unlike in Olvera, the Court invalidated the waiver based not on unconscionability but rather on the public policy grounds in Gentry. Notably, the court also held based on Gentry that the employee could not waive his entitlement under the Labor Code Private Attorney General Act of 2004 ("PAGA") to seek penalty awards on behalf of others (the employer's waiver did not attempt to limit his own individual recovery of penalties). The court then held that the single controversial provision in Plaintiff's arbitration agreement, by purporting to waive both class-wide relief and a representative action under PAGA, rendered the arbitration agreement unenforceable in its entirety.

What this Means for Employers

Class action waivers affecting employment disputes were placed in doubt long ago, particularly since Gentry. Employers that favor arbitration and utilize class action waivers have even more to worry about now, particularly because of Olvera. Enforcing arbitration agreements, even in single plaintiff cases, may now be more difficult because the existence of the waiver could demonstrate substantive unconscionability. This is a worrisome development because it jeopardizes class action waivers in cases in which the Gentry rule would likely not apply, e.g., common law claims that do not implicate unwaivable statutory rights or high-dollar claims, like discrimination, that do not need class treatment to attract legal representation. Meanwhile, the Franco decision makes it more difficult to argue that an unenforceable class action waiver should simply be severed and that the arbitration agreement be enforced without it, since anytime the waiver purports to eliminate both class and representative actions-which probably includes every broadly worded waiver-Franco suggests that the entire agreement should be invalidated.

Given these developments, employers should consult with counsel to determine whether they want to accept the risks of including a class action waiver in their arbitration agreements. Other options should also be discussed, such as narrowing the waivers to certain types of claims or seeking waivers from only highly compensated employees. The reasoning in Olvera suggests that safeguards such as these may free the waiver from unconscionability.