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California Court Of Appeal Strikes Down Arbitration Agreement In Wage-And-Hour Class Action Despite Concepcion

Posted in Arbitration, Employment

A California appellate court weighed in last week with another effort to circumvent the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion. In Franco v. Arakelian Enterprises, Inc. (pdf), a panel of the Court of Appeal in Los Angeles affirmed an order refusing to enforce an employee’s agreement to arbitrate disputes with his employer, holding that Concepcion does not abrogate the California Supreme Court’s decision in Gentry v. Superior Court.

Gentry held that a court could refuse to enforce a provision requiring individual arbitration of a claim involving “unwaivable statutory rights”—which include all wage-and-hour claims—if the court determines that (1) the complaint alleged a systematic denial of overtime pay (as any class action complaint would), (2) a class action is “likely to be a significantly more effective practical means of vindicating the rights of the affected employees” than individual arbitration would be, and (3) disallowing a class action “will likely lead to a less comprehensive enforcement of overtime laws” for the allegedly affected employees (i.e., absent class members). That is, under Gentry, a court could refuse to enforce an agreement to arbitrate individually whenever it believes that the absent class members in a putative wage-and-hour class action would collectively be more likely to recover than they would be if each employee had to comply with her agreement and arbitrate any complaint she might have.

The panel concluded that Gentry was not preempted by Concepcion, which the panel took to apply only to categorical prohibitions on class actions. In reaching that conclusion, the panel relied heavily on plaintiff-friendly law review articles, and reasoned that the Supreme Court’s opinion earlier this year in Marmet summarily reversing an explicitly categorical exception to arbitration supported limiting the reach of Concepcion to similar categorical prohibitions.

The panel concluded that Gentry was not such a categorical prohibition. But it is difficult to see how Gentry—which purported to clarify the California Supreme Court’s earlier Discover Bank decision—imposes a less categorical rule than Discover Bank, which applied to consumer class actions alleging systematically deceptive conduct producing damages in amounts too small to make individual actions likely (and which was overruled by Concepcion). Gentry says, in essence, that individual arbitration cannot be compelled whenever the court concludes on balance that the class device will make it more likely that plaintiffs’ lawyers will bring more claims on behalf of a greater number of employees. It is hard to imagine any wage-and-hour class action in which the plaintiffs’ lawyers would not allege “systematic” violations of the wage-and-hour laws, or would not contend that class actions are “significantly more effective” than individual arbitration.

Most courts that have considered Concepcion’s impact have reached a very different conclusion. For example, in Cruz v. Cingular Wireless, in which my colleagues Evan Tager, Archis Parasharami, and Kevin Ranlett represented Cingular, the Eleventh Circuit rejected a similar argument that would have done no more than create a new category of “small-value consumer fraud claims” that are exempt from mandatory individual arbitration.

Franco’s conclusion that Gentry survives Concepcion similarly creates an exempt category of (relatively) small-value wage-and-hour claims. But that conclusion seems flatly inconsistent with Concepcion, which explicitly rejected the argument that a state could require class procedures, even if those procedures are “desirable for other reasons.” That is because, as the Concepcion Court put it, imposing class procedures on arbitration would result in something other than “arbitration as envisioned by the FAA,” and “therefore may not be required by state law.”

The Franco court further justified its result by asserting an aggressive version of the vindication-of-rights argument that the plaintiffs’ class-action bar now regularly invokes in an effort to circumvent Concepcion. The panel repeatedly quoted the question presented by the Concepcion cert petition, which focused on arbitration provisions that allow effective vindication of individual claims—overlooking that the Supreme Court’s holding is broader than the question presented. Asserting that the vindication-of-rights requirement applies to claims under state law as well as to federal claims, the panel held that the arbitration clause before it failed that test for two reasons.

First, although the clause at issue made all statutory remedies available, it did not require fee-shifting in the absence of a statutory provision; in contrast, the clause in Concepcion provides for fee-shifting whenever the arbitrator awards the plaintiff more than the company’s final settlement offer. The Franco court found this significant in light of a recent California Supreme Court decision holding that, while attorneys’ fee awards are available in litigation to recover unpaid wages including overtime, no attorneys’ fee provision covers litigation over rest-break requirements. The Franco court assumed that the same analysis would preclude fee awards in litigation over meal breaks. Because Franco’s principal claims addressed rest and meal breaks, he was unlikely to recover attorneys’ fees even if he won.

Second, the arbitration clause explicitly prohibited employees from suing as private attorneys general. That fact, the court concluded, prevents an employee from recovering civil penalties on an individual basis under California’s Private Attorney General Act (PAGA), which provides for additional recoveries for certain Labor Code violations. (Other courts have interpreted similar language not to preclude individual employees from recovering civil penalties on their own behalf under PAGA.)

The court suggested that these issues distinguish the case from the Ninth Circuit’s decision in Coneff v. AT&T Corp. (another case in which Evan, Archis, and Kevin represented the defendant), which rejected a substantive-unconscionability attack on the same arbitration provision involved in Concepcion and reasoned that Concepcion had rejected the contention that individuals’ rights could not be “vindicated effectively because they are worth much less than the cost of litigating them.” Creating a division within the California Court of Appeal, the Franco court relied heavily on declarations from plaintiffs’ class-action lawyers asserting that they would never take an individual case like Franco’s, where about $10,000 (including PAGA penalties) was at stake. As Division 3 of the Second District explained in Arguelles-Romero v. Superior Court, “[t]here is an element of self-fulfilling prophecy to these declarations; it cannot be the law that attorneys who may specialize in representing consumers can control whether a class action waiver is unenforceable simply by refusing to represent plaintiffs on an individual basis.” The Eleventh Circuit in Cruz similarly rejected reliance on attorney declarations, explaining that such declarations merely “substantiat[e] the very public policy arguments that were expressly rejected by the Supreme Court in Concepcion.” In conflict with the Franco court, the Eleventh Circuit held that this effort at an individual showing of inability to vindicate rights did not change the essentially categorical legal rule the showing was intended to support.

As the Franco court noted in a footnote, in American Express v. Italian Colors Restaurant the U.S. Supreme Court will address the scope and application of the vindication-of-rights argument in the context of a federal antitrust claim. Meanwhile, the California Supreme Court will consider the vitality of Gentry in Iskanian v. CLS Transportation, which is unlikely to be fully briefed and argued until after American Express is decided. Assuming that the employer in Franco petitions for review, the petition is likely to be granted and held for Iskanian.