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Court of Appeal Holds Arbitration and Class Action Waiver Unenforceable in Employment Law Case

In Franco v. Arakelian Enterprises (LASC Case No. B232583 Decided 11/26/12) the Court of Appeal held an employee’s arbitration and class action waiver unenforceable in an employment law case and allowed the class action to proceed in Court.

On April 9, 2007, plaintiff Edixon Franco filed a class action complaint against Athens Disposal Company, Inc., dba Athens Services. The employer defendant filed a Motion to Compel Arbitration which was granted. The plaintiff appealed and in Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277 (Franco I), the Court of Appeal (California Second Appellate District, Division One) concluded that Gentry invalidated a class action waiver where an employee alleged that his employer had violated the laws regarding employees’ rights to rest and meal periods — statutory rights that are also unwaivable.  (Franco I, at pp. 1290–1294, citing Lab. Code, §§ 512, 226.7; undesignated section references are to that code.)  We further concluded that, with respect to a claim under the Labor Code Private Attorneys General Act of 2004 (PAGA) (§§ 2698–2699.5), Gentry invalidated an arbitration clause prohibiting an employee from acting as a private attorney general (see Franco I, at pp. 1299–1302).

After the Court decided Franco I, Athens Services filed a petition for review in the California Supreme Court, which declined to hear the case (June 17, 2009, S172223). Athens Services then filed a petition for a writ of certiorari in the United States Supreme Court, which denied the petition on January 11, 2010 (Athens Disposal Co., Inc. v. Franco (2010) ___ U.S. ___ [130 S.Ct. 1050]). The case returned to the trial court. 

The employer filed a second petition to compel arbitration, arguing that a change in the law rendered the class action waiver enforceable.  The trial court denied the petition.  The question on appeal is whether Gentry was overruled by Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (2010) 559 U.S. ___ [130 S.Ct. 1758] (Stolt-Nielsen) and AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740] (Concepcion). 

The Franco II Court concluded that Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights.  As required by Stolt-Nielsen, when a class action waiver is unenforceable under Gentry, the plaintiff’s claims must be adjudicated in court, where the plaintiff may file a putative class action.  

In Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry), our Supreme Court held that, in arbitration agreements governing employment, class action waivers may be unenforceable in “some circumstances [because they] . . . would lead to a de facto waiver [of employees’ statutory rights] and would impermissibly interfere with employees’ ability to vindicate [those] rights” (id. at p. 457, italics added).

More specifically, Gentry addressed the enforceability of class action waivers in the context of a claim for overtime compensation.  The court grounded its decision on the conclusion that an employee’s right to overtime compensation is an unwaivable statutory right.  (Gentry, 455–457.)  In determining the validity of class action waivers, the court stated:  (1) “individual awards in wage-and-hour cases tend to be modest” (id. at p. 457); (2) “a current employee who individually sues his or her employer is at greater risk of retaliation” (id. at p. 459); (3) “some individual employees may not sue because they are unaware that their legal rights have been violated” (id. at p. 461); (4) “‘class actions may be needed to assure the effective enforcement of statutory policies’” (id. p. 462); and (5) there may be “real world obstacles to the vindication of class members’ rights to overtime through individual arbitration” (id. at p. 463).

Gentry concluded that, when an employee alleges that an employer has systematically denied proper overtime pay to a class of employees, and a trial court finds, based on the foregoing factors, that a class action “is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable [statutory] rights . . . .’”  (Gentry, supra, 42 Cal.4th at p. 463, italics added.) 

As a result, the Court affirmed the trial Court’s decision denying the petition to compel arbitration of the class action claims. For the full opinion see http://www.courts.ca.gov/opinions/documents/B232583.pdf

This Court decision has answered many questions that lawyers, employees, and employers have regarding the enforceability of arbitration agreements and class action waivers involving overtime, meal and rest break claims as well as PAGA Claims. Ordering cases to binding arbitration used to be the “rule” rather than the exception.  Employers looking to update their policies or have them reviewed to ensure they are in compliance should contact Quintilone & Associates at req@quintlaw.com.  For more information on seeking payment for unpaid overtime, missed meal and rest periods or off the clock work as well as reimbursement of business expenses and whether you have a potential claim please contact Quintilone & Associates at req@quintlaw.com

Quintilone & Associates focuses in Class Actions, Employment Law, Personal Injury, and Business Litigation in Orange County, CA area.