Are Class Action Waivers Enforceable in California ?
In Gentry v. Superior Court (2007) 42 Cal.4th 443, the California Supreme Court held that arbitration provisions with class action waivers might be unconscionable and therefore unenforceable when applied to statutory wage claims because they could interfere with the ability of employees' to vindicate unwaivable statutory rights and to enforce the overtime laws, thereby violating public policy. (Id. at pp. 453, 457.)
Its holding expanded on the logic of Discover Bank v. Superior Court (2005) 36 Cal.4th 148 and its predicate concern that class action waivers might effectively act as exculpatory clauses because consumers would forego pursuing their small, individual claims. (Gentry at p. 457.)
In the context of an employee's unwaivable statutory rights concerning compensation, class action waivers could have the same effect through a de facto waiver of those rights. (Ibid.)
The Gentry court laid out a four-part test for determining whether a class action waiver should be invalidated in such cases:
(1) the modest size of the potential for individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent class members might be ill informed about their rights; and (4) other real world obstacles to vindicating class members' rights through individual arbitration. (Gentry, supra, 42 Cal.4th at p. 463.)
The Gentry court could not "say categorically that all class arbitration waivers in overtime cases are unenforceable. . . . Not all overtime cases will necessarily lend themselves to class actions, nor will employees invariably request such class actions. Nor in every case will class action or arbitration be demonstrably superior to individual actions." (Gentry, supra, 42 Cal.4th at p. 462.)
In Gentry, supra, 42 Cal.4th 443, the California Supreme Court ruled that a waiver of class claims in arbitration should be taken into account in the unconscionability analysis, and found class action waivers in an employment case involving overtime and minimum wage laws unenforceable. In reaching this conclusion, the Supreme Court discussed its earlier decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148.
In Discover Bank, the Supreme Court held that an "adhesion" consumer contract which includes an arbitration agreement waiving class claims in arbitration is generally unconscionable.
Specifically, Discover Bank held that, "when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party with superior bargaining power 'from responsibility for its own fraud, or willful injury to the person or property of another.' Under these circumstances, such waivers are unconscionable under California law and should not be enforced." (Discover Bank, supra, 36 Cal.4th at pp. 162-163.)
In Discover Bank, our Supreme Court addressed and rejected an argument that the Federal Arbitration Act preempted California law on the subject of unconscionability. (Discover Bank, supra, 36 Cal.4th at pp. 163-173.)
In that context, our Supreme Court observed that the United States Supreme Court had not yet addressed whether a state court could, consistent with the Federal Arbitration Act, hold a class action waiver in an adhesion contract for arbitration to be unconscionable. (36 Cal.4th at p. 171.)
The California Supreme Court found no language in the Federal Arbitration Act, and nothing in the legislative history of the act, to find such preemption.