Litigating California Wage & Hour and Labor Code Class Actions

the California Supreme Court issued two decisions – Discover Bank and Gentry – that severely
hampered the ability of an employer in California to enforce a class action waiver in an employment
arbitration agreement.
In Discover Bank v. Superior Court, 500 the Court struck down as unenforceable a class action
waiver in a consumer contract. The Discover Bank case involved a credit card holder who initiated
a class action alleging that Discover Bank had made misleading statements that imposed late fees
on him and thousands of other credit card holders. Meanwhile, Discover Bank had included a
notice within the card holder’s monthly bill that the arbitration agreement was being amended to
preclude class actions and that the credit card holder would have to cancel the credit card to
prevent this change from going into effect. Although the agreement provided for alternative means
of recovery, individual card holders had little incentive to sue over the imposition of a small late fee.
In a split decision, a bare majority of the California Supreme Court held that the class action waiver
within the arbitration agreement rendered the arbitration agreement unconscionable. The primary
bases for the ruling in Discover Bank were that the arbitration agreement was part of a “bill stuffer”
that made it a true contract of adhesion and that the claims at issue in the consumer setting were
too small to be viable without resorting to the class action device. 501
The reasoning of Discover Bank would not seem to preclude class action waivers in the
employment context. After all, California has in place procedures to incentivize individual
employees to sue to recover for Labor Code violations (including various substantial penalties and
the right to recover attorney’s fees). Moreover, mandatory arbitration and class action waivers are
usually presented to employees in a more visible manner than a bill stuffer with a credit card bill.
In Gentry v. Superior Court, 502 the California Supreme Court took review of an employment case
that seemed to provide good facts for the employer. The employee at issue presented no evidence
that he had been coerced to agree to arbitration and, on the contrary, the employee had declined to
take advantage of a company policy that allowed him to opt out of mandatory arbitration of
employment disputes. Despite these facts, the seven California Supreme Court justices split along
the same 4-3 lines as in Discover Bank and invalidated the class action waiver.
In concluding that class action waivers in arbitration agreements are generally not enforceable, the
majority first noted that the rights to minimum wage and overtime compensation are unwaivable
statutory rights. The majority reasoned that class action arbitration waivers may tend to create a
“de facto waiver” of employee rights, as employees are more likely to pursue such claims in a class
action rather than on an individual basis. Given the “modest” damages at issue in many overtime
500
501
502
36 Cal. 4th 148 (2005).
Id. at 161.
42 Cal. 4th 443 (2007).
Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (12th Edition) 113