Lead Opinion
Opinion
In this case we consider whether class arbitration waivers in employment arbitration agreements may be enforced to preclude class arbitrations by employees whose statutory rights to overtime pay pursuant to Labor Code sections 500 et seq. and 1194
Another issue posed by this case is whether a provision in an arbitration agreement that an employee can opt out of the agreement within 30 days means that the agreement is not procedurally unconscionable, thereby insulating it from employee claims that the arbitration agreement is substantively unconscionable or unlawfully exculpatory. As explained below, a finding of procedural unconscionability is not required to invalidate a class arbitration waiver if that waiver implicates unwaivable statutory rights. But such a finding is a prerequisite to determining that the arbitration agreement as a whole is unconscionable. Plaintiff in this case argues that other terms of the arbitration agreement were substantively unconscionable and that the entire agreement should not be enforced. Contrary to the Court of Appeal, we conclude the present agreement has an element of procedural unconscionability notwithstanding the opt-out provision, and therefore remand for a determination of whether provisions of the arbitration agreement were substantively unconscionable.
I. Statement of Facts
The facts are for the most part not in dispute. On August 29, 2002, Robert Gentry filed a class action lawsuit in superior court against Circuit City Stores, Inc. (Circuit City), seeking damages for violations of the Labor Code and Business and Professions Code, as well as for conversion. Gentry filed suit on behalf of salaried customer service managers such as himself whom Circuit City had allegedly “illegally misclassified” as “exempt managerial/executive employees” not entitled to overtime pay, when in fact, they were “ ‘non-exempt’ non-managerial employees” entitled to be compensated for hours worked in excess of
When he was hired by Circuit City in 1995, Gentry received a packet that included an “Associate Issue Resolution Package” and a copy of Circuit City’s “Dispute Resolution Rules and Procedures,” pursuant to which employees are afforded various options, including arbitration, for resolving employment-related disputes. By electing arbitration, the employee agrees to “dismiss any civil action brought by him in contravention of the terms of the parties’ agreement.” The agreement to arbitrate also contains a class arbitration waiver, which provides: “The Arbitrator shall not consolidate claims of different Associates into one proceeding, nor shall the Arbitrator have the power to hear arbitration as a class action . . . .” As will be explained at greater length below, the arbitration agreement also contained several limitations on damages, recovery of attorney fees, and the statute of limitations that were less favorable to employees than were provided in the applicable statutes. The packet included a form that gave the employee 30 days to opt out of the arbitration agreement. Gentry did not do so.
At that time, there was a split of authority in California on the enforceability of class action waivers in consumer contracts. (See Szetela v. Discover Bank (2002)
Gentry filed a mandate petition on September 9, 2003. The Court of Appeal denied the petition, noting that the issue of the enforceability of the class action waiver was before this court in Discover Bank. We granted Gentry’s petition for review and deferred briefing pending our decision in Discover Bank. On June 27, 2005, we issued our decision in Discover Bank, supra,
On remand, the Court of Appeal again denied Gentry’s petition for writ of mandate. It distinguished the class arbitration waiver in this case from the one found unconscionable in Discover Bank on two principal grounds. First, the court held that the agreement was not unconscionable because of the 30-day opt-out provision. Because of this provision, “the agreement at issue here does not have that adhesive element and therefore is not procedurally unconscionable.”
Second, for reasons elaborated on below, it found the class arbitration waiver here was distinguishable from the one in Discover Bank and not substantively unconscionable
We granted review to clarify our holding in Discover Bank.
II. Discussion
A. Class Arbitration Waiver in Overtime Cases May Be Contrary to Public Policy
In Discover Bank, the plaintiff sought to prosecute a class action against a credit card company that had allegedly defrauded a large number of customers for small amounts of money, as low as $29 in the plaintiff’s case. (Discover Bank, supra,
Because of the importance of class actions in consumer litigation, we concluded that “at least some class action waivers in consumer contracts are unconscionable under California law. First, when, a consumer is given an amendment to its cardholder agreement in the form of a ‘bill stuffier’ that he would be deemed to accept if he did not close his account, an element of procedural unconscionability is present. [Citation.] Moreover, although adhesive contracts are generally enforced [citation], class action waivers found in such contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract clauses that are contrary to public policy. As stated in Civil Code section 1668: ‘All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’ . . .
“Class action and arbitration waivers are not, in the abstract, exculpatory clauses. But because, as discussed above, damages
We clarified that “[w]e do not hold that all class action waivers are necessarily unconscionable. But 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 ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ (Civ. Code, § 1668.) 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.)
We also concluded in Discover Bank that it was unnecessary to abandon the arbitration forum in order to address the claims of a class of consumers. Rather, class arbitration was a well-accepted alternative to class litigation on the one hand and individual arbitration on the other. (Discover Bank, supra, 36 Cal.4th at pp. 157-158.) We noted that class arbitration has been in use for the last 20 years and that rules concerning such arbitration have been incorporated into various dispute resolution services. (Id., at p. 172.)
In Discover Bank, before discussing the general principles of unconscionability on which that decision was based, we noted that the Court of Appeal in America Online, Inc. v. Superior Court (2001)
In the present case, Gentry’s lawsuit is pursuant to statute. Section 510 provides that nonexempt employees will be paid one and one-half their wages for hours worked in excess of eight per day and 40 per week and twice their wages for work in excess of 12 hours a day or eight hours on the seventh day of work. Section 1194 provides a private right of action to enforce violations of minimum wage and overtime laws.
The public importance of overtime legislation has been summarized as follows: “An employee’s right to wages and overtime compensation clearly have different sources. Straight-time wages (above the minimum wage) are a matter of private contract between the employer and employee. Entitlement to overtime compensation, on the other hand, is mandated by statute and is based on an important public policy. . . . ‘The duty to pay overtime wages is a duty imposed by the state; it is not a matter left to the private discretion of the employer. [Citations.] California courts have long recognized [that] wage and hours laws “concern not only the health and welfare of the workers themselves, but also the public health and general welfare.” [Citation.] . . . [O]ne purpose of requiring payment of overtime wages is “ ‘to spread employment throughout the work force by putting financial pressure on the employer ....’” [Citation.] Thus, overtime wages are another example of a public policy fostering society’s interest in a stable job market. [Citation.] Furthermore ... the Legislature’s decision to criminalize certain employer conduct reflects a determination [that] the conduct affects a broad public interest.... Under Labor Code section 1199 it is a
Moreover, the overtime laws also serve the important public policy goal of protecting employees in a relatively weak bargaining position against “ ‘the evil of “overwork.” ’ ” (Barrentine v. Arkansas-Best Freight System (1981)
In short, the statutory right to receive overtime pay embodied in section 1194 is unwaivable. In Armendariz v. Foundation Health Psychcare Services, Inc. (2000)
We have not yet considered whether a class arbitration waiver would lead to a de facto waiver of statutory rights, or whether the ability to maintain a class action or arbitration is “necessary to enable an employee to vindicate . . . unwaivable rights in an arbitration forum.” (Little, supra,
In arguing the contrary, Circuit City focuses on the language in Discover Bank stating that we were not holding all class action waivers to be necessarily unconscionable, but that waivers in consumer contracts of adhesion involving “predictably . . . small amounts of damages,” that are part of a “scheme to deliberately cheat large numbers of consumers out of individually small sums of money,” will be held to be unconscionable and unenforceable. (Discover Bank, supra, 36 Cal.4th at pp. 162-163.) Circuit City argues, as the Court of Appeal concluded, that this is not such a case.
Yet the above quoted passage in Discover Bank was not intended to suggest that consumer actions involving minuscule amounts of damages were the only actions in which class action waivers would not be
First, individual awards in wage-and-hour cases tend to be modest. In addition to the fact that litigation over minimum wage by definition involves the lowest-wage workers, overtime litigation also usually involves workers at the lower end of the pay scale, since professional, executive, and administrative employees are generally exempt from overtime statutes and regulations. (See Cal. Code Regs., tit. 8, § 11070, subd. 1(A); Ramirez v. Yosemite Water Co. (1999)
Indeed, the Court of Appeal in Bell, supra,
The Court of Appeal in the present case, in upholding the class arbitration waiver, pointed to our discussion in Discover Bank of the statement in Gilmer v. Interstate/Johnson Lane Corp. (1991)
A second factor in favor of class actions for these cases, as noted in Bell, is that a current employee who individually sues his or her employer is at greater risk of retaliation. We have recognized that retaining one’s employment while bringing formal legal action against one’s employer is not “a viable option for many employees.” (Richards v. CH2M Hill, Inc. (2001)
Indeed, federal courts have widely recognized that fear of retaliation for individual suits against an employer is a justification for class certification in the arena of employment litigation, even when it was otherwise questionable that the numerosity requirements of rule 23 (Fed. Rules Civ. Proc., rule 23, 28 U.S.C.) were satisfied.
Circuit City points out that retaliation by the employer against an employee who files an overtime claim or other wage and hour claims is unlawful under section 98.6.
Third, some individual employees may not sue because they are unaware that their legal rights have been violated. The New Jersey Supreme Court recently emphasized the notification function of class actions in striking down a class arbitration waiver in a consumer contract: “[W]ithout the availability of a class-action mechanism, many consumer-fraud victims may never realize that they may have been wronged. As commentators have noted, ‘often consumers do not know that a potential defendant’s conduct is illegal. When they are being charged an excessive interest rate or a penalty for check bouncing, for example, few know or even sense that their rights are being violated.’ ” (Muhammad v. County Bank of Rehoboth Beach, Delaware (2006)
For these reasons, a federal district court recently concluded that an arbitration agreement with a class arbitration waiver was inconsistent with the minimum wage and overtime provisions of the federal Fair Labor Standards Act (FLSA). “In this case, the imposition of a waiver of class actions may effectively prevent . . . employees from seeking redress of FLSA violations. The class action provision thereby circumscribes the legal options of these employees, who may be unable to incur the expense of individually pursuing their claims. In this respect, the class action waiver is not only unfair to . . . employees, but also removes any incentive for [the employer] to avoid the type of conduct that might lead to class action litigation in the first instance. The class action clause is therefore substantively unconscionable.” (Skirchak v. Dynamics Research Corp., Inc. (D.Mass. 2006)
We also agree with the Bell court that “class actions may be needed to assure the effective enforcement of statutory policies
We cannot say categorically that all class arbitration waivers in overtime cases are unenforceable. As Circuit City points out, some 40 published cases over the last 70 years in California have involved individual employees prosecuting overtime violations without the assistance of class litigation or arbitration. (See, e.g., Ramirez v. Yosemite Water Co., supra,
Nonetheless, when it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration 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 rights in an arbitration forum.” (Little, supra,
Of course, in cases like the present, the trial court would be comparing class arbitration with the individual arbitration methods the employer offers, rather than comparing individual with classwide litigation. We do not foreclose the possibility that there may be circumstances under which individual arbitrations may satisfactorily address the overtime claims of a class of similarly aggrieved employees, or that an employer may devise a system of individual arbitration that does not disadvantage employees in vindicating their rights under section 1194. But class arbitration waivers cannot, consistent with the strong public policy behind section 1194, be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees’ prosecution of those claims.
Circuit City makes a number of arguments that we have already concluded lack merit. As in Discover Bank, we again reject the “unsupported assertions [of some courts] that, in the case of small individual recovery, attorney fees are an adequate substitute for the class action or arbitration mechanism. Nor do we agree . . . that small claims litigation, government prosecution, or informal resolution are adequate substitutes.” (Discover Bank, supra,
Nor do we accept Circuit City’s argument that a rule invalidating class arbitration waivers discriminates against arbitration clauses in violation of the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.). We considered at great length and rejected a similar argument in Discover Bank. (Discover Bank, supra, 36 Cal.4th at pp. 163-173.) The principle that in the case of certain unwaivable statutory rights, class action waivers are forbidden when class actions would be the most effective practical means of vindicating those rights is an arbitration-neutral rule: it applies to class waivers in arbitration and nonarbitration provisions alike. (See AOL, supra, 90 Cal.App.4th at pp. 17-18; see also Armendariz, supra, 24 Cal.4th at pp. 99-102 [imposition of minimal requirements on arbitration necessary to vindicate statutory rights not a violation of the FAA].) “The Armendariz requirements are . . . applications of general state law contract principles regarding the unwaivability of public rights to the unique context of arbitration, and accordingly are not preempted by the FAA.” (Little, supra,
Accordingly, we will
B. The Opt-out Provision and Procedural Unconscionability
The Court of Appeal concluded, and Circuit City argues, that the fact that an employee had 30 days to opt out of the arbitration agreement means that the terms of the agreement, including the class arbitration waiver, are not procedurally unconscionable and are therefore enforceable. But the validity of a class arbitration waiver was analyzed in the previous part of this opinion in terms of unwaivable statutory rights rather than unconscionability. (See Armendariz, supra,
Gentry does challenge provisions of the arbitration agreement other than the class arbitration waiver, however, and argues that the entire arbitration agreement is unconscionable and unenforceable. Should the trial court on remand find the class arbitration waiver in the present case to be void, it is unclear whether the issue of the unconscionability of the arbitration agreement as a whole will become moot, because it is unclear whether Gentry will continue to resist arbitration or whether Circuit City will continue to seek it. Nonetheless, because this issue may remain viable on remand, we will address the Court of Appeal’s holding that the arbitration agreement was not unconscionable because Gentry had a 30-day period to opt out of the agreement. As noted above, the Court of Appeal stated that because of the opt-out provision, “the agreement at issue here does not have [an] adhesive element and therefore is not procedurally unconscionable.”
As a threshold matter, Gentry argues that the arbitration agreement was ineffective because his failure to opt out of the agreement cannot constitute assent to
In this case, Gentry signed an easily readable, one-page form that accompanied receipt of the Associate Issue Resolution Package. The form stated in part: “I understand that participation in the Issue Resolution Program is voluntary. If I do not wish to participate in the arbitration component of the Program, however, I must send the completed ‘Circuit City Arbitration Opt-Out Form,’ which is included with this package. I must send the Opt-Out Form via U.S. mail ... to the above address within 30 calendar days of the date on which I signed below. I understand that if I do not mail the Form within 30 calendar days, I will be required to arbitrate all employment-related legal disputes I may have with Circuit City.” (Original boldface.)
Although Gentry contends his signature was merely an acknowledgement of receipt of the Associate Issue Resolution Package, it was also an acknowledgment of his assent to the opt-out provision. The opt-out provision of the acknowledgment agreement was neither inconspicuous or difficult to understand. Thus, in signing the above form, Gentry manifested his intent to use his silence, or failure to opt out, as a means of accepting the arbitration agreement. Having thus indicated his intent, he may not now claim that the failure to opt out did not constitute acceptance of the arbitration agreement. (1 Corbin on Contracts, supra, § 3.21, p. 414.) The question is not whether the acknowledgement form itself is a valid contract—it is not—but rather whether Gentry’s signature on that form reasonably led Circuit City to believe that his failure to opt out constituted acceptance of the arbitration agreement. We conclude under the circumstances of this case that it did.
The question whether an arbitration agreement has been validly formed is of course different from whether that agreement was unconscionable. In order to evaluate the Court of Appeal’s conclusion that the 30-day opt-out provision meant that Circuit City’s arbitration agreement was not procedurally unconscionable, we first review some general principles. “ ‘To briefly recapitulate the principles of unconscionability, the doctrine has “ ‘both a “procedural” and a “substantive” element,’ the former focusing on ‘ “oppression” ’ or ‘ “surprise” ’ due to unequal bargaining power, the latter on ‘ “overly harsh” ’ or ‘ “one-sided” ’ results.” [Citation.] The procedural element of an unconscionable contract generally takes the form of a contract of adhesion, “ ‘which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ” . . . [f] Substantively unconscionable
As we have further explained: “ ‘The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. ’ [Citation.] But they need not be present in the same degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz, supra,
As the above suggests, a finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided. (See, e.g., Little, supra, 29 Cal.4th at p. 1071.) As also suggested above, there are degrees of procedural unconscionability. At one end of the spectrum are contracts that have been freely negotiated by roughly equal parties, in which there is no procedural unconscionability. Although certain terms in these contracts may be construed strictly, courts will not find these contracts substantively unconscionable, no matter how one-sided the terms appear to be. (See, e.g., Nunes Turfgrass, Inc. v. Vaughan-Jacklin Seed Co. (1988)
Thus, a conclusion that a contract contains no element of procedural unconscionability is tantamount to saying that, no matter how one-sided the contract terms, a court will not disturb the contract because of its confidence that the contract was negotiated or chosen freely, that the party subject to a seemingly one-sided term is presumed to have obtained some advantage from conceding the term or that, if one party negotiated poorly, it is not the court’s place to rectify these kinds of errors or asymmetries. Accordingly, if we take the Court of Appeal in this case at its word that there was no element of procedural unconscionability in the arbitration agreement because of the 30-day opt-out provision, then the logical conclusion is that a court would have no basis under common law unconscionability analysis to scrutinize or overturn even the most unfair or exculpatory of contractual terms.
We conclude that the Court of Appeal erred in finding the present agreement free of procedural unconscionability. It is
First and foremost, the explanation of the benefits of arbitration in the Associate Issue Resolution Handbook was markedly one-sided. The Court of Appeal thought otherwise, stating: “The ‘Associate Issue Resolution Handbook,’ written in straightforward language, does point out the advantages of electing arbitration (notably, that the procedure is cost effective and the employee’s claim is resolved ‘in a matter of weeks or a few months rather than years’). However, it also notes the disadvantages (for example, the lack of a right to a jury trial and limited discovery). The employee is then free to decide whether or not the advantages of arbitration outweigh the disadvantages.”
But what the Court of Appeal’s discussion entirely neglected is that although the handbook alluded to some of the shortcomings of arbitration in the general sense, it did not mention any of the additional significant disadvantages that this particular arbitration agreement had compared to litigation. These included the following: First, the agreement provided for a one-year statute of limitations as opposed to the three-year statute for recovering overtime wages provided under Code of Civil Procedure section 338 (see Murphy, supra,
The fact that Circuit City’s explanation of the arbitration agreement emphasized that the arbitration is “much less expensive” and that “the arbitrator can award monetary damages to compensate you for the harm you may have suffered,” without mentioning the many disadvantages to the employee that Circuit City had inserted into the agreement, meant that the employee would receive a highly distorted
Moreover, it is not clear that someone in Gentry’s position would have felt free to opt out. The materials provided to Gentry made unmistakably clear that Circuit City preferred that the employee participate in the arbitration program. The “Associate Issue Resolution Handbook” distributed with the opt-out form touted the virtues of arbitration, including use of the all-capitalized subheading—WHY ARBITRATION IS RIGHT FOR YOU AND CIRCUIT CITY—that left no doubt about Circuit City’s preference. The fact that the arbitration agreement was structured so that arbitration was the default dispute resolution procedure from which the employee had to opt out underscored Circuit City’s proarbitration stance. Given the inequality between employer and employee and the economic power that the former wields over the latter (see Armendariz, supra,
To reiterate, the fact that some degree of procedural unconscionability is present does not mean necessarily that the arbitration agreement is unenforceable. But it does mean that the agreement is not immune from judicial scrutiny to determine whether or not its terms are so one-sided or oppressive as to be substantively unconscionable.
As noted, Gentry argues that several provisions of the arbitration agreement other than the class arbitration waiver are substantively unconscionable, an argument that Circuit City disputes. The Court of Appeal did not address these arguments,
III. Disposition
The judgment of the Court of Appeal is reversed and the cause is remanded for proceedings consistent with this opinion.
George, C. J., Kennard, J., and Werdegar, J., concurred.
Notes
All statutory references are to this code unless otherwise indicated.
Reporter’s Note: Review granted April 9, 2003, S113725; see
For the sake of economy, this opinion will sometimes refer to class action litigation and class arbitrations genetically as “class actions.”
Although Gentry pleads causes of action under Business and Professions Code section 17200 et seq. as well as for common law conversion, these actions are based on Circuit City’s alleged violation of the overtime laws, which Labor Code section 1194 is intended to enforce. We therefore focus on the ability of employees to vindicate their rights pursuant to section 1194.
How much is at issue in Gentry’s claim in the present case is unclear. Circuit City contends that the claim must be for over $25,000 because the “unlimited” jurisdiction box was checked on the civil case cover sheet accompanying the complaint. Cases alleging less than $25,000 are considered “limited civil cases.” (Code Civ. Proc., § 86, subd. (a)(1).) However, as Gentry points out, cases will be classified as unlimited in jurisdiction if injunctive relief is sought (Code Civ. Proc., § 580, subd. (b)(2)), as Gentry did in the present case. Therefore, the designation of “unlimited jurisdiction” on the cover sheet of the complaint does not inform us of the minimum amount of damages being sought.
“Rule 23(a) states four threshold requirements applicable to all class actions: (1) numerosity (a ‘class [so large] that joinder of all members is impracticable’); (2) commonality (‘questions of law or fact common to the class’); (3) typicality (named parties’ claims or defenses ‘are typical ... of the class’); and (4) adequacy of representation (representatives ‘will fairly and adequately protect the interests of the class’).” (Amchern Products, Inc. v. Windsor (1997)
Section 98.6, subdivision (a) states in pertinent part: “No person shall discharge an employee or in any manner discriminate against any employee or applicant for employment because ... the employee or applicant for employment has filed a bona fide complaint or claim or instituted or caused to be instituted any proceeding under or relating to his or her rights, which are under the jurisdiction of the Labor Commissioner . . . .”
The dissent claims our holding is inconsistent with Little’s predecessor, Armendariz, because here “[n]o finding is made that a class remedy is essential, as a practical matter, to vindication of the ‘unwaivable’ statutory right.” (Dis. opn., post, at p. 475.) Armendariz did not use the dissent’s italicized word “essential” in its formulation, and it is unclear what that word means in this context. Rather, in holding for example that employers must pay most of the costs when they mandate arbitration of unwaivable rights for their employees, we concluded that the imposition of such costs would burden employees’ rights by “posfing] a significant risk that employees will have to bear large costs to vindicate their statutory right against workplace discrimination.” (Armendariz, supra,
Moreover, the dissent’s contention that Gentry as an individual has not shown himself to be burdened by the class arbitration waiver is off the mark. First, questions of the value of his claim and the appropriateness of a class arbitration in this case will be determined on remand. More fundamentally, as suggested above, one of the advantages of class action litigation or arbitration is precisely the fact that the class representative spearheading the litigation is in a more advantageous position—e.g., is better informed, is less likely to be intimidated—than the class as a whole, and the class benefits from the representative’s advantages. Given this reality, and given that our primary concern is ensuring that the state’s overtime laws be effectively enforced and that class arbitration waivers not thwart that enforcement, it makes little sense to focus only on whether the class representative himself or herself would be stymied in the pursuit of an individual arbitration remedy (see dis. opn., post, at p. 478), rather than considering as well the difficulties for the class of employees affected by Circuit City’s allegedly unlawful practices.
The dissent declares that we “may not elevate a mere judicial affinity for class actions as a beneficial device for implementing the wage laws above the policy expressed by both Congress and our own Legislature that voluntary individual agreements to arbitrate . . . should be enforced according to their terms.” (Dis. opn., post, at p. 477.) What is at issue in this case, however, is not a “judicial affinity for class actions” but the enforcement of an unwaivable statutory right to overtime pay. What happens when a class action waiver significantly interferes with that right? Although the dissent claims that our concerns about the effect of class arbitration waivers are exaggerated, based on its own questionable assumptions about class arbitration and litigation, it also appears to adopt the position that even if we are correct that such waivers will substantially interfere with the ability of employees to enforce overtime laws in some cases, the waiver should nonetheless be given effect. The dissent thus articulates its preference that in this case the statutory policy in favor of enforcing arbitration agreements as written overrides the statutory policy in favor of vigorously enforcing overtime laws.
There is no indication, however, that the Legislature shared or shares the dissent’s preference, or even that it has favored the arbitration of wage and overtime claims at all. Indeed, the evidence is to the contrary. Section 1194 provides, as discussed, that an employee is entitled to recover “in a civil action” overtime or minimum wage compensation. It seems doubtful that the Legislature contemplated, when that statute was originally enacted in 1937 (Stats. 1937, ch. 90, § 1194, p. 217), that employer-mandated arbitration could serve as a substitute to “civil actions” authorized by the statute. In fact, the forerunner of the CAA, Code of Civil Procedure former section 1280, in operation at the time section 1194 was originally enacted, specifically excluded “contracts pertaining to labor” from the scope of enforceable arbitration agreements. (Stats. 1935, ch. 52, § 9, p. 388.) Moreover, at the time of the CAA’s enactment in 1961 (Stats. 1961, ch. 461, § 2, p. 1540), the United States Supreme Court’s construction of the FAA indicated that arbitration statutes would not be used to enforce agreements to arbitrate unwaivable statutory rights. (See Wilko v. Swan (1953)
We note that if an employee believes individual arbitration to be as advantageous as the dissent suggests, nothing in this opinion, nor in any subsequent trial court ruling, precludes him or her from entering into an individual postdispute arbitration agreement with Circuit City.
We note that two Ninth Circuit cases came to the contrary conclusion. (Circuit City Stores, Inc. v. Ahmed (9th Cir. 2002)
Circuit City points to a 1998 modification of the arbitration agreement that required that the arbitration be conducted according to the procedural rules in effect when the arbitration request was filed. Circuit City further points to the arbitration agreement amendments of 2001 and 2005, which it claims do not contain the above terms, and contends that these amended agreements would govern the conduct of Gentry’s arbitration and are not substantively unconscionable. Gentry on the other hand argues that the 1995 rules apply and that for various reasons the 1998 amendment is not effective. The Court of Appeal did not address this issue, nor was it one of the issues presented in the petition for review. Assuming the issue is not moot, it must be determined on remand which agreement controls and whether there is substantive unconscionability under that agreement. But for present purposes, our only inquiry is whether the 1995 arbitration agreement, notwithstanding its opt-out provision, contained an element of procedural unconscionability. The fact that the 1995 agreement had substantively unconscionable terms that were not fully disclosed to Gentry is directly pertinent to that determination.
Dissenting Opinion
I respectfully dissent. I cannot join the majority’s continuing effort to limit and restrict the terms of private arbitration agreements, which enjoy special protection under both state and federal law.
Both the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) and the California Arbitration Act (CAA; Code Civ. Proc., § 1281 et seq.) provide that an agreement to resolve disputes by arbitration, rather than by court litigation, must be enforced except upon grounds applicable to contracts generally. These statutes are intended to override courts’ historical suspicion of arbitration as an inferior forum for the vindication of claims, and to endorse contracts—including employment contracts—in which parties agree to resolve their disputes by this relatively cheap, simple, and expeditious means. (See, e.g., Circuit City Stores, Inc. v. Adams (2001)
Because of the statutory preference that arbitration agreements be fully implemented, past decisions have recognized but limited circumstances in which general contract principles may render terms of such an agreement unenforceable. The majority holds that such circumstances may be present here. In my view, the majority thereby errs.
Real party in interest Circuit City Stores, Inc. (Circuit City), offered its employees, including plaintiff Gentry, a voluntary program to resolve disputes by arbitration. Consistent with the primary advantage of arbitration as a quicker, simpler, and cheaper alternative to court litigation, the program provided, among other things, that claims would proceed on an individual basis, and that consolidation of the separate claims of multiple plaintiffs in a single proceeding would not be permitted.
The program’s terms, including the individual arbitration provision, were set forth in a package of written materials, which plaintiff Gentry received, and were further explained in a video presentation, which he attended. He signed a receipt for the written materials. The receipt advised that he should review the materials and contact Circuit City with any questions. It even suggested that he could consult with an attorney about his legal rights. Finally, it clearly provided that, having done so, he could “opt out” of the arbitration program, without penalty, by mailing the appropriate form to Circuit City within 30 days.
Gentry did not exercise his option. The majority concedes that a contract under the program’s terms was thus validly formed.
Later, contrary to those provisions, Gentry filed a class action against Circuit City, seeking overtime wages allegedly due both to himself and to other employees. The superior court enforced the arbitration agreement according to its terms, and ordered individual arbitration of Gentry’s claim. The Court of Appeal summarily denied mandate. We directed that court to reconsider under the intervening decision in Discover Bank v. Superior Court (2005)
Now the majority reverses, finding that the individual-arbitration term in Circuit City’s agreement with Gentry may be invalid. The majority does not reach this result—because it cannot—by any analysis to be found in the prior case law. No finding is made that a class remedy is
Finally, there is no suggestion that the individual-arbitration clause in the voluntary agreement between Gentry and Circuit City meets the test of invalid “exculpatory” agreements (see Civ. Code, § 1668) set forth in Discover Bank, supra,
Whatever the merits of Discover Bank—a decision from which I largely dissented—we face no similar situation here. As the instant majority admits, claims for overtime wages, unlike the minor credit card fees and charges at issue in Discover Bank, are not necessarily and predictably “minuscule” (see maj. opn., ante, pp. 456-457), such that the incentive to prosecute individual actions, and thus to hold the wrongdoer to account, will rarely, if ever, be present. Obviously, an individual claim for accumulated unpaid wages can be substantial. And (here is no indication in the record that Gentry himself—the person whose contract for individual arbitration is actually before us—cannot, as a practical matter, vindicate his statutory overtime rights except through class proceedings.
Moreover, as the instant majority acknowledges, Circuit City did not abruptly impose on Gentry a mandatory requirement of individual arbitration. Unlike the credit card customers in Discover Bank, Gentry was given the opportunity to consider the terms of Circuit City’s arbitration proposal, and, after doing so, to opt out of the arbitration program without suffering any penalty or sanction.
Nonetheless, breaking new ground, the majority opines that, for several reasons, an agreement to arbitrate disputes on an individual basis might make it “very difficult” (maj. opn., ante, at p. 457) for some Circuit City employees to pursue their unwaivable rights to unpaid overtime wages. To that extent, the majority reasons, such a provision—even, apparently, if neither oppressive nor mandatory—must thus be considered exculpatory and invalid. Accordingly,
In effect, the majority holds that, despite such an agreement, the trial court may certify a class, in an overtime-wage case, in any circumstance where it could otherwise do so. For all practical purposes, the majority thus decrees, such agreements are forbidden, and meaningless, in this context.
The majority cites no currently valid statutory provision that requires or supports such a determination.
In the majority’s view, several factors suggest that the absence of a class remedy might “under some circumstances” unduly interfere with employees’ ability to vindicate their statutory rights to overtime pay. (Maj. opn., ante, at p. 457.) Because claims for unpaid overtime wages tend to be “modest,” the majority asserts, the fees and costs of proceeding individually might discourage many such actions, resulting in mere “ ‘ “random and fragmentary enforcement” ’ ” of the wage laws. (Id., at p. 462.) The majority cites the prospect of employer retaliation—admittedly illegal—against a worker who asserts an individual claim without the protective coloration of collective action. An additional issue, the majority suggests, is that many employees, especially those low-wage workers most vulnerable to violations, may not know their rights. Finally, the majority concludes, administrative proceedings—so-called Berman hearings (Lab. Code, §§ 98-98.8; see Murphy v. Kenneth Cole Productions, Inc. (2007)
In many respects, the majority’s concerns are exaggerated. Though a credit card customer might not sue individually to recover a minor fee or charge he believes improper, one would expect an employee vigorously to pursue any significant amount due as compensation for his labor. The case law supports that hypothesis. As the majority acknowledges, “some 40 published cases over the last 70 years in California have involved individual employees prosecuting overtime violations without the assistance of class litigation or arbitration. [Citations.]” (Maj. opn., ante, at p. 462.)
And though the majority stresses the drawbacks of individual litigation to resolve small or modest claims (see generally, e.g., Linder, supra,
Moreover, while collective action has its place, the parties here may also have contemplated that resolution of a dispute by the relatively simple, informal process of individual arbitration would reduce the workplace tensions that might otherwise arise as the result of a class battle in court. Indeed, though the majority suggests that class proceedings may lessen the chances of retaliation against an individual employee,
But even if class relief were a “significantly more effective” way for Circuit City employees, as a group, to establish their overtime-wage claims (maj. opn., ante, at pp. 450, 462, 464), this does not justify invalidating Gentry’s voluntary agreement to resolve his claims by individual arbitration. Unless Gentry’s contract to arbitrate individually constitutes a de facto waiver of his own statutory rights, he should not be allowed to act, contrary to his agreement, as a representative plaintiff.
Here, as in Discover Bank, the majority insists its analysis does not discriminate against the arbitral forum—an approach forbidden by both the FAA and the CAA—but simply indicates the procedures necessary in any forum to prevent the de facto waiver of statutory rights. However, there is more than one way courts can show hostility to arbitration as a simpler, cheaper, and less formal alternative to litigation. They can simply refuse to enforce the parties’ agreement to arbitrate. Or, more subtly, they can alter the arbitral terms to which the parties agreed, and defeat the essential purposes and advantages of arbitration, by transforming that process, against the parties’ expressed will at the time they entered the agreement, into something more and more like the court litigation arbitration is intended to avoid.
Given the strong policy that arbitration agreements are to be enforced as written, any such alteration should be employed only on a showing of the starkest necessity. The majority has not adhered to that limitation here.
Two years ago, I noted that “the [strong prevailing weight] of decisions, applying federal law or the law of other states, . . . hold[s] that arbitration clauses are not invalid either because they specifically exclude class treatment or because they preclude such treatment by failing expressly to provide for it. [Citations.]” (Discover Bank, supra,
As noted above, this was not a case in which one party has simply imposed mandatory contract terms on another. Gentry was not required blindly to accept the arbitration program and its terms as a condition of his employment. (Cf. Little v. Auto Stiegler, Inc. (2003)
The instant Court of Appeal determined on this basis that no procedural unconscionability was present. Two Ninth Circuit decisions, applying California law, had previously reached the same conclusion. (Circuit City Stores, Inc. v. Najd (9th Cir. 2002)
The majority concedes that Gentry’s freedom to choose against the arbitration program “weights] against a finding of procedural unconscionability. [Citation.]” (Maj. opn., ante, at p. 470.) Nonetheless, the majority discerns an “element” of procedural oppression—thus allowing scrutiny of the agreement’s substantive terms—by finding that Circuit City’s explanatory materials were “one-sided.” (Ibid.) In particular, the majority asserts, the explanatory materials failed to disclose that certain terms of the arbitration program might work to an employee’s disadvantage in specific situations. Whatever the merits of that premise,
The majority also points out that Circuit City made clear its preference for arbitration. But even if Circuit City encouraged employees to accept the arbitration agreement, the record is devoid of any evidence that it implied, threatened, or imposed any sanction for an employee’s decision to opt out of the program. I see in this situation no grounds for a finding that Circuit City unfairly coerced or induced its employees’ agreement.
Accordingly, I would affirm the judgment of the Court of Appeal.
Chin, J., and Corrigan, J., concurred.
The petition of real party in interest for a rehearing was denied October 31, 2007. Baxter, J., Chin, J., and Corrigan, J., were of the opinion that the rehearing should be granted.
Section 2 of the FAA (9 U.S.C. § 2) creates “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” (Moses H. Cone Hospital, supra,
The majority denies that class action waivers in arbitration agreements are necessarily invalid in suits to vindicate overtime-wage rights, but that is the practical effect of the majority’s holding. Even where no class action waiver is at issue, “[a] line of California cases follows the principle of rule 23(b)(3) of the Federal Rules of Civil Procedure (28 U.S.C.), which ‘provides that, for a class action to be maintained, it must be “superior to other available methods for the fair and efficient adjudication of the controversy.” This “superiority” criterion has been held to be “manifest” in the . . . requirement that the class mechanism confer “substantial benefits.” ’ [Citations.]” (Bell v. Farmers Ins. Exchange (2004)
California statutes generally permit class actions (Code Civ. Proc., § 382) and give workers the right to engage in concerted activities with respect to workplace issues, free of employer interference or coercion (see Lab. Code, § 923), but nothing suggests these laws preclude noncoercive agreements between employer and employee to arbitrate disputes on an individual basis.
As evidence of the Legislature’s hostility to the use of contractual arbitration to vindicate wage claims, the majority points to several California statutes that purported to render arbitration agreements unenforceable in this context. (Maj. opn., ante, at pp. 465-466, fn. 8.) Of course, as the majority implicitly concedes, all such laws have been superseded or invalidated by the prevailing public policy that favors enforcement of arbitration agreements according to their terms, as set forth in the CAA and the FAA. (See Perry v. Thomas (1987)
On the other hand, as the majority is well aware, the Legislature knows how to provide for a right to class action relief that cannot be waived. It has made such provision, for example, in the Consumers Legal Remedies Act. (Civ. Code, §§ 1751, 1752, 1781; see Discover Bank, supra,
In the modern era, these cases include Ramirez v. Yosemite Water Co. (1999)
As I have indicated in the text, such a finding cannot be made on this record under the standards suggested by the majority. There is no indication that Gentry’s own claim is too small to warrant individual legal action. He need not fear retaliation as a Circuit City employee, because his employment ended in March 2001, before he filed this lawsuit in August 2002. Moreover, the very fact that he sued indicates he was, and is, aware of his legal rights.
Skirchak v. Dynamic Research Corp., Inc. (D.Mass. 2006)
As the majority makes clear, the informational packet Gentry received included not only the “Associate Issue Resolution Handbook,” which sought to explain the program, but also the “Circuit City Dispute Resolution Rules and Procedures,” which set forth the program’s terms in full.