ROBERT GENTRY, Petitioner, v. THE SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent; CIRCUIT CITY STORES, INC., Real Party in Interest.
No. S141502
Supreme Court of California
Aug. 30, 2007.
443
Riordan & Horgan, Dennis P. Riordan; Righetti & Wynne, Righetti Law Firm, Matthew Righetti and John Glugoski; Law Offices of Ellen Lake and Ellen Lake for Petitioner.
Altshuler, Berzon, Nussbaum, Rubin & Demain, Michael Rubin, Dorthea Langsam; McGuinn, Hillsman & Palefsky and Cliff Palefsky for International Brotherhood of Teamsters, Laborers International Union of North America, Service Employees International Union, Unite-Here and California Employment Lawyers Association as Amici Curiae on behalf of Petitioner.
Goldstein, Demchak, Baller, Borgen & Dardarian, Laura L. Ho and Jospeh E. Jaramillo for Trial Lawyers for Public Justice, Asian Law Caucus, Asian Pacific American Legal Center, California Rural Legal Assistance Foundation, Hastings Civil Justice Clinic, Impact Fund, The Katherine and George Alexander Community Law Center, La Raza Centro Legal, Inc., Lawyers’ Committee for Civil Rights of the San Francisco Bay Area, The Legal Aid Society of San Francisco-Employment Law Center and Mexican American Legal Defense and Educational Fund as Amici Curiae on behalf of Petitioner.
Law Office of Michael H. Crosby and Michael H. Crosby as Amicus Curiae on behalf of Petitioner.
Edmund G. Brown, Jr., Attorney General, Tom Greene, Chief Assistant Attorney General, Albert Norman Shelden, Assistant Attorney General, Ronald A. Reiter and Michele R. Van Gelderen, Deputy Attorneys General, as Amici Curiae on behalf of Petitioner.
No appearance for Respondent.
Berry & Block, Rex Darrell Berry, Scott M. Plamondon; Jones Day and Steven B. Katz for Real Party in Interest.
Littler Mendelson, Henry D. Lederman, Lisa C. Chagala and Harry M. Decourcy for Ralphs Grocery Company as Amicus Curiae on behalf of Real Party in Interest.
Sheppard, Mullin, Richter & Hampton, Richard J. Simmons, Kelly L. Hensley and Melissa K. Lee for National Retail Federation and California Retailers Association as Amici Curiae on behalf of Real Party in Interest.
Deborah J. La Fetra and Timothy Sandefur for Pacific Legal Foundation as Amicus Curiae on behalf of Real Party in Interest.
Jones Day, Elwood Lui and Harry I. Johnson III for Federated Department Stores, Inc., as Amicus Curiae on behalf of Real Party in Interest.
Fulbright & Jaworski and James R. Evans for U-Haul Co. of California as Amicus Curiae on behalf of Real Party in Interest.
Morgan, Lewis & Bockius, Rebecca D. Eisen, Brett M. Schuman and John D. Battenfeld for Employers Group as Amicus Curiae on behalf of Real Party in Interest.
Stroock & Stroock & Lavan, Julia B. Strickland, James W. Denison and Andrew W. Moritz for California Bankers Association, American Bankers Association, Consumer Bankers Association and American Financial Services Association as Amici Curiae on behalf of Real Party in Interest.
OPINION
MORENO, J.---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
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
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
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) 97 Cal.App.4th 1094 [118 Cal.Rptr.2d 862] [waivers unconscionable]; Discover Bank v. Superior Court* (Cal.App.) [waivers must be upheld under the Federal Arbitration Act (
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, 36 Cal.4th 148. As discussed at greater length below, we held that “at least under some circumstances, the law in California is that class action waivers in consumer contracts of adhesion are unenforceable” as unconscionable. (Discover Bank, supra, 36 Cal.4th at p. 153.) We remanded this case for reconsideration in light of Discover Bank.
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 because the present case, unlike Discover Bank, did not involve “predictably . . . small amounts of damages.” (Discover Bank, supra, 36 Cal.4th at p. 162.)
We granted review to clarify our holding in Discover Bank.
*Reporter‘s Note: Review granted April 9, 2003, S113725; see 36 Cal.4th 148 for Supreme Court opinion.
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, 36 Cal.4th at p. 154.) The credit card company had inserted into its agreement with its customers an amendment by sending a notice to its customers and informing them that continued use of the account would constitute acceptance of the terms of the amendment. The amendment required arbitration of all disputes and prohibited classwide arbitration. (Id., at pp. 153-154.) In finding such agreements generally unconscionable under California law, we started out reviewing the policies in favor of class actions and class arbitration2 in consumer actions, quoting Vasquez v. Superior Court (1971) 4 Cal.3d 800, 808 [94 Cal.Rptr. 796, 484 P.2d 964] (Vasquez):
” ‘Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. A class action by consumers produces several salutary by-products, including a therapeutic effect upon those sellers who indulge in fraudulent practices, aid to legitimate business enterprises by curtailing illegitimate competition, and avoidance to the judicial process of the burden of multiple litigation involving identical claims. The benefit to the parties and the courts would, in many circumstances, be substantial.’ ” (Discover Bank, supra, 36 Cal.4th at p. 156.)
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 stuffer’ 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
“Class action and arbitration waivers are not, in the abstract, exculpatory clauses. But because, as discussed above, damages in consumer cases are often small and because ” ‘[a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit“’ [citation], ” ‘the class action is often the only effective way to halt and redress such exploitation.“’ [Citation.] Moreover, such class action or arbitration waivers are indisputably one-sided. ‘Although styled as a mutual prohibition on representative or class actions, it is difficult to envision the circumstances under which the provision might negatively impact Discover [Bank], because credit card companies typically do not sue their customers in class action lawsuits.’ [Citation.] Such one-sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to insulate a party from liability that otherwise would be imposed under California law, are generally unconscionable.” (Discover Bank, supra, 36 Cal.4th at pp. 160-161, italics omitted.)
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.’ (
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) 90 Cal.App.4th 1 [108 Cal.Rptr.2d 699] (AOL), had invalidated a Virginia choice-of-law provision in
In the present case, Gentry‘s lawsuit is pursuant to statute.
By its terms, the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable. “Labor Code section 1194 confirms ‘a clear public policy that is specifically directed at the enforcement of California‘s minimum wage and overtime laws for the benefit of workers.’ ” (Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 340 [17 Cal.Rptr.3d 906, 96 P.3d 194] (Sav-On Drug Stores).) Although overtime and minimum wage laws may at times be enforced by the Department of Labor Standards Enforcement (DLSE), it is the clear intent of the Legislature in
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 crime for an employer to fail to pay overtime wages as fixed by the Industrial Welfare Commission. ” (Earley v. Superior Court (2000) 79 Cal.App.4th 1420, 1430 [95 Cal.Rptr.2d 57].)
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) 450 U.S. 728, 739 [67 L.Ed.2d 641, 101 S.Ct. 1437] [commenting on overtime provision of the federal Fair Labor Standards Act of 1938 (
In short, the statutory right to receive overtime pay embodied in
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, 29 Cal.4th at p. 1077.) We conclude that under some circumstances such a provision would lead to a de facto waiver and would impermissibly interfere with employees’ ability to vindicate unwaivable rights and to enforce the overtime laws.
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 enforced. Rather, Discover Bank was an application of a more general principle: that although “[c]lass action and arbitration waivers are not, in the abstract, exculpatory clauses” (Discover Bank, supra, 36 Cal.4th at p. 161), such a waiver can be exculpatory in practical terms because it can make it very difficult for those injured by unlawful conduct to pursue a legal remedy. Gentry argues persuasively that class action waivers in wage and hour cases and overtime cases would have, at least frequently if not invariably, a similar exculpatory effect for several reasons, and would therefore undermine the enforcement of the statutory right to overtime pay.
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
Indeed, the Court of Appeal in Bell, supra, 115 Cal.App.4th 715, rejected the argument that even an award as large as $37,000 would be “ample incentive” for an individual lawsuit for overtime pay, and would obviate the need for a class action, pointing to the expense and practical difficulties of such individual suits. “[T]he size of the average claim in part reflects the accrual of unpaid overtime over the five-year duration of this lawsuit prior to trial. When the complaint was first filed in October 1996, the average claim would have been smaller and a large portion of the claims may not have been reasonably adequate to fund the expense of individual litigation. The length of this litigation in fact underscores the practical difficulties vindicating claims to unpaid overtime. Employees will seldom have detailed personal records of hours worked. Their case ordinarily rests on the credibility of vague recollections and requires them to litigate complex overtime formulas and exemption standards. For current employees, a lawsuit means challenging an employer in a context that may be perceived as jeopardizing job security and prospects for promotion. If the employee files after termination of employment, the costs of litigation may still involve travel expenses and time off from work to pursue the case, and the value of any ultimate recovery may be reduced by legal expenses.” (Id., at p. 745.)4
It is true that
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) 500 U.S. 20, 32 [114 L.Ed.2d 26, 111 S.Ct. 1647], that a plaintiff‘s Age Discrimination in Employment Act of 1967 (
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) 26 Cal.4th 798, 821 [111 Cal.Rptr.2d 87, 29 P.3d 175]; see also Mullins v. Rockwell Internat. Corp. (1997) 15 Cal.4th 731, 741 [63 Cal.Rptr.2d 636, 936 P.2d 1246].) Richards and Mullins involved high-level managerial and professional employees. The difficulty of suing a current employer is likely
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 (
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
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) 189 N.J. 1 [912 A.2d 88, 100].) Similarly, it may often be the case that the illegal employer conduct escapes the attention of employees. Some workers, particularly immigrants with limited English language skills, may be unfamiliar with the overtime laws. (See Comment, An Analysis and Critique of KIWA‘s Reform Efforts in the Los Angeles Korean American Restaurant Industry (2001) 8 Asian L.J. 111, 122-123.) Even English speaking or better educated employees may not be aware of the nuances of overtime laws with their sometimes complex classifications of exempt and nonexempt employees. (See Ramirez v. Yosemite Water Co., supra, 20 Cal.4th at pp. 796-798.) The likelihood of employee unawareness is even greater when, as alleged in the present case, the employer does not simply fail to pay overtime but affirmatively tells its employees that they are not eligible for overtime. Moreover, some employees, due to the transient nature of their work, may not be in a position to pursue individual litigation against a former employer. (Ansoumana v. Gristede‘s Operating Corp. (S.D.N.Y. 2001) 201 F.R.D. 81, 86-87.)
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
We also agree with the Bell court that “class actions may be needed to assure the effective enforcement of statutory policies even though some claims are large enough to provide an incentive for individual action. While employees may succeed under favorable circumstances in recovering unpaid overtime through a lawsuit or a wage claim filed with the Labor Commissioner, a class action may still be justified if these alternatives offer no more than the prospect of ‘random and fragmentary enforcement’ of the employer‘s legal obligation to pay overtime.” (Bell, supra, 115 Cal.App.4th at p. 745, quoting Vasquez, supra, 4 Cal.3d at p. 807.) “By preventing ‘a failure of justice in our judicial system’ (Linder v. Thrifty Oil Co. [(2000)] 23 Cal.4th 429, 434 [97 Cal.Rptr.2d 179, 2 P.3d 27]), the class action not only benefits the individual litigant but serves the public interest in the enforcement of legal rights and statutory sanctions.” (Bell, supra, at p. 741.) In other words, absent effective enforcement, the employer‘s cost of paying occasional judgments and fines may be significantly outweighed by the cost savings of not paying overtime.
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, 20 Cal.4th 785; Sequeira v. Rincon-Vitova Insectaries, Inc. (1995) 32 Cal.App.4th 632 [38 Cal.Rptr.2d 264]; Monzon v. Schaefer Ambulance Service, Inc. (1990) 224 Cal.App.3d 16 [273 Cal.Rptr. 615].) 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.
Class arbitration must still also meet the “community of interest” requirement for all class actions, consisting of three factors: “(1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.” (Sav-On Drug Stores, supra, 34 Cal.4th at p. 326.)
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
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, 36 Cal.4th at p. 162.) In particular, we reject Circuit City‘s argument that the availability of enforcement by the Labor Commissioner is an adequate substitute for classwide arbitration. It is true that an employee may seek administrative relief from overtime violations with the Labor Commissioner through a “Berman” hearing procedure pursuant to
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;
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*
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 that agreement. Gentry bases his argument on the well-established principle “that an offeror has no power to cause the silence of the offeree to operate as an acceptance when the offeree does not intend it to do so.” (1 Corbin on Contracts (rev. ed. 1993) § 3.19, p. 407.) As one court
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
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, 24 Cal.4th at p. 114, italics omitted.)
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) 200 Cal.App.3d 1518, 1538-1539 [246 Cal.Rptr. 823] [liability limitation negotiated by two commercial entities upheld].) Contracts of adhesion that involve surprise or other sharp practices lie on the other end of the spectrum. (See, e.g., Ellis v. McKinnon Broadcasting Co. (1993) 18 Cal.App.4th 1796, 1804 [23 Cal.Rptr.2d 80] [party told that signing contract was “mere formality” to conceal oppressive forfeiture provision].) Ordinary contracts of adhesion, although they are indispensable facts of modern life that are generally enforced (see Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817-818 [171 Cal.Rptr. 604, 623 P.2d 165]), contain a degree of procedural unconscionability even without any notable surprises, and “bear within them the clear danger of oppression and overreaching.” (Id., at p. 818.)
We conclude that the Court of Appeal erred in finding the present agreement free of procedural unconscionability. It is true that freedom to choose whether or not to enter a contract of adhesion is a factor weighing against a finding of procedural unconscionability. (See, e.g., Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758, 769-771 [259 Cal.Rptr. 789] [agreement between brokerage house and sophisticated consumer of financial services that included a $50 termination fee on an IRA account was not unconscionable where competing IRA‘s without the challenged fee were freely available].) But there are several indications that Gentry‘s failure to opt out of the arbitration agreement did not represent an authentic informed choice.
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
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 picture of the arbitration Circuit City was offering. Although an employee who read Circuit City‘s nine-page single-spaced document entitled Circuit City‘s “Dispute Resolution Rules and Procedures” would have encountered the above provisions, only a legally sophisticated party would have understood that these rules and procedures are considerably less favorable to an employee than those operating in a judicial forum. As has been observed, even ” ‘experienced but legally unsophisticated businessmen may be unfairly surprised by unconscionable contract terms.’ ” (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1535 [60 Cal.Rptr.2d 138] [finding unconscionability in a corporate manager‘s arbitration agreement with his employer].) The same would be even more true for the nonexecutive employees who would be the likely plaintiffs in suits about overtime pay. And notwithstanding the statement in the documents provided Gentry that employees “may consult with an attorney” about their legal rights, and contrary to the dissenting opinion‘s contention otherwise, it is unrealistic to expect anyone other than higher echelon employees to hire an attorney to review what appears to be a routine personnel document.
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
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, believing the agreement not to be procedurally unconscionable and upholding the class arbitration waiver. As stated in the previous part of this opinion, we remand the matter to the Court of Appeal with directions to remand to the trial court to determine whether the class arbitration waiver is void. Unless the issue is mooted, the trial court must also determine on remand whether the original 1995 arbitration agreement or an amended agreement controls the present case and whether the controlling agreement has substantively unconscionable terms.11 If so, the court must
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.
BAXTER, J., Dissenting.—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;
In all but the most exceptional cases, these laws thus demand deference to the “fundamentally contractual nature [of private arbitration], and to the attendant requirement that [contractual] arbitration shall proceed as the parties themselves have agreed. [Citation.]” (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 831, first italics added; see, e.g., Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478 [103 L.Ed.2d 488, 109 S.Ct. 1248] [FAA “requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms“].) Of course, “by agreeing to arbitrate, a party ‘trades the procedures and opportunity for review in the courtroom for the simplicity, informality, and expedition of arbitration.’ [Citation.]” (Gilmer, supra, 500 U.S. 20, 31.)
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.
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 essential, as a practical matter, to vindication of the “unwaivable” statutory right (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100-113 [99 Cal.Rptr.2d 745, 6 P.3d 669] (Armendariz); see Green Tree Financial Corp.-Ala. v. Randolph (2000) 531 U.S. 79, 90–91 [148 L.Ed.2d 373, 121 S.Ct. 513]) to overtime wages. Nor does the majority rely, for this holding, on the public policy against contract terms that are both procedurally and substantively oppressive, and thus “unconscionable.” (See Gilmer, supra, 500 U.S. 20, 33; Armendariz, supra, at pp. 113-121; but cf. discussion, post.)
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
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
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, the majority rules that if, on remand, the trial court decides a representative action is a significantly better means of enforcing the statutory rights of all affected Circuit City employees to unpaid overtime wages, the court may, at Gentry‘s behest, ignore and dishonor his agreement to arbitrate on an individual basis.
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.2
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 (
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.)4
And though the majority stresses the drawbacks of individual litigation to resolve small or modest claims (see generally, e.g., Linder, supra, 23 Cal.4th 429, 435; Bell, supra, 115 Cal.App.4th 715, 741), it fails to consider that because arbitration is relatively quick, simple, informal, and inexpensive, it may allow the individual pursuit of claims that would be less practical if litigated individually in court. These qualities of informality, simplicity, and expedition—advantages largely negated by the complexities of a class proceeding—are presumably what Gentry and Circuit City sought when they agreed to individual arbitration.
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, I find it hard to imagine that a worker who organizes fellow employees to mount a class assault against the employer will thereby achieve improved standing in the employer‘s eyes.
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
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, 36 Cal.4th 148, 176, fn. 1 (conc. & dis. opn. of Baxter, J.).) The majority does not suggest, and I have no reason to believe, that this situation has changed.6 The majority thus moves California further along the path away from the mainstream on the issue. Persuasive reasoning supports the contrary, prevailing view. I must therefore disassociate myself from the majority‘s holding.
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) 29 Cal.4th 1064, 1071 [130 Cal.Rptr.2d 892, 63 P.3d 979]; Armendariz, supra, 24 Cal.4th 83, 91-92, 114-115; see also Discover Bank, supra, 36 Cal.4th 148, 154 [customers of credit card company could reject arbitration term of cardholder agreement only by ceasing to use their accounts].) On the contrary, Circuit City provided Gentry, and other employees, with an extensive orientation about the program, then allowed them a reasonable time to “opt out,” without penalty, simply by mailing back a form.
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) 294 F.3d 1104, 1108; Circuit City Stores, Inc. v. Ahmed (9th Cir. 2002) 283 F.3d 1198, 1199–1200.)
The majority concedes that Gentry‘s freedom to choose against the arbitration program “weigh[s] 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,7 the receipt Gentry signed prominently advised that he could consult his own attorney about the legal “pros and cons” of the program, and he was given ample opportunity to do so. Under these circumstances, there is no basis for a conclusion that the process by which Circuit City sought to secure its employees’ agreement to the program was misleading.
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.