California Court Holds that Arbitration Clause Barring Class Action Lawsuits in Contract Governed by Federal Arbitration Act (FAA) is Enforceable Because Not Substantively Unconscionable
Plaintiff filed a putative class action against his former employer in California state court for unfair business practices and violations of the state labor laws alleging that U-Haul misclassifies employees, fails to pay them overtime, and fails to provide meal and rest breaks. Konig v. U-Haul Co. of California, ___ Cal.App.4th ___, 52 Cal.Rptr.3d 244, 246 (Cal.App. December 19, 2006). Defense attorneys moved to compel arbitration and to dismiss the class action allegations based on an arbitration clause governed by the Federal Arbitration Act (FAA) under which employees “waive any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity,” id., at 247. (The arbitration policy and its class-action waiver provision are quoted in pertinent part in the Note below.) The trial court granted the defense motions, finding that the class action waiver was not substantively unconscionable because plaintiff had not demonstrated that the litigation governed by the arbitration clause involved “predictably . . . small amounts.”
The procedural posture of the case is interesting. In November 2005, the defense moved to compel arbitration and to dismiss the class action claims. Konig, at 247. At oral argument, “the trial court requested supplemental briefing on class action waivers in the employment context,” id., at 248. In January 2006, the Court of Appeal issued its opinion in Gentry v. Superior Court, 135 Cal.App.4th 944 (Cal.App. 2006), affirming a trial court order that enforced an arbitration clause containing a class action waiver. In March 2006, the trial court relied on Gentry in finding U-Haul’s arbitration clause enforceable, unaware that the California Supreme Court would grant review of Gentry the following month, rendering the case noncitable under California law. Id. As the Court of Appeal explained at page 248, “the trial court ruled that plaintiff did not prove that there were predictably [small] amounts of damages plus a negative impact on his ability to pursue his statutory claims such that the arbitration agreement was substantively unconscionable.” In so ruling, the trial court relied on the fact that plaintiff admitted his personal damage claim exceeded $25,000, id., at 246-47. The trial court dismissed the class action claims and compelled arbitration as to the balance of the complaint.
On appeal, the Court recognized that the purpose of the FAA “is to encourage arbitration of civil disputes outside the judicial forum.” Konig, at 249. The Court further held that under California law “[u]nconscionability has both a procedural and a substantive element,” and that both must be satisfied in order to invalidate a provision in a contract, id., at 250. The Court had little difficulty holding that the arbitration clause is procedurally unconscionable because it is “imposed as a condition of employment,” id. However, the appellate court agreed with the trial court that the class action waiver was not substantively unconscionable, reasoning that – under the particular facts of the case – it did not “‘operate to insulate a party from liability that otherwise would be imposed under California law,'” id., at 251 (quoting Discover Bank v. Superior Court, 36 Cal.4thh 148, 161 (Cal. 2005)). The appellate court concluded at page 252: “Here, plaintiff failed to establish ‘predictably . . . small amounts’ of damages payable to class members are at issue as required under the Discover Bank test. Thus, plaintiff failed to sustain his burden of proving substantive unconscionability.” Accordingly, by a 2-1 vote, it affirmed the order compelling arbitration and dismissing the class action allegations.
NOTE: The Court of Appeal quoted the following language from the U-Haul arbitration policy at page 247: “The [U-Haul Arbitration Policy] applies to all … employees, regardless of length of service or status, and covers all disputes relating to or arising out of an employee’s employment with [defendant] or the termination of that employment. Examples of the types of disputes or claims covered by the [U-Haul Arbitration Policy] include, but are not limited to, claims for wrongful termination of employment, breach of contract, fraud, employment discrimination, harassment or retaliation under the Americans With Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 and its amendments, the California Fair Employment and Housing Act or any other state or local anti-discrimination laws, tort claims, wage or overtime claims or other claims under the Labor Code, or any other legal or equitable claims and causes of action recognized by local, state or federal law or regulations…. [ ] Your decision to accept employment or continue employment with [defendant] constitutes your agreement to be bound by the [U-Haul Arbitration Policy]. Likewise, [defendant] agrees to be bound by the [U-Haul Arbitration Policy]. This mutual obligation to arbitrate means that both you and [defendant] are bound to use the [U-Haul Arbitration Policy] as the only means of resolving any employment related disputes. This mutual obligation to arbitrate claims also means that both you and [defendant] forego any right either may have to a jury trial on claims relating in any way to your employment, and both you and [defendant] forego and waive any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity, unless such procedures are agreed to by both you and [defendant]. No remedies that otherwise would be available to you individually or to [defendant] in a court of law, however, will be forfeited by virtue of this agreement to use and be bound by the [U-Haul Arbitration Policy]. The [U-Haul Arbitration Policy] changes the forum and process for resolving disputes, but does not change the potential legal remedies you have. [ ] The [U-Haul Arbitration Policy] shall be governed by the Federal Arbitration Act (‘FAA’), 9 U.S.C. § 1 et seq. If for any reason, the FAA is deemed inapplicable, only then will the [U-Haul Arbitration Policy] be governed by the applicable state arbitration statutes. The National Rules for the Resolution of Employment Disputes of the American Arbitration Association (‘AAA’) in place at the time of the dispute will govern the procedures to be used in arbitration, unless you and [defendant] agree otherwise in writing.” The appellate court further explained at page 247, “The employee arbitration agreement was to be executed and acknowledged by each employee. The employee arbitration agreement provided in part: ‘I understand that final and binding arbitration will be the sole and exclusive remedy for any such claim or dispute against [defendant] … and that, by agreeing to use arbitration to resolve my dispute, both [defendant] and I agree to forego any right we each may have had to a jury trial on issues covered by the [U-Haul Arbitration Policy], and forego any right to bring claims on a representative, class member basis, or as a private attorney general.'”