Gentry v. Superior Court, No. S141502.

• Court: United States State Supreme Court (California)
• Writing for the Court: Moreno
• Citation: 165 P.3d 556,42 Cal.4th 443,64 Cal.Rptr.3d 773
• Parties: Robert GENTRY, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Circuit City Stores, Inc., Real Party in Interest.
• Docket Number: No. S141502.
• Decision Date: 30 August 2007

64 Cal.Rptr.3d 773 42 Cal.4th 443 165 P.3d 556 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. August 30, 2007.

[64 Cal.Rptr.3d 776]

Riordan & Horgan, Dennis P. Riordan, San Francisco; Righetti & Wynne, Righetti Law Firm, Matthew Righetti, San Francisco, John Glugoski; Law Offices of Ellen Lake and Ellen Lake, Oakland, for Petitioner.

Altshuler, Berzon, Nussbaum, Rubin & Demain, Michael Rubin, Dorthea Langsam, San Francisco; McGuinn, Hillsman & Palefsky and Cliff Palefsky, San Francisco, 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, Bailer, Borgen & Dardarian, Laura L. Ho, Oakland, 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, San Diego, as Amici 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, Sacramento; Jones Day and Steven B. Katz, Los Angeles, for Real Party in Interest.

Littler Mendelson, Henry D. Lederman, Lisa C. Chagala and Harry M. Decourcy, Walnut Creek, 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, Los Angeles, 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, Sacramento, for Pacific Legal Foundation as Amicus Curiae on behalf of Real Party in Interest.

National Chamber Litigation Center, Robin S. Conrad; Constantine Cannon, W. Stephen Cannon, Raymond C. Fay; Mayer, Brown, Rowe & Maw and Donald M. Falk, Palo Alto, for Chamber of Commerce of the United States of America and Retail Industry Leaders Association as Amici Curiae on behalf of Real Party in Interest.

Jones Day, Elwood Lui and Harry I. Johnson III, Los Angeles, for Federated

[64 Cal.Rptr.3d 777]

Department Stores, Inc., as Amicus Curiae on behalf of Real Party in Interest.

Fulbright & Jaworski and James R. Evans, Los Angeles, 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, Los Angeles, 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, Los Angeles, 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.

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 Labor Code sections 500 et seq. and 1194¹ allegedly have been violated. We conclude that at least in some cases, the prohibition of classwide relief would undermine the vindication of the employees' unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state's overtime laws. Accordingly, such class arbitration waivers should not be enforced if a trial court determines, based on the factors discussed below, that class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration. We therefore reverse the judgment of the Court of Appeal upholding the class arbitration waiver and remand for the above determination.

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

64 Cal.Rptr.3d 778

eight hours per day and 40 hours per week.

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 (2003) 105 Cal.App.4th 326, 129 Cal.Rptr.2d 393 [waivers must be upheld under the Federal Arbitration Act], overruled by Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (Discover Bank).) Circuit City moved to compel arbitration. The court acknowledged that the governing case law was "conflicting and in a state of flux," and elected to follow the Court of Appeal decision in Discover Bank v. Superior Court. The court did hold two provisions of the agreement (cost splitting and limitation of remedies provisions) substantively unconscionable based on federal case law. (Morrison v. Circuit City Stores, Inc. (6th Cir.2003) 317 F.3d 646.) The court severed those provisions from the agreement, ordered Gentry to "arbitrate his claims on an individual basis and submit to the class action waiver," and stayed the superior court action.

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, 30 CaLRptr.3d 76, 113 P.3d 1100. 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, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) 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...