On August 30, 2007, the California Supreme Court issued its much-awaited decision in Gentry v. Superior Court, a case addressing the enforceability of a class action waiver contained in a pre-dispute employment arbitration agreement. In a split decision, a majority of the Court effectively invalidates the use of such waivers in overtime cases alleging violations of California's Labor Code.

In 1995, while employed by Circuit City, Gentry received an "Associate Issue Resolution Package" and a copy of the company's "Dispute Resolution Rules and Procedures" setting forth various procedures for resolving employment-related disputes. The documents contained an arbitration agreement that included a class action waiver provision. The company provided each employee with 30 days to opt out of the arbitration agreement, but Gentry did not do so. Gentry later filed a lawsuit in California state court seeking recovery of overtime on behalf of himself and a purported class of similarly-situated Circuit City employees. Circuit City moved to compel arbitration. The trial court compelled arbitration, subject to the class action waiver. The appellate court affirmed, and in a 4-3 decision, the California Supreme Court reversed, issuing a decision which will come as welcome news to plaintiff's class action lawyers in California.

Overtime Claims Are Not Subject To Class Action Waiver

In addressing the class action waiver, the Court relied upon its earlier decision in Discover Bank v. Superior Court, which had invalidated a class action waiver included in a mandatory pre-dispute credit card agreement. In Discover Bank, the Court reasoned that the class action waiver in effect insulated the bank from liability, because the amounts in dispute under the consumer protection laws at issue were so small that consumers had no incentive to bring individual claims. In Gentry, the Court addressed similar concerns in the employment context. While stopping short of a blanket ruling invalidating all class action waivers involving any statutory employment claims, the Court's analysis effectively renders such clauses unenforceable in overtime and most other wage and hour cases.

Under Gentry, a trial court must consider a range of factors in considering whether, under the circumstances presented, a class action waiver included in an otherwise enforceable arbitration agreement is valid. The factors discussed by the Court are:

• The size of the potential individual recovery. The Court noted that individual awards in wage and hour cases tend to be modest and the litigation lengthy, both underscoring the practical difficulties of vindicating individual claims to unpaid overtime.
• The potential for retaliation against individual employees. Citing its decision in Bell v. Farmers Exchange, the Court stated its concern "that a current employee who individually sues his or her employer is at greater risk of retaliation" than an employee who participates in class-wide recovery.
• The extent to which claims will go unasserted because individual employees may not be aware that their legal rights have been violated.

The Court held that if, based upon its consideration of these three factors, as well as "other real world obstacles to the vindication of class members' rights," a trial court determines that class arbitration is likely to be more effective in vindicating the rights of affected employees, and that barring class claims will lead to "a less comprehensive enforcement" of the statutory rights at issue, the class arbitration waiver should be invalidated. As a practical matter, the required analysis will make it extremely difficult, if not impossible, to enforce class action waivers of any claims alleging denial of overtime and/or most other wage and hour violations brought under California law.

Circuit City's Agreement Contains Elements of Procedural Unconscionability

The Gentry decision also furnishes guidance on the issue of procedural unconscionability in the arbitration context. As a general matter, a court may refuse to enforce an arbitration agreement that purports to require arbitration of claims asserting non-waivable statutory rights, where it finds the agreement is unconscionable. The Supreme Court identified the essential requirements of procedural and substantive unconscionability in its earlier decision in Armendariz v. Foundation Health Psychcare Services. There, the Court noted that procedural unconscionability generally takes the form of a contract of adhesion, drafted by one party, and imposed upon the party with the weaker bargaining power. The Armendariz decision addressed "mandatory" arbitration, that is, a pre-dispute agreement between the employer and the employee requiring arbitration as a condition of employment.

In Gentry, the Court considered application of procedural unconscionability requirements where the arbitration agreement is not mandatory, but is instead subject to a clause giving the employee the ability to "opt out" of the agreement. Not surprisingly, the Court observed that such an opt out clause furnishes a strong indication that the agreement is not procedurally unconscionable. However, the Supreme Court refused to go so far as to hold that the clause precluded a finding of procedural unconscionability. Instead, the Court observed that there were a number of elements of procedural unconscionability that were evident in the record, including the fact that Circuit City's explanation of its arbitration program was "one-sided" and did not adequately describe the disadvantages of arbitration for the employee. Where an agreement contains at least some elements of procedural unconscionability, Armendariz requires a full analysis of both procedural and substantive unconscionability, something which the trial court in Gentry had failed to do. Accordingly, the Court sent the case back to the trial court for further proceedings.

In sum, beyond its narrow holding, the Gentry decision arguably reflects a strong endorsement of class action procedures in litigating wage and hour claims by a majority of the current California Supreme Court. While the case did not address class certification issues as such, we anticipate that plaintiff's attorneys will liberally quote this decision in seeking such certifications in the future. In short, the decision further stokes the fires of class action wage and hour litigation in California, and underscores the need for employers to carefully assess their compliance with all applicable wage and hour regulations.