Friday, May 14, 2010

Second District Distinguishes Gentry from Discover Bank to Extract Second Class Action Waiver Test: Arturo Arguelles-Romero v. Superior Court

On May 13, 2010, the Second District, Division Three, issued an opinion in Arturo Arguelles-Romero v. Superior Court, __ Cal. App. 4th __ (2010), concluding that the California Supreme Court’s decisions in Gentry v. Superior Court, 42 Cal.4th 443 (2007) and Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) “established two separate [class action waiver] tests which should be considered separately.” See Slip Opinion, at 13-14. As the Court explained “Discover Bank is a case about unconscionability” whereas “the rule set forth in Gentry is concerned with the effect of a class action waiver on unwaivable statutory rights regardless of unconscionability.” See id.

Underpinning the Court's analysis is the realization that a unique situation exists where a defendant seeks to compel individual arbitration on a non-waivable statutory right, as “an agreement to arbitrate a non-waivable statutory claim may, in fact, improperly compel the claimant to forfeit his or her statutory rights.” See id., at 18 (citing Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000)). According to the Court, Gentry involved a secondary analysis recognizing this distinction, as Gentry acknowledged that “a class action waiver would frequently have an exculpatory effect and would undermine the enforcement of the statutory right to overtime pay.” See id., at 19. Based on Gentry, the Court concluded that where non-waivable statutory rights are in play, a court must engage in a secondary analysis – distinct from the analysis regarding unconscionability – employing the following flexible, multi-factored test:
Gentry did not establish an absolute four-part test for the enforceability or unenforceability of class action waivers. Instead, “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’ right 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.’ [Citation.]” (Gentry, supra, 42 Cal.4th at p. 463.)
Slip Opinion, at 20.

As a side note, the Court also acknowledged that the practice of some courts to extract a three-part test for unconscionability from Discover Bank is erroneous. This is an issue I previously opined upon here (see second article entitled “The Applicability of Discover Bank to Negligent Conduct”). The Court’s analysis on this point is as follows:
The Discover Bank court did not set forth a three-part test for unconscionability of a class action waiver in a consumer contract, although it is clear that the presence of three elements – (1) adhesion contract; (2) the dispute predictably involves small amounts of damages; and (3) allegations that the defendant has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money – was necessary to its analysis. (Discover Bank, supra, 36 Cal.4th at pp. 162-163.) For this reason, some federal cases applying Discover Bank have concluded that it established a three-part inquiry for determining the unconscionability of a class action waiver under California law. (See e.g., Shroyer v. New Cingular Wireless Services, Inc. (9th Cir. 2007) 498 F.3d 976, 983; In re Apple & AT & TM Antitrust Litigation (N.D.Cal. 2008) 596 F.Supp.2d 1288, 1298; Stiener v. Apple Computer, Inc. (N.D. Cal. 2008) 556 F.Supp.2d 1016, 1024.) This is not strictly accurate. While it is true that the presence of the three Discover Bank factors is sufficient to establish the unconscionability of a class action waiver, the Supreme Court did not hold that class action waivers are unconscionable only when those three elements are present.
Slip Opinion, at 16-17.

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