Tuesday, November 27, 2012

Second District Concludes Gentry Test Survives Concepcion ; Finds Class Action Waivers Unenforceable In Meal/Rest Period Actions: Franco v. Arakelian Enterprises

On November 26, 2012, the Second District (Division 1) issued an opinion in Franco v. Arakelian Enters., __ Cal.App.4th (20120) [2012 Cal. App. LEXIS 1207], revisiting its prior “class action waiver” opinion in Franco v. Athens Disposal Co., Inc., 171 Cal.App.4th 1277 (2009).  In Franco I, the Court held that the four-part test set forth in Gentry v. Superior Court, 42 Cal.4th 443 (2007) required invalidation of a class action waiver in the context of a rest and meal period action due to the exculpatory effect such application would have on unwaivable, low value statutory rights.  In this second installment, the Court considered whether Gentry (like Discover Bank) was overruled by the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).  After engaging in a very thorough examination of U.S. Supreme Court precedent on the subject, the Court held that it was not.

Boiled to its essence, the Court held that “Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights.”  Slip Opinion, at 3, 61.  Specifically, the Court explained that the Gentry test was rested upon the prohibition on of exculpatory agreements – a generally applicable contract defense to all contracts under CCP § 1668 (which is required to avoid FAA preemption under Concepcion) – which a court determines by applying the following test:
“[W]hen 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 … [1] the modest size of the potential individual recovery, [2] the potential for retaliation against members of the class, [3] the fact that absent members of the class may be ill informed about their rights, and [4] other real world obstacles to the vindication of class members‘ rights to overtime pay through individual arbitration.  If it concludes, based on these factors, that a class . . . 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 . . . .’”
Slip Opinion, at 40-41 (quoting Gentry, 42 Cal.4th at 463).

Applying this test to the meal and rest period claims at issue, the Court’s analysis turned heavily on the fact that, subsequent to Franco I, the California Supreme Court held that attorney’s fees were not recoverable as a matter of statutory right in Kirby v. Immoos Fire Protection, Inc., 53 Cal.4th 1244 (2012).  Slip Opinion, at 41-42.  As explained by the Court, this fact rendered such claims distinct from the analysis set forth in Concepcion, as it created a “means” based barrier to litigating the claim (i.e. a barrier rooted in a lack of choice), as opposed to an “incentive” based barrier (i.e. a barrier rooted in choice).  Slip Opinion, at 58-59 (“preemption under Concepcion occurs if the arbitration process would make a prevailing claimant whole, but the amount in dispute is so small that a claimant does not think it worth the effort to pursue relief; preemption does not occur under Concepcion if a claimant lacks the means to pursue a claim in arbitration because the cost of pursuing relief on an individual basis — whether in arbitration or court — exceeds the potential recovery.”).  Based thereon, the Court held that such unwaivable claims were dependent the class action mechanism, and that a class action waiver would have an impermissible exculpatory effect:
We conclude that, as established by the attorney declarations, Franco cannot pursue relief for violations of his unwaivable statutory rights to rest and meal periods unless his case can be brought as a class action. This is the type of case where the plaintiff lacks the means to vindicate his unwaivable statutory rights absent a class action. (See Coneff v. AT&T Corp., supra, 673 F.3d at p. 1159 [applying Concepcion and distinguishing between plaintiffs who lack incentive to pursue claim and those who lack means to pursue claim].) "In contrast to the facts in Concepcion, [Franco] has demonstrated that [he] would not be able to obtain representation or vindicate [his] rights on an individual basis." (Sutherland v. Ernst & Young, LLP, supra, 847 F.Supp.2d at p. 536.) "Without the possibility of recovering costs and attorney's fees, an individual plaintiff would undoubtedly have an impossible time securing legal representation . . . given the minor amount an individual plaintiff would likely recover relative to the cost of prosecution." (Kristian v. Comcast Corp., supra, 446 F.3d at p. 52.) Where, as here, an arbitration agreement operates "as a prospective waiver of a party's right to pursue statutory remedies," it will be "condemn[ed] . . . as against public policy." (Mitsubishi Motors, supra, 473 U.S. at p. 637, fn. 19.) If a "prospective litigant [cannot] effectively . . . vindicate [his or her] statutory cause of action in the arbitral forum, the [FAA] will [not] serve . . . its remedial and deterrent function." (Id. at p. 637.)
Slip Opinion, at 60.

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