A week after Franco (see this blog post), the Court of Appeal handed down another opinion invalidating a "no class action" arbitration clause. Sanchez v. Western Pizza Enterprises, Inc., ___ Cal.App.4th ___ (Mar. 17, 2009) (Second Appellate Distict, Division Three).
Sanchez is the second case this month to apply principles derived from class action jurisprudence to the analysis of whether an arbitration clause that bans class actions is valid. In Franco, the Court of Appeal adopted the rule of Linder — that merits determinations may not be made at the class certification stage — and applied it to the arbitration stage of the case. Franco, slip op. at 8. In Sanchez, the Court of Appeal adopted the standard of review from Sav-on — that class certification orders are reviewed for abuse of discretion — and applied that to the arbitration determination:
A trial court’s determination whether a class arbitration waiver is enforceable based on whether class arbitration would be significantly more effective than individual arbitrations as a means to vindicate unwaivable rights, under the rule established in Gentry, supra, 42 Cal.4th 443, depends largely on consideration of “ ‘the efficiencies and practicalities of permitting group action’ ” (id. at pp. 463-464) in the particular case. In light of the similarity of this inquiry to the inquiry a trial court makes in determining whether a class action is appropriate (ibid.), we conclude that the standard of review of the court’s ruling is the same. (Cf. Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 859 [“any determination underlying any order is scrutinized under the test appropriate to such determination”].)
A ruling on class certification is reviewed for abuse of discretion. (Sav-On Drug Stores, Inc. v. Superior Court, supra, 34 Cal.4th at p. 326.) “.... Similarly here, we will examine the trial court’s reasons for determining that the class arbitration waiver is unenforceable under the rule from Gentry, supra, 42 Cal.4th 443, and review that determination for abuse of discretion.
Sanchez, slip op. at 15-16.
Another interesting aspect of Sanchez is its implicit conclusion that the Supreme Court's analysis of the validity of "no-class-action" arbitration clauses from Gentry applies only to "unwaivable statutory rights":
An employee’s statutory right to reimbursement of job expenses is unwaivable (Lab. Code, §§ 2802, 2804; Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 951-952), as is the statutory right to receive minimum wage (Lab. Code, § 1194; Gentry, supra, 42 Cal.4th at pp. 455-456). Because this action involves the enforcement of unwaivable statutory rights, the rule from Gentry applies. (Gentry, supra, at p. 457.)
Slip op. at 17. Franco contains the same implicit holding, which the court dealt with by concluding that the meal period and rest break rights in question were also unwaivable. Franco, slip op. at 14-16.
This is not quite the correct approach (although it didn't affect the outcome in either case). In Discover Bank v. Superior Court (Boehr), 36 Cal.4th 148 (2005), decided two years before Gentry, the Supreme Court invalidated a "no-class-action" arbitration clause in a consumer case without considering whether the rights in question were "unwaivable." Rather, the Court focused on whether the class action ban was "exculpatory in practical terms" by "mak[ing] it very difficult for those injured by unlawful conduct to pursue a legal remedy." Gentry, 42 Cal.4th at 457 (citing Discover Bank, 36 Cal.4th at 161). Neither Gentry nor Discover Bank held that the rights in question must be technically or statutorily "unwaivable" for a class action ban to be invalid. Rather, the question is what "practical" impact the class action ban would have on the enforcement of those rights.
In any event, in both Franco and Sanchez, the courts determined that the rights in question were unwaivable, so this issue did not affect the outcome.
Finally, as in Franco, the Court of Appeal in Sanchez held that the entire arbitration clause (not just the class action ban) was unenforceable because it was "permeated by an unlawful purpose." Sanchez, slip op. at 35.