The UCL Practitioner

New Second Circuit decision: Ross v. Bank of America, N.A.

Ross v. Bank of America, N.A., ___ F.3d ___ (2d Cir. Apr. 25, 2008), is technically an antitrust case, but the Second Circuit's opinion is noteworthy for its discussion of arbitration clauses that ban class actions. The plaintiffs alleged that, beginning in late 1998 or early 1999, a group of banks met and agreed to include mandatory arbitration clauses with class action bans in all of their credit card agreements. Slip op. at 4-5. The plaintiffs claimed that the conspiracy violated federal antitrust laws, specifically, Section 1 of the Sherman Act (15 U.S.C. § 1). Id. at 5-6. The district court granted the defendant's motion to dismiss, holding that the plaintiffs lacked Article III standing because no defendant had threatened to enforce a collusively-formed arbitration provision against them. Id. at 6-7. The Second Circuit disagreed, and reversed:

The cardholders have adequately alleged antitrust injuries in fact. The Complaint asserts that, as a result of an illegal conspiracy and group boycott, the cardholders have been subjected to suppressed competition and “deprived of any meaningful choice on a critical term and condition of their general purpose card accounts.” Further, the district court recognized that “reduced choice and diminished quality of credit card services” were among the injuries asserted by the cardholders. In re Currency Conversion, 2006 U.S. Dist. LEXIS 66986, at *9. The Supreme Court has opined that one form of antitrust injury is “[c]oercive activity that prevents its victims from making free choices between market alternatives.” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 528 (1983); see also Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S.Ct. 2705, 2736 (2007) (Breyer, J., dissenting) (identifying “providing consumers with a free choice” about whether to choose lower prices or more services as “a basic antitrust objective”); FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 459 (1986) (“A refusal to compete with respect to the package of services offered to customers, no less than a refusal to compete with respect to the price term of an agreement, impairs the ability of the market to advance social welfare by ensuring the provision of desired goods and services to consumers at a price approximating the marginal cost of providing them.”). The Complaint alleges that reduced choice and diminished quality in credit services result directly from the banks’ illegal collusion to constrict the options available to cardholders. These harms are sufficiently “actual or imminent,” as well as “distinct and palpable,” to constitute Article III injury in fact. Denney [v. Deutsche Bank AG], 443 F.3d [253,] 264 [(2d Cir. 2006)].

The harms claimed by the cardholders, which lie at the heart of their Complaint, are injuries to the market from the banks’ alleged collusion to impose a mandatory term in cardholder agreements, not injuries to any individual cardholder from the possible invocation of an arbitration clause. The antitrust harms set forth in the Complaint – for example, the reduction in choice for consumers, many of whom might well prefer a credit card that allowed for more methods of dispute resolution – constitute present market effects that stem directly from the alleged collusion and are distinct from the issue of whether any cardholder’s mandatory arbitration clause is ever invoked. The reduction in choice and diminished quality of credit services to which the cardholders claim they have been subjected are present anti-competitive effects that constitute Article III injury in fact.

Id. at 8-9, 10. Interestingly, the Second Circuit accepted the argument that the cards were less valuable to consumers because (among other things) the class action bans meant that the class action bar would not be motivated to police the banks' conduct:

According to the cardholders, the conspiracy among the banks was designed to limit the choice of terms offered to cardholders, resulting in at least two ways in their receiving objectively less valuable cards than would otherwise have been the case. First, because the banks conspired not to offer cards permitting class actions, the cardholders will be forced to expend time and legal fees to monitor the legality of the banks’ behavior, whereas if the cardholders had access to a card that permitted class actions, they would have the option of relying on motivated class action attorneys to perform this function. If the cardholders chose not to monitor the banks – which would perhaps be more likely because, as the Complaint observes, actions that result in significant aggregate revenue to the banks (concerning, e.g., late fees, overlimit fees, foreign transaction fees, APR, etc.) generally harm individual consumers in only small amounts – they would still lose the services of class action attorneys. Either way, the cardholders would have been forced to accept a less valuable card as a result of the banks’ alleged collusion.

Second, the alleged conspiracy to limit the cardholders to cards that require arbitration of disputes also diminished the present value of the cards offered to the cardholders. A card that limits the holder to arbitration is less valuable (all other factors being equal) than a card that offers the holder a choice between court action or arbitration. Even assuming that the cardholders might be able to void that limitation when an actual dispute arises by opposing the banks’ motion to compel arbitration via a claim of antitrust collusion, that possibility is more theoretical than real for two reasons. The cost of litigating the antitrust issue when the particular dispute arises will almost certainly be disproportionate to the dispute. (A plaintiff will not spend a hundred thousand dollars in legal fees to litigate a five thousand dollar dispute.) Furthermore, the cardholders’ ability to prove the illegal collusion may well have evaporated with the passage of time, due to the deaths, retirements, changes of jobs, and fading memories of the participants and observers of the conspiratorial meetings, as well as the loss and destruction of documents.

We believe that at least in these two independent respects the cardholders have alleged an illegal conspiracy that resulted in a present injury by requiring them to accept less valuable cards than would otherwise have been available, but for the illegal collusion.

Id. at 10-12 (emphasis added). [Via Blawgletter]

"Study Shows State Courts Vacating Many Arbitration Awards for Employees, but Not for Employers"

Yesterday's National Law Journal reported on a new study by Professor Michael H. LeRoy of the University of Illinois at Urbana-Champaign College of Law showing that courts reverse arbitration awards in favor of employees more frequently than awards that favor employers. The article also disusses various legislative reform proposals that lawmakers are considering. Marcia Coyle, "Study Shows State Courts Vacating Many Arbitration Awards for Employees, but Not for Employers," National Law Journal (April 21, 2008).

Second District remands Gentry "grant and hold" case back to trial court: Massie v. Ralph's Grocery Co.

After the Supreme Court decided Gentry, it remanded all of the "grant and hold" cases back to their respective Courts of Appeal. This week, in an unpublished opinion, the Court of Appeal (Second Appellate District, Division Seven) disposed of one of those Gentry "grant and hold" remand cases. Massie v. Ralph's Grocery Co., no. B187844 (nonpub. opn. Apr. 7, 2008). The case has been remanded back to the trial court for it to decide, in the first instance, whether the arbitration provisions are enforceable under the standards set forth in Gentry:

An employer appeals from orders denying its petitions to compel arbitration of two class action lawsuits filed by its employees, alleging Labor Code and Unfair Competition Law violations. The employer unsuccessfully sought arbitration of these disputes in accordance with provisions in various agreements that subject such claims to individual binding arbitration and prohibit proceedings on a class or representative basis. In a prior opinion, we affirmed. (McLeod v. Ralphs Grocery Company (May 14, 2007, B187844/B187854) [nonpub. opn.], review granted Aug. 8, 2007, S153059.) Our Supreme Court has remanded the cause to us with directions to vacate our prior opinion and reconsider this matter in light of Gentry v. Superior Court (2007) 42 Cal.4th 443.

In Gentry v. Superior Court, supra, 42 Cal.4th at pages 462 and 463, our Supreme Court stated: “We cannot say categorically that all class arbitration waivers in overtime cases are unenforceable. . . . Nonetheless, 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[se] factors . . . : 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’ rights to overtime pay through individual arbitration.” Accordingly, Gentry’s application to the factual record in this case should be performed by the trial court in the first instance. (See Gentry v. Superior Court, supra, 42 Cal.4th at p. 472 [“we remand the matter to the Court of Appeal with directions to remand to the trial court to determine whether the class arbitration waiver is void”].) We therefore reverse and remand this matter to the trial court with directions to reconsider this case in light of Gentry, supra, 42 Cal.4th 443. Each side shall bear its own costs of appeal.

Slip op. at 2-3. See this blog post for more on Gentry.

BREAKING NEWS: U.S. Supreme Court denies review in class action arbitration case: Circuit City Stores v. Gentry

Yesterday, the U.S. Supreme Court denied the petition for a writ of certiorari in Circuit City Stores, Inc. v. Gentry, no. 07-998 (order list dated 03/31/08). Circuit City was attempting to challenge the California Supreme Court's decision in Gentry v. Superior Court (Circuit City Stores, Inc.), 42 Cal.4th 443 (2007). According to the docket, the Chamber of Commerce, the Pacific Legal Foundation, and other conservative interests filed amici curiae briefs in support of the cert. petition.

In Gentry, the California Supreme Court held that the lower courts had improperly enforced a "no class action" arbitration clause in an employment contract, remanding for further proceedings on whether the clause was unconscionable and therefore unenforceable. Presumably, the cert. petition was based on the argument that the Federal Arbitration Act preempts California law regarding unconscionability of contract provisions -- an argument that the California Supreme Court rejected not only in Gentry but also in in Discover Bank v. Superior Court (Boehr), 36 Cal.4th 148 (2005).

[Hat tip: The Daily Journal]

Recent Fourth Circuit opinion on FLSA "opt-in" classes: Long John Silver's Restaurants, Inc. v. Cole

In Long John Silver's Restaurants, Inc. v. Cole, ___ F.3d ___ (4th Cir. Jan. 28, 2008), the defendant's arbitration agreement, which all employees had to sign, said that the American Arbitration Association's commercial arbitration rules would apply to any dispute. Slip op. at 3-4. The class action provisions of those rules provide for an "opt-out" procedure (as does Rule 23). Id. at 4 (citing AAA Supplementary Rules for Class Arbitrations, Rule 7.)

The plaintiff employees initiated an arbitration proceeding seeking classwide relief for the employer's violations of the Fair Labor Standards Act ("FLSA") (29 U.S.C. §§200 et seq.), which has a statutory "opt-in" class certification procedure (29 U.S.C. §216(b)). Id. at 5. The arbitrator "made a clause constuction award, ruling that the arbitration agreement did not preclude a class arbitration proceeding," then made a later "class award," determining that the parties had waived the FLSA's "opt-in" procedure and that the AAA "opt-out" rule would apply. Id. at 5-6. The employer challenged this ruling in federal district court. The Fourth Circuit held that the arbitrator did not err by holding that the AAA "opt-out" rule trumped the "opt-in" class certification provision of the FLSA:

[T]he text and legislative history of the FLSA reassure us of Congress’s intention that the "opt-in" procedure should apply in arbitration as in court proceedings, [but] they fail to also convince us that Congress expressly intended that the "opt-in" procedure could not be waived by the parties’ agreement to an alternate procedure.

Id. at 9. This reminds me of Judge Wilken's ruling that the ordinary "opt-out" procedure of Rule 23 would apply to a UCL "unlawful" prong class action predicated on the defendant's FLSA violations. Bahramipour v. Citigroup Global Markets, Inc., 2006 WL 449132 (N.D. Cal. 2006); see also Harris v. Investor's Business Daily, Inc., 136 Cal.App.4th 28 (2006) (same).

Rehearing denied in Gentry

I reported a couple of weeks ago that a rehearing petition had been filed in Gentry and that the Supreme Court had given itself an extension of time through November 28 to rule on it. They didn't need that much extra time after all. On Wednesday, October 31, they denied the rehearing petition and the clerk issued the remittitur. The three dissenting justices (Baxter, Chin and Corrigan) voted to grant rehearing. [Via Storm's California Employment Law]

First post-Gentry "no class action" arbitration clause case: Murphy v. Check 'N Go of California, Inc.

In the first post-Gentry decision, the Court of Appeal (First Appellate District, Division One) affirmed an order denying a motion to compel arbitration pursuant to a clause in an employment contract. Murphy v. Check 'N Go of California, Inc., ___ Cal.App.4th ___ (Oct. 17, 2007). [Via Cal Biz Lit.]

UPDATE: On November 9, 2007, the Court of Appeal modified its opinion:

The words “involving unwaivable statutory rights” are added to the second sentence of the first full paragraph on page 10, so that the sentence reads: Gentry confirmed that Discover Bank’s reasoning was not confined to consumer actions involving miniscule damages, and extended Discover Bank’s rationale to wage and hour cases involving unwaivable statutory rights where a class action waiver could likewise be “exculpatory in practical terms because it can make it very difficult for those injured by unlawful conduct to pursue a legal remedy.”

Rehearing petition filed in Gentry

Wage Law points out that a rehearing petition was filed with the Supreme Court in Gentry on September 17, 2007, and that the Supreme Court has given itself until November 28, 2007 to rule on the petition. Gentry v. Superior Court (Circuit City Stores), no. S141502. My original post on Gentry is here.

Eleventh Circuit invalidates "no class action" arbitration clause: Dale v. Comcast Corp.

In Dale v. Comcast Corp., ___ F.3d ___ (11th Cir. Sept. 4, 2007), the Eleventh Circuit reversed a district court order compelling abitration, saying, in relevant part:

Corporations should not be permitted to use class action waivers as a means to exculpate themselves from liability for small-value claims.

We thus conclude that the enforceability of a particular class action waiver in an arbitration agreement must be determined on a case-by-case basis, considering the totality of the facts and circumstances. Relevant circumstances may include, but are not limited to, the fairness of the provisions, the cost to an individual plaintiff of vindicating the claim when compared to the plaintiff’s potential recovery, the ability to recover attorneys’ fees and other costs and thus obtain legal representation to prosecute the underlying claim, the practical affect [sic] the waiver will have on a company’s ability to engage in unchecked market behavior, and related public policy concerns.

Slip op. at 17.

Another pro-class-action decision from the Supreme Court: Gentry v. Superior Court

Like Pioneer Electronics (USA), Inc. v. Superior Court, 40 Cal.4th 360 (2007), the Supreme Court's opinion in Gentry v. Superior Court, ___ Cal.4th ___, 2007 WL 2445122 (Aug. 30, 2007) is very favorable to class actions generally, and to wage and hour class actions in particular.

First of all, the Court reaffirmed the importance of class actions in our judicial system in general, and in wage and hour cases in particular. “By preventing ‘a failure of justice in our judicial system,’ the class action not only benefits the individual litigant but serves the public interest in the enforcement of legal rights and statutory sanctions.” Gentry, slip op. at 20 (quoting Bell v. Farmers Insurance Exchange, 115 Cal.App.4th 715, 741 (2004)). For this reason, among others, the Gentry court determined that individual wage and hour hearings before the Labor Commissioner (Berman hearings) “are neither effective nor practical substitutes for class action [proceedings].” Id. at 24.

Additionally, throughout its opinion, the Gentry court favorably cited Bell, a leading Court of Appeal decision affirming class certification in a wage and hour (misclassification) case involving far more complex evidence than many wage and hour class actions. The Gentry court repeatedly expressed its agreement with the Bell decision, its reasoning, and its holdings. See, e.g., Gentry, slip op. at 10, 13, 14, 16, 20, 24 (citing Bell, 115 Cal.App.4th 715). These favorable citations strengthen Bell's value as precedent.

The Gentry court went on to observe that class actions are particularly appropriate in wage and hour cases, where, “absent effective enforcement, the employer’s cost of paying occasional judgments and fines may be significantly outweighed by the cost savings of not [complying with the Labor Code].” Gentry, slip op. at 20. As the Supreme Court has previously observed, when employers and other defendants find compliance with the law more costly than violation, a class action will be “the only effective way to halt and redress such exploitation.” Linder, 23 Cal.4th at 446.

What's also interesting about Gentry is that Chief Justice George turned out to be the swing vote. You may have noticed that in another wage and hour case, Prachasaisoradej v. Ralph's Grocery Co., ___ Cal.4th ___ (Aug. 23, 2007), decided one week before Gentry, Chief Justice George and Justices Baxter, Chin and Corrigan formed the four-justice majority in favor of the employer. In Gentry, Chief Justice George swung the other way, leaving Justices Baxter, Chin and Corrigan as the three-justice minority in favor of the employer. In another recent wage and hour case, Murphy v. Kenneth Cole Productions, Inc., 40 Cal.4th 1094 (2007), the Court unanimously adopted the employees' position. More time would be needed to analyze these decisions and try to discern what may have influenced certain justices' votes.

Thoughts on Gentry from Wage Law

Michael Walsh of Wage Law has a detailed post on Gentry. Also, tomorrow's Recorder reports that "Bosses Lose on Class Waivers."

Supreme Court reverses Court of Appeal opinion upholding "no class action" arbitration clause: Gentry v. Superior Court

The decision is up. The Supreme Court held 4-3 that the Court of Appeal erred by upholding the "no class action" arbitration clause, notwithstanding the fact that the clause appeared in an employment contract, rather than a consumer contract:

Yet the above quoted passage in Discover Bank was not intended to suggest that consumer actions involving minuscule amounts of damages were the only actions in which class action waivers would not be enforced. Rather, Discover Bank was an application of a more general principle: that although “[c]lass action and arbitration waivers are not, in the abstract, exculpatory clauses” (Discover Bank, supra, 36 Cal.4th at p. 161), such a waiver can be exculpatory in practical terms because it can make it very difficult for those injured by unlawful conduct to pursue a legal remedy. Gentry argues persuasively that class action waivers in wage and hour cases and overtime cases would have, at least frequently if not invariably, a similar exculpatory effect for several reasons, and would therefore undermine the enforcement of the statutory right to overtime pay.

Gentry v. Superior Court, ___ Cal.4th ___ (Aug. 30, 2007) (slip op. at 12.) The case has been remanded for the trial court to redetermine in the first instance whether the arbitration clause should be upheld. I will endeavor to post more on the decision later today and/or tomorrow.

BREAKING NEWS: Gentry to be decided tomorrow

The Supreme Court announced today that it will be handing down its opinion in the Gentry case tomorrow at 10:00 a.m.:

GENTRY (ROBERT) v. SUPERIOR COURT
S141502 (B169805 – Los Angeles County Superior Court – BC280631)
Argued in Los Angeles 6-05-07

This case presents issues regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California’s wage and hour laws.

When the opinion is posted online, it will be available at this link.

Reading the Gentry tea leaves

Any day now, the Supreme Court can be expected to hand down its decision in Gentry, the no-class-action arbitration clause case that was argued on June 5th. Meanwhile, the Court continues to issue more "grant and hold" orders in no-class-action arbitration clause cases. Its two most recent such orders were in two cases in which the lower courts struck down the no-class-action provisions. Massie v. Ralph's Grocery Co., no. S153059 (review granted 08/08/07) (blog post on Massie); Firchow v. Citibank (South Dakota), N.A., no. S150386 (review granted 4/26/07) (blog posts on Firchow). This was a break from the Court's prior pattern, which was to grant review in cases in which the lower courts upheld the provisions (presumably so that the error could be corrected) and to deny review in cases invalidating them (which were, of course, correctly decided).

An alert blog reader noticed, however, that in Massie v. Ralph's Grocery, the most recent of these cases, the Supreme Court granted review, but then denied the accompanying request for an immediate stay. Massie v. Ralph's Grocery Co., no. S153159 (order filed 08/08/07). Presumably, the denial will allow the class action to proceed apace in the court system.

So, what does all this mean? Does any of this activity tell us where the Court is headed in Gentry? I confess I'm about ready to give up on my attempts to predict this kind of thing. Comments welcome.

New Ninth Circuit no-class-action arbitration clause decision: Shroyer v. New Cingular Wireless

In Shroyer v. New Cingular Wireless, ___ F.3d ___ (9th Cir. Aug. 17, 2007), the Ninth Circuit struck down a class action waiver in an arbitration clause, concluding "that under the test set forth in Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (Cal. 2005), the waiver is both procedurally and substantively unconscionable and, therefore, unenforceable." Slip op. at 10002. The opinion provides this interesting distillation of California law on the subject:

The California Courts of Appeal have construed Discover Bank as providing for a three-part inquiry in order to determine whether a class action waiver in a consumer contract is unconscionable. See Cohen v. DirecTV, Inc., 142 Cal. App. 4th 1442, 1451-53 (2006); Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1297 (2005); Aral v. EarthLink, Inc., 134 Cal. App. 4th 544, 556-57 (2005). Under this three-part inquiry, courts are required to determine: (1) whether the agreement is “ ‘a consumer contract of adhesion’ ” drafted by a party that has superior bargaining power; (2) whether the agreement occurs “ ‘in a setting in which disputes between the contracting parties predictably involve small amounts of damages’ ”; and (3) whether “ ‘it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.’ ” Cohen, 142 Cal. App. 4th at 1151-53 (quoting Discover Bank, 36 Cal. 4th at 162-63); see also Klussman, 134 Cal. App. 4th at 1297 (summarizing the three parts identified in Discover Bank). Although there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied, it is unnecessary to explore those circumstances here because the instant action satisfies them all and cannot be distinguished from Discover Bank. Cohen, 142 Cal. App. 4th at 1455.

Slip op. at 10005-06.

Another no-class-action arbitration clause case: Clark v. First Union Securities, Inc.

In Clark v. First Union Securities, Inc., ___ Cal.App.4th ___ (Aug. 10, 2007), the Court of Appeal (Second Appellate District, Division Three) interpreted the arbitration rules in the Code of Arbitration Procedure of the National Association of Securities Dealers ("NASD"). Those rules expressly make class action and representative claims inarbitrable:

Subdivision (d) of Rule 10301 is entitled “Class Action Claims.” It makes ineligible for arbitration class actions claims submitted as a class action and claims filed by members of a putative or certified class action “if the claim is encompassed by a putative or certified class action filed in federal or state court, or is ordered by a court to an arbitral forum . . . .” (Rule 10301(d)(1)(2).) A party or class member may be compelled to arbitrate if class certification is denied, the class is decertified, the party or class member is excluded from the class by the court or the party or class member elects “not to participate in the putative or certified class action, or, if applicable, has complied with any conditions for withdrawing from the class prescribed by the court.” (Rule 10301(d)(2)(3).)

Pursuant to Rule 10301(d)(2) the arbitration panel may decide if a dispute is “encompassed by a putative or certified class action.” However, “[e]ither party may elect instead to petition the court” to resolve such disputes. Any such petition to the court must be filed within ten business days of receipt of notice that the Director of Arbitration is referring the dispute to a panel of arbitrators.” This rule also prohibits submission of class claims to “an arbitral forum sponsored by a self-regulatory organization for classwide arbitration.”

Slip op. at 3-4 (emphasis in original). The plaintiff argued that the arbitration provisions were unconscionable, but the Court of Appeal did not need to reach that issue because it held, instead, that the arbitration rules, while banning classwide arbitrations, did not make the class and representative claims inarbitrable in any forum. Rather, they could be brought in state court. Slip op. at 18-21, passim. "Simply put, there was no agreement between the parties, nor an intent by the SEC through its Code, that putative and class claims would have no forum for resolution." Id. at 21. Notably, this case involved a pre-Prop. 64 UCL representative cause of action. See id. at 14 n.11.

Supreme Court issues another "grant and hold" order in a no-class-action arbitration case: Massie v. Ralph's Grocery

On Wednesday, August 8, 2007, the Supreme Court issued a "grant and hold" order in another case involving a no-class-action arbitration clause. Massie v. Ralph's Grocery Co., no. S153059. Briefing is deferred pending resolution of Gentry v. Superior Court, no. S141542. In Massie, the Court of Appeal (Second Appellate District, Division Seven) affirmed an order denying an employer's petition to enforce the arbitration clauses in its company dispute resolution policies, citing Discover Bank. Here are the Court of Appeal's unpublished opinion dated 05/14/07 and its modification order dated 05/15/07.

Gentry was argued on June 5, 2007. We should be getting an opinion soon. Another case argued on June 6, 2007, In re Tobacco Cases II, has already been decided. The Court's 90-day period to decide Gentry will expire on or about September 4, 2007.

Washington Supreme Court strikes down "no class action" arbitration clause: Scott v. Cingular Wireless

In Scott v. Cingular Wireless, ___ P.3d ___ (Wash. Jul. 12, 2007) (en banc), the Washington Supreme Court invalidated a "no class action" arbitration clause, holding that the clause was unconscionable. Its holding was predicated on a number of California authorities, including Vasquez v. Superior Court, 4 Cal.3d 800 (1971) and Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).

Several new UCL and class action decisions

A bunch of new UCL and class action decisions have been handed down over the past week and a half:

• Schultz v. Neovi Data Corp., ___ Cal.App.4th ___ (June 15, 2007) (Fourth Appellate District, Division Three) (a Mervyn's "grant and hold" case on remand to the Court of Appeal)

• Linear Technologies Corp. v. Applied Materials, Inc., ___ Cal.App.4th ___ (June 18, 2007) (Sixth Appellate District) (a UCL competitor action)

• Gatton v. T-Mobile USA, Inc., ___ Cal.App.4th ___ (June 22, 2007) (First Appellate District, Division Five) (another case invalidating a no-class-action arbitration clause)

• In re: Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, ___ F.3d ___ (7th Cir. June 22, 2007) (the Seventh Circuit mentions the UCL again, and the CLRA, too, and warns lawyers not to file "a hideous sprawling mess" of a complaint)

• Lott v. Pfizer, Inc., ___ F.3d ___ (7th Cir. June 25, 2007) (addresses CAFA and the right to recover attorneys' fees after improper removal; see this post on the Seventh Circuit's prior opinion in the same case)

• McAdams v. Monier, Inc., ___ Cal.App.4th ___ (May 30, 2007, modified June 25, 2007) (Third Appellate District) (court just issued an order modifying the original opinion; an interesting change in wording re "restitution" "reliance")

• Juarez v. Arcadia Financial., Ltd., ___ Cal.App.4th ___ (June 26, 2007) (Fourth Appellate District, Division One) (probably the most interesting of the bunch; addresses UCL remedies)

I've had limited time to read or analyze these decisions. Time permitting, I will post more about them later on.

Review denied in another arbitration case: Lee v. Southern California University

Wage Law points out that on Wednesday, the Supreme Court denied review in Lee v. Southern California University, no. S151885. In Lee, the Court of Appeal affirmed an order denying a motion to compel arbitration, despite the fact that many of the putative class members had signed contracts with arbitration clauses. This development indirectly supports my observation that the Supreme Court does not appear to be granting review in cases in which the lower courts declined to enforce arbitration clauses, particularly those that purport to ban classwide relief.

The Court of Appeal's opinion is Lee v. Southern California University for Professional Studies, ___ Cal.App.4th ___ (Mar. 16, 2007). My original post on the Lee decision is here.

Still more on the Gentry argument

Wage Law has a detailed report today on the Gentry argument.

Oral argument report #2: Gentry v. Superior Court

Thanks to Anthony Zaller and Brian Van Vleck, authors of California Labor & Employment Defense Blog, for sending in their perspective on the Gentry argument:

We probably can’t improve much on Kelly Chen’s excellent factual reportage of the oral arguments in Gentry. Kelly concludes, however, that “as a recent law school graduate, I have to humbly admit I’m too junior to make a prediction.” Our predictions are surely no better than Kelly’s but we aren’t constrained by her prudent good sense. Consequently, below is our take on the hearing as well as some speculation about where we think the Justices may be heading with their eventual opinion.

Certain aspects of the hearing had an unmistakable “play within a play” quality. For example, the respective parties and their counsel were arguing first and foremost about whether the particular arbitration agreement drafted by Circuit City and signed by Mr. Gentry would be upheld and enforced. On the other hand, the assembled observers (and the larger community of class action practitioners), were more intently focused on just one sub-issue -- i.e, the enforceability of the agreement’s provision prohibiting Gentry from pursuing a class-wide arbitration.

Based on the representations of counsel at the hearing (and, as a disclaimer, we are not independently familiar with the briefs or appellate record), the record appears to contain more than enough ammunition for the Court to shoot down Circuit City’s agreement based on the application of familiar Armendariz factors, including lack of mutuality, a purported waiver of certain damages, a shortened statute of limitations, etc. But will the Court simply strike down the agreement based on the “totality of the circumstances,” and thereby leave open the possibility that a class arbitration ban could be upheld if it were part of a less unconscionable agreement? Or will the Court use Gentry as a vehicle to create a categorical rule that invalidates all pre-dispute restrictions on class arbitration?

Cliff Paleski, appearing on behalf [of] amici, argued forcefully in favor of a nearly per se rule that would prohibit any restrictions on class arbitration under any circumstances in employment disputes. His advocacy, while forceful and persuasive as always, was based essentially on public policy arguments. Moreover, to our bourgeois ears at least, his arguments had a radical flavor – advocating for example, that “all employment is inherently oppressive,” and that leaving the door open even a crack will lead to “no end of mischief” by avaricious employers seeking to strip workers of their rights.

As legal support for their proposition that employees can never waive their right to act as a class representative in arbitration, Gentry’s team could only cite to Labor Code section 923. This is nothing more than a vague Depression-era proclamation that collective bargaining is favored by public policy. We’ve never heard of anyone invoking Section 923 as support for employee class action rights and the argument didn’t seem to get a foothold with any of the justices either. All things considered, we’d have to rate this Section 923 argument as a prohibitive long shot.

Justice Kennard was by far the most active questioner and we wouldn’t be surprised if she is the author [of] the majority opinion. Some of her questions implied that she might have reservations about whether there was any principled basis for a broad ruling on the permissibility of class arbitration waivers. Justice Chin also focused on the tension between the competing public policies to enforce agreements and yet allow class wide procedural remedies. Chin seemed to come down on the side of enforcing arbitration agreements. The other Justices, by and large, avoided the big issues and focus[ed] more on the facts of this particular case that might render the agreement procedural or substantive unconscionability.

So what’s the bottom line? Our prediction is that the Court will hold the Circuit City agreement to be unenforceable. We are also willing to bet that, while the Court’s opinion may contain some language that the class arbitration ban contributed to this result, it will stop short of announcing any categorical rule against such provisions. As a result, a case-by-case analysis will be required and a properly drafted arbitration agreement may still offer an arguable defense to class certification. But it goes without saying that we could be wrong.

Thanks, Anthony and Brian, for that analysis. In addition to Kelly's summary, two readers (one of whom is Michael Walsh of the blog Wage Law) provided their thoughts in the comments to this post.

A couple of the reports on the argument mentioned Armendariz, but it will also be interesting to see how Discover Bank plays out as precedent in the employment context. As mentioned in these posts, I noticed a while back that the Supreme Court appeared to be granting review in cases upholding no-class-action arbitration clauses, and denying review in cases striking them down. The outcome predictions so far in Gentry are consistent with the idea that the Supreme Court felt that Discover Bank was being applied too leniently, or at least that lower courts needed more guidance. It would not be unreasonable for the Court to conclude that a public policy favoring access to the judicial system (which is what the class action device facilitates) should outweigh any countervailing public policy favoring a procedural device (arbitration) that serves to limit access. To a large degree, Discover Bank stands for exactly that proposition.

Oral argument report: Gentry v. Superior Court

Many thanks to Kelly Chen, a recent graduate of U.C. Hastings Law School, who attended the Gentry argument yesterday and wrote up this detailed report:

Kelly Chen’s Notes Re: Gentry Oral Argument
California Supreme Court Case No. S141502
June 5, 2007 -- 2pm

(NOTE: I observed the argument from a staff lounge on a 28” tv with a room full of about 40 people. It was quite difficult to “see” anything. Although I could distinguish the voices amongst the female justices, I was unable to differentiate the voices of the male justices.)

This afternoon in Los Angeles, the California Supreme Court heard oral argument regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California's wage and hour laws. Michael Rubin and Cliff Palefsky argued on behalf of the employees. Rex Berry argued for Circuit City.

Mr. Rubin started by pointing to the exculpatory purpose and effect of class action bans in employment cases. He argued that such a class action ban is inconsistent with the policy underlying Labor Code section 923, which provided that employees shall be free from employers' interference in “concerted activities” for the purpose of “mutual aid and protection.”

Justice Kennard quickly jumped in and asked: “Would this court take into consideration the relatively small awards in wage and hour cases?” She then cited the statistical average of $6,000 in individual wage claims. Mr. Rubin indicated that in overtime claims where the statute of limitation is running, some workers in a class might have begun work at the end of the claim period.

One of the male justices (not Moreno) then asked: “Would you say that the public policy in favor of class actions should trump the public policy in favor of arbitration?” Mr. Rubin indicated that he would not characterize it that way. He explained that Gentry’s position actually furthers the public policy regarding arbitration -- that is, a “fair” policy of arbitration. He argued that employers can not have an arbitration policy that undermines the policy of a fair arbitration.

Another male justice (Moreno I think) then interjected by saying that this case is not like Discover Bank where the contract of adhesion was sent in stuffed mails. Mr. Rubin responded by arguing that there is still a procedural unconscionability issue here, because this case involved a scenario where employees were asked to “take it or leave it.” Rubin explained that the nature of the work environment itself is inherently oppressive.

At this time, Justice Kennard interjected and asked about the employment handbook. Mr. Rubin said that the employment handbook indicated the oppressive nature of the agreement, given that Circuit City retained the right to unilaterally change the terms of the agreement. “That goes beyond the reasonable expectations of the employees,” Mr. Rubin argued. Mr. Rubin articulated that certain special provisions just cannot be "buried" in the handbook, including things like a class action bar, the unilateral change of the terms, and the reduction of the statute of limitations. He argued that these special provisions must be explained in a “pre-dispute” scenario.

One of the male justices (Baxter or George) then asked if it is Mr. Rubin’s opinion that his client's claims cannot be adequately adjudicated through a Berman hearing? Mr. Rubin indicated that individual claimants in a Berman hearing have to pay for attorneys fees; he then focused on his class action argument. The Justice commented that isn’t it the purpose of the Berman hearing that the employees can represent themselves in these wage claims without representation. The Justice did not seem eager to hear the class action argument. Rather, the Justice pursued his original inquiry and asked Rubin: “What’s wrong with the Berman hearing process? Or arbitration?”

At this time, Mr. Rubin’s time was up. Mr. Rubin quickly answered the questions. With the Berman hearing, Mr. Rubin pointed to the limited resources and attorneys fees as two problems. I wish Mr. Rubin had had a little bit more time to discuss the inadequacy of the Berman process in a more comprehensive manner.

Mr. Palefsky argued also on behalf of the employees.

I missed the beginning of Mr. Palefsky’s presentation and the first question posed by Justice Corrigan.

A male justice (George, Chin, or Baxter) asked a hypothetical of whether it would make a difference if the plaintiff is an employment specialist working at a law firm who is capable of understanding the terms of the employment agreement. Mr. Palefsky responded in the negative. Mr. Palefsky’s position was that employers just can’t prohibit class actions.

Justice Moreno then asked if Circuit City gave up its rights in any way in the agreement. Mr. Palefsky firmly responded: “No!” Mr. Palefsky then argued that that if one has to waive his right to a jury, etc… you can’t do it in a document with a title “Receipt.”

Justice Kennard eagerly interjected: “Is it your view that class action waiver is always invalid? Or is it a case by case analysis?” Mr. Palefsky answered that class action bars (in this context) are always invalid. He, like Mr. Rubin, cited Labor Code section 923. At one point, Mr. Palefsky used the phrase “in a wage case” during his response to Justice Kennard’s question. Upon hearing the phrase, Justice Kennard commented: “ah….you just said the magic term! It is this case!” Mr. Palefsky then used “in an employment case” when he moved on to explain the pre-dispute waiver in this case (and how it shouldn’t be allowed).

Justice Werdgar then asked whether the particularity of this case is irrelevant (i.e., whether the fact that the relevant provisions were buried in the handbook?). Mr. Palefsky indicated that the particularity of this case tells us the importance of a clear cut rule. He argued that we just can’t open the door to a class action bar with an opt-out process; hence, there must be a clear cut rule.

Justice Werdgar then followed up by asking about Gentry’s options to resolve his dispute: “If he had opted out, what are you saying it will happen to him?” Mr. Palefsky went on with his argument, but the justices interrupted and asked him to directly answer the question. “Retaliation!” Mr. Palefsky responded.

At this time, Mr. Berry argued on behalf of Circuit City. He started out by arguing that there are two flaws to Gentry’s arguments. First, he pointed to what’s on the record -- the agreement. One of the male justices (George I think) then interjected and asked about the “voluntariness” of the context of the agreement -- whether it is a contract of adhesion. Berry responded: “absolutely not… if he (i.e., Gentry) felt coerced, I suppose he could put a declaration before the Superior Court…but he did not.”

Justice Werdgar asked: “We’ve been told that Labor Code section 923 prohibits class action waivers. Is that correct?” Berry responded in the negative and argued that assertion is a stretch.

Berry then moved on and focused his arguments on the pro-arbitration public policy.

Justice Werdgar then commented that the opposing counsels focused on the class action part, not arbitration part. She asked: “Are we not talking about class action waivers?”

Berry then argued that Gentry is asking this court to render the agreement unenforceable because there was a class action waiver. He argued that this is not a commercial contract of adhesion. He indicated that employees were given a presentation about the terms of the agreement and an opportunity to opt out. At this time, one of the male justices added: “didn’t they go beyond and advise…the employees to counsel with attorneys?” (I really couldn’t “see” which of the male justices said this.)

Justice Chin (I think) then said that he sees this as a tension between class action policy verses the arbitration policy. He asked if they are both legislative policies? Berry said that the policy concerning arbitration is a legislation policy, but the policy concerning class actions is a “judicial” policy. Justice Kennard then quickly pointed out that the policy concerning overtime wages is a legislative concern. She said: “why are we in dangerous territory? I think we’re simply looking at whether a class waiver is okay. I think everyone will agree that arbitration is favored. But legislature also concerns overtime…etc…”

Justice Kennard then asked Berry to articulate what is (and what is not) in the employment handbook. She specifically asked for examples like: (i) the reduction of the statute of limitation from four to one year, and (ii) the restriction of backpay to one year. Berry didn’t address Kennard’s question directly. Instead, he talked about the presentation to the employees and how even till now no one else indicated to them what they should have said to the employees. Kennard interjected and asked Berry to respond to the question posed. Berry said “yes” and indicated that the employees signed a receipt, etc.

Justice Moreno then asked Berry to address to the issue regarding reciprocity of the contractual terms, specifically whether Circuit City gave up some rights? “Absolutely,” said Berry. He explained that his clients gave up appellate review (i.e., given that arbitration awards are not subject to appellate review). Also, he gave an example of how Circuit City also gave up suing its employees (i.e., something about collecting money from employees about traveling expenses -- I thought this was weak in comparison to the rights that the employees are giving up…for obvious reasons).

At this time, it’s Mr. Rubin’s turn again. Justice Kennard asked Mr. Rubin, in response to Berry’s earlier assertions, whether the employment handbook indeed expressly contained certain explanations about things like the reduction of the statute of limitations, etc? Mr. Rubin responded with confidence: “No!” He then referenced specific page numbers in the handbook. Rubin said: “It doesn’t say ‘no statute of limitation of more than 1 year’ or ‘no punitive damages.’” He then took the opportunity and went back to Justice Moreno’s question regarding reciprocity by referencing a page in the handbook which expressly bars lawsuits “brought by associates.”

One justice asked about Labor Code section 923 and how Circuit City claimed this section only applies to a collective bargaining situation. One of the male justices asked: “Is there any legislative intent you can cite that favors class action over arbitration?” Mr. Rubin once again indicated that they are not making such a distinction (see above). The Justice then asked about the term “concerted activity” in the section 923. Mr. Rubin responded by saying that federal courts have permitted people to apply the term “concerted activity” to consolidate cases.

At this time, Mr. Rubin articulated that a class action bar in pre-dispute employment cases (as in Gentry’s case) is unenforceable “if it is reasonably foreseeable that the ‘effect’ is to eliminate non-waiveable statutory claims.” I thought this point beautifully tied to his opening remark!

Justice Werdgar then asked: if this court were to agree with you….are you saying that class action arbitration is not okay?” Mr. Rubin said: “Oh, no.” Werdgar then cleared out two issues: (1) class action waiver, and (2) the arbitration agreement itself. She asked if Gentry’s first position is to strike out the entire agreement, and the second position is to allow arbitration without the class action bar. Rubin affirmed.

The next question posed at Mr. Rubin is whether a class action waiver is never enforceable. Mr. Rubin responded, again, that it is unenforceable in a pre-dispute situation in the employment context if it is reasonably foreseeable that the effect is to eliminate non-waiverable statutory claims.

As a recent law school graduate, I have to humbly admit I’m too junior to make a prediction.

Thanks, Kelly! Readers, what do you think? Feel free to post a comment based on Kelly's summary as well as the summary posted by a reader in the comments to this post. I'm hoping to receive at least one more summary later today.

Oral argument preview: Gentry v. Superior Court

This afternoon at 2:00 p.m., the Supreme Court will hear oral argument in the no-class-action arbitration case, Gentry v. Superior Court, no. S141502. The argument will take place in Los Angeles, and I hope to be able to post at least one report here tomorrow. Meanwhile, for everyone's reading pleasure, the Court of Appeal's opinion is here: Gentry v. Superior Court (Circuit City Stores, Inc.), 135 Cal.App.4th 944 (2006) (Second Appellate District, Division Five).

UPDATE: A reader who attended the argument today has put up a nice summary as a comment to this post. I'm expecting to receive additional reports shortly.

Supreme Court sets "no class action" arbitration case for argument: Gentry v. Superior Court

In its oral argument calendar issued last week, the Supreme Court set Gentry v. Superior Court (Circuit City Stores, Inc.), no. S147345, for argument on Tuesday, June 5, 2007 at 2:00 p.m. in Los Angeles. Gentry presents the following issue:

This case presents issues regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California's wage and hour laws.

Please let me know if you're planning to attend the argument and would like to write up a report for posting here. POST-ARGUMENT UPDATE: Multiple reports on the argument have come in. See this post and the comments to this post.

Supreme Court grants review in another "no class action" arbitration clause case: Firchow v. Citibank

On April 26, 2007, the Supreme Court issued a "grant and hold" order in another "no class action" arbitration clause case, Firchow v. Citibank (South Dakota), N.A., no. S150386. The Court of Appeal opinion in that case was unpublished; my original post is here. Briefing has been deferred pending resolution of Gentry v. Superior Court, no. S141502.

New class action arbitration decision: Lee v. Southern California University for Professional Studies

In Lee v. Southern California University for Professional Studies, ___ Cal.App.4th ___ (Mar. 16, 2007), the Court of Appeal (Fourth Appellate District, Division Three) affirmed an order denying a motion to compel arbitration, holding that if the class representative did not sign a contract with an arbitration clause, such a motion may not be granted even if members of the putative class did. The first paragraph of the opinion reads:

Plaintiff Patricia Lee sued the Southern California University for Professional Studies for violation of the Consumer Legal Remedies Act (Civ. Code, § 1750 et seq.) and Business and Professions Code section 17200. The complaint includes class action allegations. Because some of the potential class members — not including Lee — signed a contract including an arbitration clause, defendant filed a motion to compel arbitration, which the trial court denied. We affirm and find that no grounds exist for compelling arbitration when the only plaintiff currently before the court never agreed to arbitrate her claims. The question of whether she is an adequate class representative for those who did, and all other matters pertaining to whether the action is appropriate for class treatment, are issues for the trial court to decide when Lee moves to certify the class.

Slip op. at 2. The opinion also makes the interesting point that the class certification motion need not exactly track the class definition pleaded in the complaint:

Lee has not, as of yet, brought a motion to certify any class. It is quite possible that when she does so, she will seek to narrow the definition of the class to law students only, none of whom signed arbitration agreements, according to SCUPS’s own evidence. She is certainly entitled to do that — SCUPS offers no authority for the proposition that a plaintiff is bound by a preliminary class definition set forth in the complaint. It is also possible (and this court takes no position on this) that however Lee defines the class, any motion for class certification will be denied for other reasons. We cannot know this, of course, because there has, as of yet, been no such motion. Lee is the only plaintiff before the court at the moment, and she is not bound by an arbitration agreement; therefore, she cannot be compelled to arbitrate.

Slip op. at 5 (footnote omitted). Finally, the opinion reiterates the rule, adopted by the Supreme Court in 2003, that UCL injunctive relief claims are not arbitrable in any event:

SCUPS next argues that because the UCL claim is a representative action, Lee is bound by the arbitration agreements of some of the individuals she seeks to represent. Lee’s UCL claim, however, seeks only injunctive relief. Even if Lee had consented to an arbitration clause, she would not be required to arbitrate a claim under the UCL that seeks only injunctive relief on behalf of the public, as opposed to restitution and/or disgorgement of profits. (Cruz v. PacifiCare Health Systems, Inc. (2003) 30 Cal.4th 303, 315-316 (Cruz).) Thus, if she had signed an agreement with an arbitration clause, Lee’s claim for damages under the CLRA would be arbitrable. But her claims for injunctive relief, under either the CLRA or UCL, would not be. (Id. at pp. 311-316.)

Slip op. at 5-6.

Supreme Court issues "grant and hold" order in class action arbitration case: Konig v. U-Haul Co.

Last week, the Supreme Court issued this order in Konig v. U-Haul Company, no. 149883:

Petition for review GRANTED. Further action in this matter is deferred pending consideration and disposition of a related issue in Gentry v. Superior Court, S141502 (see Cal. Rules of Court, rule 8.512(d)(2)), or pending further order of the court. Submission of additional briefing, pursuant to California Rules of Court, rule 8.520, is deferred pending further order of the court.