New class action arbitration decision: Konig v. U-Haul Co.

Yesterday, in Konig v. U-Haul Co., ___ Cal.App.4th ___ (Dec. 19, 2006), the Court of Appeal (Second Appellate District, Division Five), held 2-1 that a "no class action" abitration provision in an employment contract was enforceable under Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). The majority's reasoning hinged on the potential size of the class members' claims:

Here, plaintiff failed to establish “predictably . . . small amounts” of damages payable to class members are at issue as required under the Discover Bank test. Thus, plaintiff failed to sustain his burden of proving substantive unconscionability. The complaint in this case alleges defendant has engaged in a scheme to defraud its employees out of overtime compensation. Plaintiff presented no evidence in the trial court the potential damages and penalties payable to class members would be “predictably . . . small.” Thus, plaintiff failed to establish that the class action waiver was substantively unconscionable under the Discover Bank test. In the absence of any evidence the potential damages payable to class members would be predictably small, the trial court reasonably could have found plaintiff failed to sustain his burden of proving the class action waiver was procedurally unconscionable.

Slip op. at 11. The dissenting justice disagreed with this analysis:

The plaintiff employee here alleged that he and other similarly-situated employees were covered by the Labor Code and California Industrial Welfare Commission orders, and asserted a claim for damages for various Labor Code violations, including damages and penalties for overtime compensation, waiting time, and failures to provide required rest breaks. He further alleged that the members of the proposed class have “relatively small claims.” The damages for the members of the class that have been employed for short periods of time would be especially small.

....

Although the damage amounts in employment cases may not be as small as the damage amounts in some consumer class actions, generally the amounts are still relatively small. As a result, the employee in a case such as this one is at a severe disadvantage vis-à-vis the employer in connection with pursuing a claim against the employer.

Slip op. at 2-3 (footnote omitted) (Mosk, J., dissenting). The dissent goes on:

If the waiver of class actions in employment cases such as this one is validated, such waivers likely will be included in all employment manuals and policies applicable to employees. Employee class actions would become rare. As a result, employees and the courts would be deprived of the beneficial effects of class actions for employee-employer disputes. Accordingly, I would reverse the judgment.

Id. at 5. The Supreme Court has expressed a lot of interest in "no class action" arbitration cases lately, and has granted review in several. I could see the Court taking this case up as well.

UPDATE: Wage Law has this interesting post on the Konig decision.

Comments

[Sean McLoughlin]

In the interest of full disclosure, I should state that I drafted the UAP including the class action waiver that was upheld in Konig.

I think that post-Armendariz it is specious to speculate as Justice Mosk did in his dissent that employees are necessarily at a disadvantage in arbitration. Employers pay the cost, discovery is permitted, where precisely is the alleged disadvantage? And in wage/hour cases, an employee faced with a small dollar amount claim has the free, speedy and pro-employee biased DLSE administrative claim and hearing as an option, and they needn't share their recovery with any lawyer. But in fact, as plaintiffs' wage/hour lawyers love to repeat when trying to cajole a settlement, the amounts of waiting time and other penalties that accrue for even short term or low paid employees subjected to wage/hour violations quickly add up, and the Labor Code provides for attorneys fees on top of all that, so what are these theoretical "predictably small" wage/hour claims and what is wrong with them proceeding individually before the DLSE or in arbitration?

[michael walsh]

The "alleged" disadvantage is that arbitrators are generally reluctant to render awards which are favorable to individual claimants (who are not repeat customers) and against large employers (who are).

The issue in Konig, however, is not whether arbitration was fair. The opinion noted that the arbitration order was not appealable. The issue is whether employee waivers of class actions are enforceable. If California wants to change its public policy from favoring class actions, favoring the prompt payment of wages and enforcing work safety and working conditions, and replace those policies with others favoring corporate profits and generation of business tax revenue, then you may be right.

The "free, speedy and pro-employee biased DLSE administrative claim and hearing" is no such thing, except free, especially since the current administration started dictating the practices and filling the department with friends of chamber of commerce.

While waiting time and other penalties do accrue quickly, the reality is that only a small fraction of employees ever assert such claims, even for egregious violations, either because they are afraid of retribution (not an unreasonable fear) or because the wage and hour laws are too confusing for the average worker, and employers are more than happy to provide misinformation. When we were filing meal period class actions against restaurants, we heard literally hundreds of stories about how managers would inform employees that lunch breaks aren't legally required in the restaurant industry.

In short, the class action remedy was the only thing that caused these employers to change their illegal practices that had been ongoing, without consequence, for decades. DLSE hearings didn't do it. The rare individual lawsuits didn't do it. The attorney general didn't do it. Only the class action accomplished anything. If employee class actions are done away with, the violations will return, in grand scale, with no real consequences to employers and no real relief for employees. Some people think that would be a good thing, but not all of us do.