On July 12, 2011, California’s Second Appellate District Court of Appeal issued a decision in Brown v. Ralphs Grocery Company regarding the enforceability of arbitration agreements in the employment context that limit employees’ rights to assert class and representative actions. This was the first published state court decision in California regarding employment arbitration agreements since the United States Supreme Court’s groundbreaking decision in AT&T Mobility, LLC v. Concepción ("AT&T Mobility"), where the Supreme Court held that California case law invalidating class action waivers in consumer arbitration agreements is preempted by the Federal Arbitration Act ("FAA").  (For a detailed analysis of the AT&T decision, please visit Sheppard Mullin’s labor and employment blog dated April 27, 2011.)

The mandatory arbitration agreement used by Ralphs barred class actions as well as representative actions under the Private Attorneys General Act ("PAGA"). The agreement provided: "There is no right or authority for any Covered Disputes to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of the general public, of other Ralphs employees (or any of them), or of other persons alleged to be similarly situated. . . . [T]here are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy.”   When an employee filed a class and representative action under PAGA for alleged violations of the Labor Code, Ralphs filed a petition to compel arbitration. The employee opposed arbitration, arguing that the class action and PAGA representative action waivers were unconscionable and, therefore, invalid. The trial court—who ruled on the motion to compel arbitration before AT&T Mobility was decided—held that both provisions were unconscionable under established California precedent and refused to enforce the arbitration agreement. Ralphs appealed.

In a 2-1 decision, a panel of the Second Appellate District held that the PAGA representative action waiver was indeed unconscionable and unenforceable, notwithstanding AT&T Mobility. The entire panel also agreed, however, that the employee had failed to make a sufficient evidentiary showing that the class action waiver was unconscionable in this particular case. However, the panel also was unanimous that it lacked the power to invoke AT&T Mobility as a means to deem invalid the California Supreme Court’s decision in Gentry v. Superior Court, which had held that most class action waivers in employment agreements are unconscionable.

Although the panel overturned the trial court’s decision that the class action waiver was unconscionable, it did so because Plaintiff had failed to introduce any evidence to support that argument. In Gentry, the California Supreme Court held that a plaintiff could establish that a class action waiver was unconscionable by establishing four factors, that together show that arbitration is likely to be a significantly more effective practical means of vindicating rights than individual litigation. Because the plaintiff made no showing on this issue at all (beyond identifying that the arbitration agreement contained a class action waiver), the panel held that the trial court lacked a sufficient basis to rule the class action waiver unconscionable. The two-judge majority of the panel held that the ability to find the class action waiver enforceable in spite of Gentry eliminated the need to address whether AT&T Mobility overturned Gentry. The third judge opined that AT&T Mobility probably invalidated Gentry, but further opined that an appellate court lacked the power to depart from Gentry until the California Supreme Court itself recognized that Gentry was no longer good law. So, the panel ultimately avoided resolving the key issue of whether Gentry remains good law in the wake of AT&T Mobility.

On the PAGA issue, the majority of the panel held that AT&T Mobility does not apply to provisions of arbitration agreements barring PAGA representative actions. The majority reasoned that, unlike a class action, a representative PAGA action is an enforcement action with an aggrieved employee acting as a private attorney general to collect civil penalties for an employer’s violation of the Labor Code that would otherwise be collectible only by state labor law enforcement agencies. PAGA provides a means of "deputizing" citizens to enforce the Labor Code and protect the public.   The court opined that the entire purpose of the statute would be frustrated if it could only be enforced through individual arbitrations collecting penalties for individual employees. Because AT&T Mobility did not expressly address a circumstance where enforcing an arbitration agreement effectively nullified the purpose of a state statute, the majority declined to find that AT&T Mobility required enforcement of an arbitration agreement that precluded PAGA collective actions.

The dissenting judge opined that the holding of AT&T Mobility was that states could not except classes of cases from arbitration for collateral public policy reasons, so the dissent concluded that the FAA required enforcement of the PAGA representative action waiver. Because the California Supreme Court had never addressed this issue, the dissenting judge did not feel constrained in the same manner as he had been with respect to matters addressed in Gentry

In sum, the final holding of the case was that the PAGA waiver provision was unconscionable, and the Court remanded the case to the trial court to decide whether this one unconscionable provision could be severed or instead invalidated the entire arbitration agreement. Both the majority and concurring/dissenting opinions appeared to invite the California Supreme Court to grant review and decide for itself how it was going to construe AT&T Mobility.

Because review of this decision is likely, and it typically takes two years or more before the California Supreme Court issues a decision, the law surrounding the application of AT&T Mobility in the wage/hour context will remain unsettled for some time. While employers may still seek to implement arbitration agreements with class and collective action waivers, they should recognize that there remains significant uncertainty whether they will actually be able to enforce them. If you have further questions, you can discuss them any time with the lawyers of Sheppard Mullin.

Authored by Sheppard Mullin’s Labor & Employment Practice Group.