California Court Holds Class Action Waiver Unenforceable

The Eastern District Court of California has held a class action arbitration agreement waiver unenforceable and refused to compel arbitration against a former employee seeking class action status.

In Mathias v. Rent-A-Center, Inc., No. S-10-1476 (E.D. Cal. Sept. 15, 2010), Ryan Mathias, a former Assistant Manager of a Rent-A-Center (RAC) located in California filed a class action lawsuit in California state court which alleged eight claims related to his employment with RAC, including claims related to unpaid overtime and wages. RAC removed the case to federal court and filed a motion to compel arbitration. RAC relied on an arbitration clause contained in an employment agreement between Mathias and RAC that also included a nonseverable class action waiver provision.

While both parties agreed that the Federal Arbitration Act applied, the opinion ultimately hinged on the California Supreme Court’s decision in Gentry v. Sup. Ct., 42 Cal.4th 443 (2008). In Gentry, the California Supreme Court held that a class action waiver may be unenforceable in certain circumstances when it performs as an exculpatory clause. Gentry also stated that wage, hour and overtime cases would similarly have an exculpatory effect which would “frequently if not invariably,” undermine the unwaivable statutory right to overtime pay in California.

After noting that it could not categorically hold all class action waivers unenforceable per se in overtime actions, the Gentry court held that a court must determine whether a waiver is in fact exculpatory by considering a number of specific factors. After considering the factors, if a court determines that class proceedings “are significantly more effective and practical and that disallowance of such proceedings will likely lead to less comprehensive enforcement, ‘it must invalidate the class arbitration waiver. . .’” The Gentry court held that a class waiver could also be invalid if it was found to be both procedurally and substantively unconscionable under California law.

In support of his case, Mathias argued that his individual recovery was likely to be modest based on his salary at termination, retaliation against members of the putative class was likely and individual class members were unlikely to be aware of their rights. RAC responded by arguing the recent Supreme Court holding in Stolt-Nielsen v. Animalfeeds Int’l, Inc., 130 S.Ct. 1758 (2010) preempted the decision in Gentry. The Eastern District Court was not persuaded by RAC, however, and noted that the decision in Stolt-Nielsen and the subsequent court of appeals opinions interpreting it added weight to its decision to apply California law to evaluate the class action waiver at issue. According to the Eastern District:

Nowhere in the opinion did the Court even infer that state law regarding contract interpretation is preempted where the rule of interpretation is based upon policy concerns. In fact, the court specifically held the arbitration panel should rely on state contract law in determining whether to impose class arbitration… This court has not found any decisions of the courts of appeals that interpret Stolt-Nielsen as holding that the FAA preempts state rules of contract interpretation derived from public policy concerns. For this reason, the court applies California law to evaluate the class action waiver at issue in this case.

The California court found Mathias successfully demonstrated that a waiver would undermine a statutory right such that the waiver would be exculpatory under the factors set forth in Gentry. Because the arbitration agreement in the employment contract stated the class waiver was not severable, the court held the entire arbitration agreement unenforceable and denied RAC’s motion to compel arbitration.

Disputing addressed the recent decision in Stolt-Nielsen v. Animalfeeds Int’l, Inc. many times since it was decided:

• We blogged on the case itself here;
• In Professor Stipanowich’s guest post here;
• In Professor Strong’s guest post here and
• In an article entitled “Unresolved Questions in the Wake of the U.S. Supreme Court’s Class Arbitration Ruling in Stolt-Nielsen v. AnimalFeeds International,” by Robert E. Crotty here.

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