Courts Refuse To Enforce Class Action Waivers In Arbitration Agreements

Many businesses favor requiring contracting parties to agree to arbitration clauses as part of their transactions, particularly in situations involving individuals such as consumers and employees. The clear trend in the courts is to favor arbitration and to enforce properly made agreements to arbitrate, even in some "adhesion" situations. However, courts hae been much less willing to enforce some of the strings businesses attempt to attach. As two recent decisions illustrate, businesses that require agreements to arbitrate may not be able to avoid arbitrations purporting to be brought on behalf of a class.

In Gentry v. Superior Court, 42 Cal.4th 443, 165 P.3d 556, 64 Cal.Rptr.3d 773 (Aug. 30, 2007), for example, the California Supreme Court considered a law suit brought by a Circuit City employee claiming violations of the Labor Code and Business and Professions Code. Plaintiff sued on behalf of a class of similarly situated employees. Circuit City argued that plaintiff was obligated to arbitrate, and to do so only on his own behalf.

The California Supreme Court agreed to take the case to clarify its decision in Discovery Bank v. Superior Court, 36 Cal.4th 148 (2005), in which it held that class action waivers in consumer contracts can be unconscionable and unenforceable. The court noted that Discovery Bank had not involved claims based on statute, but that plaintiff's claims in Gentry were in pursuit of statutory rights. Furthermore, the statute at issue was expressly made non-waivable by the legislature. The court concluded that under some circumstances the class action waiver Circuit City sought to enforce would lead to a de facto waiver of statutory rights provided in wage/hour cna overtime cases, and therefore would be unenforceable.