COURT UPHOLDS DENIAL OF CLASS CERTIFICATION IN CALIFORNIA OVERTIME MISCLASSIFICATION CASE

In yet another sign that the tide is turning in employers’ favor on the wage/hour class action front, a California appellate court has upheld the denial of certification in a case challenging the exempt status of managers and assistant managers at Sears auto centers.  Dailey v. Sears, Roebuck & Co.  Evidence of material variations in the way individual managers spend their time, the court held, indicates that individual issues would predominate over issues common to the class, rendering certification inappropriate.

The plaintiff in Dailey was an assistant manager and then a manager of a Sears auto center in the San Diego region.  After his termination, the plaintiff filed a class action, claiming that he and all other managers and assistant managers in the region had been misclassified as exempt employees and were entitled to overtime and premiums for missed meal periods.  He argued that class treatment was warranted because Sears had uniform policies and practices that resulted in all managers spending more than half of their time performing non-exempt work such as customer service, sales, inventory, and mechanical work, and that as such, as a class they had been misclassified as exempt.  In support of class certification, the plaintiff submitted declarations from four other managers as well as himself stating that they spent most of their time performing non-exempt work, regularly worked 50 hours per week, and were unable to take meal breaks.

In opposition, Sears argued that there were wide variations among the members of the proposed class in how managers spent their time.  It submitted declarations and testimony from six corporate managers and 21 class members attesting to significant differences in the proportion of time spent in non-exempt functions, ranging from 1% to 40%.  Sears’ evidence also disputed the existence of a company policy or practice mandating a non-exempt mix of work, instead showing that managers had substantial discretion to adjust staffing levels and set their own work schedules.  Based primarily on evidence of wide variations in the mix of exempt and non-exempt duties among managers, the trial court denied class certification.

The Court of Appeal affirmed, holding that Sears had submitted sufficient evidence to support a finding that individual issues predominated.  It rejected the plaintiff’s argument that in crediting Sears’ evidence of variation over his evidence of a common practice, the trial court had improperly decided the merits of his claims.  The court held that when the parties’ evidence conflicts relevant to whether common or individual questions predominate, the trial court is permitted to credit one party’s evidence over the other.  The plaintiff also protested the trial court’s refusal to consider random sampling to minimize and manage individual questions.  The appellate court rejected that argument as well, noting that the use of such techniques to determine liability rather than simply damages was controversial and that in any event, the plaintiff had simply proposed the methodology; he had not submitted actual data evidencing that existence of a common policy or practice.

What this means for employers:  This case reflects the encouraging trend of courts being more stringent in their examination of class certification motions in wage and hour cases, which inevitably benefits employers.  That said, employers are well advised to periodically review their exempt employee classifications, particularly those that fall in the gray area.  Audits by the U.S. Department of Labor are on the rise, including in California, with the agency pursuing an aggressive enforcement agenda.  In addition, individual overtime claims based on misclassification remain common both in the courts and before the California Labor Commissioner.

Felicia Reid

 

SEC ISSUES REPORT ON PUBLIC COMPANIES USE OF SOCIAL MEDIA

Earlier this month, the Securities and Exchange Commission issued report that provides guidance to public companies that want to use social media to disclose important information about their business activities. The report grew out of an investigation of Netflix’s CEO, who used his own Facebook page to announce information about Netflix that had not been previously disclosed and could be viewed as material.

The SEC did not bring any enforcement action against Netflix or its CEO, but it did make clear that an SEC Rule–Regulation FD–applies to a company’s use of social media. Regulation FD provides that if a company or its representatives discloses material, non-public information to a select group of people who are likely to trade on the basis of that information, the company must also disclose that information in a non-exclusionary manner to the public. This is often done through a press release, SEC filing or the company’s website. Disclosure of such information on the personal social media site of a company officer, without advance notice that such site is used to disclose company information, likely runs afoul of Regulation FD.

Practices a public company may wish to consider if it intends to use social media:

Disclose in its SEC reports, web site and press releases links to the specific sites the company intends to use, which should be accessible without charge.

At the same time any material disclosures are made on the company’s social media site(s), such disclosure should be made via a press release or SEC filing.

Remind company officers, directors and other representatives that they are not permitted to disclose material, non-public information about the company on their personal social media sites.

William Ross

Overtime Collective Actions Dealt A Major Blow By The U.S. Supreme Court

Yesterday, the U.S. Supreme Court found that a plaintiff could not maintain a collective action under the Fair Labor Standards Act (FLSA) when her former employer had offered her full monetary relief in an offer of judgment under the Federal Rules of Civil Procedure.  In a surprising 5-4 decision in Genesis HealthCare Corp. v. Symczyk, the Court rejected the plaintiff’s arguments that the employer’s tactics allowed employers an unfair means of “picking off” named plaintiffs to defeat collective actions. 

A bit of background.  Unlike Calfiornia state law, the FLSA does not allow for class actions where class members are presumed to be “in” unless they “opt out,” but rather only permits a “collective action” where “similarly situated” employees “opt in” after notice.  In this case, the plaintiff claimed that she and a group of similarly situated employees were not paid for time that they worked during meal breaks.  Ordinarily in a collective action under the FLSA, the court must determine that there are “similarly situated” employees before sending out an “opt in” notice.  In this case, before doing so, the employer made an Offer of Judgment to the single named plaintiff of the full amount of damages she had individually. 

In federal court, offers of judgment under Rule 68 operate very much like they do in state court under Cal. Code of Civ. Pro. 998.  Specifically, the rule allows defendants to make offers to have judgment in a certain amount entered against them and exposes a non-accepting plaintiff to exposure for certain post-offer costs.  The plaintiff here, however, rejected the offer, but the trial court still entered judgment on the case, effectively extinguishing the possibility of a continued “collective action”

The U.S. Supreme Court approved of the lower court’s action.  It found that there was no “actual controversy” because the individual named plaintiff had been offered full relief which made her whole.  As a result, she no longer had a “personal stake” in the litigation and could not pursue it on behalf of the “similarly situated” employees.

To be sure, that is an amazing ruling.  And it required some sleight of hand to get there.  In reaching that decision, the majority skirted the issue of whether the case had been made “moot” by virtue of the unaccepted offer of judgment.  Instead,the Court specifically declined to reach the issue and found that the plaintiff had waived it by not challenging the lower court’s ruling that the issue was moot.  Having said that, the majority did cite to a number of decisions which have found just that and the dissent even acknowledged that “a court has discretion to halt a lawsuit by entering judgment for the plaintiff when the defendant unconditionally surrenders.”

This decision potentially gives employers a powerful tool to combat collective actions under the FLSA.  But, argulably, it leaves more questions unanswered than answered.  For example, what effect, if any, will the decision have on class actions where it may be argued that a potential class of employees have a stake in the outcome?  Likewise, if the plaintiff seeks injunctive relief will that operate as a bar to an offer of monetary judgment that would otherwise make her whole?  

Undoubtedly, the courts will answer these and other questions in the coming years.  We will keep you posted on those developments.

- Dan Handman

 

New “Job Killer” Bills On The Horizon

It’s as much a Spring rite of passage as Opening Day in baseball or Tax Day: the California Chamber of Commerce’s annual list of “job killer” bills.  Ever since Arnold Schwarzenegger wielded his hefty veto stamp, this list has gotten the attention of employers throughout California.

And this year is no different.  The Chamber identified six bills which would add to the bevy of employment-related obligations on California employers.  Among them:

  • AB 10, which would increase the minimum wage by $1.25 to $9.25 over three years and thereafter increase the minimum wage based on inflation;
  • AB 1138, which would require employers to post a list of all persons covered by worker’s compensation insurance and which would allow a private right of action (and undoubtedly significant exposure in a class action or PAGA lawsuit) to any employer who maintains an inaccurate list;
  • SB 404, which would amend the Fair Employment and Housing Act to prohibit discrimination against individuals based on their “familial status,” namely whether they provide care to a family member;
  • SB 761, which would make it unlawful for an employer to retaliate against an employee because she has sought Paid Family Leave from the state-administered fund;
  • SB 626, which would significantly increase the cost of worker’s compensation premiums on employers and the amount of potential awards to worker’s compensation claimants; and
  • AB 5, the so-called “Homeless Person’s Bill of Rights, which would amend the Unruh Act to prohibit discrimination against homeless persons to various public accommodations.

To be sure, most of these bills stand little chance of passage, even in a Legislature dominated by Democrats.  With California’s unemployment rate officially at 9.6% (a full 2.0% higher than the national rate), Governor Jerry Brown has been reluctant to add to the burdens already imposed on California employers.  Indeed, none of the eight “job killer” bills identified by the Chamber in 2012 were signed into law and Governor Brown vetoed two of them.  We will keep you posted periodically about the status of these bills.

- Dan Handman

THE TIDE IS TURNING ON WAGE AND HOUR CLASS ACTIONS

Over the last two years, California employers have gotten progressively better news from the state and federal courts on the wage and hour class action front.  The trend began in 2011 with two favorable U.S. Supreme Court decisions.  In Dukes v. Wal-Mart, the court significantly tightened the federal standards for class certification, suggesting in the process that looser state standards might violate the due process guarantees of the U.S. Constitution.  In AT& T Mobility v. Concepcion, the Supreme Court held that an arbitration agreement waiving class claims is valid and enforceable, news in California where previous state court decisions were to the contrary.  Then one year ago, in April 2012, the California Supreme Court issued its Brinker Restaurants decision, holding that liability for violation of California meal period rules is not automatic but rather depends on why the employee failed to take a compliant meal period.  The meal period cases since Brinker have overwhelmingly held that meal period claims are not amenable to class treatment because the individual issues overwhelm the common ones:  for each class member, for each day, the court must ask “why did you miss your meal period?” to determine whether liability is triggered.   

Then, on March 28, 2013, the U.S. Supreme Court issued yet another decision that is sure to have further limiting effects on wage and hour class actions, Comcast Corp. v. BehrendComcast itself is not a wage/hour class action, but rather an anti-trust case.  The plaintiffs claimed that Comcast’s actions in buying up competing cable systems often in return for Comcast pulling out of areas where it was less competitive, violated the Sherman Act.  They were successful in obtaining certification of a class of two million Comcast subscribers in the Philadelphia area.  The Supreme Court, however, held that certification should not have been granted because the damages model proposed by the plaintiffs did not fit their liability theory and as a result “[q]uestions of individual damages calculations will inevitably overwhelm questions common to the class.”  To warrant certification under the federal rules, the court held, class-wide damages must be calculable through a “common methodology.”  To determine whether this standard has been met, trial courts must conduct a “rigorous analysis.” 

 What this means for employers: 

The impact of the Comcast decision on wage and hour class actions is potentially significant, because damages in these cases can be very fact intensive and based on facts specific to each individual class member.  For example, in a meal period case based on a well-established class-wide policy or practice of failing to provide compliant meal periods – which until Comcast would be sufficient to warrant class certification – damages would still have to be calculated individually because on any given day an individual employee may have skipped the meal period voluntarily.  The appropriateness of class certification in such cases is now in question after Comcast.  The Comcast decision gives employers a previously unavailable weapon for opposing class certification in wage and hour cases, at least in federal court.  It remains to be seen how effective that weapon will be in federal trial courts as well as how receptive California state courts will be to its use.

Felicia R. Reid

How Much Mileage Can You Get Out of Your Arbitration Agreements?

Right now, the answer to that question just depends on your appetite for risk.  If you are risk adverse and do not want to have to update your arbitration agreement again within the next year or so, you should hold tight until the California Supreme Court issues its decisions in a few pending arbitration cases that will attempt to reconcile federal and state law on arbitration.

All was relatively stable in California arbitration law until two years ago when the U. S. Supreme Court started to issue decisions in conflict with it.  The decision currently wreaking havoc with certainty in California arbitration law is AT&T Mobility, LLC v. Concepcion, 563 U.S. __ (2011).  In that case, the U. S. Supreme Court held that it was permissible to have arbitration agreements that bar individuals from bringing class action lawsuits.  This was decidedly not okay under existing California law (Gentry v. Superior Court, 42 Cal. 4th 443 (2007)).  In two pending cases, Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949 (2012) and Caron v. Mercedes-Benz Financial Services, 208 Cal. App. 4th 7 (2012), the California Supreme Court will look at the issue of whether Concepcion changed California law on class action waivers.  Early money is on the California Supreme Court keeping California law as it currently stands and attempting to distinguish Concepcion.

In Iskanian, the California Supreme Court granted review of the Court of Appeal’s decision, relying on Concepcion to enforce a class action waiver.  Iskanian has been de-published pending the California Supreme Court’s decision.  Similarly, in Caron v. Mercedes-Benz Financial Services, the California Supreme Court granted review of a decision that held that federal law trumps state law to allow class action waivers.  The Court of Appeal had reversed an order denying a petition to compel arbitration, holding that the Federal Arbitration Act preempts the Consumer Legal Remedies Act prohibition on class action waivers.  The California Supreme Court deferred briefing of the case pending its decision in Iskanian.

In two other cases, the California Supreme Court will look at whether Concepcion’s interpretation of the Federal Arbitration Act (“FAA”) allows the FAA to preempt state law on the issue of when mandatory arbitration provisions are enforceable.  One is even an employment case.  In Mayers v. Volt Management, Volt appealed after the Court of Appeal upheld the denial of its petition to compel arbitration in the matter.  Plaintiff Stephen Michael Mayers filed a lawsuit against his former employer alleging several claims under the California Fair Employment and Housing Act.  Volt filed a motion to compel arbitration based on plaintiff’s agreement to submit employment-related claims to final and binding arbitration, as evidenced by his signed employment application, employment agreement, and acknowledgment of receipt of the employee handbook.  The trial court denied the motion on the grounds that the arbitration provisions were unconscionable in that they required the plaintiff to submit employment-related claims to arbitration pursuant to the “applicable rules of the American Arbitration Association in the state” where plaintiff had been employed by Volt and Volt did not provide plaintiff with a copy of the rules or advise him how he could find or review the rules.  The trial court also found fault with the fact that the arbitration provisions did not specifically identify which set of AAA rules would apply.  The arbitration provisions also stated that the “arbitrator shall be entitled to award reasonable attorney’s fees and costs to the prevailing party.”  The Court of Appeal found that such a provision exposed plaintiff to greater liability than he would have faced in court.  Volt then appealed to the California Supreme Court.  After granting review, the Court ordered briefing deferred pending its decision in Sanchez v. Valencia Holding Co. LLC, 201 Cal. App. 4th 74 (2011), which will decide the same FAA preemption issue. 

If you want to make sure your current arbitration agreement complies with California law, are ready to test the waters by issuing an arbitration agreement for the first time, or want to push the envelope a bit, feel free to contact us.

Kirstin Muller

“Me Too” – Or Perhaps Not – The California Court of Appeals Excludes “me too” Evidence

On March 28, 2013, the California Court of Appeals upheld a Los Angeles Court’s ruling in Hatai v. Dept. of Transportation, precluding the Plaintiff, Hatai, from presenting “me too” evidence from other employees allegedly discriminated against by Hatai’s boss. 

Hatai sued the Department of Transportation (CalTRANS), his current employer, alleging he was discriminated against because of his Japanese ancestry and his Asian race.  At the time of trial Hatai attempted to broaden his argument by claiming that his boss, an Arab, discriminated against all employees who were not of Arab descent. 

Before trial CalTRANS brought a Motion In Limine to exclude evidence that Hatai’s supervisor had discriminated against non-Asians, claiming that discrimination against anyone of non-Arab descent was not the claim brought in his lawsuit.  Hatai’s counsel conceded that his theory was that Hatai’s supervisor had discriminatory animus against anyone who was not Arab. 

The Court ruled that since Hatai’s claim was originally pled as an anti-Asian claim, he was only entitled to introduce evidence under the “me too” doctrine – i.e., that employees had also been subject to similar discrimination.  But, it also found that Hatai had not shown enough evidence of pro-Arab favoritism to allow such evidence.

The California Court of Appeals affirmed the trial court’s decision.  In Johnson v. United Cerebral Palsy, the plaintiff had claimed her employer fired her based on her pregnancy, and was allowed to submit evidence that the employer had fired other women also because they were pregnant.  The Johnson Court ruled that such “me too” evidence was admissible because evidence of pregnancy discrimination against other employees was sufficiently similar to the claim set forth by the plaintiff. 

In Hatai, The Court of Appeals held that Hatai’s evidence was not sufficiently related to his claim of discrimination or harassment based on Asian or Japanese ancestry.  Therefore, “me too” evidence would only be allowed with respect to other CalTRANS employees of similar descent or ancestry who allegedly had been discriminated against.  Based on his pleading, any broader admissibility of pro-Arab favoritism would not be admitted.

While this case sets forth a favorable decision for employers, in some part this was based upon the Plaintiff’s failure to specifically plead that his supervisor discriminated against non-Arabs, as opposed to Asians.  As has been consistent in California, “me too” evidence is admissible in discrimination and harassment cases.  While generally this will be limited to individuals of the same protected category alleged by a plaintiff, employers should be aware that in a favoritism kind of case, “me too” evidence may be admissible on a much broader scale. 

Greg Glazer

 

PERB’s Recent Decision In Rio Hondo Community College District Re-Ups The Ante On A Public Employer’s Obligation To Bargain Over Reasonably Foreseeable Effects

In mid-April 2009, the Rio Hondo Community College District advised the California School Employees Association (CSEA or Union) of its intent to install surveillance cameras in its new Learning Resource Center.  Thereafter, the College expanded its plans to include the placement of such cameras in its parking lots.  The cameras would show CSEA bargaining unit members while coming and going, entering and leaving a break room, cleaning public areas of the building and maintaining outdoor areas of the campus.

A couple of months after being advised of the installation of the cameras, CSEA requested to negotiate over the decision and effects of the decision to install the surveillance cameras. CSEA’s request stated that the installation of the cameras in members’ work areas impacted the working conditions of its members, including performance evaluations and potential discipline, both matters within the scope of bargaining.  The District denied CSEA’s request to negotiate.  CSEA seeking to convince the College to negotiate, again reiterated its request and provided a copy of a memorandum of understanding with another district that addressed the use of video cameras.  Unconvinced, the College reiterated its refusal to bargain.

The College in refusing to bargain with CSEA contended that to implicate an employer’s bargaining duty, a union’s effects bargaining demand must clearly identify areas of impact and absent such identification the employer has no duty to bargain.

The Administrative Law Judge concluded that the College’s denial of the Union’s request to negotiate over the decision’s effects violated EERA.  The ALJ also concluded that the College’s decision to install security surveillance cameras did have reasonably foreseeable negotiable effects.

PERB adopted the ALJ’s conclusions of law, but took the opportunity to resurrect prior PERB decisions.  In reviewing the College’s claim that the Union had failed to clearly identify negotiable effects, PERB backed away from more recent decisions relied upon by the College which had appeared to solidly establish that to implicate an employer’s bargaining duty, a union’s effects bargaining demand must clearly identify areas of impact and absent such identification the employer has no duty to bargain.  Relying on decisions primarily from the 1980s PERB noted that an employer must provide a union with notice and a reasonable opportunity to negotiate before taking action that impacts matters within the scope of representation.  This, according to PERB, includes the duty to seek clarification of what is proposed for bargaining and whether what is proposed falls within the scope of representation.  PERB noted that upon receiving a union’s demand, the employer has three options: (1) accede to the demand and address the union’s concerns in negotiations; (2) ask the union for its justification, viz., seek clarification of (a) the areas of impact proposed for negotiation and (b) whether these areas of impact are within the scope of representation; or (3) refuse the union’s demand.  In choosing the third option, the employer does so at its peril if its refusal is determined unjustified.    

Henceforth, a public employer’s faced with a vague or unspecified request for effects bargaining should seek clarification from the union before refusing to bargain.  Failure to take this step puts the employer at substantial legal risk and can result in an adverse finding against the employer by PERB.

Carmen Plaza de Jennings

Choice of Law: Law Firm Drafting of Arbitration Agreement Comes Back to Haunt Them

File this one under “be careful what you draft,” especially if you are a law firm.

Bingham McCutcheon LLP provided a letter agreement to one of its associates in California, Hartwell Harris, setting forth the terms of the employment relationship.  The letter agreement included arbitration language and stated that Massachusetts law would apply.

Hartwell filed a lawsuit and alleged that the firm wrongfully terminated her employment and discriminated against her after she requested reasonable accommodation for a sleeping disorder.  Bingham McCutcheon petitioned to compel arbitration based on the letter agreement language.

The California Court of Appeal looked at the language of the letter agreement, which had been drafted by the law firm.  The Court found that the choice-of-law provision applied Massachusetts law and that California courts favor enforcement of such choice-of-law provisions.  The Court then looked at the underlying law in Massachusetts and found that mandatory arbitration of statutory discrimination claims is enforceable only if arbitration agreements “at a minimum, state clearly and specifically that such claims are covered by the contract’s arbitration clause.”  The Harris letter agreement did not specifically identify the statutory discrimination claims.  Therefore, the Court concluded that the arbitration provision was not enforceable under Massachusetts law.

The Court criticized Bingham McCutcheon for trying to “have it both ways” by arguing the arbitration provision was enforceable, but language in the very same agreement (applying Massachusetts law) did not apply.  Further, the Court pointed to the law firm as the stronger party that drafted the agreement, which makes the firm’s attempt to avoid one of its provisions (application of Massachusetts law) even more problematic.  The Court stated that in California the weaker party to an adhesion contract may be able to avoid the enforcement of a choice-of-law provision where enforcement would result in substantial injustice.

Employers, especially those that cross multiple states, should be careful about the choice-of-law provision and ensure that an arbitration agreement or other contract language is enforceable under that particular state law.  That is why local counsel should be consulted in the drafting of such agreements.

John Baum

Will The U.S. Supreme Court Force A Sea Change On California Arbitration Agreements

Although arbitration agreements are supposed to ease disputes, for the last decade they have had a tendency to exacerbate them.  Proponents of arbitration see it as an efficient, cost-effective way to resolve disputes, particularly given the budget crisis among California courts, but opponents decry arbitration as a means for employers to set barriers that effectively exculpate themselves from liability.

California courts have strongly sided with the opponents of arbitration particularly as it concerns employment agreements.  In 2000, the California Supreme Court decided Armendariz v. Foundation Health Psychcare Services, the seminal case in California on arbitration agreements in the employment context which held that the common law defense of unconscionability applied in full force to arbitration agreements.                                                                                           

Unconscionability: A “Peculiar” Common Law Defense

On its face, that principle seems rather uncontroversial.  After all, while the Federal Arbitration Act strongly favors the use of arbitration and requires that arbitration agreements be placed on equal footing with other contracts, the FAA explicitly acknowledges that common law “grounds as exist at law or in equity for the revocation of any contract” remain in full force.   So, the application of a common law defense that is seemingly applicable to all contracts should not be of any special concern.

But, it was never that clear.  While Armendariz recognized that unconscionability was a traditional common law defense to the enforcement of contracts, it also noted that “the ordinary rules of unconscionability may manifest themselves in forms peculiar to the arbitration context.”    

The Armendariz court identified a few “peculiar” ways unconscionability presents itself in arbitration agreements involving the employment relationship.  Arbitration agreements in the employment context require that arbitration be mutually binding on all parties in all respects unless the employer can establish “business realities” require a lack of mutuality.  Ostensibly the same is true for an arbitration agreement that limits discovery below that which is allowed in court.

Since Armendariz, California courts have expanded the scope of the unconscionability defense as it applies to arbitration agreements.  At first, California courts struck down arbitration agreements as unconscionable because they allowed employers to seek preliminary injunctive relief but did not afford employees that same opportunities.  Then, the same courts struck down arbitration agreements even when they contained mutual carve-outs for preliminary injunctions on the grounds that an employer was more likely to seek an injunction than an employee.

Likewise, the California Supreme Court has refused to allow waivers of class actions in arbitration agreements in the employment context.  In Gentry v. Superior Court, the Court held that a class waiver provision in an arbitration agreement should not be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.”  The California Supreme Court extended that rule to “consumer contracts of adhesion” in Discover Bank v. Superior Court. 

Other California courts have struck down arbitration agreements for issues on issues of much less significance.  Some courts, for example, struck down agreement which did not attach a copy of the applicable arbitration rules.  Others did so if the agreements limited discovery to a point that the court deemed insufficient for the plaintiff to pursue his case, or in some cases if the employer did not translate the agreement to another language.      

The U.S. Supreme Court Scolds California Again

California’s hostility toward arbitration agreements seemed like it was headed for a change after the U.S. Supreme Court issued its groundbreaking decision in AT&T Mobility LLC v. Concepcion, a 5-4 decision authored by Justice Antonin Scalia.  In that case, the U.S. Supreme Court overruled Discover Bank insofar as it held that class action waivers in arbitration agreements in consumer contracts were unconscionable.  The U.S. Supreme Court identified two situations where state law would be pre-empted by the FAA: (1) when state law prohibits outright the arbitration of a particular type of claim; and (2) when a common law defense is “applied in a fashion that disfavors arbitration.”

The Discover Bank rule falls into that second category because class actions “interfered with” the purpose underlying arbitration, namely the “efficient, streamlined” resolution of disputes.  The U.S. Supreme Court reasoned that requiring defendants to arbitrate class actions would make arbitration unnecessarily costly, inefficient and time-consuming. 

Justice Scalia did not pull any punches in his criticism of the unconscionability in general in California courts.  In particular, he notedthat statistically “California’s courts have been more likely to hold contracts to arbitrate unconscionable than other contracts.”  And, in dicta, he signaled that he could foresee a number of situations where he would reverse state law unconscionability decisions that would have a “disproportionate impact” on arbitration agreements. 

The California Courts Push Back Against The Supremes

Surely then, California courts can now recognize that in many of its decisions, the “peculiar” application of unconscionability to arbitration agreements has resulted in a “disproportionate impact” on arbitration agreements.  In fact, it is worth asking whether Armendariz itself survives judicial scrutiny.  After all, the Armendariz decision is expressly premised on balancing the advantages of arbitration against its disadvantages – a balancing act that Justice Scalia made quite clear was not permitted given the strong federal policy favoring arbitration.  Does that holding not raise the specter that Armendariz is no longer good law? 

Apparently not.  In three separate post-Concepcion decisions, the Courts of Appeal have found that Armendariz remains good law despite Concepcion.  Not only that, but they continue to strike down arbitration agreements for lack of perfect mutuality or because agreements did not attach a copy of arbitral rules. 

That might seem like enough to get the U.S. Supreme Court fired up about California’s arbitration jurisprudence.  But it gets even more complicated.  Since Concepcion was decided, several panels of the Courts of Appeal have seemingly thumbed their noses at the case, finding that class action waivers in employment agreements were still unconscionable. 

One post-Concepcion case where the Court of Appeal upheld a class action waiver in an arbitration agreement has wound its way to the California Supreme Court.  In Iskanian v. CLS Transportation Los Angeles, LLC, the plaintiff’s bar has asked the California Supreme Court to reconcile Concepcion with Gentry, a case whose logic was at best undermined by Concepcion and at worst completely invalidated by it.

Will The U.S. Supreme Court Wipe Out Years Of Unconscionability Law?

Whether it is Iskanian or some other case, the U.S. Supreme Court is bound to weigh in on this sooner or later.  There are already five decisions from the U.S. Supreme Court overruling California state courts on arbitration agreements, so they are not bashful to do so.

If the composition of the U.S. Supreme Court does not change, it would not be at all surprising if it takes California courts to task for their attempts to circumvent Concepcion.   The only question may be how much California law gets overruled the next time.  Will it just be Gentry that falls (as many believe it already has) or will Armendariz itself or some its progeny also face their death knell.

Only time will tell.  The conservative justices who joined Justice Scalia in the majority in Concepcion famously avoid broad pronouncements of law and limit themselves to deciding no more than the narrow questions presented to them.  But in this case, they may not be able to resist. 

Dan Handman