In a clear victory for employers, the First District Court of Appeals held that arbitration agreements precluding class and representative actions do not violate California public policy as long as they are otherwise valid and enforceable under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000) (setting forth a multi-factor test to determine the validity of arbitration agreements in the employment context) and so long as there is no clear evidence that class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.
The enforceability of employee arbitration agreements that do not permit class and representative actions has, for years, been a hotly contested issue with conflicting opinions from the California Supreme Court (Gentry v. Superior Court, 42 Cal. 4th 443) in 2007, the U.S. Supreme Court (Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___) in 2010, and the NLRB (D.R. Horton, 357 NLRB No. 184) in 2012. In Gentry, the California Supreme Court ruled that arbitration agreements that preclude class or representative actions violate public policy where the plaintiff can show that class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration. In contrast, in Stolt-Nielsen, the U.S. Supreme Court ruled that, under the Federal Arbitration Act, class arbitration cannot be compelled unless there is a contractual basis for concluding that the parties agreed to do so. The upshot of this holding is that employees who signed employment arbitration agreements can be compelled to arbitrate their own individual claims even if they sought to bring a class or representative action against the employer. Finally, in D.R. Horton, the National Labor Relations Board went the other way, holding that requiring individual arbitrations violated employees’ statutory right to collective action. Now, the Nelsen Court offers California employers some guidance by rejecting the holding in D.R. Horton, distinguishing Gentry, and following Stolt-Nielsen.
Lorena Nelsen filed a putative class action lawsuit in San Francisco Superior Court against her former employer, Legacy Partners Residential, Inc. (LPI), alleging multiple violations of the California Labor Code, including failure to pay overtime, failure to provide meal and break periods, and failure to timely pay wages, among other claims.
Nelsen was hired by LPI, a real estate investment management company, to serve as a property manager in July of 2006. In connection with her hiring, Nelsen signed a series of employment forms, including a form which contained an agreement to binding arbitration as follows: “I agree that any claim, dispute, or controversy … between myself and Legacy Partners arising from, related to, or having any relationship or connection whatsoever with my … employment by Legacy Partners, … shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act [9 U.S.C. § 1 et seq., (FAA) ] …” The arbitration provision did not contain an express waiver of classwide arbitration and was silent on that issue.
After Nelsen filed her putative class action, LPI moved to compel individual arbitration. The trial court granted LPI’s motion. Nelsen appealed.
The primary issues on appeal were (1) whether enforcement of the arbitration provision to preclude classwide arbitration would violate California and Federal law, as well as public policy in the employment field; and (2) whether requiring employees to waive the filing of a class action in any form, arbitral or judicial, is a violation of the National Labor Relations Act [“NLRA”] under D.R. Horton, Inc.
As to the first issue, the court commenced by reviewing the California Supreme Court’s opinion in Gentry, which Nelsen pressed as being supportive of her position. As noted, Gentry held that, when a class action is asserted in a wage and hour case notwithstanding an arbitration agreement expressly precluding class or representative actions, the court must conduct a public policy analysis, weighing whether individual arbitration is so impractical as a means of vindicating employee rights that requiring it would undermine California’s public policy promoting enforcement of its employment laws. If the court finds that individual arbitration is impractical, Gentry requires that the class arbitration waiver in the contract be invalidated.
The Nelsen court questioned the continuing viability of Gentry given the US Supreme Court’s opinion in AT & T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, which found that a state law rule requiring classwide arbitrations based on public policy grounds rather than on the parties’ arbitration agreement itself violates the FAA. Ultimately, however, the court distinguished Gentry on the facts. The arbitration agreement in Nelsen did not include an explicit waiver of classwide arbitration and was completely silent on the issue. Under such factual circumstances, the court found the US Supreme Court decision in Stolt–Nielsen was controlling. In Stolt-Nielsen, the Court found that when an arbitration agreement is silent on the issue of classwide arbitration, the silence “cannot be taken as dispositive evidence to allow class arbitration.” Id. at 1775. The Supreme Court further noted that consent to classwide arbitration “cannot be inferred solely from the agreement to arbitrate, and the decision cannot be based on the court’s view of sound policy regarding class arbitration but must be discernible in the contract itself.” Id. at 1767–68.
Using the guidelines of Stolt-Nielsen, the Nelsen court confined its analysis to the arbitration agreement and found the plain language of the provision to be determinative in that it covered only “claims, disputes, and controversies ‘between myself and Legacy Partners,’ that is, between Nelsen and LPI.” Nelsen, supra at 8. Other portions of the agreement also reinforced the two-party intent of the agreement, for instance that the arbitrator’s award could be appealed “at either party’s written request.” As a result, the court affirmed the trial court’s order compelling Nelsen to individual arbitration.
As to the second issue, the court declined to follow Horton on grounds that it was not bound by federal administrative interpretations of federal law. The court was critical of the Horton decision, noting that the subject matter of the interplay of class action litigation, the FAA, and section 7 of the NLRA, was outside the Board’s area of expertise and that the decision reflected a “novel interpretation of section 7 and the FAA.” The Court pointed out that two federal district courts specifically rejected arguments that class action waivers in the labor context violated section 7 of the NLRA before Horton was decided. See Grabowski v. C.H. Robinson (S.D.Cal.2011) 817 F.Supp.2d 1159; Slawienskiv. Nephron Pharmaceutical Corp. (N.D.Ga.2010) 2010 WL 5186622. Further, at least two federal district court cases have rejected Horton since it was decided, both on grounds that the right to collective action cannot be reconciled with the FAA’s overarching purpose of ensuring that arbitration agreement are enforced according to their terms. See Jasso v. Money Mart Exp., Inc. (N.D.Cal.2012) 2012 WL 1309171; LaVoice v. UBS Financial Services, Inc. (S.D.N.Y.2012) 2012 WL 124590. Finally, the Court noted that Nelsen’s title as “property manager” suggests that she would not even be covered by the NLRA because she would not fit the definition of “employee” under the definition in Section 7 of the NLRA.
Nelsen is good news for employers using employee arbitration agreements and it provides a well-reasoned critique of D.R. Horton. Nevertheless, arbitration agreements, including those with class action waivers, remain subject to challenge in California and in other forums, including before the NLRB. Employers should still consult with legal counsel when reviewing the enforceability of arbitration agreements going forward.