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California’s Hostility to Arbitration Agreement is Changing

California’s Hostility Toward Arbitration of Employment Disputes: Cracks in the Wall Are Starting to Show

In two recent decisions, the California Court of Appeal has shown a willingness to enforce arbitration agreements after many years of doing just the opposite. First, in Lorena Nelsen v. Legacy Partners Residential, Inc., 2012 WL 3308384 (Cal. App. 2012) the Court of Appeals rejected the recent decision of the National Labor Relations Board in D.R. Horton, Inc., 357 NLRB No. 184 (2012). In D.R. Horton the NLRB ruled that arbitration agreements requiring employees to arbitrate their employment-related disputes on an individual basis and preventing them from pursuing such claims on a class wide basis in any forum violated Section 7 of the National Labor Relations Act.

In July 2012, the California Court of Appeal rejected application of the D.R. Horton decision criticizing the NLRB for going beyond its authority. In doing so, the Court found that it had no obligation to follow the NLRB’s decision and declined to do so.

On August 9, 2012, in Truly Nolen of America v. Superior Court, 2012 WL 3222211 (Cal. App. 2012) the California Court of Appeal had an opportunity to apply the United States Supreme Court’s recent decisions in AT&T Mobility LLC v. Concepcion, 131 S.Ct 1740 (2011) and Stolt-Nielsen v. Animal Feeds International Corp., 130 Sup. Ct. 1758 (2010). In Concepcion and Stolt-Nielsen, the Supreme Court held that under the Federal Arbitration Act, California must enforce arbitration agreements even if the agreement requires that consumer complaints be arbitrated individually (instead of on a class action basis). A key issue was the continued viability of the California Supreme Court’s 2007 decision in Gentry v. Superior Court, 42 Cal.4th 443 (2007), in which the court set forth four factors to be used when determining whether class arbitration waivers in overtime pay cases.

The factors are: 1) the modest size of the potential individual recovery, 2) the potential for retaliation against individual class members, 3) the fact that absent members of the class may be ill informed about their rights, and 4) other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration. The Truly Nolen court opined that the Gentry decision no longer represents good law in the wake of Concepcion and Stolt-Nielsen. However, the court ultimately found that it was required to follow Gentry until the California Supreme Court ruled on the issue. The court applied the four Gentry factors and found the trial court had not adduced sufficient evidence to make a proper ruling. The court remanded the case back to the trial court instructing it to provide the parties’ the opportunity to present evidence on the threshold issue as to whether the parties’ arbitration agreement contained an implied agreement to authorize class arbitration.

These cases do not completely reverse California’s long-standing hostility toward arbitration agreements. However, in the wake of arbitration-friendly United States Supreme Court decisions, the barriers to arbitration in California seem finally to be weakening.

If you have questions about arbitration agreements, feel free to contact any member of the Labor and Employment Group.