Appendix — Circuit City Stores, Inc. v. Gentry, 128 S. Ct. 1743 (2008) (No. 07-998)
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APPENDIX A
SUPREME COURT OF CALIFORNIA
No. $141502
ROBERT GENTRY,
Petitioner,
Vv.
THE SUPERIOR COURT OF LOS ANGELES COUNTY,
Respondent,
CIRCUIT CITY STORES, INC.,
Real Party in Interest.
Aug. 30, 2007
Rehearing Denied Oct. 31, 2007
MORENO, J.
In this case we consider whether class arbitration
waivers in employment arbitration agreements may
be enforced to preclude class arbitrations by employ-
ees whose statutory rights to overtime pay pursuant
to Labor Code sections 500 et seq. and 1194’ allegedly
have been violated. We conclude that at least in
some cases, the prohibition of classwide relief would
undermine the vindication of the employees’ unwaiv-
able statutory rights and would pose a serious
obstacle to the enforcement of the state’s overtime
laws. Accordingly, such class arbitration waivers
should not be enforced if a trial court determines,
based on the factors discussed below, that class
‘ All statutory references are to this code unless otherwise
indicated.
2a
arbitration would be a significantly more effective
way of vindicating the rights of affected employees
than individual arbitration. We therefore reverse the
judgment of the Court of Appeal upholding the class
arbitration waiver and remand for the above deter-
mination.
Another issue posed by this case is whether a
provision in an arbitration agreement that an em-
ployee can opt out of the agreement within 30 days
means that the agreement is not procedurally
unconscionable, thereby insulating }% from employee
claims that the arbitration agreement is substan-
tively unconscionable or unlawfully exculpatory. As
explained below, a finding of procedural unconscion-
ability is not required to invalidate a class arbitration
waiver if that waiver implicates unwaivable statutory
rights. But such a finding is a prerequisite to deter-
mining that the arbitration agreement as a whole is
unconscionable. Plaintiff in this case argues that
other terms of the arbitration agreement were sub-
stantively unconscionable and that the entire agree-
ment should not be enforced. Contrary to the Court
of Appeal, we conclude the present agreement has an
element of procedural unconscionability notwithstand-
ing the opt-out provision, and therefore remand for a
determination of whether provisions of the arbi-
tration agreement were substantively unconscion-
able.
I. STATEMENT OF FACTS
The facts are for the most part not in dispute. On
August 29, 2002, Robert Gentry filed a class action
lawsuit in superior court against Circuit City Stores,
Inc- (Circuit City), seeking damages for violations of
the Labor Code and Business and Professions Code,
3a
as well as for conversion. Gentry filed suit on behalf
of salaried customer service managers such as
himself whom Circuit City had allegedly “illegally
misclassified” as “exempt managerial/executive em-
ployees” not entitled to overtime pay, when in fact,
they were “non-exempt’ non-managerial employees”
entitled to be compensated for hours worked in excess
of eight hours per day and 40 hours per week.
When he was hired by Circuit City in 1995, Gentry
received a packet that included an “Associate Issue
Resolution Package” and a copy of Circuit City’s
“Dispute Resolution Rules and Procedures,” pursuant
to which employees are afforded various options, in-
cluding arbitration, for resolving employment-related
disputes. By electing arbitration, the employee
agrees to “dismiss any civil action brought by him in
contravention of the terms of the parties’ agreement.”
The agreement to arbitrate also contains a class
arbitration waiver, which provides: “The Arbitrator
shall not consolidate claims of different Associates
into one proceeding, nor shall the Arbitrator have the
power to hear arbitration as a class action... .” As
will be explained at greater length below, the
arbitration agreement also contained several limita-
tions on damages, recovery of attorney fees, and the
statute of limitations that were less favorable to
employees than were provided in the applicable
statutes. The packet included a form that gave the
employee 30 days to opt out of the arbitration
agreement. Gentry did not do so.
At that time, there was a split of authority in
California on the enforceability of class action waiv-
ers in consumer contracts. (See Szetela v. Discover
Bank (2002) 97 Cal.App.4th 1094, 118 Cal.Rptr.2d
4a
862 [waivers unconscionable]; Discover Bank v. Supe-
rior Court (2003) 105 Cal.App.4th 326, 129 Cal.Rptr.
2d 393 [waivers must be upheld under the Federal
Arbitration Act], overruled by Discover Bank v.
Superior Court (2005) 36 Cal.4th 148, 30 Cal. Rptr.3d
76, 113 P.3d 1100 (Discover Bank).) Circuit City
moved to compel arbitration. The court acknowl-
edged that the governing case law was “conflicting
and in a state of flux,” and elected to follow the Court
of Appeal decision in Discover Bank v. Superior
Court. The court did hold two provisions of the
agreement (cost splitting and limitation of remedies
provisions) substantively unconscionable based on
federal case law. (Morrison v. Circuit City Stores,
Inc. (6th Cir.2003) 317 F.3d 646.) The court severed
those provisions from the agreement, ordered Gentry
to “arbitrate his claims on an individual basis and
submit to the class action waiver,” and stayed the
superior court action.
Gentry filed a mandate petition on September 9,
2003. The Court of Appeal denied the petition,
noting that the issue of the enforceability of the class
action waiver was before this court in Discover Bank.
We granted Gentry’s petition for review and deferred
briefing pending our decision in Discover Bank. On
June 27, 2005, we issued our decision in Discover
Bank, supra, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113
P.3d 1100. As discussed at greater length below, we
held that “at least under some circumstances, the law
in California is that class action waivers in con-
sumer contracts of adhesion are unenforceable” as
unconscionable. (Discover Bank, supra, 36 Cal.4th at
p. 153, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) We re-
manded this case for reconsideration in light of
Discover Bank.
5a
On remand, the Court of Appeal again denied
Gentry’s petition for writ of mandate. It distin-
guished the class arbitration waiver in this case from
the one found unconscionable in Discover Bank on
two principal grounds. First, the court held that the
agreement was not unconscionable because of the 30-
day opt-out provision. Because of this provision, “the
agreement at issue here does not have that adhesive
element and therefore is not procedurally unconscion-
able.”
Second, for reasons elaborated on below, it found
the class arbitration waiver here was distinguishable
from the one in Discover Bank and not substantively
unconscionable because the present case, unlike Dis-
cover Bank, did not involve “predictably .. . small
amounts of damages.” (Discover Bank, supra, 36
Cal.4th at p. 162, 30 Cal. Rptr.3d 76, 113 P.3d 1100.)
We granted review to clarify our holding in Di-
scover Bank.
II. DISCUSSION
A. Class Arbitration Waiver in Overtime Cases
May Be Contrary to Public Policy
In Discover Bank, the plaintiff sought to prosecute
a class action against a credit card company that had
allegedly defrauded a large number of customers for
small amounts of money, as low as $29 in the
plaintiffs case. (Discover Bank, supra, 36 Cal.4th at
p. 154, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) The credit
card company had inserted into its agreement with
its customers an amendment by sending a notice to
its customers and informing them that continued use
of the account would constitute acceptance of the
terms of the amendment. The amendment required
arbitration of all disputes and prohibited classwide
6a
arbitration. (/d., at pp. 153-154, 30 Cal.Rptr.3d 76,
113 P.3d 1100.) In finding such agreements gener-
ally unconscionable under California law, we started
out reviewing the policies in favor of class actions
and class arbitration’ in consumer actions, quoting
Vasquez v. Superior Court (1971) 4 Cal.3d 800, 808,
94 Cal.Rptr. 796, 484 P.2d 964 (Vasquez): “Fre-
quently numerous consumers are exposed to the
same dubious practice by the same seller so that
proof of the prevalence of the practice as to one
consumer would provide proof for all. Individual
actions by each of the defrauded consumers is often
impracticable because the amount of individual re-
covery would be insufficient to justify bringing a
separate action; thus an unscrupulous seller retains
the benefits of its wrongful conduct. A class action by
consumers produces several salutary by-products,
including a therapeutic effect upon those sellers who
indulge in fraudulent practices, aid to legitimate
business enterprises by curtailing illegitimate com-
petition, and avoidance to the judicial process of
the burden of multiple litigation involving identical
claims. The benefit to the parties and the courts
would, in many circumstances, be substantial.” (Dis-
cover Bank, supra, 36 Cal.4th at p. 156, 30 Cal.
Rptr.3d 76, 113 P.3d 1100.)
Because of the importance of class actions in
consumer litigation, we concluded that “at least some
class action waivers in consumer contracts are
unconscionable under California law. First, when, a
consumer is given an amendment to its cardholder
agreement in the form of a ‘bill stuffer’ that he would
* For the sake of economy, this opinion will sometimes refer to
class action litigation and class arbitrations generically as “class
actions.”
me
be deemed to accept if he did not close his account, an
element of procedural unconscionability is present.
[Citation.}] Moreover, although adhesive contracts
are generally enforced [citation], class action waivers
found in such contracts may also be substantively
unconscionable inasmuch as they may operate effec-
tively as exculpatory contract clauses that are con-
trary to public policy. As stated in Civil Code section
1668: ‘All contracts which have for their object,
directly or indirectly, to exempt anyone from respon-
sibility for his own fraud, or willful injury to the
person or property of another, or violation of law,
whether willful or negligent, are against the policy of
the law.’. . .
“Class action and arbitration waivers are not, in
the abstract, exculpatory clauses. But because, as
discussed above, damages in consumer cases are
often small and because “[a] company which wrong-
fully exacts a dollar from each of millions of custom-
ers will reap a handsome profit” [citation], “the class
action is often the only effective way to halt and
redress such exploitation.” ([Citation.] Moreover,
such class action or arbitration waivers are indis-
putably one-sided. ‘Although styled as a mutual
prohibition on representative or class actions, it is
difficult to envision the circumstances under which
the provision might negatively impact Discover
[Bank], because credit card companies typically do
not sue their customers in class action lawsuits.’
[Citation.] Such one-sided, exculpatory contracts in a
contract of adhesion, at least to the extent they
operate to insulate a party from liability that other-
wise would be imposed under California law, are
generally unconscionable.” (Discover Bank, supra, 36
Cal.4th at pp. 160-161, 30 Cal.Rptr.3d 76, 113 P.3d
1100, italics omitted.)
8a
We clarified that “[wle do not hold that all class
action waivers are necessarily unconscionable. But
when the waiver is found in a consumer contract of
adhesion in a setting in which disputes between
the contracting parties predictably involve small
amounts of damages, and when it is alleged that the
party with the superior bargaining power has carried
out a scheme to deliberately cheat large numbers of
consumers out of individually small sums of money,
then, at least to the extent the obligation at issue is
governed by California law, the waiver becomes in
practice the exemption of the party ‘from respons-
ibility for [its] own fraud, or willful injury to the
person or property of another.’ (Civ.Code, § 1668.)
Under these circumstances, such waivers are
unconscionable under California law and should not
be enforced.” (Discover Bank, supra, 36 Cal.4th at
pp. 162-163, 30 Cal.Rptr.3d 76, 113 P.3d 1100.)
We also concluded in Discover Bank that it was
unnecessary to abandon the arbitration forum in
order to address the claims of a class of consumers.
Rather, class arbitration was a well-accepted alter-
native to class litigation on the one hand and individ-
ual arbitration on the other. (Discover Bank, supra,
36 Cal.4th at pp. 157-158, 30 Cal.Rptr.3d 76, 113
P.3d 1100.) We noted that class arbitration has been
in use for the last 20 years and that rules concerning
such arbitration have been incorporated into various
dispute resolution services. (/d., at p. 172, 30 Cal.
Rptr.3d 76, 113 P.3d 1100.)
In Discover Bank, before discussing the general
principles of unconscionability on which that decision
was based, we noted that the Court of Appeal in
America Online, Inc. v. Superior Court (2001) 90 Cal.
App.4th 1, 108 Cal.Rptr.2d 699 (AOL), had invali-
9a
dated a Virginia choice-of-law provision in a con-
sumer contract with no arbitration agreement that
effectively would have disallowed the pursuit of a
class action. The plaintiff sought class relief pursu-
ant to California’s Consumer Legal Remedies Act
(CLRA) (Civ.Code, § 1750 et seq.), which specifically
authorizes such class actions (Civ.Code, § 1781), and
which further provides in Civil Code section 1751
that “[a]ny waiver by a consumer of the provisions of
this title is contrary to public policy and shall be
unenforceable and void.” (Discover Bank, supra, 36
Cal.4th at p. 158, 30 Cal.Rptr.3d 76, 113 P.3d 1100.)
We noted that the plaintiff in Discover Bank ¢id “not
plead a CLRA cause of action and so does not invoke
its antiwaiver provision; nor does he seek recovery
under any other California statute as to which a class
action remedy is essential” (id., at p. 160, 30 Cal.
Rptr.3d 76, 113 P.3d 1100, fn. omitted) apparently
because the plaintiff sought to pursue a national
class action suit and had made a strategic decision
not to rely on a California statute. (Discover Bank,
supra, 36 Cal.4th at p. 160, fn. 2, 30 Cal.Rptr.3d 76,
113 P.38d 1100.) Accordingly, we had no occasion in
Discover Bank to consider whether a class action or
class arbitration waiver would undermine the plain-
tiffs statutory rights.
In the present case, Gentry’s lawsuit is pursuant
to statute. Section 510 provides that nonexempt
employees will be paid one and one-half their wages
for hours worked in excess of eight per day and 40
per week and twice their wages for work in excess of
12 hours a day or eight hours on the seventh day of
work. Section 1194 provides a private right of action
to enforce violations of minimum wage and overtime
10a
laws.’ That statute states: “Notwithstanding any
agreement to work for a lesser wage, any employee
receiving less than the legal minimum wage or the
legal overtime compensation applicable to the em-
ployee is entitled to recover in a civil action the
unpaid balance of the full amount of this minimum
wage or overtime compensation, including interest
thereon, reasonable attorney’s fees, and costs of suit.”
(§ 1194, subd. (a), italics added.) By its terms, the
rights to the legal minimum wage and legal overtime
compensation conferred by the statute are unwaiv-
able. “Labor Code section 1194 confirms ‘a clear
public policy . . . that is specifically directed at the
enforcement of California’s minimum wage and
overtime laws for the benefit of workers.” (Sav-On
Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th
319, 340, 17 Cal.Rptr.3d 906, 96 P.3d 194 (Sav-On
Drug Stores).) Although overtime and minimum
wage laws may at times be enforced by the De-
partment of Labor Standards Enforcement (DLSE), it
is the clear intent of the Legislature in section 1194
that minimum wage and overtime laws should
be enforced in part by private action brought by ag-
grieved employees. (See Bell v. Farmers Ins.
Exchange (2004) 115 Cal.App.4th 715, 746, 9 Cal.
Rptr.3d 544 (Bell) [noting declaration of former chief
counsel of DLSE indicating that without private
enforcement through class actions department’s re-
sources to resolve claims would be overtaxed].)
* Although Gentry pleads causes of action under Business and
Professions Code section 17200 et seq. as well as for com-
mon law conversion, these actions are based on Circuit City’s
alleged violation of the overtime laws, which section 1194 is
intended to enforce. We therefore focus on the ability of em-
ployees to vindicate their rights pursuant to section 1194.
lla
The public importance of overtime legislation has
been summarized as follows: “An employee’s right
to wages and overtime compensation clearly have
different sources. Straight-time wages (above the
minimum wage) are a matter of private contract
between the employer and employee. Entitlement
to overtime compensation, on the other hand, is
mandated by statute and is based on an important
public policy. ... ‘The duty to pay overtime wages is
a duty imposed by the state; it is not a matter left to
the private discretion of the employer. ([Citations.]
California courts have long recognized [that] wage
and hours laws “concern not only the health and
welfare of the workers themselves, but also the public
health and general welfare.” [Citation.] ... [O]ne
purpose of requiring payment of overtime wages is
“to spread employment throughout the work force by
putting financial pressure on the employer. .. .”
[Citation.] Thus, overtime wages are another exam-
ple of a public policy fostering society’s interest in a
stable job market. [Citation.] Furthermore... the
Legislature’s decision to criminalize certain employer
conduct reflects a determination [that] the conduct
affects a broad public interest. ... Under Labor Code
section 1199 it is a crime for an employer to fail to
pay overtime wages as fixed by the Industrial
Welfare Commission.” (Earley v. Superior Court
(2000) 79 Cal.App.4th 1420, 1430, 95 Cal.Rptr.2d 57.)
Moreover, the overtime laws also serve the important
public policy goal of protecting employees in a
relatively weak bargaining position against “the evil
of “overwork.”” (Barrentine v. Arkansas-Best Freight
System (1981) 450 U.S. 728, 739, 101 S.Ct. 1437, 67
L.Ed.2d 641 [commenting on overtime provision of
the federal Fair Labor Standards Act].)
12a
In short, the statutory right to receive overtime
pay embodied in section 1194 is unwaivable. In
Armendariz v. Foundation Health Psychcare Services,
Inc. (2000) 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d
669 (Armendariz), we held that when an employee is
bound by a predispute arbitration agreement to adju-
dicate unwaivable statutory employment rights (in
that case, rights conferred by the Fair Employment
and Housing Act (FEHA)), the arbitration will be
subject to certain minimal requirements. As we sum-
marized in a subsequent case: “(1) the urbitration
agreement may not limit the damages normally
available under the statute (Armendariz, supra, 24
Cal.4th at p. 103[, 99 Cal.Rptr.2d 745, 6 P.3d 669));
(2) there must be discovery ‘sufficient to adequately
arbitrate their statutory claim’ (id. at p. 106[, 99
Cal.Rptr.2d 745, 6 P.3d 669]); (3) there must be a
written arbitration decision and judicial review “suf-
ficient to ensure the arbitrators comply with the
requirements of the statute” (ibid.); and (4) the
employer must ‘pay all types of costs that are unique
to arbitration’ (id. at p. 113[, 99 Cal.Rptr.2d 745, 6
P.3d 669]).” (Little v. Auto Stiegler, Inc. (2003) 29
Cal.4th 1064, 1076[, 1380 Cal.Rptr.2d 892, 63 P.3d
979] (Little).) Our imposition of these requirements
was based on the recognition that while “a party
compelled to arbitrate such rights does not waive
them, but merely “submits to their resolution in an
arbitral, rather than a judicial, forum” [citation],
arbitration cannot be misused to accomplish a de
facto waiver of these rights.” (Little, supra, 29 Cal.
4th at p. 1079, 130 Cal.Rptr.2d 892, 63 P.3d 979.)
“(T]he above requirements [are] necessary to enable
an employee to vindicate . . . unwaivable rights in an
arbitration forum.” (/d. at p. 1077, 130 Cal.Rptr.2d
892, 63 P.3d 979.)
13a
We have not yet considered whether a class
arbitration waiver would lead to a de facto waiver of
statutory rights, or whether the ability to maintain a
class action or arbitration is “necessary to enable an
employee to vindicate .. . unwaivable rights in an
arbitration forum.” (Little, supra, 29 Cal.4th at p.
1077, 130 Cal. Rptr.2d 892, 63 P.3d 979.) We
conclude that under some circumstances such a
provision would lead to a de facto waiver and would
impermissibly interfere with employees’ ability to
vindicate unwaivable rights and to enforce the
overtime laws.
in arguing the contrary, Circuit City focuses on the
language in Discover Bank stating that we were not
holding all class action waivers to be necessarily
unconscionable, but that waivers in consumer con-
tracts of adhesion involving “predictably . . . small
amounts of damages,” that are part of a “scheme to
deliberately cheat large numbers of consumers out of
individually small sums of money,” will be held to be
unconscionable and unenforceable. (Discover Bank,
supra, 36 Cal.4th at pp. 162-163, 30 Cal.Rptr.3d 76,
113 P.3d 1100.) Circuit City argues, as the Court of
Appeal concluded, that this is not such a case.
Yet the above quoted passage in Discover Bank was
not intended to suggest that consumer actions
involving minuscule amounts of damages were the
only actions in which class action waivers would not
be enforced. Rather, Discover Bank was an appli-
cation of a more general principle: that although
“IcJlass action and arbitration waivers are not, in the
abstract, exculpatory clauses” (Discover Bank, supra,
36 Cal.4th at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d
1100), such a waiver can be exculpatory in practical
terms because it can make it very difficult for those
l4a
injured by unlawful conduct to pursue a legal rem-
edy. Gentry argues persuasively that class action
waivers in wage and hour cases and overtime cases
would have, at least frequently if not invariably, a
similar exculpatory effect for several reasons, and
would therefore undermine the enforcement of the
statutory right to overtime pay.
First, individual awards in wage and hour cases
tend to be modest. In addition to the fact that
litigation over minimum wage by definition involves
the lowest-wage workers, overtime litigation also
usually involves workers at the lower end of the pay
scale, since professional, executive, and adminis-
trative employees are generally exempt from over-
time statutes and regulations. (See Cal.Code Regs.,
tit. 8, § 11070, subd. I(A); Ramirez v. Yosemite Water
Co. (1999) 20 Cal.4th 785, 798, fn. 4, 85 Cal.Rptr.2d
844, 978 P.2d 2.) According to the DLSE’s report in
response to Gentry’s Public Records Act request, the
average award from its wage adjudication unit for
2000-2005 was $6,038. (See also Asian Pacific Ameri-
can Legal Center et al., Reinforcing the Seams:
Guaranteeing the Promise of California’s Landmark
Anti-Sweatshop Law, An Evaluation of Assembly Bill
633 Six Years Later (Sept. 2005) p. 2 [average claim
for overtime and minimum wage violations submitted
to DLSE ranged from $5,000-$7,000, and settlement
ranged from $400-$1,600].)
Indeed, the Court of Appeal in Bell, supra, 115
Cal.App.4th 715, 9 Cal.Rptr.3d 544, rejected the
argument that even an award as large as $37,000
would be “ample incentive” for an individual lawsuit
for overtime pay, and would obviate the need for a
class action, pointing to the expense and practical
difficulties of such individual suits. “[T]he size of the
15a
average claim in part reflects the accrual of unpaid
overtime over the five-year duration of this lawsuit
prior to trial. When the complaint was first filed in
October 1996, the average claim would have been
smaller and a large portion of the claims may not
have been reasonably adequate to fund the expense
of individual litigation. The length of this litigation
in fact underscores the practical difficulties vindi-
cating claims to unpaid overtime. Employees will
seldom have detailed personal records of hours
worked. Their case ordinarily rests on the credibility
of vague recollections and requires them to litigate
complex overtime formulas and exemption standards.
For current employees, a lawsuit means challenging
an employer in a context that may be perceived as
jeopardizing job security and prospects for promotion.
If the employee files after termination of employ-
ment, the costs of litigation may still involve travel
expenses and time off from work to pursue the case,
and the value of any ultimate recovery may be
reduced by legal expenses.” (Jd. at p. 745, 9 Cal. Rptr.
Ad 544.)*
It is true that section 1194 permits employees to
recover reasonable attorney fees if they prevail in an
overtime litigation suit. (See Bell v. Farmers Ins.
* How much is at issue in Gentry’s claim in the present case is
unclear. Circuit City contends that the claim must be for over
$25,000 because the “unlimited” jurisdiction box was checked on
the civil case cover sheet accompanying the complaint. Cases
alleging less than $25,000 are considered “limited civil cases.”
(Code Civ. Proc., § 86, subd. (aX1).) However, as Gentry points
out, cases will be classified as unlimited in jurisdiction if injunc-
tive relief is sought (Code Civ. Proc., § 580, subd. (b)(2)), as
Gentry did in the present case. Therefore, the designation of
“unlimited jurisdiction” on the cover sheet of the complaint does
not inform us of the minimum amount of damages being sought.
16a
Exchange (2001) 87 Cal.App.4th 805, 831, 105 Cal.
Rptr.2d 59.) Even assuming that such attorney fees
were equally available in arbitration, employees and
their attorneys must weigh the typically modest re-
covery, and the typically modest means of the em-
ployees bringing overtime lawsuits, with the risk of
not prevailing and being saddled with the substantial
costs of paying their own attorneys. Moreover, the
award of “reasonable” fees and costs are at the
discretion of the trial court. Assuming that the arbi-
trator had similar discretion, there is still a risk that
even a prevailing plaintiff/employee may be under-
compensated for such expenses. Given these risks
and economic realities, class actions play an impor-
tant function in enforcing overtime laws by per-
mitting employees who are subject to the same
unlawful payment practices a relatively inexpensive
way to resolve their disputes. We have acknowledged
as much in a case involving overtime litigation
similar to that at issue in the present case. ““By
establishing a technique whereby the claims of many
individuals can be resolved at the same timc, the
class suit both eliminates the possibility of repe-
titious litigation and provides small claimants with a
method of obtaining redress for claims which would
otherwise be too small to warrant individual liti-
gation.”” (Sav-On Drug Stores, supra, 34 Cal.4th at
p. 340, 17 Cal.Rptr.3d 906, 96 P.3d 194.) Although
we agree at least in theory with Circuit City that
arbitration can be a relatively quick and inexpensive
method of dispute resolution, the requirement that
numerous employees suffering from the same illegal
practice each separately prove the employer’s wrong-
doing is an inefficiency that may substantially drive
up the costs of arbitration and diminish the prospect
that the overtime laws will be enforced.
17a
The Court of Appeal in the present case, in up-
holding the class arbitration waiver, pointed to our
discussion in Discover Bank of the statement in
Gilmer v. Interstate/Johnson Lane Corp. (1991) 500
U.S. 20, 32, 111 S.Ct. 1647, 114 L.Ed.2d 26, that a
plaintiffs Age Discrimination in Employment Act
(ADEA) claim should be arbitrated notwithstanding
the lack of classwide relief. “At most, the Gilmer
court can be understood to mean that a party can still
vindicate his or her rights under the ADEA even if no
class action remedy is available.” (Discover Bank,
supra, 36 Cal.4th at p. 168, 30 Cal.Rptr.3d 76, 113
P.3d 1100.) In so concluding, we cited an article
reporting that the median award for employee age
discrimination suits was $269,000. (Zbid.) Our dis-
cussion of Gilmer clearly does not apply to the much
more modest awards generally available in overtime
compensation cases.
A second factor in favor of class actions for these
cases, as noted in Bell, is that a current employee
who individually sues his or her employer is at
greater risk of retaliation. We have recognized that
retaining one’s employment while bringing formal
legal action against one’s employer is not “a viable
option for many employees.” (Richards v. CH2M
Hill, Inc. (2001) 26 Cal.4th 798, 821, 111 Cal.Rptr.2d
87, 29 P.3d 175; see also Mullins v. Rockwell Internat.
Corp. (1997) 15 Cal.4th 731, 741, 63 Cal.Rptr.2d 636,
936 P.2d 1246.) Richards and Mullins involved high-
level managerial and professional employees. The
difficulty of suing a current employer is likely greater
for employees further down on the corporate hierar-
chy. As one court observed: “Although there is only
plaintiffs suggestion of intimidation in this instance,
the nature of the economic dependency involved in
the employment relationship is inherently inhibit-
18a
ing.” (O’Brien v. Encotech Const. Services, Inc.
(2001) 203 F.R.D. 346, 351.)
Indeed, federal courts have widely recognized that
fear of retaliation for individual suits against an
employer is a justification for class certification in the
arena of employment litigation, even when it was
otherwise questionable that the numerosity require-
ments of rule 23 (Fed. Rules Civ. Proc., rule 23,
28 U.S.C.) were satisfied.” (See, e.g., Mullen v. Treas-
ure Chest Casino, LLC (5th Cir.1999) 186 F.3d 620,
625 [it is “reasonably presumed” that potential class
members still employed by employer “might be
unwilling to sue individually or join a suit for fear of
retaliation at their jobs”]; see also Horn v. Associated
Wholesale Grocers, Inc. (10th Cir.1977) 555 F.2d 270,
275; Arkansas Education Ass’n v. Board of Education
of Portland, Ark. (8th Cir.1971) 446 F.2d 763, 765;
Scott v. Aetna Servs., Inc. (D.Conn.2002) 210 F.R.D.
261, 267; Adames v. Mitsubishi Bank, Ltd. (E.D.N.Y.
1989) 133 F.R.D. 82, 89 [“[s]ince here a number of
putative members [of the class] are current employ-
ees, the concern for possible employer reprisal action
exists and renders the alternative of individual
joinder less than practicable”); Simmons v. City of
Kansas City (D.Kan.1989) 129 F.R.D. 178, 180;
Slanina v. William Penn Parking Corp. (W.D.Pa.
1984) 106 F.R.D. 419, 423-424 [indications that if
* “Rule 23(a) states four threshold requirements applicable to
all class actions: (1) numerosity (a ‘class [so large] that joinder
of all members is impracticable’); (2) commonality (‘questions of
law or fact common to the class’); (3) typicality (named parties’
claims or defenses ‘are typical . . . of the class’); and (4) adequacy
of representation (representatives ‘will fairly and adequately
protect the interests of the class’).” (Amchem Products, Inc. v.
Windsor (1997) 521 U.S. 591, 613, 117 S.Ct. 2231, 188 L.Ed.2d
689.)
19a
individual joinder were required, “most, if not all, of
the current employees will be hesitant to join”].) “(It
needs no argument to show that fear of economic
retaliation might often operate to induce aggrieved
employees quietly to accept substandard conditions.”
(Mitchell v. Robert DeMario Jewelry, Inc. (1960) 361
U.S. 288, 292, 80 S.Ct. 332, 4 L.Ed.2d 323.)
Circuit City points out that retaliation by the
employer against an employee who files an overtime
claim or other wage and hour claims is unlawful
under section 98.6.° It further points to DLSE
reports showing that the number of complaints made
pursuant to section 98.6 in the years 2000-2004
ranged from 446 to 808 annually. (See DLSE, An-
nual Discrimination Complaint Reports, <http://
www.dir.ca.gov/dlse/DLSEreports.htm> [as of Aug.
30, 2007].) It argues from these statistics that the
enforcement mechanism to sanction such retaliation
is working. We agree with Gentry, however, that
these statistics are supportive of his position that
retaliation against employees for asserting statutory
rights under the Labor Code is widespread. Given
that retaliation would cause immediate disruption of
the employee’s life and economic injury, and given
that the outcome of the complaint process is un-
certain, we do not believe the existence of an anti-
retaliation statute and an administrative complaint
process undermines Gentry’s point that fear oi re-
* Section 98.6, subdivision (a) states in pertinent part: “No
person shall discharge an employee or in any manner discrim-
inate against any employee or applicant for employment be-
cause .. . the employee or applicant for employment has filed
a bona fide complaint or claim or instituted or caused to be
instituted any proceeding under or relating to his or her rights,
which are under the jurisdiction of the Labor Commissioner. .. .
”
20a
taliation will often deter employees from individually
suing their employers.
Third, some individual employees may not sue be-
cause they are unaware that their legal rights have
been violated. The New Jersey Supreme Court
recently emphasized the notification function of class
actions in striking down a class arbitration waiver in
a consumer contract: “[Wljithout the availability of
a class-action mechanism, many consumer-fraud vic-
tims may never realize that they may have been
wronged. As commentators have noted, ‘often con-
sumers do not know that a potential defendant’s
conduct is illegal. When they are being charged an
excessive interest rate or a penalty for check bounc-
ing, for example, few know or even sense that their
rights are being violated.” (Muhammad v. County
Bank of Rehoboth Beach, Delaware (2006) 189 N.J. 1,
912 A.2d 88, 100.) Similarly, it may often be the case
that the illegal employer conduct escapes the atten-
tion of employees. Some workers, particularly immi-
grants with limited English language skills, may be
unfamiliar with the overtime laws. (See Ha, An
Analysis in Critique of KIWA’s Reform Efforts in the
Los Angeles Korean-American Restaurant Industry
(2001) 8 Asian L.J. 111, 122-123.) Even English-
speaking or better educated employees may not be
aware of the nuances of overtime laws with their
sometimes complex classifications of exempt and non-
exempt employees. (See Ramirez v. Yosemite Water
Co., supra, 20 Cal.4th at pp. 796-798, 85 Cal.Rptr.2d
844, 978 P.2d 2.) The likelihood of employee un-
awareness is even greater when, as alleged in the
present case, the employer does not simply fail to pay
overtime but affirmatively tells its employees that
they are not eligible for overtime. Moreover, some
employees, due to the transient nature of their work,
2la
may not be in a position to pursue individual litiga-
tion against a former employer. (Ansoumana uv.
Gristede’s Operating Corp. (S.D.N.Y.2001) 201 F.R.D.
81, 86-87.)
For these reasons, a federal district court recently
concluded that an arbitration agreement with a class
arbitration waiver was inconsistent with the mini-
mum wage and overtime provisions of the federal
Fair Labor Standards Act (FLSA). “In this case, the
imposition of a waiver of class actions may effectively
prevent ... employees from seeking redress of FLSA
violations. The class action provision thereby cir-
cumscribes the legal options of these employees, who
may be unable to incur the expense of individually
pursuing their claims. In this respect, the class
action waiver is not only unfair to . . . employees, but
also removes any incentive for [the employer] to avoid
the type of conduct that might lead to class ac-
tion litigation in the first instance. The class action
clause is therefore substantively unconscionable.”
(Skirchak v. Dynamics Research Corp., Inc. (D.Mass.
2006) 432 F.Supp.2d 175, 181.) Similarly, in another
FLSA suit for minimum wage and overtime viola-
tions, the trial court stated, interpreting the rule
23(a)(1) requirement that “the proposed class be ‘so
numerous that joinder of all members is imprac-
ticable”: “I also find it fair to consider that the
members of this group would not be likely to file
individual suits. Their lack of adequate financial
resources or access to lawyers, their fear of reprisals
(especially in relation to the immigrant status of
many), the transient nature of their work, and other
similar factors suggest that individual suits as an
alternative to a class action are not practical. [Cita-
tion.]” (Ansoumana v. Gristede’s Operating Corp.,
supra, 201 F.R.D. at pp. 85-86.)
22a
We also agree with the Bell court that “class
actions may be needed to assure the effective en-
forcement of statutory policies even though some
claims are large enough to provide an incentive for
individual action. While employees may succeed
under favorable circumstances in recovering unpaid
overtime through a lawsuit or a wage claim filed with
the Labor Commissioner, a class action may still be
justified if these alternatives offer no more than the
prospect of ‘random and fragmentary enforcement’ of
the employer’s legal obligation to pay overtime.”
(Bell, supra, 115 Cal.App.4th at p. 745, 9 Cal.Rptr.3d
544, quoting Vasquez, supra, 4 Cal.3d at p. 807, 94
Cal.Rptr. 796, 484 P.2d 964.) “By preventing ‘a
failure of justice in our judicial system’ (Linder uv.
Thrifty Oil Co.{(2000)] 23 Cal.4th 429, 434[, 97
Cal.Rptr.2d 179, 2 P.3d 27]), the class action not only
benefits the individual litigant but serves the pub-
lic interest in the enforcement of legal rights and
statutory sanctions.” (Bell, supra, at p. 741, 9 Cal.
Rptr.3d 544.) In other words, absent effective en-
forcement, the employer’s cost of paying occasional
judgments and fines may be significantly outweighed
by the cost savings of not paying overtime.
We cannot say categorically that all class arbitration
waivers in overtime cases are unenforceable. As Cir-
cuit City points out, some 40 published cases over the
last 70 years in California have involved individual
employees prosecuting overtime violations without the
assistance of class litigation or arbitration. (See, e.g.,
Ramirez v. Yosemite Water Co., supra, 20 Cal.4th 785,
85 Cal.Rptr.2d 844, 978 P.2d 2; Sequeira v. Rincon-
Vitova Insectaries, Inc. (1995) 32 Cal.App.4th 632, 38
Cal.Rptr.2d 264; Monzon v. Schaefer Ambulance Ser-
vice, Inc. (1990) 224 Cal.App.3d 16, 273 Cal.Rptr. 615.)
Not all overtime cases will necessarily lend themselves
23a
to class actions, nor will employees invariably request
such class actions. Nor in every case will class action
or arbitration be demonstrably superior to individual
actions.
Nonetheless, when it is alleged that an employer
has systematically denied proper overtime pay to a
class of employees and a class action is requested
notwithstanding an arbitration agreement that con-
tains a class arbitration waiver, the trial court must
consider the factors discussed above: the modest size
of the potential individual recovery, the potential for
retaliation against members of the class, the fact that
absent members of the class may be ill informed
about their rights, and other real world obstacles to
the vindication of class members’ right to overtime
pay through individual arbitration. If it concludes,
based on these factors, that a 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,
and finds that the disallowance of the class action
will likely lead to a less comprehensive enforcement
of overtime laws for the employees alleged to be
affected by the employer’s violations, it must in-
validate the class arbitration waiver to ensure that
these employees can “vindicate [their] unwaivable
rights in an arbitration forum.” (Little, supra, 29
Cal.4th at p. 1077, 130 Cal.Rptr.2d 892, 63 P.3d
979.)' The kind of inquiry a trial court must make is
" The dissent claims our holding is inconsistent with Little’s
predecessor, Armendariz, because here “{n]Jo finding is made that
a class remedy is essential, as a practical matter, to vindication
of the ‘unwaivable’ statutory right” (Dis. opn., post, 64 Cal.
Rptr.3d at pp. 797-798, 165 P.3d at p. 576.) Armendariz did not
use the dissent’s italicized word “essential” in its formulation,
and it is unclear what that word means in this context. Rather,
24a
similar to the one it already makes to determine
in holding for example that employers must pay most of the
costs when they mandate arbitration of unwaivable rights for
their employees, we concluded that the imposition of such costs
would burden employees’ rights by “posling] a significant risk
that employees will have to bear large costs to vindicate their
statutory right against workplace discrimination.” (Armendariz,
supra, 24 Cal.4th at p. 110, 99 Cal.Rptr.2d 745, 6 P.3d 669.) So,
too, in the present case, although it is still possible for employ-
ees to individually vindicate their rights to overtime pay, the
class arbitration waiver may, practically speaking, significantly
burden the ability of employees to do so. Armendariz makes
clear that for public policy reasons we will not enforce provisions
contained within arbitration agreements that pose significant
obstacles to the vindication of employees’ statutory rights. The
Legislature has amended the California Arbitration Act (CAA)
several times since Armendariz (Stats.2002, ch. 176, § 1; Stats.
2002, ch. 1158, § 1; Stats.2005, ch. 607, § 1; Stats.2006, ch. 357,
§ 1) but has not overturned or modified the holdings in that
case.
Moreover, the dissent’s contention that Gentry as an individ-
ual has not shown himself to be burdened by the class
arbitration waiver is off the mark. First, questions of the value
of his claim and the appropriateness of a class arbitration in
this case will be determined on remand. More fundamentally,
as suggested above, one of the advantages of class action litiga-
tion or arbitration is precisely the fact that the class representa-
tive spearheading the litigation is in a more advantageous
position—e.g., is better informed, is less likely to be intimi-
dated—than the class as a whole, and the class benefits from
the representative’s advantages. Given this reality, and given
that our primary concern is ensuring that the state’s overtime
laws be effectively enforced and that class arbitration waivers
not thwart that enforcement, it makes little sense to focus only
on whether the class representative himself or herself would be
stymied in the pursuit of an individual arbitration remedy (see
dis. opn., post, 64 Cal.Rptr.3d at p. 800, 165 P.3d at p. 578),
rather than considering as well the difficulties for the class
of employees affected by Circuit City’s allegedly unlawful
practices.
25a
whether class actions are appropriate. “[T]rial courts
are ideally situated to evaluate the efficiencies and
. practicalities of permitting group action... .” (Linder
v. Thrifty Oil, Co., supra, 23 Cal.4th at p. 435, 97
Cal.Rptr.2d 179, 2 P.3d 27.) Class arbitration must
still also meet the “community of interest” require-
ment for all class actions, consisting of three factors:
“(1) predominant common questions of law or fact;
(2) class representatives with claims or defenses
typical of the class; and (3) class representatives who
can adequately represent the class.” (Sav-On Drug
Stores, supra, 34 Cal.4th at p. 326, 17 Cal.Rptr.3d
906, 96 P.3d 194.)
Of course, in cases like the present, the trial court
would be comparing class arbitration with the
individual arbitration methods the employer offers,
rather than comparing individual with classwide
litigation. We do not foreclose the possibility that
there may be circumstances under which individual
arbitrations may satisfactorily address the overtime
claims of a class of similarly aggrieved employees, or
that an employer may devise a system of individual
arbitration that does not disadvantage employees in
vindicating their rights under section 1194. But class
arbitration waivers cannot, consistent with the
strong public policy behind section 1194, be used to
weaken or undermine the private enforcement of
overtime pay legislation by placing formidable prac-
tical obstacles in the way of employees’ prosecution of
those claims.
Circuit City makes a number of arguments that we
have already concluded lack merit. As in Discover
Bank, we again reject the “unsupported assertions [of
some courts] that, in the case of small individual
recovery, attorney fees are an adequate substitute for
26a
the class action or arbitration mechanism. Nor do we
agree ... that small claims litigation, government
prosecution, or informal resolution are adequate
substitutes.” (Discover Bank, supra, 36 Cal.4th at p.
162, 30 Cal.Rptr.3d 76, 113 P.3d 1100.) In particular,
we reject Circuit City’s argument that the avail-
ability of enforcement by the Labor Commissioner is
an adequate substitute for classwide arbitration. It
is true that an employee may seek administrative
relief from overtime violations with the Labor Com-
missioner through a “Berman” hearing procedure
pursuant to sections 98 to 98.8. (Added by
Stats.1976, ch. 1190, §§ 4-11, pp. 5368-5371.) But a
losing employer has a right to a trial de novo in
superior court, where the ruling of the Labor
Commissioner’s hearing officer is entitled to no
deference. (§ 98.2, subds. (b), (c); Murphy v. Kenneth
Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1116,
56 Cal.Rptr.3d 880, 155 P.38d 284 (Murphy).) Thus,
Berman hearings may result in no cost savings to the
employee. Moreover, in Bell, in rejecting the same
argument, the court considered a declaration by a
former chief counsel of the DLSE, who stated that
“(rJequiring two thousand or so class members to go
through individual “Berman” hearings would
obviously be extremely inefficient as compared to a
single class action. Also, a deluge of claims would
simply outstrip the resources of the DLSE .. .
impacting not only these claimants but others un-
related to this suit.” (Bell, supra, 115 Cal.App.4th at
p. 746, 9 Cal.Rptr.3d 544.) In short, Berman
hearings are neither effective nor practical sub-
stitutes for class action or arbitration.
Nor do we accept Circuit City’s argument that a
rule invalidating class arbitration waivers discrim-
inates against arbitration clauses in violation of the
27a
Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.).
We considered at great length and rejected a similar
argument in Discover Bank. (Discover Bank, supra,
36 Cal.4th at pp. 163-173, 30 Cal.Rptr.3d 76, 113
P.3d 1100.) The principle that in the case of certain
unwaivable statutory rights, class action waivers are
forbidden when class actions would be the most
effective practical means of vindicating those rights
is an arbitration-neutral rule: it applies to class
waivers in arbitration and nonarbitration provisions
alike. (See AOL, supra, 90 Cal.App.4th at pp. 17-18,
108 Cal.Rptr.2d 699; see also Armendariz, supra, 24
Cal.4th at pp. 99-102, 99 Cal.Rptr.2d 745, 6 P.3d 669
limposition of minimal requirements on arbitration
necessary to vindicate statutory rights not a violation
of the FAA].) “The Armendariz requirements are .. .
applications of general state law contract principles
regarding the unwaivability of public rights to the
unique context of arbitration, and accordingly are not
preempted by the FAA.” (Little, supra, 29 Cal.4th at
p. 1079, 130 Cal. Rptr.2d 892, 63 P.3d 979.) We also
continue to reject Circuit City’s suggestion that class
actions are incompatible with arbitration and that
compelling class arbitration in the appropriate case
violates the FAA. (Discover Bank, supra, 36 Cal.4th
at pp. 171-172, 30 Cal. Rptr.3d 76, 113 P.3d 1100.)°
* The dissent declares that we “may not elevate a mere
judicial affinity for class actions as a beneficial! device for im-
plementing the wage laws above the policy expressed by both
Congress and our own Legislature that voluntary individual
agreements to arbitrate . . . should be enforced according to
their terms.” (Dis. opn., post, 64 Cal.Rptr.3d at pp. 799-800, 165
P.3d at p. 578.) What is at issue in this case, however, is not a
“judicial affinity for class actions” but the enforcement of an
unwaivable statutory right to overtime pay. What happens
when a class action waiver significantly interferes with that
28a
right? Although the dissent claims that our concerns about the
effect of class arbitration waivers are exaggerated, based on its
own questionable assumptions about class arbitration and liti-
gation, it also appears to adopt the position that even if we are
correct that such waivers will substantially interfere with the
ability of employees to enforce cvertime laws in some cases, the
waiver should nonetheless be given effect. The dissent thus
articulates its preference that in this case the statutory policy in
favor of enforcing arbitration agreements as written overrides
the statutory policy in favor of vigorously enforcing overtime
laws.
There is no indication, however, that the Legislature shared
or shares the dissent’s preference, or even that it has favored
the arbitration of wage and overtime claims at all. Indeed, the
evidence is to the contrary. Section 1194 provides, as discussed,
that an employee is entitled to recover “in a civil action” over-
time or minimum wage compensation. It seems doubtful that
the Legislature contemplated, when that statute was origin-
nally enacted in 1937 (Stats.1937, ch. 90, § 1194, p. 217), that
employer-mandated arbitration could serve as a substitute to
“civil actions” authorized by the statute. In fact, the forerunner
of the CAA, Code of Civil Procedure former section 1280, in
operation at the time section 1194 was originally enacted, spe-
cifically excluded “contracts pertaining to labor” from the scope
of enforceable arbitration agreements. (Stats.1935, ch. 52, § 9,
p. 388.) Moreover, at the time of the CAA’s enactment in 1961
(Stats.1961, ch. 461, § 2, p. 1540), the United States Supreme
Court’s construction of the FAA indicated that arbitration stat-
utes would not be used to enforce agreements to arbitrate un-
waivable statutory rights. (See Wilko v. Swan (195?) 346 U.S.
427, 435-437, 74 S.Ct. 182, 98 L.Ed. 168, overruled by Rodriguez
de Quijas v. Shearson/Am. Exp. (1989) 490 U.S. 477, 109 S.Ct.
1917, 104 L.Ed.2d 526.) Outright legislative hostility to arbi-
trating wage claims was further manifested in Labor Code
section 229, passed two years before the CAA went into effect.
(Stats.1959, ch. 1939, § 1, p. 4532.) That section, which involves
judicial actions to collect unpaid wages, provides that such
actions “may be maintained without regard to the existence of
any private agreement to arbitrate.” Thus, if we can discern
any legislative policy toward employee wage claims, it is that
employees should have direct access to a judicial forum to
29a
Accordingly, we will remand this case to the Court
of Appeal with directions to remand to the trial court
to determine in light of the above discussion whether,
in this particular case, class arbitration would be a
significantly more effective means than individual
arbitration actions of vindicating the right to over-
time pay of the group of employees whose rights to
such pay have been allegedly violated by Circuit City.
If the trial court invalidates the waiver on public
policy grounds, then the parties may proceed to class
arbitration or, if the parties wish, have the matter
brought in court (see Discover Bank, supra, 36
Cal.4th at p. 173, fn. 8, 30 Cal.Rptr.3d 76, 113 P.3d
1100), unless the trial court invalidates the arbitra-
tion agreement altogether for reasons discussed in
the next section of this opinion. Generally speaking,
when an arbitration agreement contains a single
enforce their rights. Nor is there any sign that the Congress
that enacted the FAA contemplated that it be used to compel
arbitration of statutory wage claims. (See Leroy & Feuille,
Judicial Enforcement of Predispute Arbitration Agreements:
Back to the Future (2003) 18 Ohio St. J. Disp. Resol. 249, 279
{legislative history indicates “Congress’s main concern was with
businesses who wanted to... . resolve their commercial disputes
privately.”].) The United States Supreme Court has since held
that the FAA does not permit states to legislatively prohibit
arbitration of wage disputes. (Perry v. Thomas (1987) 482 U.S.
483, 107 S.Ct. 2520, 96 L.Ed.2d 426.) But both the FAA and the
CAA permit arbitration-neutral rules that limit enforcement of
specific provisions of arbitration agreements on public policy
grounds. (See Armendariz, supra, 24 Cal.4th at p. 99, 99 Cal.
Rptr.2d 745, 6 P.3d 669; 9 U.S.C. § 2; Code Civ. Proc., § 1281.)
It is perfectly snsistent with the evident intent of the Legisla-
ture to refuse to enforce, under some circumstances and in an
arbitration-neutral manner in accord with the FAA and the
CAA, provisions of arbitration agreements that significantly
.undermine the ability of employees to vindicate their statutory
right to overtime pay.
30a
term in violation of public policy, that term will be
severed and the rest of the arbitration agreement
enforced. (Little, supra, 29 Cal.4th at pp. 1074-1075,
130 Cal.Rptr.2d 892, 63 P.38d 979.) We believe that
severance is particularly appropriate in the case of
class arbitration waivers because, unlike limitations
on remedies or other limitations that are invalid on
their face (see Armendariz, supra, 24 Cal.4th at pp.
103-104, 99 Cal.Rptr.2d 745, 6 P.3d 669), such waiv-
ers will only be invalidated after the proper factual
showing, as discussed above. The presence of a class
arbitration waiver in an employee arbitration agree-
ment therefore does not by itself “indicate a system-
atic effort to impose arbitration on an employee not
simply as an alternative to litigation, but as an
inferior forum that works to the employer’s advan-
tage.” (Id. at p. 124, 99 Cal.Rptr.2d 745, 6 P.3d 669.)
B. The Opt-out Provision and Procedural Uncon-
scionability
The Court of Appeal concluded, and Circuit City
argues, that the fact that an employee had 30 days to
opt out of the arbitration agreement means that the
terms of the agreement, including the class arbi-
tration waiver, are not procedurally unconscionable
and are therefore enforceable. But the validity of a
class arbitration waiver was analyzed in the previous
part of this opinion in terms of unwaivable statutory
rights rather than unconscionability. (See Armen-
dariz, supra, 24 Cal.4th at p. 113, 99 Cal. Rptr.2d 745,
6 P.3d 669.) Because the statutory rights under
section 1194 at issue in this case are not waivable,
the minimal requirements imposed on arbitration
agreements to ensure their vindication cannot be
waived by the employee in a prelitigation agreement.
(Armendariz, supra, 24 Cal.4th at p. 103, fn. 8, 99
3la
Cal.Rptr.2d 745, 6 P.3d 669.) As we clarified in
Armendariz, such waiver could only occur “in situ-
ations in which an employer and an employee
knowingly and voluntarily enter into an arbitration
agreement after a dispute has arisen. In those cases,
employees are free to determine what trade-offs
between arbitral efficiency and formal procedural
protections best safeguard their statutory rights.
Absent such freely negotiated agreements, it is for
the courts to ensure that the arbitration forum
imposed on an employee is sufficient to vindicate his
or her rights... .” (lbid., italics added.) There was
no freely negotiated postdispute agreement, nor for
that matter a postdispute agreement of any kind, in
the present case. Therefore, if the trial court on
remand finds the class arbitration waiver invalid
using the factors set forth in the previous part of this
opinion, that waiver will not be enforced.*
Gentry does challenge provisions of the arbitration
agreement other than the class arbitration waiver,
however, and argues that the entire arbitration
agreement is unconscionable and unenforceable.
Should the trial court on remand find the class
arbitration waiver in the present case to be void, it is
unclear whether the issue of the unconscionability of
the arbitration agreement as a whole will become
moot, because it is unclear whether Gentry will
continue to resist arbitration or whether Circuit City
will continue to seek it. Nonetheless, because this
issue may remain viable on remand, we will address
* We note that if an employee believes individual arbitration
to be as advantageous as the dissent suggests, nothing in this
opinion, nor in any subsequent trial court ruling, precludes him
or her from entering into an individual postdispute arbitration
agreement with Circuit City.
32a
the Court of Appeal’s holding that the arbitration
agreement was not tnconscionable because Gentry
had a 30-day period to opt out of the agreement. As
noted above, the Court of Appeal stated that because
of the opt-out provision, “the agreement at issue here
does not have [an] adhesive element and therefore is
not procedurally unconscionable.”
As a threshold matter, Gentry argues that the
arbitration agreement was ineffective because his
failure to opt out of the agreement cannot constitute
assent to that agreement. Gentry bases his argu-
ment on the well-established principle “that an
offeror has no power to cause the silence of the
offeree to operate as an acceptance when the offeree
does not intend it to do so.” (1 Corbin on Contracts
(rev. ed.1993) § 3.19, p. 407.) As one court cited in
the above treatise has stated: “[W]here the recipient
of an offer is under no duty to speak, silence, when
not misleading, may not be translated into accept-
ance merely because the offer purports to attach that
effect to it. [Citations.]” (Albrecht Chemical Co. v.
Anderson Trading Corp. (1949) 298 N.Y. 437, 84
N.E.2d 625, 626; see also Leslie v. Brown Brothers
Incorporation (1929) 208 Cal. 606, 621, 283 P. 936.)
On the other hand, silence can constitute acceptance
when “the conduct of the party denying a contract
has been such as to lead the other reasonably to
believe that silence, without communication, would
be sufficient” to create a contract. (1 Corbin on Con-
tracts, supra, § 3.21, p. 414.)
In this case, Gentry signed an easily readable, one-
page form that accompanied receipt of the Associate
Issue Resolution Package. The form stated in part:
“I understand that participation in the Issue Reso-
lution Program is voluntary. If I do not wish to
33a
participate in the arbitration component of the Pro-
gram, however, I must send the completed ‘Circuit
City Arbitration Opt-Out Form,’ which is included
with this package. I must send the Opt-Out Form via
U.S. mail . . . to the above address within 30
calendar days of the date on which I signed below.
I understand that if I do not mail the Form within 30
calendar days, I will be required to arbitrate all
employment-related legal disputes I may have with
Circuit City.”(Original boldface.)
Although Gentry contends his signature was merely
an acknowledgement of receipt of the Associate Issue
Resolution Package, it was also an acknowledgment
of his assent to the opt-out provision. The opt-out
provision of the acknowledgment agreement was
neither inconspicuous or difficult to understand.
Thus, in signing the above form, Gentry manifested
his intent to use his silence, or failure to opt out, as
a means of accepting the arbitration agreement.
Having thus indicated his intent, he may not now
claim that the failure to opt out did not constitute
acceptance of the arbitration agreement. (1 Corbin
on Contracts, supra, § 3.21, p. 414.) The question is
not whether the acknowledgement form itself is a
valid contract—it is not—but rather whether Gentry’s
signature on that form reasonably led Circuit City to
believe that his failure to opt out constituted accep-
tance of the arbitration agreement. We conclude
under the circumstances of this case that it did.
The question whether an arbitration agreement
has been validly formed is of course different from
whether that agreement was unconscionable. In
order to evaluate the Court of Appeal’s conclusion
that the 30-day opt-out provision meant that Circuit
City’s arbitration agreement was not procedurally
34a
unconscionable, we first review some general prin-
ciples. “To briefly recapitulate the principles of un-
conscionability, the doctrine has “both a “proce-
dural” and a “substantive” element,’ the former
focusing on “oppression” or “surprise” due to un-
equal bargaining power, the latter on “overly harsh”
or “one-sided” results.” [Citation.] The procedural
element of an unconscionable contract generally
takes the form of a contract of adhesion, “which,
imposed and drafted by the party of superior bar-
gaining strength, relegates to the subscribing party
only the opportunity to adhere to the contract or
reject it.” ... [J] Substantively unconscionable terms
may take various forms, but may generally be
described as unfairly one-sided.” (Discover Bank,
supra, 36 Cal.4th at p. 160, 30 Cal.Rptr.3d 76, 113
P.3d 1100.)
As we have further explained: “The prevailing
view is that [procedural and substantive unconscion-
ability] must both be present in order for a court to
exercise its discretion to refuse to enforce a contract
or clause under the doctrine of unconscionability.’
[Citation.] But they need not be present in the same
degree. ‘Essentially a sliding scale is invoked which
disregards the regularity of the procedural process of
the contract formation, that creates the terms, in pro-
portion to the greater harshness or unreasonableness
of the substantive terms themselves.’ [Citations.] In
other words, the more substantively oppressive the
contract term, the less evidence of procedural un-
conscionability is required to come to the conclusion
that the term is unenforceable, and vice versa.”
(Armendariz, supra, 24 Cal.4th at p. 114, 99 Cal.
Rptr.2d 745, 6 P.3d 669, italics omitted.)
35a
As the above suggests, a finding of procedural un-
conscionability does not mean that a contract will not
be enforced, but rather that courts will scrutinize the
substantive terms of the contract to ensure they are
not manifestly unfair or one-sided. (See, e.g., Little,
supra, 29 Cal.4th at p. 1071, 1380 Cal.Rptr.2d 892, 63
P.3d 979.) As also suggested above, there are degrees
of procedural unconscionability. At one end of the
spectrum are contracts that have been freely negoti-
ated by roughly equal parties, in which there is no
procedural unconscionability. Although certain terms
in these contracts may be construed strictly, courts
will not find these contracts substantively uncon-
scionable, no matter how one-sided the terms appear
to be. (See, e.g., Nunes Turfgrass, Inc. v. Vaughan-
Jacklin Seed Co. (1988) 200 Cal.App.3d 1518, 1538-
1539, 246 Cal.Rptr. 823 [liability limitation negoti-
ated by two commercial entities upheld].) Contracts
of adhesion that involve surprise or other sharp prac-
tices lie on the other end of the spectrum. (See, e.g.,
Ellis v. McKinnon Broadcasting Co. (1993) 18 Cal.
App.4th 1796, 1804, 23 Cal.Rptr.2d 80 [party told
that signing contract was “mere formality” to conceal
oppressive forfeiture provision].) Ordinary contracts
of adhesion, although they are indispensable facts of
modern life that are generally enforced (see Graham
v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817-818,
171 Cal.Rptr. 604, 623 P.2d 165), contain a degree of
procedural unconscionability even without any nota-
ble surprises, and “bear within them the clear danger
of oppression and overreaching.” (/d., at p. 818, 171
Cal.Rptr. 604, 623 P.2d 165.)
Thus, a conclusion that a contract contains no
element of procedural unconscionability is tant-
amount to saying that, no matter how one-sided the
contract terms, a court will not disturb the contract
36a
because of its confidence that the contract was
negotiated or chosen freely, that the party subject to
a seemingly one-sided term is presumed to have
obtained some advantage from conceding the term or
that, if one party negotiated poorly, it is not the
court’s place to rectify these kinds of errors or
asymmetries. Accordingly, if we take the Court of
Appeal in this case at its word that there was no
element of procedural unconscionability in the arbi-
tration agreement because of the 30-day opt-out
provision, then the logical conclusion is that a court
would have no basis under common law uncon-
scionability analysis to scrutinize or overturn even
the most unfair or exculpatory of contractual terms.
We conclude that the Court of Appeal erred in
finding the present agreement free of procedural
unconscionability. It is true that freedom to choose
whether or not to enter a contract of adhesion is a
factor weighing against a finding of procedural un-
conscionability. (See, e.g., Dean Witter Reynolds, Inc.
v. Superior Court (1989) 211 Cal.App.3d 758, 769-
771, 259 Cal.Rptr. 789 [agreement between brok-
erage house and sophisticated consumer of financial
services that included a $50 termination fee on an
IRA account was not unconscionable where compet-
ing IRA’s without the challenged fee were freely
available].) But there are several indications that
Gentry’s failure to opt out of the arbitration agree-
ment did not represent an authentic informed choice.
First and foremost, the explanation of the benefits
of arbitration in the Associate Issue Resolution
Handbook was markedly one-sided. The Court of
Appeal thought otherwise, stating: “The ‘Associate
Issue Resolution Handbook,’ written in straight-
forward language, does point out the advantages of
37a
electing arbitration (notably, that the procedure is
cost effective and the employee’s claim is resolved ‘in
a matter of weeks or a few months rather than
years’). However, it also notes the disadvantages (for
example, the lack of a right to a jury trial and limited
discovery). The employee is then free to decide
whether or not the advantages of arbitration out-
weigh the disadvantages.”
But what the Court of Appeal’s discussion entirely
neglected is that although the handbook alluded to
some of the shortcomings of arbitration in the general
sense, it did not mention any of the additional
significant disadvantages that this particular arbi-
tration agreement had compared to litigation. These
included the following: First, the agreement provided
for a one-year statute of limitations as opposed to the
three-year statute for recovering overtime wages pro-
vided under Code of Civil Procedure section 338 (see
Murphy, supra, 40 Cal.4th at p. 1099, 56 Cal.Rptr.3d
880, 155 P.3d 284) and a four-year statute of limita-
tions for the unfair competition claim under Business |
and Professions Code section 17208. Second, the
agreement provided a limitation of remedies to back-
pay “only up to one year from the point at which the
[employee] knew or should have known of the events
giving rise to the alleged violation of the law,”
whereas an employee filing suit could potentially
recover backpay for a three-year period from the date
the cause of action actually accrued. Third, the
agreement imposed a maximum of $5,000 in punitive
damages. Although exemplary damages are not
available in overtime suits (see § 1194.2 [“liquidated
damages” equal to the amount of wages recovered
available in minimum wage litigation but not over-
time litigation]), Circuit City’s agreement applied to
“any and all employment-related legal disputes,”
38a
including violation of the FEHA and discharges in
violation of public policy, for which punitive damages
without any such limitation would be available. (See
Commodore Home Systems, Inc. v. Superior Court
(1982) 32 Cal.3d 211, 220-221, 185 Cal.Rptr. 270, 649
P.2d 912.) Fourth, the agreement comtained a pro-
vision that parties will “generally” be liable for their
own attorney fees, with the arbitrater having the
“discretion” to award the employee attorney fees, as
opposed to section 1194’s provision that a prevailing
employee “is entitled to” reasonable attorney fees and
costs. ($ 1194, subd. (a).)
The fact that Circuit City’s explanation of the
arbitration agreement emphasized that the arbitra-
tion is “much less expensive” and that “the arbitrator
can award monetary damages to compensate you for
the harm you may have suffered,” without mention-
ing the many disadvantages to the employee that
Circuit City had inserted into the agreement, meant
that the employee would receive a highly distorted
picture of the arbitration Circuit City was offering.
Although an employee who read Circuit City’s nine-
page single-spaced document entitled Circuit City’s
“Dispute Resolution Rules and Procedures” would
have encountered the above provisions, only a legally
sophisticated party would have understood that these
rules and procedures are considerably less favorable
to an employee than those operating in a judicial
forum. As has been observed, even “experienced but
legally unsophisticated businessmen may be unfairly
surprised by unconscionable contract terms.” (Stirlen
v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1535,
60 Cal.Rptr.2d 138 [finding unconscionability in a
corporate manager’s arbitration agreement with his
employer].) The same would be even more true for
the nonexecutive employees who would be the likely
39a
plaintiffs in suits about overtime pay. And notwith-
standing the statement in the documents provided
Gentry that employees “may consult with an attor-
ney” about their legal rights, and contrary to the
dissenting opinion’s contention otherwise, it is unre-
alistic to expect anyone other than higher echelon
employees to hire an attorney to review what appears
to be a routine personnel document.
Moreover, it is not clear that someone in Gentry’s
position would have felt free to opt out. The materi-
als provided to Gentry made unmistakably clear that
Circuit City preferred that the employee participate
in the arbitration program. The “Associate Issue
Resolution Handbook” distributed with the opt-out
form touted the virtues of arbitration, including use
of the all-caps subheading—WHY ARBITRATION IS
RIGHT FOR YOU AND CIRCUIT CITY—that left no
doubt about Circuit City’s preference. The fact that
the arbitration agreement was structured so that
arbitration was the default dispute resolution proce-
dure from which the employee had to opt out under-
scored Circuit City’s pro-arbitration stance. Given
the inequality between employer and employee and
the economic power that the former wields over the
latter (see Armendariz, supra, 24 Cal.4th at p. 115,
99 Cal.Rptr.2d 745, 6 P.3d 669), it is likely that
Circuit City employees felt at least some pressure not
to opt out of the arbitration agreement. The lack of
material information about the disadvantageous
terms of the arbitration agreement, combined with
the likelihood that employees felt at least some
pressure not to opt out of the arbitration agreement,
leads to the conclusion that the present agreement
40a
was, at the very least, not entirely free from pro-
cedural unconscionability. “
To reiterate, the fact that some degree of pro-
cedural unconscionability is present does not mean
necessarily that the arbitration agreement is unen-
forceable. But it does mean that the agreement is not
immune from judicial scrutiny to determine whether
or not its terms are so one-sided or oppressive as to
be substantively unconscionable.
As noted, Gentry argues that several provisions of
the arbitration agreement other than the class arbi-
tration waiver are substantively unconscionable, an
argument that Circuit City disputes. The Court of
Appeal did not address these arguments, believing
the agreement not to be procedurally unconscionable
and upholding the class arbitration waiver. As stated
in the previous part of this opinion, we remand the
matter to the Court of Appeal with directions to
remand to the trial court to determine whether the
class arbitration waiver is void. Unless the issue is
mooted, the trial court must also determine on
remand whether the original 1995 arbitration >gree-
ment or an amended agreement controls the p1.sent
case and whether the controlling agreement has
© We note that two Ninth Circuit cases came to the contrary
conclusion. (Circuit City Stores, Inc. v. Ahmed (9th Cir.2002)
283 F.3d 1198; Circuit City Stores, Inc. v. Najd (9th Cir.2002)
294 F.3d 1104.) The Ahmed court in its brief discussion of the
unconscionability issue did not consider the concealment of
disadvantageous terms nor the reality that Circuit City clearly
favored arbitration and was in a position to pressure employees
to choose its favored option. (Ahmed, supra, 283 F.3d at pp.
1199-1200.) Najd viewed Ahmed as binding. (Najd, supra, 294
F.3d at p. 1108.) We find neither case persuasive.
4la
substantively unconscionable terms.” If so, the court
must determine whether these terms should be sev-
ered, or whether instead the arbitration agreement
as a whole should be invalidated. (See Little, supra,
29 Cal.4th at pp. 1074-1076, 130 Cal.Rptr.2d 892, 63
P.3d 979.)
Ill. DISPOSITION
‘he judgment of the Court of Appeal is reversed
and the cause is remanded for proceedings consistent
with this opinion.
WE CONCUR: GEORGE, C.J., KENNARD, and
WERDEGAR, JJ.
" Circuit City points to a 1998 modification of the arbitration
agreement that required that the arbitration be conducted ac-
cording to the procedural rules in effect when the arbitration
request was filed. Circuit City further points to the arbitration
agreement amendments of 2001 and 2005, which it claims do
not contain the above terms, and contends that these amended
agreements would govern the conduct of Gentry’s arbitration
and are not substantively unconscionable. Gentry on the other
hand argues that the 1995 rules apply and that for various
reasons the 1998 amendment is not effective. The Court of
Appeal did not address this issue, nor was it one of the issues
presented in the petition for review. Assuming the issue is not
moot, it must be determined on remand which agreement con-
trols and whether there is substantive unconscionability wnder
that agreement. But for present purposes, our only inquiry is
whether the 1995 arbitration agreement, notwithstanding its
opt-out provision, contained an element of procedural uncon-
scionability. The fact that the 1995 agreement had substan-
tively unconscionable terms that were not fully disclosed to
Gentry is directly pertinent to that determination.
42a
Dissenting Opinion by BAXTER, J.
I respectfully dissent. I cannot join the majority’s
continuing effort to limit and restrict the terms of
private arbitration agreements, which enjoy special
protection under both state and federal law.
Both the Federal Arbitration Act (FAA; 9 U.S.C.
§ 1 et seq.) and the California Arbitration Act (CAA;
Code Civ. Proc., § 1281 et seq.) provide that an agree-
ment to resolve disputes by arbitration, rather than
by court litigation, must be enforced except upon
grounds applicable to contracts generally. These
statutes are intended to override courts’ historical
suspicion of arbitration as an inferior forum for the
vindication of claims, and to endorse contracts—
including employment contracts—in which parties
agree to resolve their disputes by this relatively
cheap, simple, and expeditious means. (See, e.g.,
Circuit City Stores, Inc. v. Adams (2001) 532 US.
105, 111-124, 121 S.Ct. 1302, 149 L.Ed.2d 234; Gilmer
v. Interstate/ Johnson Lane Corp. (1991) 500 U.S. 20,
30, 111 S.Ct. 1647, 114 L.Ed.2d 26 (Gilmer); Moses H.
Cone Hospital v. Mercury Constr. Corp. (1983) 460
U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (Moses H.
Cone Hospital); St. Agnes Medical Center v. PacifiCare
of California (2003) 31 Cal.4th 1187, 1204, 8 Cal.
Rptr.3d 517, 82 P.3d 727; Mercury Ins. Group v.
Superior Court (1998) 19 Cal.4th 332, 342, 79
Cal.Rptr.2d 308, 965 P.2d 1178; Moncharsh v. Heily
& Blase (1992) 3 Cal.4th 1, 9, 10 Cal. Rptr.2d 183, 832
P.2d 899.)’
’ Section 2 of the FAA (9 U.S.C. § 2) creates “a liberal federal
policy favoring arbitration agreements, notwithstanding any
state substantive or procedural policies to the contrary.” (Moses
H. Cone Hospital, supra, 460 U.S. 1, 24, 103 S.Ct. 927.)
43a
In all but the most exceptional cases, these laws
thus demand deference to the “fundamentally con-
tractual nature [of private arbitration], and to the
attendant requirement that [contractual] arbitration
shall proceed as the parties themselves have agreed.
[Citation.]” (Vandenberg v. Superior Court (1999) 21
Cal.4th 815, 831, 88 Cal.Rptr.2d 366, 982 P.2d 229,
first italics added; see, e.g., Volt Info. Sciences v.
Leland Stanford Jr. U. (1989) 489 U.S. 468, 478, 109
S.Ct. 1248, 103 L.Ed.2d 488 [FAA “requires courts to
enforce privately negotiated agreements to arbitrate,
like other contracts, in accordance with their
terms”].) Of course, “by agreeing to arbitrate, a party
‘trades the procedures and opportunity for review
in the courtroom for the simplicity, informality,
and expedition of arbitration.’ [Citation.]” (Gilmer,
supra, 500 U.S. 20, 31, 111 S.Ct. 1647.)
Because of the statutory preference that arbitra-
tion agreements be fully implemented, past decisions
have recognized but limited circumstances in which
general contract principles may render terms of such
an agreement unenforceable. The majority holds
that such circumstances may be present here. In my
view, the majority thereby errs.
Real party in interest Circuit City Stores, Inc. (Cir-
cuit City) offered its employees, including plain-
tiff Gentry, a voluntary program to resolve disputes
by arbitration. Consistent with the primary advan-
tage of arbitration as a quicker, simpler, and cheaper
alternative to court litigation, the program provided,
among other things, that claims would proceed on an
individual basis, and that consolidation of the sepa-
rate claims of multiple plaintiffs in a single pro-
ceeding would not be permitted.
44a
The program’s terms, including the individual
arbitration provision, were set forth in a package of
written materials, which plaintiff Gentry received,
and were further explained in a video presentation,
which he attended. He signed a receipt for the
written materials. The receipt advised that he
should review the materials and contact Circuit City
with any questions. It even suggested that he could
consult with an attorney about his legal rights.
Finally, it clearly provided that, having done so, he
could “opt out” of the arbitration program, without
penalty, by mailing the appropriate form to Circuit
City within 30 days.
Gentry did not exercise his option. The majority
concedes that a contract under the program’s terms
was thus validly formed.
Later, contrary to those provisions, Gentry filed a
class action against Circuit City, seeking overtime
wages allegedly due both to himself and to other
employees. The superior court enforced the arbitra-
tion agreement according to its terms, and ordered
individual arbitration of Gentry’s claim. The Court of
Appeal summarily denied mandate. We directed that
court to reconsider under the intervening decision in
Discover Bank v. Superior Court (2005) 36 Cal.4th
148, 30 Cal.Rptr.3d 76, 113 P.38d 1100 (Discover
Bank). After doing so, the Court of Appeal again
denied Gentry relief.
Now the majority reverses, finding that the indi-
vidual-arbitration term in Circuit City’s agreement
with Gentry may be invalid. The majority does not
reach this result—because it cannot—by any analysis
to be found in the prior case law. No finding is made
that a class remedy is essential, as a practical matter,
to vindication of the “unwaivable” statutory right
45a
(Armendariz v. Foundation Health Psychcare Ser-
vices, Inc. (2000) 24 Cal.4th 83, 100-113, 99 Cal.Rptr.
2d 745, 6 P.3d 669 (Armendariz); see Green Tree
Financial Corp.-Ala. v. Randolph (2000) 531 U.S. 79,
90-91, 121 S.Ct. 513, 148 L.Ed.2d 373) to overtime
wages. Nor does the majority rely, for this holding,
on the public policy against contract terms that are
both procedurally and substantively oppressive, and
thus “unconscionable.” (See Gilmer, supra, 500 U.S.
20, 33, 111 S.Ct. 1647; Armendariz, supra, at pp. 113-
121, 99 Cal.Rptr.2d 745, 6 P.3d 669; but cf. discus-
sion, post.)
Finally, there is no suggestion that the individual-
arbitration clause in the voluntary agreement be-
tween Gentry and Circuit City meets the test
of invalid “exculpatory” agreements (see Civ.Code,
§ 1668) set forth in Discover Bank, supra, 36 Cal.4th
148, 30 Cal.Rptr.3d 76, 113 P.3d 1100. There we
confronted an agreement, unilaterally imposed by
means of a “bill stuffer,” that required customers of a
credit card company to either accept nonclass arbitra-
tion of claims against the company or cease using
their accounts. The Discover Bank majority held that
a waiver of class rights, contained in such a manda-
tory contract, may be deemed exculpatory, and thus
unenforceable, in a setting where “disputes between
the contracting parties [will] predictably involve
small amounts of damages, and ... it is alleged that
the party with the superior bargaining power has
carried out a scheme to deliberately cheat large
numbers of [persons] out of individually small sums
of money.” (/d., at pp. 162-163, 30 Cal.Rptr.3d 76,
113 P.3d 1100.) Under such circumstances, the
majority reasoned, the waiver of class treatment
“becomes in practice the exemption of the party [with
superior bargaining power] ‘from responsibility for
46a
[its] own fraud, or willful injury to the person or
property of another.’ [Citation.]” (qd., at p. 163, 30
Cal.Rptr.3d 76, 113 P.3d 1100.)
Whatever the merits of Discover Bank—a decision
from which I largely dissented—we face no similar
situation here. As the instant majority admits,
claims for overtime wages, unlike the minor credit
card fees and charges at issue in Discover Bank, are
not necessarily and predictably “miniscule” (maj.
opn., ante, 64 Cal.Rptr.3d at p. 782, 165 P.3d at p.
564), such that the incentive to prosecute individual
actions, and thus to hold the wrongdoer to account,
will rarely, if ever, be present. Obviously, an individ-
ual claim for accumulated unpaid wages can be
substantial. And there is no indication in the record
that Gentry himself—the person whose contract for
individual arbitration is actually before us—cannot,
as a practical matter, vindicate his statutory over-
time rights except through class proceedings.
Moreover, as the instant majority acknowledges,
Circuit City did not abruptly impose on Gentry a
mandatory requirement of individual arbitration.
Unlike the credit card customers in Discover Bank,
Gentry was given the opportunity to consider the
terms of Circuit City’s arbitration proposal, and, after
doing so, to opt out of the arbitration program with-
out suffering any penalty or sanction.
Nonetheless, breaking new ground, the majority
opines that, for several reasons, an agreement to
arbitrate disputes on an individual basis might make
it “very difficult” (maj. opn., ante, 64 Cal.Rptr.3d
at pp. 782-783, 165 P.3d at p. 564) for some Circuit
City employees to pursue their unwaivable rights to
unpaid overtime wages. To that extent, the majority
reasons, such a provision—even, apparently, if nei-
47a
ther oppressive nor mandatory—must thus be con-
sidered exculpatory and invalid. Accordingly, the
majority rules that if, on remand, the trial court
decides a representative action is a significantly
better means of enforcing the statutory rights of all
affected Circuit City employees to unpaid overtime
wages, the court may, at Gentry’s behest, ignore and
dishonor his agreement to arbitrate on an individual
basis.
In effect, the majority holds that, despite such an
agreement, the trial court may certify a class, in an
overtime-wage case, in any circumstance where it
could otherwise do so. For all practical purposes, the
majority thus decrees, such agreements are for-
bidden, and meaningless, in this context.”
* The majority denies that class action waivers in arbitration
agreements are necessarily invalid in suits to vindicate over-
time-wage rights, but that is the practical effect of the majority’s
holding. Even where no class action waiver is at issue, “[a] line
of California cases follows the principle of rule 23(b)(3) of the
Federal Rules of Civil Procedure (28 U.S.C.), which ‘provides
that, for a class action to be maintained, it must be “superior to
other available methods for the fair and efficient adjudication of
the controversy.” This “superiority” criterion has been held to
be “manifest” in the . . . requirement that the class mechanism
confer “substantial benefits.” [Citations.]” (Bell v. Farmers Ins.
Exchange (2004) 115 Cal.App.4th 715, 741, 9 Cal. Rptr.3d 544
(Bell); see also, e.g., Linder v. Thrifty Oil Co. (2000) 23 Cal.4th
429, 435, 97 Cal.Rptr.2d 179, 2 P.3d 27 (Linder); Blue Chip
Stamps v. Superior Court (1976) 18 Cal.3d 381, 385, 134
Cal.Rptr. 393, 556 P.2d 755.) Thus, the majority holds in effect
that whenever, in an overtime-wage case, the court cow!d other-
wise find a class proceeding appropriate, it may do so notwith-
standing a free and fair agreement for individual arbitration.
Nor is there any realistic limitation in the majority’s suggestion
that its rule applies to cases where “systematic[ ]” denial of
overtime pay to a “class of employees” is alleged. (Maj. opn.,
48a
The majority cites no currently valid statutory pro-
vision that requires or supports such a determina-
tion.’ On the other hand, two statutes—the FAA and
the CAA—strongly undermine it. I conclude that the
majority may not elevate a mere judicial affinity for
class actions as a beneficial device for implementing
the wage laws above the policy expressed by both
ante, 64 Cal.Rptr.3d at pp. 786-787, 165 P.3d at p. 567.) Such
assertions would appear, by necessity, in any complaint seeking
to litigate overtime-pay claims in a class proceeding.
* California statutes generally permit class actions (Code Civ.
Proc., § 382) and give workers the right to engage in concerted
activities with respect to workplace issues, free of employer
interference or coercion (see Lab.Code, § 923), but nothing sug-
gests these laws preclude noncoercive agreements between em-
ployer and employee to arbitrate disputes on an individual
basis.
As evidence of the Legislature’s hostility to the use of contrac-
tual arbitration to vindicate wage claims, the majority points to
several California statutes that purported to render arbitration
agreements unenforceable in this context. (Maj. opn., ante, 64
Cal.Rptr.3d at p. 789, fn. 8, 165 P.3d at p. 569, fn. 8.) Of course,
as the majority implicitly concedes, all such laws have been
superseded or invalidated by the prevailing public policy that
favors enforcement of arbitration agreements according to their
terms, as set forth in the CAA and the FAA. (See Perry v.
Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426
[FAA preempted California statute (Lab.Code, § 229) that
allowed maintenance of action for unpaid wages “without regard
to the existence of any private agreement to arbitrate”].)
On the other hand, as the majority is well aware, the Legisla-
ture knows how to provide for a right to class action relief that
cannot be waived. It has made such provision, for example, in
the Consumers Legal Remedies Act. (Civ.Code, §§ 1751, 1752,
1781; see Discover Bank, supra, 36 Cal.4th 148, 158-159, 30
Cal.Rptr.3d 76, 113 P.3d 1100; maj. opn., ante, 64 Cal.Rptr.3d at
p. 780, 165 P.3d at p. 562.) No similar provisions appear in the
wage laws at issue here.
49a
Congress and our own Legislature that voluntary
individual agreements to arbitrate—by which parties
give up certain litigation rights and procedures in
return for the relative speed, informality, and cost
efficiency of arbitration—should be enforced accord-
ing to their terms. Hence, I cannot accept the major-
ity’s reasoning, or its result.
In the majority's view, several factors suggest that
the absence of a class remedy might “under some
circumstances” unduly interfere with employees’
ability to vindicate their statutory rights to overtime
pay. (Maj. opn., ante, 64 Cal.Rptr.3d at p. 782, 165
P.3d at pp. 563-564.) Because claims for unpaid
overtime wages tend to be “modest,” the majority
asserts, the fees and costs of proceeding individually
might discourage many such actions, resulting in
mere ““random and fragmentary enforcement” of
the wage laws. (/d., 64 Cal.Rptr.3d at p. 787, 165
P.3d at p. 567.) The majority cites the prospect of
employer retaliation—admittedly illegal—against a
worker who asserts an individual claim without the
protective coloration of collective action. An addi-
tional issue, the majority suggests, is that many em-
ployees, especially those low-wage workers most
vulnerable to violations, may not know their rights.
Finally, the majority concludes, administrative pro-
ceedings—so-called Berman hearings (Lab.Code,
§§ 98-98.8; see Murphy v. Kenneth Cole Productions,
Inc. (2007) 40 Cal.4th 1094, 1114-1116, 56 Cal.
Rptr.3d 880, 155 P.3d 284)—are an inadequate
alternative means of vindicating smaller claims for
overtime wages.
In many respects, the majority’s concerns are exag-
gerated. Though a credit card customer might not
sue individually to recover a minor fee or charge he
50a
believes improper, one would expect an employee
vigorously to pursue any significant amount due as
compensation for his labor. The case law supports
that hypothesis. As the majority acknowledges, “some
40 published cases over the last 70 years in Califor-
nia have involved individual employees prosecuting
overtime violations without the assistance of class
litigation or arbitration. ([Citations.]” (Maj. opn.,
ante, 64 Cal.Rptr.3d at p. 787, 165 P.3d at p. 567.)
And though the majority stresses the drawbacks of
individual litigation to resolve small or modest claims
(see generally, e.g., Linder supra, 23 Cal.4th 429,
435, 97 Cal.Rptr.2d 179, 2 P.3d 27; Bell, supra, 115
Cal.App.4th 715, 741, 9 Cal.Rptr.3d 544), it fails to
consider that because arbitration is relatively quick,
simple, informal, and inexpensive, it may allow the
individual pursuit of claims that would be less prac-
tical if litigated individually in court. These qualities
of informality, simplicity, and expedition—advent-
ages largely negated by the complexities of a class
proceeding—are presumably what Gentry and Cir-
cuit City sought when they agreed to individual
arbitration.
Moreover, while collective action has its place,
the parties here may also have contemplated that
“In the modern era, these cases include Ramirez v. Yosemite
Water Co. (1999) 20 Cal.4th 785, 85 Cal. Rptr.2d 844, 978 P.2d 2;
Rawson v. Tosco Refining Co. (1997) 57 Cal.App.4th 1520, 67
Cal.Rptr.2d 790; Sequeira v. Rincon-Vitova Insectaries, Inc.
(1995) 32 Cal.App.4th 632, 38 Cal.Rptr.2d 264; Monzon uv.
Schaefer Ambulance Service, Inc. (1990) 224 Cal.App.3d 16, 273
Cal.Rptr. 615; Baker v. Aubry (1989) 216 Cal.App.3d 1259, 265
Cal.Rptr. 381; Hernandez v. Mendoza (1988) 199 Cal.App.3d
721, 245 Cal. Rptr. 36; Swepston v. State Personnel Bd. (1987)
195 Cal.App.3d 92, 240 Cal.Rptr. 470; and Markman v. County
of Los Angeles (1973) 35 Cal.App.3d 132, 110 Cal.Rptr. 610.
5la
resolution of a dispute by the relatively simple, infor-
mal process of individual arbitration would reduce
the workplace tensions that might otherwise arise as
the result of a class battle in court. Indeed, though
the majority suggests that class proceedings may
lessen the chances of retaliation against an individ-
ual employee, I find it hard to imagine that a worker
who organizes fellow employees to mount a class
assault against the employer will thereby achieve
improved standing in the employer’s eyes.
But even if class relief were a “significantly more
effective” way for Circuit City employees, as a group,
to establish their overtime-wage claims (maj. opn.,
ante, 64 Cal.Rptr.3d at pp. 777, 787, 788, 165 P.3d at
pp. 559, 567, 568), this does not justify invalidating
Gentry’s voluntary agreement to resolve his claims by
individual arbitration. Unless Gentry’s contract to
arbitrate individually constitutes a de facto waiver of
his own statutory rights, he should not be allowed to
act, contrary to his agreement, as a representative
plaintiff.° Otherwise, the strong public policy that
arbitration agreements are to be enforced according
to their terms should prevail.
Here, as in Discover Bank, the majority insists its
analysis does not discriminate against the arbitral
forum—an approach forbidden by both the FAA
and the CAA—but simply indicates the procedures
* As I have indicated in the text, such a finding cannot be
made on this record under the standards suggested by the
majority. There is no indication that Gentry’s own claim is too
small to warrant individual legal action. He need not fear re-
taliation as a Circuit City employee, because his employment
ended in March 2001, before he filed this lawsuit in August
2002. Moreover, the very fact that he sued indicates he was,
and is, aware of his legal rights.
52a
necessary in any forum to prevent the de facto waiver
of statutory rights. However, there is more than one
way courts can show hostility to arbitration as a
simpler, cheaper, and less formal alternative to liti-
gation. They can simply refuse to enforce the parties’
agreement to arbitrate. Or, more subtly, they can
alter the arbitral terms to which the parties agreed,
and defeat the essential purposes and advantages of
arbitration, by transforming that process, against the
parties’ expressed will at the time they entered the
agreement, into something more and more like the
court litigation arbitration is intended to avoid.
Given the strong policy that arbitration agree-
ments are to be enforced as written, any such
alteration should be employed only on a showing of
the starkest necessity. The majority has not adhered
to that limitation here.
Two years ago, I noted that “the [strong prevailing
weight] of decisions, applying federal law or the law
of other states, .. . hold[s] that arbitration clauses
are not invalid either because they specifically ex-
clude class treatment or because they preclude such
treatment by failing expressly to provide for it.
[Citations.]” (Discover Bank, supra, 36 Cal.4th 148,
176, fn. 1, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (conc.
& dis. opn. of Baxter, J.).) The majority does not
suggest, and I have no reason to believe, that this
situation has changed.” The majority thus moves
* Skirchak v. Dynamics Research Corp., Inc. (D.Mass.2006)
432 F.Supp.2d 175, the only overtime case cited by the majority
in which a class waiver in an arbitration provision was invali-
dated, involved a mandatory agreement unilaterally imposed by
the employer. In Skirchak, employees were advised by e-mail
that they would be required to submit to the company’s dispute
resolution program. Acceptance was a condition of continued
53a
California further along the path away from the
mainstream on the issue. Persuasive reasoning
supports the contrary, prevailing view. I must there-
fore disassociate myself from the majority’s holding.
In a separate ruling, the majority concludes that
the arbitration agreement between Gentry and Cir-
cuit City is procedurally unconscionable, thus expos-
ing numerous other provisions of the agreement to
possible invalidation on grounds that they are sub-
stantively oppressive or unfair. (See, e.g., Armen-
dariz, supra, 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745,
6 P.3d 669.) Again, I cannot agree.
As noted above, this was not a case in which one
party has simply imposed mandatory contract terms
on another. Gentry was not required blindly to accept
the arbitration program and its terms as a condition
of his employment. (Cf. Little v. Auto Stiegler, Inc.
(2003) 29 Cal.4th 1064, 1071, 130 Cal.Rptr.2d 892, 63
P.3d 979; Armendariz, supra, 24 Cal.4th 83, 91-92,
114-115, 99 Cal.Rptr.2d 745, 6 P.3d 669; see also
Discover Bank, supra, 36 Cal.4th 148, 154, 30 Cal.
Rptr.3d 76, 113 P.3d 1100 [customers of credit card
company could reject arbitration term of cardholder
agreement only by ceasing to use their accounts].)
On the contrary, Circuit City provided Gentry, and
other employees, with an extensive orientation about
the program, then allowed them a reasonable time to
“opt out,” without penalty, simply by mailing back a
form.
employment. Applying principles of procedural unconscion-
ability under Massachusetts law, the court deemed essential
to its holding that the employees had no meaningful choice
whether to accept the provision. (Jd. at pp. 179-180.)
54a
The instant Court of Appeal determined on this
basis that no procedural unconscionability was pre-
sent. Two Ninth Circuit decisions, applying Califor-
nia law, had previously reached the same conclusion.
(Circuit City Stores, Inc. v. Najd (9th Cir.2002) 294
F.3d 1104, 1108; Circuit City Stores, Inc. v. Ahmed
(9th Cir.2002) 283 F.3d 1198, 1199-1200.)
The majority concedes that Gentry’s freedom to
choose against the arbitration program “weigh|s]
against a finding of procedural unconscionability.
[Citation.]” (Maj. opn., ante, 64 Cal. Rptr.3d at p. 794,
165 P.3d at p. 573.) Nonetheless, the majority dis-
cerns an “element” of procedural oppression—thus
allowing scrutiny of the agreement’s substantive
terms—by finding that Circuit City’s explanatory
materials were “one-sided.” (/bid.) In particular, the
majority asserts, the explanatory materials failed to
disclose that certain terms of the arbitration program
might work to an employee’s disadvantage in specific
situations. Whatever the merits of that premise,’ the
receipt Gentry signed prominently advised that he
could consult his own attorney about the legal “pros
and cons” of the program, and he was given ample
opportunity to do so. Under these circumstances,
there is no basis for a conclusion that the process by
which Circuit City sought to secure its employees’
agreement to the program was misleading.
The majority also points out that Circuit City made
clear its preference for arbitration. But even if Cir-
cuit City encouraged employees to accept the arbitra-
" As the majority makes clear, the informational packet
Gentry received included not only the “Associate Issue Resolu-
tion Handbook,” which sought to explain the program, but also
the “Circuit City Dispute Resolution Rules and Procedures,”
which set forth the program’s terms in full.
55a
tion agreement, the record is devoid of any evidence
that it implied, threatened, or imposed any sanction
for an employee’s decision to opt out of the program.
I see in this situation no grounds for a finding that
Circuit City unfairly coerced or induced its employ-
ees’ agreement.
Accordingly, I would affirm the judgment of the
Court of Appeal.
WE CONCUR: CHIN, and CORRIGAN, JJ.
56a
APPENDIX B
COURT OF APPEAL SECOND DISTRICT,
DIVISION 5, CALIFORNIA
No. B169805
ROBERT GENTRY,
Petitioner,
v.
THE SUPERIOR COURT OF LOS ANGELES COUNTY,
Respondent.
CIRCUIT CITY STORES, INC.,
Real Party in Interest.
Jan. 19, 2006
Rehearing Denied Feb. 9, 2006
Review Granted April 26, 2006
ARMSTRONG, J.
This employment case concerns the enforceability
of a pre-employment arbitration agreement contain-
ing a class action waiver. The Supreme Court has
remanded the case for reconsideration in light of
Discover Bank v. Superior Court (2005) 36 Cal.4th
148, 30 Cal.Rptr.3d 76, 113 P.3d 1100, in which that
Court invalidated a class action waiver in what the
Court referred to as a “consumer contract of ad-
hesion” contained in a credit card mailer. We issued
an order to show cause and invited supplemental
briefing limited to the issue of whether the holding in
57a
Discover Bank invalidates a class action waiver in an
employment case of this type. We hold that Discover
Bank does not render the class action waiver in
this case unenforceable. Accordingly, we deny the
petition.
FACTS AND PROCEDURAL HISTORY
On August 29, 2002, Robert Gentry filed a class
action lawsuit in superior court against Circuit City
seeking damages for conversion as well as violations
of the Labor Code and Business and Professions
Code. Gentry alleged that Circuit City had “illegally
misclassified” Gentry and other salaried customer
service managers as “exempt managerial/executive
employees” not entitled to overtime pay, when in fact,
they were ““non-exempt’ non-managerial employees”
entitled to be compensated for hours worked in excess
of 8 hours per day and 40 hours per week[.]
During the time he was employed by Circuit City
in 1995, Gentry received a packet that included an
“Associate Issue Resolution Package” (AIRP) and a
copy of Circuit City’s “Dispute Resolution Rules
and Procedures,” pursuant to which employees are
afforded various options (including arbitration) for
resolving employment-related disputes. By electing
arbitration, the employee agrees to “dismiss any civil
action brought by him in contravention of the terms
of the parties’ agreement.” The agreement to arbi-
trate also contains a class action waiver, which pro-
vides: “The Arbitrator shall not consolidate claims of
different Associates into one proceeding, nor shall the
Arbitrator have the power to hear arbitration as a
class action... .” The packet includes a form that
58a
gives the employee 30 days to opt out of the arbitra-
tion agreement. Gentry did not do so.’
At that time, there was a split of authority in
California on the enforceability of class action waiv-
ers in consumer contracts. In Szetela v. Discover
Bank (2002) 97 Cal.App.4th 1094, 118 Cal.Rptr.2d
862, the court held that an arbitration provision in a
credit card agreement that prohibited class actions
was unfair and unconscionable, and thus unenforce-
able. In Discover Bank v. Superior Court (2003) 105
Cal.App.4th 326, 129 Cal.Rptr.2d 393, the Court
disagreed with Szetela and held that where there is a
valid arbitration clause, governed by the Federal
Arbitration Act (FAA), the trial court could not apply
state substantive law to strike a class action waiver
from the arbitration agreement.
The petition to compel arbitration was heard Feb-
ruary 26, 2003. Respondent court took the imatter
under submission and, on February 28, 2003, issued
an order granting the petition. The court acknowl-
edged that the governing case law was “conflicting
and in a state of flux,” and elected to follow Discover
Bank. The court did hold two provisions of the
agreement (cost splitting and limitation of remedies
provisions) substantively unconscionable based on
federal case law. (Morrison v. Circuit City Stores,
Inc. (6th Cir.2003) 317 F.3d 646.) The court severed
those provisions from the agreement, ordered Gentry
to “arbitrate his claims on an individual basis and
' The arbitration agreement contains a choice-of-law pro-
vision which provides that the arbitrator “shall apply the sub-
stantive law of the State in which the Associate is, was or
sought to be predominately employed.” Because Gentry was
employed in California, we evaluate the enforceability of the
agreement under California substantive law.
59a
submit to the class action waiver,” and stayed the
superior court action.
On April 16, 2003, Gentry appealed the order on
the theory that it was a final order regarding class
certification. In fact, the order was one compelling
arbitration and staying the superior court action,
which is not appealable. (Code Civ. Proc., § 1294.)
On July 11, 2003, we dismissed the appeal but noted
that Gentry had an alternative remedy by way of a
petition for writ of mandate.
Gentry filed this mandate petition on September 9,
2003. We initially denied the petition, noting that
the issue of the enforceability of the class action
waiver was before the Supreme Court. The Supreme
Court granted Gentry’s petition for review. On June
27, 2005, the court issued its decision in Discover
Bank. Analyzing the case under general principles of
unconscionability, the Court held that “at least under
some circumstances, the law in California is that
class action waivers in consumer contracts of ad-
hesion are unenforceable, . ..” (Discover Bank, supra,
36 Cal.4th at p. 153, 30 Cal.Rptr.3d 76, 113 P.3d
1100.) The Court remanded this employment case for
reconsideration in light of Discover Bank.
DISCUSSION
The issue in this case is a narrow one: whether the
class action waiver in the Circuit City arbitration
agreement is an unconscionable provision that ren-
ders the provision unenforceable. We conclude the
provision is neither procedurally nor substantively
unconscionable.
In Discover Bank, the Supreme Court analyzed the
bank’s class action waiver under principles of uncon-
scionability applicable to contracts of adhesion. The
60a
term “contract of adhesion” “signifies a standardized
contract, which, imposed and drafted by the party of
superior bargaining strength, relegates to the sub-
scribing party only the opportunity to adhere to the
contract or reject it.” (Graham v. Scissor-Tail, Inc.
(1981) 28 Cal.3d 807, 817, 171 Cal.Rptr. 604, 623
P.2d 165, citing Neal v. State Farm Ins. Cos. (1961)
188 Cal.App.2d 690, 694, 10 Cal.Rptr. 781.) “A con-
tract of adhesion is fully enforceable according to its
terms [citations] unless certain other factors are pre-
sent which, under established legal rules—legislative
or judicial—operate to render it otherwise.” (Graham
v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 819-820,
171 Cal.Rptr. 604, 623 P.2d 165.) “Generally speak-
ing, there are two judicially imposed limitations on
the enforcement of adhesion contracts or provisions
thereof. The first is that such a contract or provision
which does not fall within the reasonable expec-
tations of the weaker or ‘adhering’ party will not be
enforced against him. ([Citations.] The second—a
principle of equity applicable to all contracts gener-
ally—is that a contract or provision, even if consis-
tent with the reasonable expectations of the parties,
will be denied enforcement if, considered in its
context, it is unduly oppressive or ‘unconscionable.’
[Citations.]” (qd. at p. 820, 171 Cal.Rptr. 604, 623
P.2d 165.)
The judicially created doctrine of “unconscionabil-
ity” contains both procedural and substantive ele-
ments. “The procedural element of an unconscion-
able contract generally takes the form of a contract of
adhesion, ‘which, imposed and drafted by the party of
superior bargaining strength, relegates to the sub-
scribing party only the opportunity to adhere to the
contract or reject it.’. .. Substantively unconscionable
terms may take various forms, but may generally
6la
be described as unfairly one-sided.” (Little v. Auto
Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071, 130
Cal.Rptr.2d 892, 63 P.3d 979.)
In the employment context, our Supreme Court has
found pre-employment arbitration agreements to be
adhesive where the agreement is made a condition
of employment. (Armendariz v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83, 115-
116, 99 Cal.Rptr.2d 745, 6 P.3d 669; Little, supra, 29
Cal.4th at p. 1071, 130 Cal.Rptr.2d 892, 63 P.3d 979.)
However, the agreement at issue here does not have
that adhesive element and therefore is not proce-
durally unconscionable. Signing the arbitration
agreement was not made a condition of Gentry’s
employment; he was given 30 days to decide whether
or not to opt out of the agreement, and chose not to
do so.
The Ninth Circuit has twice held that because of
the “opt-out” provision, the 1995 version of the
Circuit City arbitration agreement was not proce-
durally unconscionable. (Circuit City Stores v. Najd
(9th Cir.2002) 294 F.3d 1104; Circuit City Stores
v. Ahmed (9th Cir.2002) 283 F.3d 1198, 1200.) In
Ahmed, the Court noted that the agreement lacked
the “necessary element of procedural unconscion-
ability. Ahmed was not presented with a contract of
adhesion because he was given the opportunity to
opt-out of the Circuit City arbitration program by
mailing in a simple one-page form. Moreover, and
apart from its non-adhesive nature, the arbitration
agreement here also lacked any other indicia of pro-
cedural unconscionability. The terms of the arbitra-
tion agreement were clearly spelled out in written
materials and a videotape presentation; Ahmed was
encouraged to contact Circuit City representatives or
62a
to consult an attorney prior to deciding whether to
participate in the program; and he was given 30 days
to decide whether to participate in the program.” (Jd.
at p. 1199.)’
Gentry nonetheless claims the agreement is proce-
durally unconscionable despite the opt-out provision
because Circuit City attempted to “sucker unsophisti-
cated employees into not opting out” by touting the
advantages of arbitration. His claim is without
merit. The “Associate Issue Resolution Handbook,”
written in straightforward language, does point out
the advantages of electing arbitration (notably, that
the procedure is cost effective and the employee’s
claim is resolved “in a matter of weeks or a few
months rather than years”). However, it also notes
the disadvantages (for example, the lack of a right to
a jury trial and limited discovery). The employee is
then free to decide whether or not the advantages of
arbitration outweigh the disadvantages.
We further find that the class action waiver in this
case is not substantively unconscionable. In Discover
Bank, the Supreme Court found that the class action
waiver in the bank’s cardholder agreement was both
procedurally and substantively unconscionable for a
variety of reasons. The amendment was mailed to
the cardholder in a “bill stuffer” that the average
* Ingle v. Circuit City Stores, Inc. (2003) 328 F.3d 1165, 1175-
1176, also decided by the Ninth Circuit, is factually distinguish-
able. In Ingle, the court found an arbitration agreement that
included a class action waiver to be procedurally unconscionable
because the employee had only three days in which to decide
whether or not to opt out of the arbitration agreement. The
court held the three-day waiting period did not provide the
plaintiff with a “meaningful opportunity” to opt out of the agree-
ment. (Jd. at p. 1172.)
63a
cardholder was unlikely to read. The cardholder had
no opportunity to opt out of the amendment, other
than to close his account. (Discover Bank, supra, 36
Cal.4th at p. 161, 30 Cal.Rptr.3d 76, 113 P.3d 1100.)
These factors provided the element of procedural un-
conscionability. (Ibid.)
The court also found the class action waiver sub-
stantively unconscionable because it was “found in a
consumer contract of adhesion in a setting in which
disputes between the contracting parties predictably
involve small amounts of damages,” and it was
“alleged that the party with the superior bargaining
power has carried out a scheme to deliberately cheat
large numbers of consumers out of individually small
sums of money... .” In such a case, “the waiver
becomes in practice the exemption of the party ‘from
responsibility for [its] own fraud, or willful injury
to the person or property of another.’ (Civ.Code,
§ 1668.) Under these circumstances, such waivers
are unconscionable under California law and should
not be enforced.” (qd. at pp. 162-163, 30 Cal.Rptr.3d
76, 113 P.3d 1100.)
The infirmities that plagued the Discover Bank
class action waiver are not present here. The Circuit
City agreement is not a “consumer contract of adhe-
sion” that the cardholder had no opportunity to
reject. Nor is this a case in which the “disputes
between the contracting parties predictably involve
small amounts of damages,” or where “the party with
the superior bargaining power has carried out a
scheme to deliberately cheat large number of con-
sumers out of individually small sums of money.”
(Discover Bank, supra, 36 Cal.4th at pp. 162-163, 30
Cal.Rptr.3d 76, 113 P.3d 1100.) The Supreme Court
held in Discover Bank that under such circum-
64a
stances, enforcing a class action waiver “becomes in
practice the exemption of the party ‘from respons-
ibility for [its] own fraud, or willful injury to the
person or property of another.’ (Civ.Code, § 1668.)”
(Ibid.) Here, Gentry has alleged statutory violations
that could result in substantial damages and penal-
ties should he prevail on his individual claims. In
fact, the Supreme Court acknowledged in Discover
Bank that in some employment cases, large individ-
ual awards are commonplace. (Discover Bank, supra,
36 Cal.4th at p. 168, 30 Cal.Rptr.3d 76, 113 P.3d
1100, see Gilmer v. Interstate/Johnson Lane Corp.
(1991) 500 U.S. 20, 32, 111 S.Ct. 1647, 114 L.Ed.2d
26.)
DISPOSITION
The petition for writ of mandate is denied. Costs of
this proceeding are awarded to Circuit City.
We concur: TURNER, P.J., and KRIEGLER, J.
65a
APPENDIX C
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
[Filed Nov. 30, 2005]
B169805
(Super. Ct. No. BC280631)
ROBERT GENTRY,
Petitioner,
¥.
THE SUPERIOR COURT OF
LOS ANGELES COUNTY,
Respondent.
CIRCUIT CITY STORES, INC.,
Real Party in Interest.
ORDER TO SHOW CAUSE
TO THE SUPERIOR COURT OF LOS ANGELES
COUNTY:
Pursuant to the August 31, 2005 order of the
California Supreme Court, a copy of which is
attached hereto, you are hereby ordered to show
cause before this court in its courtroom at 300 South
Spring Street, Los Angeles, California 90013, on
January 10, 2006, at 10 a.m., why a peremptory writ
ordering you to do so should not issue.
66a
The return to the petition, if any, shall be filed on
or before December 9, 2005, and the reply, if any,
shall be filed within 10 days thereafter. The parties
may incorporate their supplemental briefs in the
return and the reply. The sole issue to be decided is
whether Discover Bank v. Superior Court (2005) 36
Cal.3d 148, 162, invalidates a class action waiver in
an employment case of this type.
Nothing in this order to show cause shall be
construed to stay any arbitration proceeding.
WITNESS THE HONORABLE PAUL TURNER,
Presiding Justice of Division Five of the Court of
Appeal of the State of California, Second Appellate
District.
ATTEST my hand and the seal of this court this
30th day of November, 2005.
JOSEPH A. LANE, Clerk
By [legible]
Deputy Clerk
67a
APPENDIX D
IN THE SUPREME COURT OF CALIFORNIA
En Banc
[Filed Aug. 31, 2005]
No. B1698905
S119334
ROBERT GENTRY,
Petitioner,
Vv.
THE SUPERIOR COURT OF
Los ANGELES COUNTY,
Respondent.
CIRCUIT CITY STORES, INC..,
Real Party in Interest.
The above-entitled matter is transferred to the Court
of Appeal, Second Appellate District, Division Five, with
directions to vacate its decision and to reconsider the
cause in light of Discover Bank v. Superior Court (2005)
36 Cal.4th 148. (Cal. Rules of Court, rule 29.3(d).)
George
Chief Justice
Kennard
Associate Justice
Baxter
Associate Justice
Werdegar
Associate Justice
Chin
Associate Justice
Moreno
Associate Justice
Associate Justice
68a
APPENDIX E
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
[Filed Sept. 18, 2003]
B169805
(Super. Ct. No. BC280631)
ROBERT GENTRY,
Petitioner,
¥.
THE SUPERIOR COURT OF
LOS ANGELES COUNTY,
Respondent.
CIRCUIT CITY STORES, INC.,
Real Party in Interest.
ORDER
THE COURT:
The court has read and considered the petition for
writ of mandate, filed September 9, 2003. The peti-
tion is denied. The court notes that the issue of the
validity of the arbitration agreement’s class action
waiver provision is pending before the California
Supreme Court.
TURNER, P.J. GRIGNON, J.
69a
APPENDIX F
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
[Filed Sep. 09, 2003)
B169805
(Super. Ct. No. BC280631)
ROBERT GENTRY,
Petitioner,
Vv.
THE SUPERIOR COURT OF
LOS ANGELES COUNTY,
Respondent.
Circu!tT City STORES, INC..,
Real Party in Interest.
ORDER
Petitioner’s stay request is denied. Petitioner has
failed to make a showing of urgency or any time
constraints that warrant an immediate stay.
/s/ Turner
Paul Turner
Presiding Justice
70a
APPENDIX G
IN THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
[Filed JUL 11, 2003)
B166778
(Los Angeles County
Super. Ct. No. BC280631)
ROBERT GENTRY et ail.,
Plaintiffs and Appellants,
Vv.
CIRCUIT CITY STORES, INC.,
Defendant and Respondent.
DISMISSAL ORDER
Plaintiff, Robert Gentry, appeals after the trial
court entered an order compelling him to arbitrate
a dispute with defendant, Circuit City Stores, Inc.
The notice of appeal states, “NOTICE IS HEREBY
GIVEN that Plaintiffs on their own behalf and on
behalf of all putative class members, hereby appeal
from tne Order of this Court granting Defendant’s
Petition to Compel Arbitration, filed on February
28, 2003, the Hon. Thomas Wilhite presiding.”
Defendant has moved to dismiss plaintiffs appeal
because an order compelling arbitration and staying
an action is not appealable. The parties agree that
an order compelling arbitration and staying an
action is not appealable. (Code Civ. Proc., § 1294;
7la
Muao v. Grosvenor Properties, Ltd. (2002) 99
Cal.App.4th 1085, 1088.) Further, any issue con-
cerning the class action waiver is not a final ap-
pealable order at present. (Code Civ. Proc., § 904.1.)
However, plaintiff argues that the trial court
has entered a final order on the issue of class
certification which is appealable. (Griset v. Fair
Political Practices Com. (2001) 25 Cal.4th 688, 698;
Exxon Mobil Corp. v. County of Santa Barbara
(2001) 92 Cal.App.4th 1347, 1351.) No such order
was issued. The trial court merely ordered ar-
bitration of plaintiffs individual claims, waiver of
the class action claim, and stayed the action. No
final judicial order has been issued on the class
certification issue. Once the stay is lifted, the class
certification issues can be finally resolved. The
court after the arbitration may choose to elect a
number of options including trying the class issues.
All that has occurred is that the arbitration of
plaintiffs individual claim will proceed.
Three further points are pertinent. First, if
plaintiff is dissatisfied with the trial court’s orders,
he can file an extraordinary relief petition. Plaintiff
has a remedy which is readily available to challenge
the interlocutory orders of the trial court. Appeal is
not such a remedy at present. Second, after the stay
is vacated and a final order concerning class
certification is entered, then all of the class’s
contentions may, depending on the circumstances,
be reviewable of direc’; appeal. Third, defendant’s
sanctions motion is denied. There is no evidence of
any conduct which could give rise to monetary
sanctions on plaintiffs part. (mn re Marriage of
Flaherty (1982) 31 Cal.3d 637, 650; Reed v. Mutual
72a
Service Corp. (2003) 106 Cal.App.4th 1359, 1373,
fn. 13.)
The appeal is dismissed. Defendant, Circuit City
Stores, Inc., shall recover its costs on appeal from
plaintiff, Robert Gentry.
Turner Grignon =
TURNER, P.ZJ. GRIGNON, J.
73a
APPENDIX H
SUPERIOR COURT OF CALIFORNIA
COUNTY OF LOS ANGELES
[Filed 00-7-03]
DEPT. 23
HONORABLE THOMAS L. WILLHITE, JR. Judge
G YOUNG, CRT ASST. Deputy Sheriff
E T ESPINOZA, Deputy Clerk
BC280631
ROBERT GENTRY,
vs.
CIRCUIT CITY STORES, INC.
-“NOT COMPLEX”- 12/4/02
170.6/JUDGE FREEMAN/PLFF
NATURE OF PROCEEDINGS:
NUNC PRO TUNC
The court finds that through inadvertence and error
the minute order of February 28, 2003 does not fully
reflect the order of the court, said minute order is
ordered corrected nunc pro tune as follows:
By adding:
“The matter is stayed pending the outcome of the
arbitration.”
74a
Counsel are hereby notified that the court has set a
status conference for September 11, 2003, 8:30 A.M.,
this department.
A true copy of this minute order is sent to counsel via
U.S. Mail this date as follows:
Matthew Righetti
456 Montgomery Street, Suite 1400
San Francisco, CA 94104
Rex D. Berry
Livingston & Mattesich
1201 K Street, Suite 1100
Sacramento, CA 95814-3938
75a
APPENDIX I
SUPERIOR COURT OF CALIFORNIA
COUNTY OF LOS ANGELES
[Filed 02-28-03]
DEPT. 23
HONORABLE THOMAS L. WILLHITE, JR. Judge
G YOUNG, CRT ASST. Deputy Sheriff
E T ESPINOZA, Deputy Clerk
BC280631
ROBERT GENTRY,
VS.
CIRCUIT CITY STORES, INC.
-“NOT COMPLEX”-12/4/02
170.6/JUDGE FREEMAN/PLFF
NATURE OF PROCEEDINGS:
RULING ON SUBMITTED MATTER
The court having taken PETITION TO COMPEL
ARBITRATION under submission on February 26,
2003, now rules as follows:
The court grants the Petition. The court orders
plaintiff to arbitrate his claims on an individual basis
and submit to the class action waiver. However, the
cost splitting and limitation of remedies provisions of
the arbitration agreement are unenforceable.
76a
The ruling is more fully set forth in the Court Ruling
on Submitted Matter which is filed this date and
incorporated herein by reference.
A true copy of this minute order and Court Ruling is
sent to counsel via U.S. Mail this date as follows:
Matthew Righetti
456 Montgomery Street, Suite 1400
San Francisco, CA 94104
Rex D. Berry
Livingston & Mattesich
1201 K Street, Suite 1100
Sacramento, CA 95814-3938
77a
APPENDIX J
SUPERIOR COURT OF THE
STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
[Filed FEB 28, 2003]
CASE NUMBER
BC280631
ROBERT GENTRY,
Plaintiff,
vs.
CIRCUIT CITY STORES, INC.,
Defendants.
RULING ON SUBMITTED MATTER
The court having taken PETITION TO COMPEL
ARBITRATION under submission on February 26,
2603, now rules as follows:
Plaintiff Robert Gentry filed a class action
complaint against defendant Circuit City Stores, Inc.
alleging violations of the Labor Code, Business and
Professions Code section 17200, and conversion.
Plaintiff signed an arbitration agreement with
Circuit City in connection with his employment in
which he agreed to submit all employment related
claims to arbitration. The arbitration procedure also
provided: “The Arbitator shall not consolidate claims
of different Associates into one proceeding, nor shall
the Arbitrator have the power to hear an arbitration
as a class action. .. .” (Miles Decl. Exh. B p. 19.)
Circuit City petitions to compel plaintiff to arbitrate
his claims as an individual. The court grants the
78a
petition. The court orders plaintiff to arbitrate his
claims on an individual basis and submit to the class
action waiver. However, the cost splitting and
limitation of remedies provisions of the arbitration
agreement are unenforceable.
As the parties note in their briefing, the governing
case law is conflicting and in a state of flux. Circuit
City relies primarily on Discover Bank v. Superior
Court (2003) 105 Cal.App.4th 326° and Morrison v.
Circuit City Stores, Inc. (6th Cir. 2003) _ F.3d __
{2003 WL 193410]. Plaintiff relies on Szetela v.
Discover Bank (2002) 97 Cal.App.4th 1094, Ting uv.
AT&T (9th Cir. 2003) __ F.3d __ [2003 DJDAR 1630],
and also cites Morrison, supra. Also relevant are
Mandel v. Household Bank (2003) __ Cal.App.4th __
[2003 WL 57282 (4th Dist. 1/7/03)] and Shea v.
Household Bank (2003) __ Cal.App.4th __ [2003 WL
57281 (4th Dist 1/7/03).]
Without adding any further discussion to the
debate, the court elects to follow the decision in
Discover Bank, supra, decided by the Second Appel-
late District. (See McCallum v. McCallum (1987) 190
Cal.App.3d 308, 315, n.4 [*As a practical matter, a
superior court ordinarily will follow an appellate
opinion emanating from its own district even though
it is not bound to do so”].) In Discover Bank, the
Court found that where there is a valid arbitration
agreement governed by the Federal Arbitration Act
(“FAA”), California’s public policy regarding class
action waivers has been preempted. (105 Cal.App.4th
at p. 346.) In Discover Bank, the dispute involved the
enforceability of a credit card holder agreement.
Discover Bank expressly disagreed with Szetela uv.
‘ Petition for review pending.
79a
Discover Bank (2002) 97 Cal.App.4th 1094 from
the Fourth Appellate District. In the instant case,
consistent with Discover Bank, the court finds that
the FAA preempts California’s public policy against
class action waivers in arbitration agreements.
Gentry argues that the arbitration agreement is
unenforceable because it is procedurally and sub-
stantively unconscionable. (See Armendariz v. Foun-
dation Health Psychcare Services, Inc. (2000) 24
Cal.4th 83.) If both are present the agreement is
unenforceable. (Jd. at 114.) In the instant case, the
agreement is not unenforceable. It is essentially
undisputed that Circuit City drafted the agreement,
and had superior bargaining power. However, Gentry
was given the option of opting out of the arbitration
agreement. Circuit City provided an “Arbitration
Opt-Out Form,” containing identical instructions for
Associates who chose not to participate in the
arbitration component of the AIRP. Gentry did not
opt out and did not return the form. The agreement is
not procedurally unconscionable.
Only two provisions of the agreement are sub-
stantively unconscionable, the cost-splitting provi-
sion and the limitation of remedies provision. In
Morrison v. Circuit City Stores, Inc., supra, 2003 WL
193410, the Court held that statutory claims may
be heard in an arbitral forum, the Circuit City
arbitration agreement was supported by sufficient
consideration and a mutuality of obligation and the
provisions regarding discovery and the limitations
period arc enforceable. Ud. at 13, 15 and n. 16.)
However, the Court invalidated both the cost-
splitting and limitation of remedies provisions in the
Circuit City arbitration agreement. (/d. at 18-22.) In
the instant case, the court ends that the agreement is
80a
not invalid as a whole, and only the cost splitting and
limitation of remedies provisions are unenforceable.
Therefore, the court orders plaintiff to arbitrate his
claims on an individual basis and submit to the
class action waiver. However, the cost splitting and
limitation of remedies provisions of the arbitration
agreement are unenforceable.
8la
APPENDIX K
IN THE SUPREME COURT OF CALIFORNIA
En Banc
[Filed Oct. 31, 2007]
$141502
Court of Appeal,
Second Appellate District,
Div. 5 - B169805
ROBERT GENTRY,
Petitioner,
Ws
SUPERIOR COURT OF LOS ANGELES COUNTY,
Respondent;
CIRCUIT CITY STORES, INC.,
Real Party in Interest.
The petition for rehearing is denied.
Baxter, Chin and Corrigan, JJ., are of the opinion
the petition should be granted.
George
Chief Justice
82a
APPENDIX L
STATE STATUTE
Cal. Labor Code § 1194. Action to recover minimum
wage, overtime compen-
sation, interest, attorney's
fees, and costs by employee
(a) Notwithstanding any agreement to work for a
lesser wage, any employee receiving less than the
legal minimum wage or the legal overtime com-
pensation applicable to the employee is entitled to
recover in a civil action the unpaid balance of the full
amount of this minimum wage or overtime com-
pensation, including interest thereon, reasonable
attorney’s fees, and costs of suit.
(b) The amendments made to this section by Chapter
825 of the Statutes of 1991 shall apply only to civil
actions commenced on or after January 1, 1992.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.