Brown v. Ralphs Grocery Co. , 128 Cal. Rptr. 3d 854 ( 2011 )

KRIEGLER, J., Concurring and Dissenting.

I concur in the majority opinion’s rejection of plaintiff Terri Brown’s argument that the class action waiver in her employment contract with Ralphs Grocery Company and The Kroger Co. was unconscionable under Gentry v. Superior Court (2007) 42 Cal.4th 443 [64 Cal.Rptr.3d 773, 165 P.3d 556] (Gentry). I respectfully dissent, however, from the majority’s further conclusion that Brown’s waiver of the right to file a representative action under the Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.)¹ was unenforceable. The preemptive effect of the Federal Arbitration Act (FAA) requires enforcement of the PAGA waiver in the employment arbitration agreement in this case under the holding of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. _ [179 L.Ed.2d 742, 131 S.Ct. 1740] (AT&T). I would reverse the order of the trial court denying the motion to compel arbitration.

Gentry

The majority correctly holds that Brown failed to present substantial evidence that the class action waiver in the employment contract was unconscionable, as required by Gentry, supra, 42 Cal.4th at page 466. Gentry's continuing vitality is in doubt after the decision in AT&T, which disapproved the holding in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 [30 Cal.Rptr.3d 76, 113 P.3d 1100] (Discover Bank). (See AT&T, supra, 563 U.S. at pp. _-_ ,_ [131 S.Ct. at pp. 1750-1751, 1753].) Gentry relied heavily on the reasoning in Discover Bank in holding that class action waivers in arbitration agreements are unconscionable when applied to overtime claims by an employee. (Gentry, supra, 42 Cal.4th at pp. 453-455, 457, 464-466.) With the reasoning of Discover Bank having been rejected as being in conflict with the FAA, the same fate may be in store for Gentry. Nonetheless, as the majority correctly points out, Gentry remains the binding law of this state, which we must follow. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455 [20 Cal.Rptr. 321, 369 P.2d 937].) The claim of unconscionability under Gentry fails due to a lack of substantial evidence.

The PAGA Claim

“The ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’ ” (AT&T, supra, 563 U.S. at p._[131 S.Ct. at p. 1748], quoting Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478 [103 L.Ed.2d 488, 109 S.Ct. 1248].) Despite this admonition, the majority refuses to enforce the undisputed language in Brown’s arbitration agreement that waived her right to bring a representative action under the PAGA.

The arbitration agreement between Brown and Ralphs/Kroger applies to “all employment related disputes.” Under the agreement, Brown has no right for claims “to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of the general public . . . .” In addition, the agreement provides that “there are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy.”

The causes of action in Brown’s complaint were all “employment related disputes” covered by the arbitration agreement. Brown alleged causes of action for unpaid meal period premiums (§§ 226.7, 512), unpaid rest period premiums (§ 226.7), wages not timely paid during employment (§ 204), noncompliant wage statements (§ 226, subd. (a)), and unfair competition (Bus. & Prof. Code, § 17200 et seq.). Despite having agreed to arbitrate her employment disputes on an individual basis, and having waived the right to file a representative action, Brown’s complaint demanded a jury trial “individually, and on behalf of other members of the general public similarly situated, and as an aggrieved employee pursuant to the [PAGA].”

In a series of cases, the United States Supreme Court has found California statutory and decisional law that impedes contractual arbitration agreements to be preempted by the FAA. In Southland Corp. v. Keating (1984) 465 U.S. 1 [79 L.Ed.2d 1, 104 S.Ct. 852] (Southland), franchisees filed an action alleging fraud related causes of action and a violation of California’s Franchise Investment Law (Corp. Code, § 31000 et seq.). The California Supreme Court held that the Franchise Investment Law cause of action could not be compelled into arbitration despite a contrary agreement between the parties. The court further held this interpretation of the statute did not contravene the FAA. The United States Supreme Court reversed, holding that the California Supreme Court’s interpretation of the Franchise Investment Law “directly conflicts with [section] 2 of the Federal Arbitration Act and violates the Supremacy Clause” because Congress “mandated the enforcement of arbitration agreements.” (Southland, supra, 465 U.S. at p. 10.) Citing the provision of the FAA allowing for revocation of an arbitration agreement “upon ‘grounds as exist at law or in equity for the revocation of any contract,’ ” the United States Supreme Court held that arbitration agreements are not “subject to any additional limitations under state law.” (Id. at p. 11.)

In Perry v. Thomas (1987) 482 U.S. 483 [96 L.Ed.2d 426, 107 S.Ct. 2520], an employee filed an action involving a dispute over commissions on securities sales. The defendants moved to compel arbitration pursuant to the terms of the employment contract. The California trial and appellate courts held that the employee had the right to proceed at law under section 229, which provided that wage collection actions could be maintained without regard to an arbitration agreement. (482 U.S. at pp. 486-488.) The United States Supreme Court reversed, holding that section 229 was preempted by the FAA to the extent the statute required “that litigants be provided a judicial forum for resolving wage disputes” without regard to the contents of an arbitration agreement. (482 U.S. at pp. 490-491.)

Preston v. Ferrer (2008) 552 U.S. 346 [169 L.Ed.2d 917, 128 S.Ct. 978] involved an action by an attorney who rendered services to workers in the entertainment industry. The defendants sought to compel arbitration pursuant to a written agreement. California’s Labor Commissioner asserted jurisdiction to consider whether the agreement violated section 1700 (the California Talent Agencies Act). While the Labor Commissioner considered the validity of the agreement, the trial court denied a petition to compel arbitration, and the California Court of Appeal affirmed. (Preston, at p. 351.) The United States Supreme Court held that section 1700 was preempted by the FAA to the extent it granted the Labor Commissioner, rather than the arbitrator, the power to determine the validity of the arbitration agreement. (Preston, at pp. 353-354.) By submitting to arbitration, the attorney relinquished no right under section 1700, “[b]ut under the contract he signed, he cannot escape resolution of those rights in an arbitral forum.” (Preston, at p. 359.) “When parties agree to arbitrate all questions arising under a contract, the FAA supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.” (Ibid.; see also Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440, 446 [163 L.Ed.2d 1038, 126 S.Ct. 1204] [arbitrator, not the court, decides the legality of a contract provision under the FAA].)

In AT&T, the issue was whether the holding in Discover Bank, supra, 36 Cal.4th 148, deeming class action waivers in consumer contracts of adhesion unenforceable as unconscionable, violated section 2 of the FAA, which “makes agreements to arbitrate ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ ” (AT&T, supra, 563 U.S. at p._[131 S.Ct. at p. 1744].) “The overarching purpose of the FAA ... is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (Id. at p._[131 S.Ct. at p. 1748].) The Discover Bank rule was preempted by the FAA. “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” (Id. at p._[131 S.Ct. at p. 1747].)

Given the consistent line of Supreme Court cases mandating enforcement of arbitration clauses under the FAA, even in the face of California statutory or decisional law requiring court or administrative action rather than arbitration, I cannot join the majority’s conclusion that the arbitration agreement’s waiver of representative PAGA actions is unenforceable. “The point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.” (AT&T, supra, 563 U.S. at p._[131 S.Ct. at p. 1749].) Brown and Ralphs/Kroger agreed to the streamlined procedures of arbitration of all covered employment claims without resort to classwide or representative litigation. That agreement must be enforced under the FAA.

I recognize, but respectfully disagree with the analysis of our colleagues in Division One in Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277 [90 Cal.Rptr.3d 539] (Franco), a case decided prior to the decision in AT&T. Franco held that a provision of an arbitration agreement prohibiting an employee from acting as a private attorney general was invalid because it conflicted with the PAGA’s goal of enforcing the Labor Code through imposition of statutory sanctions and fines under Gentry. (171 Cal.App.4th at pp. 1299-1303.) Application of Franco in this case means the agreement to arbitrate will not be enforced due to state law, which is inconsistent with the above-cited Supreme Court authority. Moreover, there is nothing in the language of the PAGA to preclude a waiver of representative actions in employment agreements. (Cf. Civ. Code, § 1751 [any waiver of the provisions of the Consumers Legal Remedies Act (§ 1750 et seq.) “is contrary to public policy and shall be unenforceable and void”].)

The United States District Court for the Central District of California has recently reached the same result in finding the reasoning of Franco “no longer tenable in light of the Supreme Court’s recent decision in [AT&T]." (Quevedo v. Macy's, Inc, supra, No. CV 09-1522 GAF (MANx), Civ. Minutes at p. 20 (Quevedo).) “The California Court of Appeal’s decision in Franco shows only that a state might reasonably wish to require arbitration agreements to allow for collective PAGA actions. [Citation.] AT&T. . . makes clear, however, that the state cannot impose such a requirement because it would be inconsistent with the FAA. [Citation.]” (Quevedo, supra, Civ. Minutes at p. 21.)

Allowing the arbitration to go forward on Brown’s individual right to statutory penalties for violations of the Labor Code is not necessarily inconsistent with the spirit of the PAGA.² As explained in Arias v. Superior Court (2009) 46 Cal.4th 969 [95 Cal.Rptr.3d 588, 209 P.3d 923], an arbitration award in favor of Brown for penalties under the Labor Code may be asserted as collateral estoppel on behalf of other similarly situated employees in their own actions. (Id. at pp. 985-987.) Viewed in this light, a waiver of representative actions under the PAGA need not defeat the legislative purpose of the act, as other similarly situated employees will be eligible to rely on whatever success Brown attains in arbitration.

Severance

The majority remands the case to the trial court to determine if the waiver of the PAGA representative actions renders the entire arbitration agreement unconscionable, or if that provision can be severed from the remainder of the agreement. The majority leaves open the possibility that one remedy for the invalid PAGA waiver might be to order a representative PAGA claim to arbitration.

First, I disagree that if the PAGA representative waiver is unenforceable, it somehow renders the entire arbitration agreement unconscionable. As a matter of law, the one defect identified by the majority—the preclusion of representative PAGA actions—cannot establish that the entire arbitration agreement in this case is permeated by unconscionability. (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 122 [99 Cal.Rptr.2d 745, 6 P.3d 669].) This singular defect can easily be severed from the arbitration agreement, should it need to go forward in a judicial forum.

Second, I would expressly instruct the trial court not to order arbitration of a representative PAGA claim absent agreement of both parties. The United States Supreme Court has held that parties who have not contracted for class arbitration may not be forced to arbitrate on a classwide basis. (Stolt-Nielsen S. A. v. AnimalFeeds Int'l Corp. (2010) 559 U.S._,_[176 L.Ed.2d 605, 130 S.Ct. 1758, 1774] [party may not be compelled to submit to class arbitration absent a contractual agreement to do so].) An agreement to arbitrate does not support the inference of an agreement to arbitrate on a classwide basis. (Id. at p._[130 S.Ct. at p. 1775].) I would apply the same mle to representative actions that are not specifically authorized by an arbitration agreement. Ralphs/Kroger never agreed to arbitration of any issue on a representative basis, and the trial court should not consider compelling arbitration of the PAGA claims on that basis unless expressly agreed to by both parties. (Quevedo, supra, No. CV 09-1522 GAP (MANx), Civ. Minutes at p. 19.)

A petition for a rehearing was denied July 29, 2011, and on July 20, 2011, the opinion was modified to read as printed above. Appellants’ petition for review by the Supreme Court was denied October 19, 2011, S195850. Baxter, J., was of the opinion that the petition should be granted.

1 All statutory references are to the Labor Code unless otherwise indicated.

2 Quevedo, supra, No. CV 09-1522 GAP (MANx), Civil Minutes at page 19 agrees that an individual’s PAGA claim is subject to arbitration.