Court of Appeal Steps Around Concepcion

So, you may have heard (over and over again), the U.S. Supreme Court in AT&T Mobility Services v. Concepcion (discussed here, article here)  decided that California cannot hold arbitration agreements unconscionable because they require only individuals to arbitrate and prohibit class actions in arbitration.

The first Court of Appeal to address post-Concepcion arbitration agreements is in Brown v. Ralphs Grocery.   A wage-hour class action, the plaintiffs also sought relief under California's Private Attorney General Act, or PAGA, which allows recovery of penalties on behalf of the named plaintiff and other, unnamed, aggrieved employees.  The penalty money is split 75/25 with the state.  See generally Labor Code Section 2699.

The trial court held that the class action waiver in Ralphs arbitration agreement was unconscionable, following the California Supreme Court's decision in Gentry v. Superior Court.  But the U.S. Supreme Court invalidated Gentry in the Concepcion case.

The Court of Appeal neatly side-stepped that little problem. Instead, the court held that the plaintiff failed to establish via "substantial evidence" that the class action waiver was indeed unconscionable under Gentry.

In doing so, the Court established that class action waivers are not automatically unconscionable under Gentry, and that the plaintiff had to produce evidence satisfying Gentry's four-factor test. Of course, this is all moot, because Gentry is not good law.

The Court's second task was to consider whether the PAGA claim-waiver in the arbitration agreement was unconscionable.  Here, the Court decided Concepcion did not apply. That is because, the court reasoned, a PAGA claim is asserted by the individual, not a "class."  Without a class, Concepcion would not apply - directly.   Rather, the plaintiff would go to arbitration and litigate the PAGA claim. If successful, the plaintiff would distribute the "bounty" of the penalties to the state and keep 25% for him or herself. Given there was a waiver of PAGA claims in the arbitration agreement, though, the court said that the agreement prohibiting arbitration of PAGA claims was unconscionable.

The decision may not survive on the books if the Supreme Court (California or US) decides to accept review.  On review, it will be interesting to see if, following Concepcion, the parties to an arbitration agreement may carve-out claims that can and cannot be arbitrated.  In this instance, the question would be who would be authorized to pursue a PAGA claim if every employee signed an arbitration agreement.  If the PAGA waiver is enforceable, the result might be no one. That's something that the courts might find troubling.  

The plaintiff's bar is cheering this Brown decision as an end-run around Concepcion. But everyone should keep the corks in the champagne. There are other legal battles left to fight.  For example, is it ok for the parties to let the arbitrator decide whether an arbitration clause is unconscionable, and avoid some courts' rather anti-arbitration posture regarding employment arbitration agreements. (There, I said it).   The California courts have not yet definitively decided this issue just yet:

We note that in general, the question whether an arbitration agreement is unconscionable or contrary to public policy is for the court, not the arbitrator, to decide. [Citation.] Recently, the Supreme Court held, in a case brought in federal court, that the question of unconscionability of an arbitration agreement may be for the arbitrator to decide when the agreement has clearly and unmistakably delegated that issue to the arbitrator. (Rent-A-Center[, supra,] 561 U.S. , [177 L.Ed.2d 403, 130 S.Ct. 2772, 2778–2779].) Sonic[-Calabasas A, Inc.] has not contended that the arbitration agreement delegates responsibility to the arbitrator to decide questions of the agreement's unconscionability or violation of public policy. We thus have no need to decide whether Rent-A-Center's five-to-four decision applies to actions brought in state court (see Preston [v. Ferrer (2008)] 552 U.S. 346, 363 [169 L.Ed.2d 917, 128 S.Ct. 978] (dis. opn. of Thomas, J.) [reaffirming the view of Justice Thomas that the FAA does not apply to state court proceedings]), nor whether we would adopt a similar rule as a matter of state law.”
Hartley v. Superior Court, 2011 Cal. App. LEXIS 824 (Cal. App. 4th Dist. June 28, 2011) (quoting (Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659, 688, fn. 12).

The fat lady is not singing, but she is kind of confused. Time will tell!  In the meantime, wait to see if Brown remains good law. If it does, don't include PAGA waivers in your arbitration agreements.  And talk to your lawyer about including clear and unmistakable language in your arbitration agreement concerning whether the court or the arbitrator will decide unconscionability.

The opinion in Brown v. Ralphs Grocery is here.