Class Action Lawsuit and Waivers in Employment Arbitration Agreements V. Consumer Arbitration Agreements

Law Talk

Robert Gentry filed a class action suit against his employer, Circuit City, seeking money that was withheld from him for overtime pay. A class action is a lawsuit brought by one or more plaintiffs on behalf of a larger group with similar common interests. Gentry, and other employees, claimed that Circuit City had "illegally misclassified" them as "exempt managerial/executive employees" not entitled to overtime pay. In fact, Gentry claimed that they were entitled to be paid overtime pay for the hours they worked over 8 hours per day and 40 hours per week.

In 1995, while employed at Circuit City, Gentry had received a packet that contained an arbitration agreement. Under the arbitration agreement, the employees agreed to arbitrate employment-related disputes. However, the agreement also contained a class action waiver, which would keep the arbitrator from hearing a class action dispute. The packet also included a form that gave the employee 30 days to opt out of the arbitration agreement. Gentry did not opt out of the agreement.

The Circuit City case decided a narrow issue: whether the class action waiver in the Circuit City arbitration agreement is an unconscionable provision that makes it unenforceable. The court decision stated that the provision was neither procedurally nor substantively unconscionable.

Both substantive and procedural unconscionably are required for an arbitration provision to not be upheld. Substantive unconscionability deals with what the contract clause requires (i.e. the losing party will pay the other side's attorney's fees); procedural unconscionability deals with how the parties reached the agreement (i.e. it was included in a pack of documents to be signed by an employee before he/she was hired). These elements are weighed against each other-a strong showing of one, allows for less evidence of the other. Written arbitration agreements that are strongly in favor of one party are called substantively unconscionable. Further, if these unconscionable provisions are found in contracts of adhesion (also known as "take it or leave it" agreements), where a party has no opportunity to negotiate the terms of the agreement, the arbitration agreement may be not upheld. Contracts of adhesion are usually standardized forms as opposed to one that is drawn up after the parties have talked about what they each want included in the writing.

The court compared the present situation to one, which arose in a case called Discover Bank v. Superior Court (a 2005 California Supreme Court case). In that case, the court said that class action waivers in consumer contracts of adhesion are unenforceable because they are both procedurally and substantively unconscionable. The class action waiver in the bank's cardholder agreement was mailed as an amendment to the cardholder in a "bill stuffer" - something the average cardholder does not usually read. Further, short of closing the account, there was no opportunity for the cardholder to opt out of the amendment.

Class action waivers are unenforceable when (1) they are found in consumer contracts of adhesion ("take-it-or-leave-it" type contracts); (2) where disputes are usually for small amounts of money; and (3) when the party with superior bargaining power has been engaged in a scheme of cheating a large number of consumers out of small amounts of money for each individual. In the Circuit City case, Gentry could potentially have won substantial damages and penalties on his claim alone. This clearly would not be classified as "small amounts of money."

In the employment context, pre-employment arbitration agreements are found to be adhesive when the agreement is made a condition to employment. Here, the Circuit City employees were provided with the advantages and disadvantages of arbitration. They were then given an opportunity to opt out of the agreement by mailing in a form within 30 days. Signing the arbitration agreement was not made a condition of Gentry's employment. It is because of this opt out provision that the agreement was not found to be procedurally unconscionable.

In the end, not only did Gentry lose his appeal, but he was also ordered to pay Circuit City the costs of the proceeding.