Franco II: California Court of Appeal Rules Arbitration Clause Unenforceable, Gentry Not Preempted

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A unanimous panel of California’s intermediate appellate court has upheld a trial court ruling that denied the defendant’s petition to compel arbitration. See Franco v. Arakelian Enterprises, Inc., __ Cal. App. 4th __ (Nov. 26, 2012). The decision from the Second Appellate District’s Division One took up whether the U.S. Supreme Court’s AT&T v. Concepcion ruling abrogated Gentry v. Superior Court (42 Cal. 4th 443 (2007)). In contrast to a decision out of Division Two of the Second District from earlier this year, Iskanian v. CLS Transportation (206 Cal. App. 4th 949 (2012)), Franco II holds that it does not.

Franco II involves a class action suit brought by a truck driver for meal and overtime violations, where the defendant employer attempted to compel individual arbitration pursuant to an arbitration clause with a class action waiver in plaintiff’s employment contract. Franco I (Franco v. Athens Disposal Co., Inc., 171 Cal. App. 4th 1277 (2009)) is a pre-Concepcion ruling in the same case, with essentially the same holding as Franco II, notwithstanding the intervening Concepcion decision.

In Gentry, the California Supreme Court held that, in arbitration agreements governing employment, class action waivers may be unenforceable in “some circumstances [where they] . . . would lead to a de facto waiver [of employees’ statutory rights] and would impermissibly interfere with employees’ ability to vindicate [those] rights.” Gentry at 457. In Franco II, the Second District held that Concepcion leaves room for California courts to make individual findings on the validity of waivers, thus limiting the preemption analysis of Concepcion to state rules that would categorically exempt a certain type of contract from arbitration. “We conclude that Gentry remains good law because, as required by Concepcion, it does not establish a categorical rule against class action waivers but, instead, sets forth several factors to be applied on a case-by-case basis to determine whether a class action waiver precludes employees from vindicating their statutory rights.” Franco II, slip op. at 3.

In reaching this holding, the Franco II panel credited the attestations of the plaintiff’s counsel that there was little chance of an attorney taking on the plaintiff’s case as an individual matter, owing to the maximum recovery of just over $10,000 being vastly exceeded by the legal resources necessary to prosecute the individual action. “The United States Supreme Court has recognized the necessity of a class action in cases where, as here, the potential recovery exceeds the cost of litigating a plaintiff‘s claims on an individual basis.” Slip op. at 63.

The Franco II court conducted what might be the California Court of Appeal’s most thorough history of U.S. Supreme Court case law on arbitration, cataloging decisions from 1953 to the present. This history included post-Concepcion developments in courts across the country. Additionally, this court outlined the history of the Vindication of Statutory Rights doctrine, central to the California Supreme Court case Armendariz v. Foundation Health Psychcare Services, Inc. (24 Cal. 4th 83 (2000)) and the U.S. Supreme Court case Green Tree Financial Corp.-Ala. v. Randolph (531 U.S. 79 (2000)). This doctrine permits the invalidation of arbitration agreements where an individual would be unable to effectively vindicate his or her statutory rights in the particular arbitral forum outlined in the arbitration agreement. This doctrine was a central component of the Franco II court’s finding that Gentry had not been overruled, as “Concepcion did not address or question prior Supreme Court cases recognizing that an arbitration agreement may be unenforceable if it prevents a plaintiff from vindicating his or her statutory rights.” Slip op. at 14.

The split between divisions of the Court of Appeal’s Second District will be resolved pursuant to the California Supreme Court’s grant of review of Iskanian on September 19, 2012. While it is probable that the Supreme Court will grant and hold review of Franco II pending its decision in Iskanian, the Court may instead consider Franco II alongside Iskanian. Additionally, the Vindication of Statutory Rights doctrine, as well as other issues addressed in Franco II, will likely be addressed by the U.S. Supreme Court when it reviews the Second Circuit case In re Am. Express Merchants’ Litig. (“Amex III”) later this term.