Brown v. Ralphs Grocery Co.

197 Cal.App.4th 489

128 Cal.Rptr.3d 854

18 Wage & Hour Cas.2d (BNA) 1812

11 Cal. Daily Op. Serv. 8765

2011 Daily Journal D.A.R. 10,523

Terri BROWN, Plaintiff and Respondent,

v.RALPHS GROCERY COMPANY et al., Defendants and Appellants.

No. B222689.

Court of Appeal, Second District, Division 5, California.

July 12, 2011.

As Modified July 20, 2011.

Rehearing Denied July 29, 2011.

Review Denied Oct. 19, 2011.^*

Reed Smith, Los Angeles, Linda S. Husar, and Steven B. Katz for Defendants and Appellants.

Initiative Legal Group, Los Angeles, Gene Williams, Mark P. Pifko, and Arnab Banerjee for Plaintiff and Respondent.

Spiro Moss, H. Scott Leviant, Santa Barbara, Dennis F. Moss, Los Angeles, Gregory N. Karasik, J. Mark Moore; Arbogast & Berns and David M. Arbogast, Los Angeles, for Amicus Curiae Consumer Attorneys of California.

MOSK, J.

INTRODUCTION

Plaintiff and respondent Terri Brown (plaintiff) brought a class action and representative action under the Private Attorney General Act of 2004 (the PAGA) ¹ against her employers, defendants and appellants Ralphs Grocery Company and The Kroger Co. (defendants), for alleged violations of the Labor Code. Defendants appeal from the trial court's order denying their petition to compel plaintiff to submit her individual causes of action to arbitration as required under her employment agreement.

We hold that the trial court erred in ruling that under Gentry v. Superior Court (2007) 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556( Gentry ), the class action waiver provision ² in plaintiff's employment agreement was unenforceable because that ruling was not supported by substantial evidence. We also hold that the recent decision of the United States Supreme Court in AT & T Mobility LLC v. Concepcion et ux. (2011) ––– U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 ( AT & T ), holding that California decisional law invalidating class action waivers in consumer arbitration agreements is preempted by the Federal Arbitration Act ( 9 U.S.C. § 1 et seq. (FAA)), does not apply to representative actions under the PAGA, and thus the trial court correctly ruled that the waiver of plaintiff's right to pursue a representative action under the PAGA was not enforceable under California law. We remand the case for the trial court to determine whether to sever the unenforceable provision in the arbitration agreement waiving plaintiff's right to pursue a PAGA representative action or whether to refuse to enforce the entire arbitration agreement or parts thereof.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff filed a complaint asserting as a class action four Labor Code violations and a violation of Business and Professions Code section 17200, et seq. based on the alleged Labor Code violations. Plaintiff also alleged that she had satisfied all the administrative prerequisites to pursuing a representative action under the PAGA and sought civil penalties pursuant to that statute.

Defendants responded to the complaint by filing a petition to compel arbitration. The petition was supported by a copy of plaintiff's employment application, which included an acknowledgement of and agreement to defendants' Mediation and Binding Arbitration Policy (arbitration policy). The petition also included a copy of the arbitration policy that was incorporatedby reference in the employment application. The arbitration policy provided that, except for excluded disputes,³ “[t]his Arbitration Policy applies to any and all employment-related disputes that exist or arise between Employees and Ralphs [Grocery Company] (or any of them) that would constitute cognizable claims or causes of action in a federal, state or local court or agency under applicable federal, state or local laws (referred to in this Arbitration Policy as ‘Covered Disputes').” The arbitration policy further provided that “there is no right or authority for any Covered Disputes 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, of other Ralphs [Grocery Company] employees (or any of them), or of other persons alleged to be similarly situated.... [T]here are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy.”

Plaintiff opposed the petition to compel arbitration, arguing that the class action waiver provision was “unconscionable” under Gentry, supra, 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556; that the waiver of plaintiff's right to pursue a representative action for civil penalties under the PAGA was also unenforceable; and that the presence of those two unconscionable provisions in the arbitration agreement made that agreement unenforceable in its entirety. Plaintiff supported her opposition with a declaration from her attorney stating that plaintiff had been employed by defendants as a security guard since 2005, had filed a class action alleging certain Labor Code violations, and had also asserted a representative action under the PAGA. Plaintiff's attorney further stated that defendants had filed a petition to compel arbitration and that a copy of the arbitration agreement upon which the petition was based was attached to the declaration as an exhibit. Defendants argued in reply that plaintiff had failed to carry her evidentiary burden under the four-factor test established in Gentry for invalidating a class action waiver provision, that plaintiff's arguments based on Gentry were preempted under the FAA, and that plaintiff's arguments under the PAGA and Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, 90 Cal.Rptr.3d 539( Franco ) were incorrect.

The trial court determined that the arbitration provision was procedurally unconscionable and, because of the invalidity of the class action and the PAGA waivers, substantively unconscionable. The trial court said, “the arbitration provision impermissibly requires a waiver of class action[s] and representative actions under [the PAGA] rendering the agreement unconscionable and unenforceable. Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277 [90 Cal.Rptr.3d 539].”

Plaintiff filed a timely notice of appeal. After the submission of the case, the United States Supreme Court decided AT & T, supra, 131 S.Ct. 1740. By a five to four majority, the court held that the California Supreme Court's rule in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100( Discover Bank )—that class action waivers in consumer arbitration agreements may be unenforceable or unconscionable—is preempted by the FAA. Upon our request, the parties submitted additional briefing on the applicability and effect of the AT & T decision.

DISCUSSION

A. Evidentiary Burden Under Gentry

Defendants contend that plaintiff had the evidentiary burden to establish the four factors required under Gentry, supra, 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556 to invalidate a class action waiver provision, but failed to do so. Plaintiff counters that Gentry does not require an evidentiary showing and that the trial court adequately considered the Gentry factors in making its decision to invalidate the class action waiver in an employment case.

In Gentry, supra, 42 Cal.4th 443, 64 Cal.Rptr.3d 773, 165 P.3d 556, the court held as follows: “[W]hen 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 contains 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' rights 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 invalidate the class action waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’ ( Little [ v. Auto Stiegler, Inc. (2003) ] 29 Cal.4th [1064,] 1077 [130 Cal.Rptr.2d 892, 63 P.3d 979].) (Footnote omitted.) The kind of inquiry a trial court must make is similar to the one it already makes to determine 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. [ (2000) ] 23 Cal.4th [429,] 435 [97 Cal.Rptr.2d 179, 2 P.3d 27].) Class arbitration must still also meet the ‘community of interest’ requirement 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 [ v. Superior Court (2004) ] 34 Cal.4th [319,] 326 [17 Cal.Rptr.3d 906, 96 P.3d 194].)” ( Id. at pp. 463–464, 64 Cal.Rptr.3d 773, 165 P.3d 556.) The court in Gentry went on to state expressly that “such [class action] waivers will only be invalidated after the proper factual showing, as discussed above.” ( Id. at p. 466, 64 Cal.Rptr.3d 773, 165 P.3d 556, italics added.)

“ ‘ “ ‘Whether an arbitration agreement applies to a controversy is a question of law to which the appellate court applies its independent judgment where no conflicting extrinsic evidence in aid of interpretation was introduced in the trial court....