Court of Appeal Holds Employers Cannot Be Compelled To Arbitrate On A Class Basis If The Arbitration Agreement Limits Arbitration To Arbitration Of Disputes Between The Employer And The Employee Individually

Yesterday, the California Court of Appeal, Second Appellate District, Division Three, issued its decision in Kinecta Alternative Financial Solutions, Inc. v. Malone, published in part and unpublished in part, in which the Court held employers cannot be compelled to arbitrate class action claims if the employment arbitration agreement between the employee and the employer expressly limits arbitration of disputes as to those between the individual employee and the employer.

When Kinecta hired plaintiff Malone, Malone signed a “Comprehensive Agreement Employment At-Will and Arbitration” agreement which stated that Kinecta and Malone would arbitrate disputes arising out of Malone’s employment. On November 2, 2010, Malone filed a wage and hour class action lawsuit against Kinecta on behalf of herself and all other employees similarly situated. Kinecta filed a motion to compel arbitration of Malone’s claims and to dismiss the class claims. The trial court denied Kinecta’s motion to dismiss the class claims but ordered Kinecta and Malone to arbitrate all claims in the lawsuit. Kinecta appealed the trial court’s order and requested dismissal of the class claims from the complaint.

The Court of Appeal observed that by granting Kinecta’s motion to compel arbitration but denying its motion to dismiss the class claims, the trial court imposed class arbitration, even though the arbitration agreement was silent on the issue of class arbitration and limited arbitration to disputes between Malone and Kinecta. The Court addressed the issue whether a party to an arbitration agreement which neither authorizes nor prohibits class arbitration can be compelled to arbitrate class claims.

The Court held the outcome was governed by the United States Supreme Court case Stolt-Nielsen v. Animalfeeds International Corp. (2010) 130 S.C.t 1758, which holds that under the Federal Arbitration Act, a party may not be compelled to submit to class arbitration unless the arbitration agreement provides a basis for concluding the party agreed to do so.

Malone relied on the California Supreme Court’s decision in Gentry v. Superior Court, (2007) 42 Cal.4th 443. Gentry held that even where an employment arbitration agreement expressly waives class arbitration the trial court can invalidate the class arbitration waiver if the trial court finds, based on several factors, that: (1) a class arbitration is likely to be a significantly more effective practical means of vindicating the employees’ rights than individual litigation or arbitration, and (2) disallowance of the class action would likely lead to a less comprehensive enforcement of overtime laws for employees affected by the employer’s alleged violations.

The Court of Appeal acknowledged that a question exists as to whether the holding in Gentry is still valid because Gentry rejected an argument that a rule invalidating class arbitration waivers violated the Federal Arbitration Act (“FAA”), relying on Discover Bank v. Superior Court, (2005) 36 Cal.4th 148, which was overruled by the United States Supreme Court in AT&T v. Concepcion (2011) 131 S.Ct. 1740. But the Court determined that Gentry established a different test that Discover Bank to determine whether to enforce a class arbitration waiver, and because Gentry has not to date been expressly overruled, held that Gentry is still binding law in California.

Nonetheless, the Court determined that Gentry did not help Malone because the Court found that Malone failed to establish the two elements necessary to invalidate the arbitration agreement. Instead, the Court found that the arbitration agreement expressly limited arbitration to the arbitration of disputes between Malone and Kinecta and made no reference to, and did not authorize, class arbitration of disputes. Thus, the Court reversed the trial court’s order denying Kinecta’s motion to dismiss the class claims.

This case provides another strong reason for employer’s to consider using arbitration agreements. While not one-size-fits-all, and not without some downside, arbitration agreements can provide a means for employers to limit their exposure in the ever threatening wage and hour class action litigation. Employers are encouraged to discuss the pros and cons of arbitration agreements to determine whether they are a viable option for them.

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