The life and times of Gentry v. Superior Court

Section 2 of the Federal Arbitration Act provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. Section 2. As the U.S. Supreme Court noted in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006), "Section 2 embodies the national policy favoring arbitration."

Nevertheless, California's courts have been traditionally hostile to the FAA's requirement that "private agreements to arbitrate are enforced according to their terms," barring any state rule that "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of the FAA. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1753, 1773 (2011). Time and time again the state's courts have carved out exceptions to the FAA's enforcement mandate where they perceived it as hostile to important state policies, even though the FAA requires enforcement of the terms of an arbitration agreement and preempts any state rules that stand in the way. And even though the U.S. Supreme Court has repeatedly said that the importance of conflicting state rules doesn't matter, in cases such as Concepcion and Marmet Health Care Center, Inc. v. Brown, 132 S.Ct. 1201 (2012).

Gentry v. Superior Court, 42 Cal. 4th 443 (2007), cert. denied sub nom Circuit City Stores, Inc. v. Gentry, 552 U.S. 1296 (2008), is a perfect example of the state's hostility to federal arbitration policy. In Gentry, the state Supreme Court established a 4-factor test to determine when a waiver of class arbitration in an employment agreement is unenforceable: (1) whether the "potential individual recovery" is "modest"; (2) whether there is a "potential for retaliation against members of the class"; (3) whether "absent members of the class may be ill informed of their rights"; and (4) whether there exist other "real world obstacles to the vindication of class members' rights ... through individual arbitration." In doing so, it summarily rejected any suggestion that such a rule runs afoul of the FAA.

But the past six years have not been kind to Gentry, and the state Supreme Court is now likely poised to reverse itself.

A series of U.S. Supreme Court decisions issued in the past four terms of the court have hacked away at Gentry's underpinnings. In 2010, Stolt-Nielsen S.A. v. AnimalFees Int'l Corp., 559 U.S. 662 (2010), held that vigorous enforcement means not imposing arbitration-unfriendly features, such as class action procedures, unless the parties actually agreed to them. In the next term, Concepcion held that states could not require the parties to agree to class action arbitration as a condition of enforcing an arbitration agreement. In the next, a unanimous court in Marmet Health Care Centers held that state law rules that "prohibit outright the arbitration of a particular type of claim" - in that case, the arbitration of personal injury or wrongful death claims - "the analysis is straightforward: The conflicting rule is displaced by the FAA."

Two years ago, the state Supreme Court followed Gentry's path in Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011), vacated and remanded, 132 S.Ct. 496 (2011), where it held that an employee's right to bring an action for back wages against their employer before an administrative agency was too important to be arbitrated. The U.S. Supreme Court didn't even bother to ask for briefing or oral argument. It summarily took the case and issued a short opinion reversing the California court, telling it to try again. The state Supreme Court held oral argument in April, and we are waiting for a new decision.

In the meantime, Stolt-Nielsen, Concepcion and Marmet Health have lead the state Court of Appeals to question the continuing viability of Gentry, leading to a series of cases holding that the Gentry rule could not be applied in cases governed by the FAA. Those cases are now pending before the state Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, S204032.

At the end of its most recent term, the U.S. Supreme Court delivered Gentry's coup de grace in American Express Co. v. Italian Colors Restaurant, 2013 DJDAR 7944 (2013).

The issue in Italian Colors was whether the courts could create an exception to these principles whenever they believed that the absence of class arbitration procedures prevented "effective vindication" of a statutory right. A merchant brought a class action lawsuit against American Express, alleging that the company violated antitrust laws when it set the fees it charged merchants who accepted its card. The merchant's agreement with American Express required the parties to arbitrate their claims, and the agreement barred class arbitration.

Because the merchant provided evidence that it might cost more in expert witness fees to prove its claim than the claim was worth, the 2nd U.S. Circuit Court of Appeals held that the merchant's agreement prevented a merchant from "effective[ly] vindicat[ing]" its rights under federal antitrust laws, and denied enforcement of the agreement. The Supreme Court granted review, but then returned the case to the 2nd Circuit to reconsider the ruling after Stolt-Nielsen. The 2nd Circuit held fast. Then, the 2nd Circuit took a third look at the case after Concepcion was decided. It still held fast, and the Supreme Court once again intervened.

The Supreme Court said, in effect, the 2nd Circuit should have gotten the hint the first time around. "Truth to tell, our decision in [Concepcion] all but resolves this case. ... We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" The court acknowledged that there might be a narrow "effective vindication" exception to "prevent 'prospective waiver of a party's right to pursue statutory remedies. ... But the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." In other words, the "effective vindication" exception is not a back-door path to imposing class arbitration.

Italian Colors decisively disposes of the Gentry rule, which is built entirely on the (shifting) sands of "effective vindication."