U.S. Supreme Court Overturns California Law on Arbitration Agreements

Second Quarter 2011Newsletters California Update Employment Law

California courts have been on a march in recent years, striking down arbitration agreements on the ground that they are “unconscionable.” That march has just come to a halt.

In AT&T Mobility v. Concepcion, the U.S. Supreme Court held that a class action waiver in an arbitration agreement is enforceable in the consumer context, and ruled that, as a matter of pre-emptive federal law, arbitration agreements must be enforced “according to their terms.” The case overruled a case decided by the California state Supreme Court, Discover Bank v. Superior Court (2005), which held that a similar arbitration provision was “unconscionable” and unenforceable. Other California cases that relied on Discover Bank have likely also been overruled.

In another case, Gentry v. Superior Court (2007), the California Supreme Court effectively held that class action waivers in the employment context were not enforceable based on the Discover Bank case. The court in Gentry held that agreements that prohibited class-wide arbitration are “unconscionable under California law.” But now, the U.S. Supreme Court has overruled Discover Bank, on which Gentry explicitly relied. Gentry has therefore been implicitly reversed. Given the decision in the AT&T Mobility case, a court will now be hard-pressed to deny the enforceability of class action waivers in the employment context. At least one superior court judge agrees and found Gentry overruled. As a result, employers may compel cases to individual arbitration and avoid class litigation. Based on AT&T Mobility, employers should:

  • Consider implementing class action waivers in arbitration agreements for all new employees
  • Consider implementing class action waivers for existing employees during updates of other company policies, performance evaluations, or with additional consideration
  • Attempt to decertify any pending class action and move to compel individual arbitration, in the event that the plaintiffs have arbitration agreements with class action waivers