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August 29, 2011

Does Concepcion Mean the Death of Gentry?


Some have argued that AT&T should not affect Gentry because it involved a consumer contract and not an employment agreement. However, the Supreme Court has clearly stated that arbitration agreements governing employment disputes are fully enforceable under the FAA, and the Court's analysis in AT&T focused heavily on the FAA and not the kind of agreement in issue. There should accordingly be no question that AT&T applies to employment arbitration agreements of the kind at issue in Gentry.

Some have also argued that class waivers are inconsistent with the National Labor Relations Act, 29 U.S.C. Section 151 et seq., and cannot be enforced because they interfere with employees' protected and concerted activities of banding together for the purpose of seeking to improve wages, hours and working conditions that are protected by Section 7 of that statute. They base this argument on past decisions of the National Labor Relations Board, which found violations of the statute when employers engaged in discriminatory or retaliatory conduct toward employees who filed class action suits. But assuming that an employer does not engage in any such unlawful conduct and simply seeks to enforce a class action waiver in its arbitration agreement, the Office of the NLRB General Counsel has acknowledged that there is nothing in that law that in any way prohibits the inclusion of a class action waiver in an employment arbitration contract, and that an attempt to enforce such a waiver is not unlawful under that statute.

Recently, in Brown v. Ralph's Grocery Co., 2011 DJDAR 10963 (2nd Dist. July 7, 2011) a state appellate court stated that it did not have to determine whether the "rule in Gentry concerning the validity of class action waivers" is preempted by the FAA by reason of the AT&T decision, because the plaintiff had failed to make the required showing under Gentry in opposing a petition to compel arbitration. The court nevertheless stated while Discover Bank was a case about unconscionabilty, the "rule set forth in Gentry is concerned with the effect of a class action waiver on unwaivable rights regardless of unconscionability" - thereby suggesting (without in any way deciding) that it believed Gentry may have survived AT&T.

But this appears to just have been a means of attempting to avoid the inescapable effect of the Supreme Court's broad-based decision in AT&T, which clearly subjects any state-law policy reasons which preclude the enforcement of arbitration agreements as written to a strict preemption analysis. The ultimate fate of Gentry was indeed foreshadowed by Justice Sandy Kriegler's well-reasoned dissent in the Brown court's 2-1 decision, in which he opined that "Gentry's continuing vitality is in doubt" after AT&T.

In this regard, the fact that Gentry may have involved factors unrelated to the Discover Bank "unconscionability" test should make little difference to the U.S. Supreme Court's preemption analysis. This follows because Gentry consists of a set of rules - applied strictly to arbitration agreements - that directly interfere with the contractual arrangement made by two parties to arbitrate their disputes on an individual and not a class-wide basis. If anything, Gentry should actually be considered even more easily subject to preemption than Discover Bank, given the fact that the latter case was founded on the "unconscionability" defense which is generally applicable to all contracts. Indeed, it was Discovery Bank's "application of a more general [unconscionability] principle" that the four dissenting justices relied on in their opinion in AT&T - thereby raising serious questions as to whether they would similarly vote to save Gentry.

Several district courts have in fact already ruled that AT&T pre-empts Gentry. Plaintiffs' counsel will nevertheless surely continue to argue that Gentry remains good law until the U.S. Supreme Court addresses the question or the state high court overrules it. But the substantive law of the FAA applies to proceedings in both state and federal courts, and the federal law developed under that statute governs the issue or arbitrability in both forums.

In addition, a powerful argument exists that AT&T already did address the question of the enforceability of class action waivers in California, and therefore effectively overruled Gentry. Because AT&T and Stolt-Nielsen are binding and precedent-setting decisions applying the FAA, which the state courts are also bound to follow, the state trial and appellate courts should not be able to simply ignore them in deciding whether to enforce arbitration agreements governed by that statute.

Gentry therefore is indeed (or at least should be) "dead" after AT&T, and should be given a speedy burial before both this state's individuals and corporate citizens are required to spend millions of dollars more in legal fees before the courts ultimately arrive at this fairly obvious conclusion.

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