Employment Arbitration Programs

'Accordingly, courts almost unanimously enforce the use of fair, mandatory arbitration programs to resolve individual workplace disputes between employers and employees. See, e.g., Quilloin v. Tenet Health Sys. Phila., 673 F.3d 221, 237 (3d Cir. 2012) (reversing district court's denial of the motion to compel arbitration, and directing arbitration under federal and Pennsylvania law). The FAA instructs courts to refer to principles of applicable state law when determining the existence and scope of an agreement to arbitrate. Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir. 2005).

'Although the standard varies slightly from state to state, arbitration agreements are generally enforceable as long as: 1) a dispute exists; 2) the parties have a written agreement to arbitrate; and 3) the dispute is covered by the scope of the arbitration agreement. Trippe, 401 F.3d at 532; Opalinski v. Robert Half Intern., Inc., No. 10-2069, 2011 WL 4729009, *8 (D.N.J. Oct. 6, 2011) (granting motion to compel arbitration of employee's FLSA claim). Arbitration agreements are on “an equal footing with other contracts,” and therefore must be enforced according to their own terms. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011); see also DuBois v. Macy's East Inc., 338 F. App'x 32, 33 (2d Cir. 2009).

'Despite the general amenability of the courts to arbitration agreements, there are a number of fundamental requirements with which an arbitration agreement must comply in order to be enforceable. Among these are:

'Arbitration Programs May Not Deprive Employees of Substantive Rights. An agreement to arbitrate will not be enforced if it “alter[s] or limit[s] the rights and remedies available to [a] party in the arbitral forum ' ” Quilloin v. Tenet Health Sys. Phila., 673 F.3d 221, 230 (3d Cir. 2012) (quoting Edwards v. HOVENSA, LLC, 497 F.3d 355, 364 (3d Cir. 2007)). With respect to statutory claims, this means that an arbitration program must preserve an employee's right to recover all types and amounts of damages, including punitive damages, that would be available in a judicial action. See Gilmer, 500 U.S. at 26 (noting that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.”) (internal quotation omitted); see also Booker v. Robert Half Int'l Inc., 413 F.3d 77, 83 (D.C.Cir. 2005) (finding arbitration provision barring punitive damages unenforceable in civil rights action where District of Columbia law provided for such damages); Hadnot v. Bay, Ltd., 344 F.3d 474, 478 & n. 14 (5th Cir. 2003) (arbitration agreements bar on punitive damages unenforceable in Title VII case). Similarly, provisions requiring parties to be responsible for their own expenses, including attorneys' fees, are generally unconscionable because restrictions on attorneys' fees conflict with federal statutes providing for fee-shifting as a remedy. See The Hall v. Treasure Bay Virgin Islands Corp., 371 F. App'x 311, 312 (3d Cir. 2010); Spinetti v. Serv. Corp. Int'l, 324 F.3d 212, 216 (3d Cir. 2003).

'Procedural Requirements Must Be Reasonable. While employers may require that employees utilize an internal complaint process before initiating arbitration, and may establish time limits for such steps, time limitations in arbitration agreements are substantively unconscionable if they are clearly unreasonable and unduly favorable to the employer. See Pyo v. Wicked Fashions, Inc., CIV09-2422 (DRD), 2010 WL 1380982, *9 (D.N.J. Mar. 31, 2010) (upholding process that afforded employee one year statute of limitations period to complete internal process).

'Sufficient Discovery Procedures Must Be Available. Courts have further concluded that, consistent with arbitration's goals of “simplicity, informality, and expedition,” employers may adopt arbitration procedures that limit the availability of discovery. See Gilmer, 500 U.S. at 31. However, the opportunity for discovery sufficient to vindicate the employee's rights must be available. Accordingly, while the discovery methods in arbitration need not be as extensive as are available in court proceedings, employees must still be afforded “a fair opportunity to present their claims.” Id.; accord Lucey v. FedEx Ground Package Systems, Inc., No. 06-3738, 2007 WL 3052997, *12 (D.N.J. Oct. 18, 2007) (rejecting as unconscionable arbitration agreement stating that “[n]either party shall be entitled to written or deposition discovery from the other, except with respect to damages”).

The Defense of Unconscionability

AT&T Mobility LLC v. Concepcion

'The FAA does permit arbitration agreements to be declared unenforceable pursuant to generally applicable contract defenses, which are determined by state law, such as fraud, duress and unconscionability. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011). The question of whether an arbitration agreement is enforceable is decided by a court, rather than an arbitrator, unless this issue has been “clear[ly] and unmistakab[ly]” reserved for the arbitrator. Quilloin, 673 F.3d at 228. While plaintiffs frequently raise unconscionability as a defense to enforcement of arbitration agreements, courts, especially in light of the Supreme Court's decision in Concepcion, have significantly limited the availability of that defense.

In Concepcion, the Court enforced an arbitration provision in a commercial arbitration agreement that contained a class action waiver, despite a California court rule prohibiting class action waivers as unconscionable. 131 S. Ct. at 1753. “The principal purpose of the FAA,” the Court stated, “is to ensure that private arbitration agreements are enforced according to their terms.” Id. at 1748 (internal quotation marks omitted). Accordingly, “[a]lthough the FAA's saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives.” Id. Further, the Court clarified that if a state law singles out arbitration agreements by imposing requirements that do not apply to other contracts, the law is preempted. Id. at 1747-48.

'Application of Concepcion to Federal Statutory Employment Claims

'Most courts have interpreted Concepcion broadly and utilized its rationale to reject claims of unconscionability. Recently, the Fourth Circuit relied on Concepcion in reversing a district court decision that held that an agreement purporting to require an employee to arbitrate FLSA and state law wage claims was unconscionable. Muriithi v. Shuttle Express, Inc., 11-1445, 2013 WL 1287859, 82 (4th Cir. Apr. 1, 2013).

'In Muriithi, the district court refused to compel arbitration based on three provisions in the franchise agreement that the court found unconscionable: 1) a class action waiver; 2) a requirement that the parties “'split' arbitration fees,” and 3) a one-year statute of limitations period for claims arising under the franchise agreement. Id. at *2. The Fourth Circuit vacated and remanded. Id. at *8.

In so doing, the Court of Appeals explained that the Supreme Court's decision in Concepcion, which preempted a state rule requiring the availability of class arbitration, also means that a class action waiver does not render unenforceable an otherwise valid arbitration agreement. Id.at *4. Indeed, the court emphasized that the Supreme Court's ruling in Concepcion was not merely an assertion of federal preemption, but also “plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid agreement under these circumstances.” Id. The Fourth Circuit further concluded that the district court erred when determining the agreement was unconscionable because the claimant had not provided sufficient evidence of the prohibitive costs associated with the fee-shifting provision, or that the statute of limitation was unconscionable. Id. at *5-*7.

Other courts have reached similar conclusions. See, e.g., Quilloin, 673 F.3d at 235 (holding that “contracts cannot be deemed unconscionable 'simply because of a disparity in bargaining power,'” and that “more than a disparity in bargaining power is needed in order to show that an arbitration agreement was not entered into willingly”).

Concepcion and California Law

One holdout against the broad interpretation generally afforded to Concepcion has been the California courts. This is evidenced by recent decisions holding that Concepcion does not invalidate two California Supreme Court cases concerning unconscionable arbitration provisions. See Compton v. Superior Court, 154 Cal. Rptr. 3d 413 (Cal. Ct. App. 2013); Fowler v. CarMax, B238426, 2013 WL 1208111 (Cal. Ct. App. Mar. 26, 2013).

'At issue in Compton and Fowler, respectively, were the California Supreme Court's decisions in Armendariz v. Foundation Health Psychcare Serv., Inc., 6 P.3d 669 (Cal. 2000), and Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007).

'In Armendariz, the California Supreme Court held that mandatory arbitration agreements are unconscionable unless they have a “modicum of bilaterality.” Armendariz, 6 P.3d at 692. In other words, agreements that require employees to arbitrate their claims, but allow the employer access to a judicial form for its claims, are substantively unconscionable under California law. Id. (denying an employer's petition to compel arbitration of sex discrimination claims because the arbitration provision applied only to claims asserted by employees and was therefore unfairly one-sided). Following Concepcion, a number of employers had challenged the continued validity of the modicum of bilaterality rule, but the rule had yet to be overturned at the time of Compton.

The Compton case concerned a property manager for American Management Services who sued the company for failing to pay overtime properly, and sought damages for a state-wide class of other managers. Id. at *1. The employee signed a mandatory arbitration agreement as a condition of employment. Id. The court explained that the arbitration agreement was unconscionably one-sided, in violation of the modicum of bilaterality rule because: 1) the employee was asked to sign the agreement on her first day of work without the benefit of reading the contract or having someone review it; 2) the agreement required arbitration of all the claims the employee was most likely to bring, while retaining for the employer the right to litigate the claims it was most likely to bring; and 3) the agreement imposed a statute of limitations for initiating arbitration that was substantially shorter than the statute of limitation periods for claims covered by the agreement. Id. at 7-*8.

'In Compton, a panel of the California 2nd District Court reversed a trial court's order granting an employer's petition to compel arbitration of an employee's class claims by finding the agreement invalid under the modicum of bilaterality rule. 154 Cal. Rptr. 3d 413, *6 (Cal. App. Dep't Super. Ct. 2013). The Compton court expressly rejected the employer's argument that Concepcion invalidated the modicum of bilaterality rule because the rule singles out arbitration provisions. Id. at *9. The court concluded that Concepcion did not abrogate the modicum of bilaterality rule because Concepcion did not specifically discuss the rule or overrule the line of cases supporting it. Id. at *12.

Accordingly, for now, the modicum of bilaterality rule remains viable under California law, and may be utilized to invalidate purportedly one-sided arbitration agreements. But see Harris v. Green Tree Fin. Corp., 183 F.3d 173, 180 (3d Cir. 1999) (“[P]arties to an arbitration agreement need not equally bind each other with respect to an arbitration agreement if they have provided each other with consideration beyond the promise to arbitrate.”).

It was also unclear whether Gentry v. Superior Court remained good law in the wake of Concepcion, because, like the modicum of bilaterality rule, the decision seemed to treat arbitration agreements differently than other contracts. 165 P.3d 556 (Cal. 2007). In Gentry, the California Supreme Court held that a collective action waiver in an arbitration agreement between an employee and employer would be invalid under circumstances in which such a provision would lead to a de-facto waiver, or interfere with, the employee's ability to enforce overtime laws. Id. at 563.

The Gentry court identified several functional obstacles that an employee faces when attempting to vindicate his or her rights under the wage and hour laws: 1) that individual awards in wage and hour cases tended to be modest and that employees and their attorneys must consider the modest recoveries against the risk of not prevailing and incurring substantial fees; 2) that individual employees bringing wage and hour claims face greater risk of retaliation than class claimants; and 3) that some employees may not be aware of their legal rights, and are therefore only protected by class actions. Id. at 565-66. The court instructed that if, after considering those factors, the trial court concludes “that a class action 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 arbitration waiver to ensure that these employees can 'vindicate [their] unwaivable rights … .'” Id. at 568 (internal citations omitted).

In Fowler, the court reversed a trial court's order granting a motion to compel arbitration of an employee's wage and hour claim, and remanded for consideration as to whether the arbitration agreement was unenforceable under Gentry. B238426, 2013 WL 1208111 (Cal. Ct. App. Mar. 26, 2013). The Fowler court distinguished Gentry from the rule invalidated in Concepcion by noting that the Gentry analysis requires examination of arbitration agreements in the employment context “not for unconsionability, but rather for whether, under the circumstances in the particular case, 'a class ' is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.” Id. at * 7. Because “[t]he Supreme Court did not address a situation in which an employee's unwaivable statutory rights were involved ' Concepcion does not preclude our application of a Gentry analysis.” Id.

Thus, at least for now, Gentry remains good law in California. However, the Supreme Court of California has granted certiorari with respect to the question of whether Gentry remains valid after Concepcion, and Gentry's continued vitality may therefore be short-lived. See Iskanian v. CLS Transp. Los Angeles, LLC, 142 Cal. Rptr.3d 372 (Cal App. Ct. June 4, 2012) (finding that “the Concepcion decision conclusively invalidates the Gentry test”) cert. granted, 286 P.3d 147 (Cal. Sept. 19, 2012).

Class and Collective Action Waivers in the Wake of Concepcion

'As noted above, a properly drafted arbitration agreement will almost always be binding upon an employee who seeks to assert individual employment claims, including discrimination claims, absent a finding that the agreement is unconscionable. However, there is some uncertainty about the enforceability of a mandatory arbitration programs that preclude employees from bringing class claims (i.e., by including a provision that arbitration may only proceed on an individual basis), although this uncertainty may be dissipating.

Employees frequently argue that arbitration agreements containing class or collective waiver provisions are inconsistent with the protections afforded by state or federal laws. See, e.g., Concepcion, 131 S. Ct. at 1744; Quilloin, 673 F.3d at 232; Litman v. Cellco Partnership, 655 F. 3d 225, 230 (3d Cir. 2011). Subsequent to Concepcion, however, many courts ' including the Third Circuit ' have invalidated state laws that prohibit class action waivers as preempted by the FAA and enforced arbitration agreements with collective waiver agreements. See, e.g., Litman, 655 F. 3d at 231 (“We understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration is desirable for unrelated reasons.”); Quilloin, 673 F.3d at 233 (“The Pennsylvania law at issue here is clearly preempted under Concepcion and Litman“); Green v. SuperShuttle Intern., Inc., 653 F. 3d 766, 769 (8th Cir. 2011) (affirming grant of motion to compel arbitration pursuant to franchise agreement, finding drivers' claim that district court violated Minnesota law by enforcing class action waiver was preempted).

Conclusion

In next month's issue, we continue this discussion with a look at class waivers, the FLSA, and the D.R. Horton decision.

Alan D. Berkowitz is a Partner at Dechert LLP and chair of its labor and employment practice, resident in the firm's Philadelphia office. Designated by Chambers USA as a top labor and employment attorney since 2003, he represents employers in a wide range of employment litigation. J. Ian Downes is Counsel, and Jennifer L. Burdick is an Associate in the same office.

'

'

The enforcement of arbitration agreements in employment and other contexts has been a source of continuing litigation. Most recently, many of these cases have focused on whether arbitration agreements may be used to preclude class or collective action litigation. The clear trend in these cases has been to uphold class and collective action waivers. As a result, many employers have begun to revisit the question of whether they should adopt mandatory arbitration programs. This article explores recent developments in the arbitration context, particularly those involving class or collective action issues, and highlights a number of significant unsettled issues that may soon be decided.

'Enforceability of Arbitration Agreements Generally

'The Federal Arbitration Act (FAA) states 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. ' 2. The Supreme Court has long held that the FAA permits mandatory arbitration of statutory claims, including employment discrimination claims. See Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 26 (1991) (requiring arbitration of ADEA claims). Arbitration will be precluded only where “Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” Id . at 26 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. , 473 U.S. 614, 628 (1985)).

'Accordingly, courts almost unanimously enforce the use of fair, mandatory arbitration programs to resolve individual workplace disputes between employers and employees. See, e.g., Quilloin v. Tenet Health Sys. Phila. , 673 F.3d 221, 237 (3d Cir. 2012) (reversing district court's denial of the motion to compel arbitration, and directing arbitration under federal and Pennsylvania law). The FAA instructs courts to refer to principles of applicable state law when determining the existence and scope of an agreement to arbitrate. Trippe Mfg. Co. v. Niles Audio Corp. , 401 F.3d 529, 532 (3d Cir. 2005).

'Although the standard varies slightly from state to state, arbitration agreements are generally enforceable as long as: 1) a dispute exists; 2) the parties have a written agreement to arbitrate; and 3) the dispute is covered by the scope of the arbitration agreement. Trippe, 401 F.3d at 532; Opalinski v. Robert Half Intern., Inc., No. 10-2069, 2011 WL 4729009, *8 (D.N.J. Oct. 6, 2011) (granting motion to compel arbitration of employee's FLSA claim). Arbitration agreements are on “an equal footing with other contracts,” and therefore must be enforced according to their own terms. AT&T Mobility LLC v. Concepcion , 131 S. Ct. 1740, 1745 (2011); see also DuBois v. Macy's East Inc. , 338 F. App'x 32, 33 (2d Cir. 2009).

'Despite the general amenability of the courts to arbitration agreements, there are a number of fundamental requirements with which an arbitration agreement must comply in order to be enforceable. Among these are:

'Arbitration Programs May Not Deprive Employees of Substantive Rights. An agreement to arbitrate will not be enforced if it “alter[s] or limit[s] the rights and remedies available to [a] party in the arbitral forum ' ” Quilloin v. Tenet Health Sys. Phila. , 673 F.3d 221, 230 (3d Cir. 2012) (quoting Edwards v. HOVENSA, LLC , 497 F.3d 355, 364 (3d Cir. 2007)). With respect to statutory claims, this means that an arbitration program must preserve an employee's right to recover all types and amounts of damages, including punitive damages, that would be available in a judicial action. See Gilmer , 500 U.S. at 26 (noting that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.”) (internal quotation omitted); see also Booker v. Robert Half Int'l Inc. , 413 F.3d 77, 83 (D.C.Cir. 2005) (finding arbitration provision barring punitive damages unenforceable in civil rights action where District of Columbia law provided for such damages); Hadnot v. Bay, Ltd. , 344 F.3d 474, 478 & n. 14 (5th Cir. 2003) (arbitration agreements bar on punitive damages unenforceable in Title VII case). Similarly, provisions requiring parties to be responsible for their own expenses, including attorneys' fees, are generally unconscionable because restrictions on attorneys' fees conflict with federal statutes providing for fee-shifting as a remedy. See The Hall v. Treasure Bay Virgin Islands Corp. , 371 F. App'x 311, 312 (3d Cir. 2010); Spinetti v. Serv. Corp. Int ' l , 324 F.3d 212, 216 (3d Cir. 2003).

'Procedural Requirements Must Be Reasonable. While employers may require that employees utilize an internal complaint process before initiating arbitration, and may establish time limits for such steps, time limitations in arbitration agreements are substantively unconscionable if they are clearly unreasonable and unduly favorable to the employer. See Pyo v. Wicked Fashions, Inc., CIV09-2422 (DRD), 2010 WL 1380982, *9 (D.N.J. Mar. 31, 2010) (upholding process that afforded employee one year statute of limitations period to complete internal process).

'Sufficient Discovery Procedures Must Be Available. Courts have further concluded that, consistent with arbitration's goals of “simplicity, informality, and expedition,” employers may adopt arbitration procedures that limit the availability of discovery. See Gilmer, 500 U.S. at 31. However, the opportunity for discovery sufficient to vindicate the employee's rights must be available. Accordingly, while the discovery methods in arbitration need not be as extensive as are available in court proceedings, employees must still be afforded “a fair opportunity to present their claims.” Id.; accord Lucey v. FedEx Ground Package Systems, Inc., No. 06-3738, 2007 WL 3052997, *12 (D.N.J. Oct. 18, 2007) (rejecting as unconscionable arbitration agreement stating that “[n]either party shall be entitled to written or deposition discovery from the other, except with respect to damages”).

The Defense of Unconscionability

AT&T Mobility LLC v. Concepcion

'The FAA does permit arbitration agreements to be declared unenforceable pursuant to generally applicable contract defenses, which are determined by state law, such as fraud, duress and unconscionability. AT&T Mobility LLC v. Concepcion , 131 S. Ct. 1740, 1746 (2011). The question of whether an arbitration agreement is enforceable is decided by a court, rather than an arbitrator, unless this issue has been “clear[ly] and unmistakab[ly]” reserved for the arbitrator. Quilloin, 673 F.3d at 228. While plaintiffs frequently raise unconscionability as a defense to enforcement of arbitration agreements, courts, especially in light of the Supreme Court's decision in Concepcion, have significantly limited the availability of that defense.

In Concepcion, the Court enforced an arbitration provision in a commercial arbitration agreement that contained a class action waiver, despite a California court rule prohibiting class action waivers as unconscionable. 131 S. Ct. at 1753. “The principal purpose of the FAA,” the Court stated, “is to ensure that private arbitration agreements are enforced according to their terms.” Id. at 1748 (internal quotation marks omitted). Accordingly, “[a]lthough the FAA's saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives.” Id. Further, the Court clarified that if a state law singles out arbitration agreements by imposing requirements that do not apply to other contracts, the law is preempted. Id. at 1747-48.

'Application of Concepcion to Federal Statutory Employment Claims

'Most courts have interpreted Concepcion broadly and utilized its rationale to reject claims of unconscionability. Recently, the Fourth Circuit relied on Concepcion in reversing a district court decision that held that an agreement purporting to require an employee to arbitrate FLSA and state law wage claims was unconscionable. Muriithi v. Shuttle Express, Inc., 11-1445, 2013 WL 1287859, 82 (4th Cir. Apr. 1, 2013).

'In Muriithi, the district court refused to compel arbitration based on three provisions in the franchise agreement that the court found unconscionable: 1) a class action waiver; 2) a requirement that the parties “'split' arbitration fees,” and 3) a one-year statute of limitations period for claims arising under the franchise agreement. Id. at *2. The Fourth Circuit vacated and remanded. Id. at *8.

In so doing, the Court of Appeals explained that the Supreme Court's decision in Concepcion, which preempted a state rule requiring the availability of class arbitration, also means that a class action waiver does not render unenforceable an otherwise valid arbitration agreement. Id.at *4. Indeed, the court emphasized that the Supreme Court's ruling in Concepcion was not merely an assertion of federal preemption, but also “plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid agreement under these circumstances.” Id. The Fourth Circuit further concluded that the district court erred when determining the agreement was unconscionable because the claimant had not provided sufficient evidence of the prohibitive costs associated with the fee-shifting provision, or that the statute of limitation was unconscionable. Id. at *5-*7.

Other courts have reached similar conclusions. See, e.g., Quilloin, 673 F.3d at 235 (holding that “contracts cannot be deemed unconscionable 'simply because of a disparity in bargaining power,'” and that “more than a disparity in bargaining power is needed in order to show that an arbitration agreement was not entered into willingly”).

Concepcion and California Law

One holdout against the broad interpretation generally afforded to Concepcion has been the California courts. This is evidenced by recent decisions holding that Concepcion does not invalidate two California Supreme Court cases concerning unconscionable arbitration provisions. See Compton v. Superior Court , 154 Cal. Rptr. 3d 413 (Cal. Ct. App. 2013); Fowler v. CarMax, B238426, 2013 WL 1208111 (Cal. Ct. App. Mar. 26, 2013).

'At issue in Compton and Fowler , respectively, were the California Supreme Court's decisions in Armendariz v. Foundation Health Psychcare Serv., Inc. , 6 P.3d 669 (Cal. 2000), and Gentry v. Superior Court , 165 P.3d 556 (Cal. 2007).

'In Armendariz, the California Supreme Court held that mandatory arbitration agreements are unconscionable unless they have a “modicum of bilaterality.” Armendariz, 6 P.3d at 692. In other words, agreements that require employees to arbitrate their claims, but allow the employer access to a judicial form for its claims, are substantively unconscionable under California law. Id. (denying an employer's petition to compel arbitration of sex discrimination claims because the arbitration provision applied only to claims asserted by employees and was therefore unfairly one-sided). Following Concepcion, a number of employers had challenged the continued validity of the modicum of bilaterality rule, but the rule had yet to be overturned at the time of Compton.

The Compton case concerned a property manager for American Management Services who sued the company for failing to pay overtime properly, and sought damages for a state-wide class of other managers. Id. at *1. The employee signed a mandatory arbitration agreement as a condition of employment. Id. The court explained that the arbitration agreement was unconscionably one-sided, in violation of the modicum of bilaterality rule because: 1) the employee was asked to sign the agreement on her first day of work without the benefit of reading the contract or having someone review it; 2) the agreement required arbitration of all the claims the employee was most likely to bring, while retaining for the employer the right to litigate the claims it was most likely to bring; and 3) the agreement imposed a statute of limitations for initiating arbitration that was substantially shorter than the statute of limitation periods for claims covered by the agreement. Id. at 7-*8.

'In Compton, a panel of the California 2nd District Court reversed a trial court's order granting an employer's petition to compel arbitration of an employee's class claims by finding the agreement invalid under the modicum of bilaterality rule. 154 Cal. Rptr. 3d 413, *6 (Cal. App. Dep't Super. Ct. 2013). The Compton court expressly rejected the employer's argument that Concepcion invalidated the modicum of bilaterality rule because the rule singles out arbitration provisions. Id. at *9. The court concluded that Concepcion did not abrogate the modicum of bilaterality rule because Concepcion did not specifically discuss the rule or overrule the line of cases supporting it. Id. at *12.

Accordingly, for now, the modicum of bilaterality rule remains viable under California law, and may be utilized to invalidate purportedly one-sided arbitration agreements. But see Harris v. Green Tree Fin. Corp. , 183 F.3d 173, 180 (3d Cir. 1999) (“[P]arties to an arbitration agreement need not equally bind each other with respect to an arbitration agreement if they have provided each other with consideration beyond the promise to arbitrate.”).

It was also unclear whether Gentry v. Superior Court remained good law in the wake of Concepcion, because, like the modicum of bilaterality rule, the decision seemed to treat arbitration agreements differently than other contracts. 165 P.3d 556 (Cal. 2007). In Gentry, the California Supreme Court held that a collective action waiver in an arbitration agreement between an employee and employer would be invalid under circumstances in which such a provision would lead to a de-facto waiver, or interfere with, the employee's ability to enforce overtime laws. Id. at 563.

The Gentry court identified several functional obstacles that an employee faces when attempting to vindicate his or her rights under the wage and hour laws: 1) that individual awards in wage and hour cases tended to be modest and that employees and their attorneys must consider the modest recoveries against the risk of not prevailing and incurring substantial fees; 2) that individual employees bringing wage and hour claims face greater risk of retaliation than class claimants; and 3) that some employees may not be aware of their legal rights, and are therefore only protected by class actions. Id. at 565-66. The court instructed that if, after considering those factors, the trial court concludes “that a class action 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 arbitration waiver to ensure that these employees can 'vindicate [their] unwaivable rights … .'” Id. at 568 (internal citations omitted).

In Fowler, the court reversed a trial court's order granting a motion to compel arbitration of an employee's wage and hour claim, and remanded for consideration as to whether the arbitration agreement was unenforceable under Gentry. B238426, 2013 WL 1208111 (Cal. Ct. App. Mar. 26, 2013). The Fowler court distinguished Gentry from the rule invalidated in Concepcion by noting that the Gentry analysis requires examination of arbitration agreements in the employment context “not for unconsionability, but rather for whether, under the circumstances in the particular case, 'a class ' is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.” Id. at * 7. Because “[t]he Supreme Court did not address a situation in which an employee's unwaivable statutory rights were involved ' Concepcion does not preclude our application of a Gentry analysis.” Id.

Thus, at least for now, Gentry remains good law in California. However, the Supreme Court of California has granted certiorari with respect to the question of whether Gentry remains valid after Concepcion, and Gentry's continued vitality may therefore be short-lived. See Iskanian v. CLS Transp. Los Angeles, LLC , 142 Cal. Rptr.3d 372 (Cal App. Ct. June 4, 2012) (finding that “the Concepcion decision conclusively invalidates the Gentry test”) cert. granted, 286 P.3d 147 (Cal. Sept. 19, 2012).

Class and Collective Action Waivers in the Wake of Concepcion

'As noted above, a properly drafted arbitration agreement will almost always be binding upon an employee who seeks to assert individual employment claims, including discrimination claims, absent a finding that the agreement is unconscionable. However, there is some uncertainty about the enforceability of a mandatory arbitration programs that preclude employees from bringing class claims (i.e., by including a provision that arbitration may only proceed on an individual basis), although this uncertainty may be dissipating.

Employees frequently argue that arbitration agreements containing class or collective waiver provisions are inconsistent with the protections afforded by state or federal laws. See, e.g., Concepcion, 131 S. Ct. at 1744; Quilloin, 673 F.3d at 232; Litman v. Cellco Partnership , 655 F. 3d 225, 230 (3d Cir. 2011). Subsequent to Concepcion, however, many courts ' including the Third Circuit ' have invalidated state laws that prohibit class action waivers as preempted by the FAA and enforced arbitration agreements with collective waiver agreements. See, e.g., Litman, 655 F. 3d at 231 (“We understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration is desirable for unrelated reasons.”); Quilloin, 673 F.3d at 233 (“The Pennsylvania law at issue here is clearly preempted under Concepcion and Litman“); Green v. SuperShuttle Intern., Inc. , 653 F. 3d 766, 769 (8th Cir. 2011) (affirming grant of motion to compel arbitration pursuant to franchise agreement, finding drivers' claim that district court violated Minnesota law by enforcing class action waiver was preempted).

Conclusion

In next month's issue, we continue this discussion with a look at class waivers, the FLSA, and the D.R. Horton decision.

Alan D. Berkowitz is a Partner at Dechert LLP and chair of its labor and employment practice, resident in the firm's Philadelphia office. Designated by Chambers USA as a top labor and employment attorney since 2003, he represents employers in a wide range of employment litigation. J. Ian Downes is Counsel, and Jennifer L. Burdick is an Associate in the same office.

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