LawMemo Arbitration Blog: October 2007 Archives

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GENTRYfication of class action waivers
October 24, 2007 by Ross Runkel at LawMemo

"Gentryfication" - A new word for a new legal theory. Or an old theory used in a new way.

California has adopted a new, perhaps easier, way to attack class action waivers.

The standard attack has been on the ground of unconscionability.
The new attack is on the ground of public policy.
Why does it matter?

Unconscionability: A theory in search of predictability.

In order to get a court to throw out a "nasty" contract clause under the theory of unconscionability, the attacker must demonstrate both procedural and substantive unconscionability. The fact that the clause is "nasty" (unfair, overly burdensome to one side, etc.) establishes the substantive unconscionability. The procedural unconscionability requires a showing of unequal bargaining power, a take-it-or-leave-it offer, abuse of the bargaining process, some trickery, or some other "unfairness" in the negotiation of the contract. Some courts use a sliding scale: The worse the substantive clause, the less bad the procedural unconscionability has to be. This obviously results in lack of predictability, and lots of litigation.

Public policy: A simpler theory.

The public policy theory has its focus on the allegedly "nasty" clause. There is no need to inquire into the "procedural" aspects such as unequal bargaining power. A simple rule: If a contract clause violates public policy, the a court will not enforce the clause.

In Gentry v. Superior Court [Circuit City] (California 08/30/2007) (4-3) the California Supreme Court held that in some cases a class arbitration action waiver may be contrary to public policy.

The employee (Gentry) was claiming a violation of California's statutory overtime rules. The court said that Gentry had an "unwaivable" statutory right to overtime pay. Then the court said that in some cases a class action waiver "would lead to a de facto waiver [of the statutory right] and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce the overtime laws."

True, the court said there are a number of other factors to be examined. But my point is that Gentry did not have to demonstrate any "procedural unconscionability" in order to prevail.

LawMemo publishes Employment Law Memo.

Hall Street: Contract vs. statute
October 22, 2007 by Ross Runkel at LawMemo

One key feature of arbitration is that an arbitrator's award is "final." Courts do not review arbitration awards to be sure the arbitrator was correct in making fact-findings, or correct in interpreting a contract, or correct in applying the law.

Federal Arbitration Act Section 10 specifies the grounds for vacating an award. It is plain from Section 10 that these grounds are "collateral attacks" on the award, and do not empower a court to inquire into the merits of the case.

In Hall Street Associates v. Mattel the issue before the US Supreme Court is whether the arbitrating parties can convey additional powers on the court to review an award.

Specifically, the issue is whether courts must (or may) enforce the parties' contractual agreement that their award can be vacated by a federal district court "where the arbitrator's conclusions of law are erroneous."

All of this will be the subject of oral argument at the US Supreme Court on November 7, 2007. [All briefs collected here]

The basic arguments are simple: (1) The FAA specifies the grounds for vacating an award, and courts cannot go beyond the statute. (2) Parties have freedom to decide, via contract, the procedural aspects of their arbitration.

In my view the Supreme Court will have little difficulty deciding this case. The Court has previously made it clear that the parties can agree to whatever arbitration procedures they want. So, the parties can - by contract - set the rules of evidence, determine how many arbitrators there will be, and otherwise control exactly how the arbitration proceedings will be carried out.

However, this case involves the powers and duties of a federal court after the arbitration is finished. Those powers and duties are decided by Congress. It is beyond my imagination that the Supreme Court would allow private parties to convey on federal courts a review power that Congress withheld.

LawMemo publishes Employment Law Memo.