FRANCO v.ATHENS DISPOSAL COMPANY, INC
Filed 3/10/09
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
| EDIXON FRANCO, Plaintiff and Appellant, v. ATHENS DISPOSAL COMPANY, INC., Defendant and Respondent. | B203317 (Los Angeles County Super. Ct. No. BC369201) |
APPEAL from an order of the Superior Court of Los Angeles County, Elizabeth A. Grimes, Judge. Reversed with directions.
Rastegar & Matern, Matthew J. Matern and Thomas S. Campbell for Plaintiff and Appellant.
Hill, Farrer & Burrill, Kyle D. Brown, James A. Bowles and E. Sean McLoughlin for Defendant and Respondent.
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Plaintiff, a trash truck driver, filed this suit, denominated a class action, against his former employer, a private company. He alleged the employer had violated the Labor Code by, among other things, denying meal and rest periods. The employer responded with a petition to compel arbitration based on a written agreement with plaintiff. The agreement contained a provision waiving class arbitrations. It also precluded an employee from acting in “a private attorney general capacity,” which would bar plaintiff’s enforcement of the Labor Code on behalf of other employees.
Plaintiff argued that the petition should be denied because the class arbitration waiver and the private attorney general prohibition were unconscionable. The trial court disagreed and granted the petition, effectively limiting the arbitration to plaintiff’s claims.
We conclude that the class arbitration waiver is unconscionable with respect to the alleged violations of the meal and rest period laws given “the modest size of the potential individual recovery, the potential for retaliation against members of the class, [and] the fact that absent members of the class may be ill informed about their rights.” (Gentry v. Superior Court (2007) 42 Cal.4th 443, 463 (Gentry).) In addition, because the arbitration agreement prevents plaintiff from acting as a private attorney general, it conflicts with the Labor Code Private Attorneys General Act of 2004 (PAGA) (§§ 2698–2699.5) — an act that furthers Gentry’s goal of comprehensively enforcing state labor laws through statutory sanctions (see Gentry, supra, 42 Cal.4th at pp. 462–463).
Thus, the arbitration agreement is unconscionable in more than one respect and is unenforceable in its entirety. We conclude that the case should be tried in a court of law.
I
BACKGROUND
The allegations, facts, and evidence on appeal are drawn from the complaint and the papers filed in connection with the petition to compel arbitration.
A. The Complaint
On April 9, 2007, plaintiff Edixon Franco filed a class action complaint against Athens Disposal Company, Inc. (Athens), alleging as follows. Franco had been employed by Athens as a nonexempt, hourly employee until he left the company. He brought this suit individually and on behalf of other similarly situated current and former employees. The potential class is significant in size such that individual joinder would be impractical. Athens engaged in a systematic course of illegal payroll practices and policies in violation of the Labor Code and the Business and Professions Code. Athens subjected all of its hourly employees to the identical violations.
The first cause of action alleges that Athens violated Labor Code sections 510 and 1194 by failing to pay overtime. (All statutory references are to the Labor Code unless otherwise indicated.) In the second cause of action, Franco alleges that Athens violated section 226.7 and the applicable Industrial Welfare Commission wage order, No. 9‑2001 (Wage Order)
B. The Petition to Compel Arbitration
On June 22, 2007, Athens filed a petition to compel arbitration and to dismiss or stay the civil action. The petition stated that Athens was in the business of trash removal, hauling, disposal, and recycling and was engaged in interstate commerce within the meaning of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1–16). Athens alleged that arbitration was required under the arbitration agreement signed by Franco — written in Spanish — which was attached as an exhibit. According to the petition, the arbitration would be conducted pursuant to the employment arbitration rules of the American Arbitration Association (AAA). Further, “AAA . . . has promulgated supplemental rules for class arbitrations, including rules permitting the AAA and the arbitrator to determine whether and when class claims may be pursued in arbitration and the procedures for arbitration of such claims.”
Nevertheless, the attached arbitration agreement provided that “both you and the Company forgo and waive any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity. . . . No remedies that otherwise would be available to you individually or to the Company in a court of law, however, will be forfeited by virtue of this agreement . . . . [¶] . . . The parties in any such arbitration will be limited to you and the Company . . . .”
Small claims actions were exempt from arbitration, whether brought by the employee or the company. The agreement provided that it would be governed by the FAA.
C. Proceedings on the Petition
On July 23, 2007, Athens filed a notice of hearing, a memorandum of points and authorities, and supporting evidence, setting the hearing for August 16, 2007. Athens made a straightforward argument: Under the FAA, arbitration was mandatory.
On August 3, 2007, Franco filed opposition papers, asserting that the class arbitration waiver was (1) invalid under Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank) and (2) unconscionable because it prevented him from acting as a private attorney general under the PAGA. Franco contended that the arbitration agreement was so tainted with illegality that Athens’s petition should be denied in its entirety.
In its reply, Athens argued that Franco had not filed a timely response to the petition, thereby admitting all of Athens’s allegations. (See Code Civ. Proc., §§ 1290, 1290.6.) Athens distinguished Discover Bank as involving a class arbitration waiver in consumer litigation where small sums of damages are caused by a fraudulent credit card scheme. Finally, Athens stated that Franco could seek the penalties authorized under the PAGA because nothing in the arbitration agreement precluded him from doing so.
The petition was heard on August 20, 2007. During argument, the trial court expressed the view that Discover Bank did not extend to employment cases. By order of the same date, the trial court granted the petition and directed Franco to submit his claims to arbitration in accordance with the arbitration agreement, that is, as individual claims. The trial court also ordered that the civil action be dismissed, but the court retained “jurisdiction to either vacate the dismissal in order to enter any order(s) necessary to enforce this order or to aid the arbitration so ordered, or to enter an order to confirm, modify or vacate any award entered in the arbitration proceedings so ordered.” Franco filed an appeal from the order granting the petition.
Meanwhile, on September 4, 2007, Franco filed a motion for reconsideration based on the Supreme Court’s August 30, 2007 decision in Gentry, supra, 42 Cal.4th 443, which extended the rationale of Discover Bank to overtime compensation claims. Notwithstanding Athens’s opposition, the trial court granted reconsideration and, by order dated October 22, 2007, instructed the parties to file supplemental papers, stating “the Gentry opinion establishes that a class action arbitration waiver in an employment agreement may be unconscionable.”
1. Franco’s Supplemental Memorandum
Franco worked for Athens from May 22, 2005, to May 10, 2006. He submitted evidence showing that, based on his hourly wage, his estimated damages for the alleged denial of meal and rest periods totaled $7,750; he would also be entitled to approximately $2,500 in civil penalties. As for Franco’s overtime allegations, he was owed around $15,000 in lost pay and $1,250 in civil penalties. Franco filed a declaration in which he stated that, during his employment with Athens: (1) he did not know he was entitled to an hour’s pay if Athens did not give him a meal or rest period; (2) he was not aware of all of his rights under the Labor Code or other labor law; (3) in his experience, employees who complained about working conditions were “looked down on” by management and “often los[t] their jobs or [were] treated in ways that force[d] them to quit”; and (4) he “did not feel secure enough to complain about anything [he] may have felt was wrong . . . . [He] felt that if [he] complained about anything [he]would be fired.”
Franco filed declarations from three attorneys who specialize in employment law and class actions. As one of Franco’s attorneys explained, “Without the ability to litigate these [labor] cases as a class proceeding, my firm could not represent the individual class members especially if we had [to] arbitrate each one separately because of the low damages present in many of these cases, including this one.” The other two attorneys were of the same view. One attorney opined that “paying the claims of each individual employee who happens to walk into my or another attorney’s office will not deter the employer from continuing to deny meal and rest periods or force the employer to pay its employees the wages due. Rather, preventing class proceedings from occurring will only allow this and other employers to pay the claims of a few employees, if any, and continue violating the Labor Code unabated.”
Franco asserted that the petition to compel arbitration should be denied in its entirety because (1) the class arbitration waiver was unconscionable and (2) the private attorney general prohibition precluded him from recovering civil penalties under the PAGA on behalf of other current and former employees.
2. Athens’s Supplemental Memorandum
Athens submitted evidence that Franco was employed as a waste hauling driver, he held a commercial driver’s license, and he drove one of the company’s trash trucks, a three-axle commercial vehicle weighing more than 10,000 pounds.
An operator of that type of vehicle is exempt from the overtime provisions of the Labor Code (§§ 510, 1194). (See Cal. Code Regs., tit. 13, § 1200, subd. (a); Veh. Code, § 34500, subd. (a).) Rather, the operator is subject to the regulations of the Department of the California Highway Patrol. (See Cal. Code Regs., tit.13, §§ 1200–1216.) Franco did not contend he was entitled to overtime compensation based on those regulations. Nor did he suggest another ground for overtime pay under state or federal law, such as the federal Fair Labor Standards Act (FLSA) (29 U.S.C. § 201 et seq.). (See 29 U.S.C. § 213(b)(1) [certain commercial drivers exempt from overtime provisions of FLSA]; 1 Wilcox, Cal. Employment Law (2008) §§ 3.03[1][b], 3.03[2][b], pp. 3‑16.1 to 3‑17, 3‑19 & fn. 40 [certain commercial drivers exempt from California and federal overtime laws].)
Athens also offered evidence that its drivers were told more than once, sometimes in both English and Spanish, to take all required meal and rest periods. The company posted the Wage Order where drivers congregated. Also, Athens utilized an electronic timecard system, and employees “swiped” their individual badges when arriving and leaving the workplace. The company kept accurate computerized records of the hours worked by its drivers. Athens had a policy not to permit or tolerate retaliation against employees for reporting problems, making complaints, or asserting their legal rights.
Athens argued that Gentry did not apply for several reasons and urged the trial court to issue an order compelling arbitration under the arbitration agreement as written.
3. The Trial Court’s Ruling
On December 6, 2007, the trial court heard further argument on the petition to compel arbitration and took the matter under submission. Later that day, the court issued an order granting the petition and directing Franco to submit his claims to arbitration in accordance with the arbitration agreement. In its order, the trial court stated that Franco had no overtime claim under the Labor Code, and thus Gentry did not apply. Assuming Gentry applied to the nonovertime claims, Franco had failed to show that class arbitration would be significantly more effective than individual arbitrations. As shown by Athens’s evidence, Franco’s claims concerning meal and rest periods were not suitable for class treatment because of the preponderance of individualized issues, the specific inquiries into the merits of each individual’s claims, and the varying extent of liability. Last, Athens’s arbitration program would not disadvantage any employee who pursued claims through individual arbitration.
Franco did not appeal from the December 6, 2007 order but relied on the earlier appeal from the August 20, 2007 order.
II
DISCUSSION
“‘“Whether an arbitration agreement applies to a controversy is a question of law to which the appellate court applies its independent judgment where no conflicting extrinsic evidence in aid of interpretation was introduced in the trial court.” [¶] . . . Where the trial court’s decision on arbitrability is based upon resolution of disputed facts, we review the decision for substantial evidence. . . .’” (Amalgamated Transit Union Local 1277 v. Los Angeles County Metropolitan Transportation Authority (2003) 107 Cal.App.4th 673, 685.)
The party opposing arbitration has the burden of establishing that an arbitration provision is unconscionable. (Brown v. Wells Fargo Bank, NA (2008) 168 Cal.App.4th 938, 955.) “[T]o the extent the trial court’s determination that the arbitration agreement was [not] unconscionable turned on the resolution of conflicts in the evidence or on factual inferences to be drawn from the evidence, we consider the evidence in the light most favorable to the trial court’s ruling and review the trial court’s factual determinations under the substantial evidence standard.” (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 892.)
A. Preliminary Issues
At the outset, we address issues concerning (1) appealability, (2) Franco’s allegedly untimely response to the petition, and (3) the trial court’s handling of the overtime claim.
1. Appealability
Athens contends that Franco’s appeal from the first order was improper, and the appeal should be dismissed because the trial court’s reconsideration of that order had the effect of vacating it. We disagree. The first order found that the class arbitration waiver was enforceable and instructed Franco to arbitrate his claims individually. That was the “death knell” of class litigation through arbitration. Any subsequent motion for reconsideration or renewal in the trial court had no effect on the appealability of the first order. Consequently, Franco filed a proper appeal. (See Stephen v. Enterprise Rent-A-Car (1991) 235 Cal.App.3d 806, 810–814; Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2008) ¶¶ 2:39 to 2:39.1, p. 2‑25 (rev. # 1, 2008).)
2. Timeliness of Franco’s Response
Under the California Arbitration Act (Code Civ. Proc., §§ 1280–1294.2), “[a] copy of the petition and a written notice of the time and place of the hearing thereof and any other papers upon which the petition is based shall be served in the manner provided [herein].” (Id., § 1290.4, subd. (a).) “A response shall be served and filed within 10 days after service of the petition . . . .” (Id., § 1290.6.) If a response is not “duly served and filed,” the allegations of the petition “are deemed to be admitted.” (Id., § 1290.)
Athens argued, and the trial court found, that Franco did not serve and file a timely response to the petition. Assuming for purposes of appeal that the trial court was correct, the untimeliness of the response is of no import. None of the allegations in the petition concerns the questions before us.
3. The Overtime Claim
In determining the validity of a class arbitration waiver, the trial court must consider the plaintiff’s theories of liability and the amount of the typical individual recovery. (See Gentry, supra, 42 Cal.4th at pp. 457–458 & fn. 4 [average recovery for state overtime claims], 459 [median award in federal age discrimination suits]; Discover Bank, supra, 36 Cal.4th at p. 154 [amount of unlawful late fee imposed on credit card payments in suit based on breach of contract and Delaware consumer fraud statute].) Franco relied on provisions of the Labor Code as the basis of his overtime claim.
Athens argued Franco was exempt from state overtime laws based on evidence that he drove a commercial truck having three axles and weighing over 10,000 pounds. (See Cal. Code Regs., tit. 13, § 1200, subd. (a); Veh. Code, § 34500, subd. (a).) The trial court agreed, ruled that Franco had no overtime claim, and gave it no consideration in determining the validity of the class arbitration waiver. The court also found that the waiver was valid as to the remaining claims for meal and rest period violations. The result, as stated, was the “death knell” of class arbitration — the equivalent of an order denying class certification.
This procedural history raises concerns about the trial court’s decisionmaking process. It may well be that, as a matter of law, Franco is exempt from state overtime laws. And the exemption may be quite easy to prove. Yet, the trial court did not follow established procedures in finding that Franco was an exempt employee. As noted in Gentry, “The kind of inquiry a trial court must make [in deciding whether to invalidate a class arbitration waiver] is similar to the one it already makes to determine whether class actions are appropriate.” (Gentry, supra, 42 Cal.4th at p. 463.) The inquiry into class certification, however, does not include consideration of the merits or sufficiency of a plaintiff’s cause of action.
“[W]e view the question of [class] certification as essentially a procedural one that does not ask whether an action is legally or factually meritorious. Nonetheless, we remain mindful that if the class action is to prove a useful tool to the litigants and the court, trial courts must be accorded the flexibility ‘to adopt innovative procedures, which will be fair to the litigants and expedient in serving the judicial process.’ . . . Here, [the defendant] argues that a court’s decision whether to certify a class . . . should be informed by an evaluation of the merits of the proposed class claims. . . .
“We agree that the important interests of fairness and efficiency sometimes may be served better when class causes of action are screened for legal sufficiency before the matter of certification is decided. But nothing prevents a court from weeding out legally meritless [claims] prior to certification via a defendant’s demurrer or pretrial motion. In fact, it is settled that courts are authorized to do so. . . .
“When the substantive theories and claims of a proposed class suit are alleged to be without legal or factual merit, the interests of fairness and efficiency are furthered when the contention is resolved in the context of a formal pleading (demurrer) or motion (judgment on the pleadings, summary judgment, or summary adjudication) that affords proper notice and employs clear standards. Were we to condone merit-based challenges as part and parcel of the certification process, similar procedural protections would be necessary to ensure that an otherwise certifiable class is not unfairly denied the opportunity to proceed on legitimate claims. . . . [P]rocedures already exist for early merit challenges.” (Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 439–441, citations and fn. omitted.)
Here, the trial court granted a de facto summary adjudication motion on the overtime claim in determining the enforceability of a class arbitration waiver. That was error. Absent a demurrer or dispositive motion — Athens brought none — Franco’s overtime claim had to be considered as part of the case in deciding the validity of the class arbitration provision.
And, as we shall discuss, the trial court erred in upholding the class arbitration waiver with respect to the meal and rest period claims.
B. The Class Arbitration Waiver
Gentry held that “at least in some cases,” “class arbitration waivers in employment arbitration agreements may [not] be enforced to preclude class arbitrations by employees whose rights to overtime pay pursuant to [the Labor Code] allegedly have been violated.” (Gentry, supra, 42 Cal.4th at p. 450.) The court observed that in those cases, “the prohibition of classwide relief would undermine the vindication of the employees’ unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state’s overtime laws.” (Ibid.) In the present case, the trial court improperly disposed of Franco’s overtime claim, leaving only the meal and rest period claims for its consideration. (See pt. II.A.3., ante.)
Thus, the primary issue on appeal is whether Gentry applies to claims for meal and rest periods under the Labor Code (§§ 512, 226.7) and the Wage Order (§§ 11, 12). We conclude it does. Discover Bank, a consumer case, laid the foundation for Gentry, an overtime case. And it is but a small step from the overtime claims in Gentry to the meal and rest period claims here. Although overtime compensation is undoubtedly important (see Gentry, supra, 42 Cal.4th at p. 456), the state has a significant interest in making sure that the drivers of commercial vehicles receive sufficient food and rest while on the job.
1. Unwaivable Statutory Rights
“Meal and rest periods have long been viewed as part of the remedial worker protection framework. . . . Concerned with the health and welfare of employees, the [Industrial Welfare Commission] issued wage orders mandating the provision of meal and rest periods in 1916 and 1932, respectively. The wage orders required meal and rest periods after specified hours of work. The only remedy available to employees, however, was injunctive relief aimed at preventing future abuse. In 2000, due to a lack of employer compliance, the [commission] added a pay remedy to the wage orders, providing that employers who fail to provide a meal or rest period ‘shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each work day’ that the period is not provided.” (Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1105–1106, citations omitted.)
In rejecting an employer’s challenge to the meal period requirements of several wage orders, one court explained: “This section [on meal periods] states the circumstances requiring the employer to provide at least a 30-minute meal period [and] when the meal period shall be included in the time worked . . . . The statements describe the history of the section commencing in 1916, that it has been substantially the same since 1947, and provide for exemptions under certain circumstances. [¶] . . . [¶]
“The trial court found, and we agree, that, ‘A lesson taught by experience since 1947 concerning a thirty minute [lunch] period, not to mention the fact that no great change in mankind’s makeup has been noted in the past thirty years that would indicate he now needs either more or less time to eat than he did thirty years ago both provide an adequate basis [for the orders].’
“Where the evidence clearly supports an existing order, and where the most basic demands of an employee’s health and welfare are so obvious, the statement of basis describing the history and confirming the finding is sufficient to permit meaningful judicial review. When stating the obvious[,] little detail is required.” (California Manufacturers Assn. v. Industrial Welfare Com. (1980) 109 Cal.App.3d 95, 114–115.)
The same court addressed the validity of rest periods: “This section [of the wage orders] provides a mandatory 10-minute rest period net, for every four hours worked, without wage deductions.
“The statements trace the history of the section, commencing in 1932, and reaffirm that the requirement is reasonable and minimal. [¶] . . . [¶]
“Employee welfare demands in this area are . . . obvious . . . . Just as the consumption process is essential to humankind, so is the elimination process, and these needs have not greatly changed in the last 40 years. [Regarding] the length of the rest period, it is sufficient to state that experience has shown that 10 minutes is reasonable.” (California Manufacturers Assn. v. Industrial Welfare Com., supra, 109 Cal.App.3d at p. 115.)
As for the statutory basis for the wage order in this case, section 226.7 states: “(a) No employer shall require any employee to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commission.
“(b) If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.”
Under section 516, “the Industrial Welfare Commission may adopt or amend working condition orders with respect to break periods, meal periods, and days of rest for any workers in California consistent with the health and welfare of those workers.”
In language that closely parallels section 512, subdivision (a), the Wage Order states: “(A) No employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes, except that when a work period of not more than six (6) hours will complete the day’s work the meal period may be waived by mutual consent of the employer and the employee.
“(B) An employer may not employ an employee for a work period of more than ten (10) hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived.
“(C) Unless the employee is relieved of all duty during a 30 minute meal period, the meal period shall be considered an ‘on duty’ meal period and counted as time worked. An ‘on duty’ meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time.
“(D) If an employer fails to provide an employee a meal period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each workday that the meal period is not provided. [¶] . . . [¶]
“(F) [This] section shall not apply to any public transit bus driver covered by a valid collective bargaining agreement if the agreement expressly provides for meal periods for those employees . . . .” (Wage Order, § 11(A)–(D), (F).)
Thus, if the employee works a “short” day — six hours or less — a meal period is unnecessary if the employer and employee so agree. There is no contention here that Franco, or any employee he seeks to represent, worked a short day.
On the subject of rest periods, the Wage Order states: “(A) Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.
“(B) If an employer fails to provide an employee a rest period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each workday that the rest period is not provided.
“(C) This section shall not apply to any public transit bus driver covered by a valid collective bargaining agreement if the agreement expressly provides for rest periods for those employees . . . .” (Wage Order, § 12(A)–(C).)
TO BE CONTINUED AS PART II….
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