California Supreme Court Says Circuit City Cannot Avoid Worker Protection Laws by Banning Employee Class Actions

In a victory for California workers, the California Supreme Court ruled on August 31 that Circuit City cannot insulate itself from liability for cheating its employees out of overtime pay by banning them from bringing class actions against the company.  The court held in Gentry v. Circuit City that if the class action ban would prevent employees from vindicating their rights to overtime pay, the ban cannot be enforced under California law.

Public Justice, the national public interest law firm based in Washington, DC, filed an amici curiae brief arguing that a class action ban may prevent workers with valid wage-and-hour claims from having a meaningful chance of pursuing those claims. Ten other public interest organizations joined the amici brief, which noted several scenarios in which workers would be unable to pursue justice on an individual basis, and the court agreed, citing many of those circumstances in its opinion. 

For example, the court pointed out that employees may not be able to bring claims without class actions when their individual claims involve modest sums of money; when they fear retaliation by their employer; or when they may be unaware of their legal rights, among other “real world obstacles.”  The court concluded that, where a class action is a “significantly more effective” means of obtaining justice than bringing an individual case, a class action ban cannot be enforced.

“This is a great decision for California workers,” said Joseph Jaramillo of Goldstein, Demchak, Baller, Borgen & Dardarian, who authored Public Justice’s amici brief.  “The court recognized that class actions play a critical role in ensuring that state laws enacted to protect workers can be enforced.”

Because of the great disparity in power between employee and employer, and because Circuit City had touted advantages of its arbitration scheme without mentioning the many disadvantages, the court also rejected Circuit City’s argument that the contract was enforceable since it had given employees a brief time to “opt out” of arbitration.  

“The court rightly focused on the substance of what is really unfair about these class action bans, rather than the empty formalities that Circuit City relied upon,” said Public Justice’s Paul Bland.  “Circuit City supposedly offered its workers a chance to keep their rights, but the court saw through that as a phony option.  And though Circuit City pointed to several unrealistic avenues to support its claim that its workers would still be able to protect their rights without class actions, the court clearly set forth why those avenues were dead ends.”

In holding that Circuit City’s class action ban cannot be enforced if it would exculpate the corporation from liability under state labor laws, the court made clear that its holding in Discover Bank v. Superior Court (Boehr) – a 2005 decision argued by Bland – applies with equal force in the employment setting. 

In Discover Bank, the court struck down a class action ban in a lender’s contract on grounds that its customers would be unable to hold the corporation accountable for cheating them out of small amounts of money.  The Gentry decision makes clear that the principle established in Discover Bank – that contract terms that operate as “get out of jail free cards” (“exculpatory” provisions, in legal terms) will not be enforced – is in no way limited to small-dollar consumer claims.                     

Writing for the 4-3 majority, Justice Carlos Moreno emphasized that “class actions play an important function in enforcing overtime laws by permitting employees who are subject to the same unlawful payment practices a relatively inexpensive way to resolve their disputes.”  The court remanded the case to the trial court for a determination of whether, based on the particular facts of the case, a class action or class arbitration would be a “significantly more effective practical means” for employees to vindicate their rights, and whether permitting Circuit City to ban employee class actions would “lead to a less comprehensive enforcement of overtime laws.” 

The case arose when Circuit City allegedly misclassified certain employees, including Mr. Gentry, as “exempt” and thus not entitled to overtime pay. 

Public Justice’s amici brief, which was written by Jaramillo and Laura Ho of Goldstein, Demchak, Baller, Borgen & Dardarian with input from Public Justice’s Leslie Bailey, Paul Bland, and Victoria Ni, was joined by the Asian Law Caucus, the Asian Pacific American Legal Center, the California Rural Legal Assistance Foundation, the Hastings Civil Justice Clinic, the Impact Fund, the Katharine and George Alexander Community Law Center, La Raza Centro Legal, the Lawyers’ Committee for Civil Rights of the San Francisco Bay Area, the Legal Aid Society-Employment Law Center, and the Mexican American Legal Defense & Educational Fund.  The brief was filed as part of Public Justice’s Access to Justice Campaign and Class Action Preservation Project.