Court of Appeal Upholds Arbitration Agreement. Rejects D.R. Horton

Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 144 Cal.Rptr.3d 198

Background: Plaintiff, Lorena Nelsen (Nelsen) worked a property manager in California for Defendant, Legacy Partners Residential, Inc. (LPI). At the inception of her employment, Plaintiff received an employee handbook. On the last two pages of a 43-page handbook contained an arbitration clause. Page 42 of the handbook contained a title “TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT” which failed to make reference to the arbitration provision. The arbitration agreement was silent on whether class claims could be pursued in arbitration.

Court History: On July, 2010, Plaintiff filed a putative class action lawsuit against Defendant alleging multiple violations of the California Labor Code. Defendant filed motion to compel arbitration of former employee’s individual claims. The trial court granted Defendant’s motion. Plaintiff appealed.

Pertinent Issues addressed: Affirming the trial court’s order compelling arbitration Court of Appeal made the following relevant findings:

a.  LPI’s arbitration agreement was procedurally unconscionable. Among other things, the arbitration agreement was part of a preprinted form agreement drafted by LPI; agreement was given to employees on a take-it-or-leave-it basis; the arbitration provision was located on the last two pages of a 43-page handbook and the “TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT,” made no reference to arbitration; the arbitration language appeared in small font not set off in any way to stand out from the rest of the agreement or handbook; generally, an employee is not expected to be conversant with the rules of pleading in the Code of Civil Procedure, the law and procedure applicable to appellate review, and the rules for the disqualification of superior court judges, the terms and rules of the arbitration reference. (Emphasis added)

b.  LPI’s arbitration agreement was not substantively unconscionable. The employment agreement arbitration, for all practical purposes, was identical to Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 130 Cal.Rptr.2d 892 (Little) where the California Supreme Court found the identical parts of the arbitration agreement valid and enforceable. The only substantive difference in Littler (a clause in Littler that provided that only awards exceeding $50,000 required the arbitrator’s “ ‘written reasoned opinion’ ” or triggered the right to appeal to a second arbitrator) on which the California Supreme Court found the substantive unconscionability was not present in the LPI’s arbitration agreement.

c.  Since, the arbitration agreement was only procedurally and not substantively unconscionable, the agreement is valid and enforceable. (Relying on Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 99 Cal.Rptr.2d 745)

d.  Nelsen had to pursue her claims individually in arbitration. Relying on Stolt–Nielsen S.A. v. AnimalFeeds Int’l Corp. (2010) 130 S.Ct. 1758, 176 L.Ed.2d 605 (Stolt–Nielsen) the Court of Appeal held since no there was no “contractual basis” to the agreement to class arbitration, silence cannot be interpreted as the employer’s express agreement to arbitrate class claims.  The Supreme Court of the United States in Stolt-Nielsen has held that, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

e.  Nelsen failed to submit any evidence in support of factors established by California Supreme Court in Gentry v. Superior Court (2007) 42 Cal.4th 443, 64 Cal.Rptr.3d 773 (Gentry). Under Gentry, before a class action waiver can be held unenforceable, it requires a predicate showing that (1) potential individual recoveries are small; (2) there is a risk of employer retaliation; (3) absent class members are unaware of their rights; and (4) as a practical matter, only a class action can effectively compel employer overtime law compliance. (Gentry at p. 463, 64 Cal.Rptr.3d 773, 165 P.3d 556.). Accordingly, Nelsen was denied the leave to remand for the purpose of affording her a second opportunity to produce relevant evidence.  The Court of Appeal refused to decide on the issue of whether Gentry is preempted by Supreme Court of the United States decision in AT & T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 179 L.Ed.2d 742.

f.  The Court declined to follow National Labor Relations Board’s decision in D.R. Horton, Inc. (2012) 357 NLRB No. 184 citing the recent case of Iskanian v. CLS Transp. Los Angeles, LLC (2012) 142 Cal.Rptr.3d 372, 12 Cal. Daily Op. Serv. 6138 (discussed here) where Second District Court of Appeal refused to follow D.R. Horton because the decision goes well beyond the scope of the NLRB’s administrative expertise by interpreting a statute- the FAA- that the agency is not charged with enforcing. The Court further found that the National Labor Relations Act (NLRA) does not apply to “any individual employed as a supervisor” and Nelsen’s title as a property manager” suggested that she could be not covered by NLRA.

g.  The court rejected Nelsen’s argument that her claim for injunctive relief was exempt from arbitration.  Citing Concepcion, the Court of Appeal stated, “the FAA preempts any rule or policy rooted in state law that subjects agreements to arbitrate particular kinds of claims to more stringent standards of enforceability than contracts generally.”


  • The case is an encouraging development towards enforceability of arbitration agreements. Nonetheless, the employers should concentrate on issues relating to substantive as well as procedural unconscionability.
  • Employers should be aware that the law regarding enforceability of class action waivers is still unsettled and dissimilar trends have been followed by California Courts. Hence, unless the California Supreme Court gives a clear opinion on whether Concepcion preempts Gentry employers should consult with their legal counsel on issue of enforceability of class action claims.