California HR

A Cautionary Tale on Arbitration Agreements

By Elizabeth J. Boca, Epstein Becker & Green, P.C.

The California Court of Appeal recently denied an employer’s appeal of a lower court’s denial of its motion to compel arbitration of a lawsuit filed by a former employee that included claims under the Private Attorneys General Act (PAGA).

The court of appeal held that the arbitration agreement contained a PAGA waiver that was impermissible. The appellate court invalidated the entire agreement for several reasons, including the fact that the agreement stated the waiver was a material term and the entire agreement would be void if the waiver was found unenforceable.

Background

Wet Seal is a clothing retailer with stores in several states, including California. Elizabeth Montano formerly worked at one of Wet Seal’s stores in California. Montano claims that during her employment, she wasn’t provided meal and rest breaks or properly paid overtime and that Wet Seal violated other provisions of the California Labor Code. She claims that Wet Seal committed similar Labor Code violations with regard to other employees in its California retail stores.

In 2011, Montano filed a lawsuit against Wet Seal in Los Angeles County Superior Court alleging violations of the Labor Code. She filed her claims on both an individual and a classwide basis (i.e., bringing the claims on behalf of herself and other employees of Wet Seal). Her complaint also included a representative claim under PAGA.

Wet Seal Files a Motion to Compel Arbitration

Like many California employees, Montano signed an arbitration agreement when she was hired. In response to her lawsuit, Wet Seal filed a motion to compel arbitration of her claims. In support of the motion to compel, Wet Seal pointed to the language in the agreement stating, “You and the Company hereby agree that any and all disputes, claims or controversies arising out of or relating to this Agreement [and] the employment relationship between the parties . . . shall be resolved by final and binding arbitration by a neutral arbitrator.”

Montano opposed the motion to compel arbitration, arguing that the agreement was unconscionable because it waived the right to bring class actions and representative PAGA actions. The agreement stated that the parties “waive their right to join or consolidate claims with others or to make claims with others as a representative or a member of a class or as a private attorney general.”

Trial Court Denies Wet Seal’s Motion to Compel

The trial court issued a tentative ruling on the motion that would find the agreement’s waiver invalid but would sever (remove) the waiver from the remainder of the arbitration agreement, which was otherwise enforceable, compel arbitration of Montano’s individual claims, and stay (halt) her legal action pending the completion of arbitration. The parties appeared at a hearing and argued the motion, and the court indicated it would consider the matter further and issue a final order.

The court’s final order, which is the subject of this appeal, contained a different outcome than the tentative ruling. Although the order stated that the agreement’s waiver was invalid, the court did not sever it from the remainder of the agreement. That rendered the entire agreement void, and the court denied Wet Seal’s motion to compel arbitration. Wet Seal appealed the trial court’s denial of its motion to compel arbitration.

Court of Appeal’s Decision

Montano’s unconscionability argument was based in part on the arbitration agreement’s waiver of class action and PAGA claims. It has been several years since the U.S. Supreme Court and the California Supreme Court ruled that class actions may be waived through arbitration agreements. The real issue in this case was the PAGA waiver. The California Supreme Court has already ruled that the statutory right to bring representative claims under PAGA cannot be waived by an arbitration agreement.

Many contracts contain a severability clause, which may result in a court severing a provision and enforcing the remainder of the agreement. The court looked at the plain language of Wet Seal’s agreement and noted that it contained a nonseverability clause that was described as “a material and important term” of the agreement. That plain language rendered the terms nonseverable.

But Wet Seal had another hurdle: The agreement went on to say that if the “waiver is found to be unenforceable for any reason by a court or arbitrator, then this entire arbitration agreement is void and unenforceable by the parties.” As a result, because the class action and PAGA waiver was unenforceable, the entire agreement was unenforceable.

The appellate court determined that the trial court properly denied Wet Seal’s motion to compel arbitration of Montano’s claims. Montano v. The Wet Seal Retail, Inc. (California Court of Appeal, 2nd Appellate District, 1/7/15, reposted upon lifting of bankruptcy stay).

Bottom Line

Although courts typically enforce arbitration agreements, this decision provides some guidance for employers with such agreements. You should review your arbitration agreements to make sure they aren’t invalidated for a preventable reason, such as an unenforceable clause.

In this case, a severability clause in the agreement probably would have allowed enforcement of the remainder of the agreement. In turn, Wet Seal might have been able to compel arbitration of Montano’s individual claims and bifurcate the PAGA claim. And that might have resulted in Montano losing interest in pursuing the PAGA claim.

Elizabeth J. Boca is an associate in the labor and employment practice, in the San Francisco office of Epstein, Becker & Green. She is also a contributor to the California Employment Law Letter. Ms. Boca can be reached at eboca@ebglaw.com.