The California Court of Appeal ruled in April that, under Texas Law, an arbitration clause used by upscale department store Neiman Marcus in connection with its employment agreement is illusory and unenforceable, and ordered that the underlying case be heard in a court of law, rather than in arbitration. See Peleg v. Neiman Marcus Group, Inc., 140 Cal. Rptr. 3d 38 (Cal. Ct. App. 2012) (available here).
In the underlying action, the plaintiff had alleged that Neiman Marcus, his former employer, discriminated against him on multiple grounds, including his national origin, sexual orientation, and religion. See Peleg at 42. Neiman Marcus responded by moving to compel arbitration on the basis of a mandatory arbitration agreement that the plaintiff, like most Neiman Marcus employees, had purportedly agreed to. Id. at 43-44. The defendant’s motion was granted, and the parties began the arbitration process. After the arbitrator failed to give the plaintiff a requested continuance and in essence ended his case on a procedural technicality, he sought relief in the courts, arguing that the Neiman Marcus arbitration agreement was illusory and unenforceable, chiefly because Neiman Marcus could unilaterally modify or revoke the agreement, with the changes applying to any cases filed within 30 days, without providing a “savings clause” for claims that were known or had accrued at the time. Id.
The California Court of Appeal for the Second Appellate District reversed the trial court and the arbitrator, holding that the unilateral modification provision rendered the agreement illusory and unenforceable. The majority explained that “an arbitration contract containing a modification provision is illusory if an amendment, modification, or revocation . . . applies to claims that have accrued or are known to the employer. . . . [O]therwise, the employer could amend the contract in anticipation of a specific claim, altering the arbitration process to the employee’s detriment and making it more likely the employer would prevail.” Id. at 42.
The Court of Appeal rejected the defendant’s argument that the arbitration clause’s 30-day notice period precluded the arbitration clause being declared unenforceable. As the panel’s majority explained, the notice provision “merely indicates when a contract change will take effect.” Id. at 58.
The Peleg ruling is expected to be influential. Indeed, just this week, Judge Kramer of the San Francisco Superior Court followed Peleg in denying two motions to compel arbitration by Neiman Marcus (in the coordinated cases, Neiman Marcus v. Monjazeb and Neiman Marcus v. Tanguilig), following on nearly 400 pages of collective briefing and four hearings.