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.

A federal judge in the Southern District of New York has rebuffed a defendant’s attempt to block class treatment using the aggressive tactic of moving to strike class allegations.  See Chen-Oster v. Goldman Sachs, No. 10-6950 (S.D.N.Y. Jul. 17, 2012) (Opinion & Order) (available here).  Defendant’s motion, largely premised on Wal-Mart v. Dukes (131 S. Ct. 2541 (2011)), attacked the plaintiffs’ class allegations based on commonality, predominance, and standing for injunctive relief.  See Opinion at 2-3.  Judge Leonard B. Sand denied the defendant’s motion except as to class allegations under 23(b)(2), holding that, under Dukes, only current employees would have standing to pursue injunctive relief as a remedy, and the class contained both current and former employees.  Id. at 15.  However, Judge Sand clearly took issue with this, stating that “. . . the Dukes majority’s blanket rule that always denies standing to ex-employees cuts too broad a swath”, but nonetheless followed that rule.  Id. at 13.

In distinguishing Dukes as to the commonality and predominance issues, the court emphasized that the Chen-Oster plaintiffs alleged specific, company-wide employment practices, in contrast to the generalized allegations in Dukes.  Id. at 4-5.  Additionally, Dukes’ historically massive proposed class size was not an impediment to certification, since “Plaintiffs do not number in the millions; Plaintiffs all worked at—and the allegations all center around—Goldman’s New York office.”  Id. at 7.

This is the second time that the Chen-Oster case had generated a notable ruling, the first having come in connection with the U.S. Supreme court’s AT&T Mobility v. Concepcion decision.  In that prior ruling, the court held that, notwithstanding Concepcion, “it remains the law of the Second Circuit that an arbitration provision which ‘precludes plaintiffs from enforcing their [federal] statutory rights’ is unenforceable.” Chen-Oster v. Goldman, Sachs & Co., No. 10-06950, 2011 U.S. Dist. LEXIS 73200, at *15 (S.D.N.Y. Jul. 7, 2011), citing In re American Express Merchants’ Litigation, 634 F.3d 187 (2d Cir. 2011). Chen-Oster thus has the unique distinction of generating significant interpretations of both of the Supreme Court’s two landmark class action rulings from 2011.

In an unexpected trend following on last year’s aggressively pro-arbitration ruling in AT&T Mobility v. Concepcion, which some predicted would prove to be the “death knell” for class actions, federal courts continue to deal defeats to defendants attempting to enforce class-action waivers.  In Schwab v. FINRA, the party arguing for a class action waiver has suffered an indirect, yet critical, defeat.  See Schwab v. Financial Indus. Regulatory Auth., No. 12-518 (N.D. Cal. May 11, 2012) (Order on Motion to Dismiss) (available here).  The brokerage firm Charles Schwab & Co. had sought a declaratory judgment to the effect that the Financial Industry Regulatory Authority (FINRA) could not prevent Schwab from adding a class action waiver to its customer account agreements.  Order at 1.  In a closely reasoned and complex 21-page decision, Magistrate Judge Elizabeth Laporte granted, without leave to amend, FINRA’s motion to dismiss the Schwab lawsuit against it, thus bolstering FINRA’s authority to bring an enforcement action against Schwab focused on the class action waiver in Schwab’s customer agreement.  Because FINRA maintains the arbitration forum in which customers and securities firms often resolve their disputes, it was expected that other firms would have followed Schwab’s lead, had Schwab’s attempt to bar class actions been successful. 

While the ruling is a victory for FINRA as well as Schwab’s investors, as a formal matter the FINRA disciplinary proceeding against Schwab must still be resolved. However, the ruling on FINRA’s motion to dismiss strongly suggests that the class action waiver is likely to be found invalid: “[Schwab] has allegedly already violated a rule by inserting the class action waiver into its account agreement. Regardless of where this dispute is heard, Plaintiff may face sanctions for that violation unless it succeeds in changing the interpretation of or invalidating FINRA Rule 2268(d).”  Order at 20.

California’ Second Appellate District has issued a ruling underscoring the fact that orders denying class certification do not operate, by collateral estoppel, to prevent those other than the named plaintiffs from filing a subsequent class action alleging the same claims.  See Ellis v. Pacific Health Corp., No. B229609 (Cal. Ct. App. Jul. 24, 2012) (order re appeal from judgment of dismissal) (available here).

Ellis usefully summarizes and affirms the controlling authorities, foremost Bridgeford v. Pacific Health Corp., 202 Cal. App. 4th 1034 (2012).  In Bridgeford, the court adopted the United States Supreme Court’s holding in Smith v. Bayer Corp., “[n]either a proposed class action nor a rejected class action may bind nonparties.”  131 S.Ct. 2368, 2380 (2011).  Ellis demonstrates that the Bridgeford holding (“unnamed putative class members of a class that was never certified cannot be bound by collateral estoppel”) is not an idle doctrine.  Bridgeford at 1037.  In Ellis, the trial court had sustained Pacific Health’s demurrer on the ground that the plaintiff was within the class definition of an earlier putative class action (Larner v. Pacific Health Corp.), which alleged the same claims against the same defendant.  However, as to the pivotal privity requirement for the application of collateral estoppel, the unanimous three-judge panel held that the plaintiff, as merely one among the many unnamed prospective class members, was neither a party to the prior action nor represented by a party to the prior action.  Order at 7.  The court explained that, while the named plaintiffs in Ellis had economic interests that were “substantially aligned with Larner’s,” the prior decision cannot bind them; since the Larner case was never certified, the Ellis plaintiffs could not have been parties to it. Id.