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Court Holds That An Arbitration Agreement That Allows The Employer To Unilaterally Modify Or Revoke Arbitration Clauses Is Unenforceable

This week, in Peleg v. Niemen-Marcus Group, Inc., the California Court Of Appeals held that an arbitration agreement that allowed an employer to unilaterally modify or revoke the arbitration agreement with 30 days’ notice was unenforceable.  The Court held also held that it was proper for the trial court, and not the arbitrator, to determine the issue of whether the arbitration agreement was enforceable.

Peleg sued Niemen-Marcus(“NM”)asserting numerous claims related to his termination.  NM moved to compel arbitration and the trial court agreed and sent the case to arbitration.  After the arbitration, Peleg appealed the trial court’s decision to send the case to arbitration, asserting that the arbitration agreement was unenforceable because it contained a provision which allowed NM to unilaterally amend, modify, or revoke the agreement upon 30 days’ written notice. The provision applied to any claim that had not been filed as of the date of the modification (i.e. the employee had 30 days from the notice of a change to file arbitration).  Peleg argued this was in violation of the law.

Applying California law, the Court held that the trial judge, not the arbitrator, was the proper person to determine if the arbitration agreement was enforceable. The Court stated that arbitration agreement did not “clearly and unmistakably delegate enforceability questions to the arbitrator,” and therefore the trial court was required to make the determination.  Next, the Court examined Texas law (due to a choice of law provision) and Federal Arbitration Act (as required by the agreement) to determine if the arbitration agreement which contained the modification clause was enforceable.  The Court held that an employer’sunrestricted right to amend, modify, or terminate an arbitration agreement at any time renders the agreement illusory and therefore unenforceable.

Lastly, the Court examined California law to determine if the law chosen by the parties was in conflict with a fundamental policy of California. The Court held that that “an arbitration contract containing a modification provision is illusory if an amendment, modification, or revocation — a contract change — applies to claims that have accrued or are known to the employer.”  That said, “if a modification provision is restricted — by express language or by terms implied under the covenant of good faith and fair dealing — so that it exempts all claims, accrued or known, from a contract change, the arbitration contract is not illusory.”  The Court stated that were it otherwise, “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. The employer could also terminate the arbitration contract altogether, opting for a judicial forum if that seemed beneficial to the company.”  Based on this, it held California public policy was not being contravened.

In short, based on the employer’s right to revoke or modify the arbitration agreement, the Court overturned the arbitration ruling and remanded the case back to the trial court to have a trial (not arbitration) on the merits.

For more information, or if you need legal assistance, please contact the Wagner Legal Group at info@wagnerlegalgroup.com or (310) 857-5293.

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