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Wednesday, June 27, 2012

Pulli v. Pony International: Court Holds That Labor Code 206.5 Does Not Prohibit Waiver of Right to Jury Trial in Wage Actions

Pulli v. Pony International, LLC (6/19/12) --- Cal.App.4th ---- addresses an unusual wrinkle in the Arbitration Wars.

The plaintiff, Pulli, alleged that the defendant, Pony, fraudulently induced him to enter into an employment agreement and wrongfully terminated his employment. Pulli alleged that Pony hired him under false pretenses, then forced him to sign a second employment agreement, threatening that if he refused to do so, he would forfeit certain earned wages. Pulli alleged that this agreement was void under Labor Code section 206.5, which prohibits an employer from requiring an employee to execute "a release of a claim or right on account of wages due unless the wages are actually paid."

Pony moved to compel arbitration, arguing that all claims against it were subject to an arbitration clause in the employment agreement. In opposition, Pulli argued -- as he had alleged in his complaint -- that the agreement was void under section 206.5.

The trial court (San Diego Superior Court, Judge Joan M. Lewis) denied the motion, finding that the employment agreement was void under section 206.5, and that the arbitration provision contained in the employment agreement was therefore unenforceable.

On appeal, Pony argued that the trial court erred in failing to permit the arbitrator to determine whether section 206.5 rendered the arbitration provision unenforceable. On the merits, Pony argued that the trial court erred in determining that the arbitration provision was unenforceable pursuant to section 206.5.

The Court of Appeal held that Pony waived its right to have the arbitrator determine the section 206.5 issue. "By submitting the section 206.5 issue to a judicial forum, Pony acted in a manner 'inconsistent with the right to arbitrate,' and 'substantially invoked' 'the litigation machinery'." Slip op. at 9.

On the merits -- and more importantly for our purposes -- the Court concluded that the arbitration provision was not unenforceable under section 206.5. "Pulli contends that section 206.5 precludes an employer from requiring an employee to either agree to an arbitration provision and release his right to a jury trial or forfeit wages that the employee has earned." Slip op. at 13. The Court rejected this argument.

Accordingly, we conclude that section 206.5 prohibits an employer from obtaining a release of a claim for wages under specified circumstances, and does not preclude a party from waiving its right to a jury trial by entering into an agreement containing an arbitration provision.
Slip op. at 17. 

Pulli apparently did not make the broader Armendariz argument that requiring him to arbitrate his statutory claims would result in their forfeiture, and the Court did not address this issue.  

But the case does raise a puzzling question: If a plaintiff alleges that an agreement to arbitrate is void, and makes the same argument in opposition to a motion to compel arbitration, how can a defendant counter the plaintiff's argument and at the same time preserve its right -- if it believes it has such a right -- to have the issue determined by an arbitrator?

The opinion is available here.

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