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Wednesday, July 8, 2015

Pinela v. Neiman Marcus: Court Invalidates "Delegation Clause" Giving Arbitrator Right to Rule on Enforceability of Arbitration Clause; Finds Arbitration Clause Unconscionable

In Pinela v. Neiman Marcus Group, Inc. (6/29/15) --- Cal.App.4th ---, the plaintiffs brought a class and PAGA representative action alleging a number of wage and hour violations. The trial court granted the defendant's motion to compel arbitration, except as to the PAGA claims. The trial court later reconsidered and denied the motion, holding that the arbitration agreement was illusory. The Court of Appeal affirmed, holding as follows:

Under Code of Civil Procedure section 1008, a trial court may exercise its inherent discretion to reconsider any issue at any time, and the trial court maintained jurisdiction to reconsider the arbitration order, even after entering that order compelling arbitration.

Although the arbitration agreement delegated questions of its enforceability to the arbitrator, this clause did not satisfy the conditions required for a valid delegation clause. First, Peleg v. Neiman Marcus Group,Inc. (2012) 204 Cal.App.4th 1425, (discussed here) found that the same delegation clause did not "clearly and unmistakably delegate enforceability questions to the arbitrator," as required, because a second clause regarding severability provided that the court may decide the same issue. Second, the delegation clause was not irrevocable, as required, because "both the delegation provision and the Agreement as a whole are unconscionable" and therefore revocable.

As to unconscionability, the Court found that the delegation clause was procedurally unconscionable because it was part of a contract of adhesion. In addition, it was substantively unconscionable because it included an element of surprise, in that an unsophisticated person likely would not understand it and because the clause imposed an "unfair burden that is different from the inherent features and consequences of delegation clauses" in that the agreement included a Texas choice-of-law provision that would not allow application of California's unconscionability analysis.

Having found that the delegation clause was unconscionable, the Court next found that the entire agreement was unconscionable, not because it was illusory, but because it included at least three unconscionable terms: the Texas choice-of-law clause; the clause providing for a shortened statute of limitations; and the clause allowing the arbitrator to award fees and costs "to the extent such an award is permitted by applicable law."

The opinion is available here.

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