“Exotic” Choice Of Law Clause Is The Key To This Case.
Stained glass in Neiman Marcus store, San Francisco. Carol M. Highsmith, photographer. 2012. Library of Congress.
Neiman Marcus drafted an ingenious choice of law clause that the First District, Division Four, describes as “exotic” – perhaps a euphemism for “too clever by half”, because it ultimately led the Court of Appeal to find the arbitration agreement unconscionable in an employee-employer putative class action/wage-hour dispute. Pinela v. Neiman Marcus Group, Inc., A137520 (1/4 June 29, 2015) (Streeter, Reardon, Rivera).
The choice of law clause provided Texas law applied, “except that for claims or defenses arising under federal law, the arbitrator shall follow the substantive law as set forth by the United States Supreme Court and the United States Court of Appeals for the Fifth Circuit. The arbitrator does not have the authority to enlarge, add to, subtract from, disregard, or . . . otherwise alter the parties’ rights under such laws, except to the extent set forth herein.” The agreement also included a broad delegation provision allowing the arbitrator to decide pretty much any disputed issue.
Ordinarily an agreement can specify choice of law and delegate decisions to the arbitrator. Indeed, typically such provisions are enforced, but such was not their fate here. The Court performed an unconscionability analysis, and found the arbitration provisions both procedurally and substantively unconscionable.
The Court did not like the fact that the agreement disabled the arbitrator from applying California law to a labor dispute involving California workers, and therefore it refused to enforce the Texas choice of law provision, explaining that California has an important interest “in ensuring that its statutory protections for California-based workers are not selectively disabled by out-of-state companies wishing to do business in this state . . .” (My ball, my rules.) The Texas choice of law disadvantaged California workers both as to substantive claims that they might have in California, but not in Texas, and as to defenses to the enforceability of an arbitration agreement, e.g., California law concerning unconscionability.
“[B]ecause the ability of the arbitrator to call upon California law in deciding the enforceability questions entrusted to him is a ‘consideration  inextricably bound up in the question of the validity of the choice of law provision, ‘”, once the choice of law provision was jettisoned, the delegation of the enforceability decision to the arbitrator was too.
Having concluded that the delegation clause was uneforceable, the Court then analyzed the arbitration agreement as a whole and found several instances of substantive unconscionability.
The Court’s bottom line: “We conclude that the delegation clause and the agreement are both unconscionable and therefore unenforceable under California law.”
COMMENT: The Court notes, “In Peleg [v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012)], Division One of the Second District Court of Appeal held an arbitration agreement identical in form to the agreement at issue in this case was illusory under Texas law (which the appellate court applied pursuant to a choice of law provision) and therefore unenforceable).” I have previously posted about Peleg on November 7, 2012:
The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466. This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.
See also my post of April 18, 2012. Note that Peleg and Pinela reach the same result – invalidation of the arbitration agreement – but by different routes. Peleg finds the arbitration agreement illusory under Texas law. Pinela refuses to apply Texas or Fifth Circuit law, and finds the agreement unconscionable under California law.