Problem Here: Modification Provision Was Not Sufficiently Restricted So As To Exempt All Employee Claims, Accrued Or Known, From A Contract Change
Magician, Illusionist, Entertainer. 1913. Library of Congress.
The next case takes us back to law school days: is a contract illusory? The case required the Court of Appeal to determine (1) who was responsible for deciding whether the arbitration provision was illusory; (2) what law applied; (3) what Texas law would hold on the issue; (4) whether Texas law is contrary to California public policy; and (5) whether the arbitration provision was illusory. Peleg v. Neiman Marcus Group, Inc., B231634 (2nd Dist. Div. 2 April 17, 2012) (certified for publication).
The plaintiff, who worked in the fragrance department of Neiman Marcus, sued his employer for violations of the FEHA, breach of an implied-in-fact contract requiring good cause for termination, wrongful termination, and defamation. The employer, Texas-based Neiman Marcus, was successful in compelling arbitration of the dispute. The employee appealed after an adverse result.
The contract contained a modification provision stating that the employer may amend, modify, or revoke the arbitration contract on 30 days' written notice; at the end of the 30-day period, a contract change applies to any claim that has not been filed with the AAA. The employee argued that the employer's ability to change the arbitration contract on 30 days' notice made the contract illusory. The employer pointed to a saving provision in the contract: "[A]ny amendment, modification, or revocation will have no effect on any Claim that was filed for arbitration prior to the effective date of such amendment, modification, or revocation." Illusory or not?
In a lengthy analysis of the issues, the Court of Appeal determined:
First, that the issue was for a judge, not an arbitrator to decide. The issue is "comparable" to determining arbitrability or unconscionability – issues determined by the court "unless the parties clearly and unmistakably delegate them to the arbitrator." And, "[t}hat did not happen here."
Second, the Court of Appeal upheld the choice of law provision requiring the application of Texas law and the FAA, because "Neiman Marcus has a substantial relationship to Texas and engages in interstate commerce."
Third, the Court held that under Texas law, the arbitration provision was illusory, because it made it possible for the employer to change the contract after giving a "trivial" 30 days notice, so long as no claim was filed before the expiration of the 30 day period. Under Texas law, the provision would need to be more protective, and exempt claims accrued, or known, from a contract change, in order not to be illusory.
Fourth, the Court held that Texas law was not contrary to California fundamental public policy – it simply required an express provision (absent here) that in California would be implied by the covenant of good faith and fair dealing.
Thus, the Court majority, in an opinion authored by Justice Mallano, with Justice Johnson, concurring, held that the change provision created an illusory contract.
Justice Rothschild dissented, arguing essentially that Texas cases had found such agreements were not illusory, and that the majority had teased out distinctions that do not yet exist under Texas case law.
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