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Amir Peleg v. Neiman Marcus Group

April 17, 2012


APPEAL from orders of the Superior Court of Los Angeles County, David L. Minning, Judge. Super. Ct. No. BC400057)

The opinion of the court was delivered by: Mallano, P. J.


Los Angeles County

Reversed with directions.

Under the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16), "arbitration is a matter of contract." (Steelworkers v. Warrior & Gulf Co. (1960) 363 U.S. 574, 582 [80 S.Ct. 1347]; accord, 9 U.S.C. § 2.) An arbitration contract typically consists of the parties' mutual promises to arbitrate their claims against each other.

In this employment case, an employer and its at-will employees purportedly entered into a contract requiring the arbitration of claims by both sides. But the contract contains 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 American Arbitration Association (AAA). The contract also has a choice-of-law clause stating that the contract shall be governed by Texas law and the FAA. The employee contends that, under the choice-of-law clause, the employer's unilateral right to make contract changes renders the contract illusory. We ultimately conclude that the choice-of-law clause is valid and that the arbitration contract is illusory under Texas law.

In reaching that conclusion, we also examine California law regarding illusory arbitration contracts. On that subject, we determine 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. 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. 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.


The allegations and evidence in this appeal are taken from the pleadings as well as the declarations and exhibits submitted in connection with the motion to compel arbitration and the subsequent cross-motions to vacate and confirm the arbitration award.

A. Complaint

The complaint alleges that plaintiff, Amir Peleg, is a gay Jewish male of Israeli national origin. He worked at the Neiman Marcus store in Beverly Hills from December 28, 2005, to February 21, 2008. The store is owned by defendant Neiman Marcus Group, Inc. (Neiman Marcus). Peleg's supervisor was an Iranian woman of the Muslim religious faith.

Peleg worked in the fragrances department and performed his duties in an exemplary manner.

On February 21, 2008, Peleg was discharged because of his national origin, religion, and sexual orientation in violation of the Fair Employment and Housing Act (FEHA) (Gov. Code, §§ 12900-12996). He was also harassed and subjected to retaliation for the same reasons. He exhausted his administrative remedies under the FEHA and received a right-to-sue letter. (See Gov. Code, §§ 12960, 12963, 12965, subd. (b).) In addition, his discharge violated an implied-in-fact contract requiring good cause for termination and was contrary to public policy in that the discharge was motivated by his complaints about compensation issues and his disclosure of Neiman Marcus's failure to comply with state and federal laws. Finally, Neiman Marcus falsely stated it had discharged Peleg because he stole samples from the store.

The complaint, filed on October 16, 2008, contained causes of action alleging violations of the FEHA, breach of an implied-in-fact contract requiring good cause for termination, wrongful termination in violation of public policy, and defamation.

B. Motion to Compel Arbitration

Neiman Marcus responded to the complaint with a motion to compel arbitration of the entire case. The company established that, at the time of hire, Peleg was given a "Mandatory Arbitration Agreement" (Agreement). Over a year later, he signed a form acknowledging (1) he had received the Agreement and had an opportunity to review it, (2) he understood that he and the company had to submit all disputes to binding arbitration, and (3) the Agreement was a mandatory condition of employment.

The first three pages of the Agreement indicate that the parties agreed to arbitrate "claims" against each other.

The Agreement defines "Covered Employees" as "[a]ll employees of the Company who are employed by the Company on or after the Effective Date [of July 15, 2007], and all employees who accept employment on or after the Effective Date . . . . [T]his Agreement does not cover employees who have their own separately signed employment agreement with the Company."

On page 1, the Agreement recites: "The following are the terms and conditions of this Agreement. [¶] . . . [¶] . . . All 'Claims' described in Section 3 below that any Covered Employee may have against the Company shall be resolved exclusively through final and binding arbitration . . . . [¶] . . . All 'Claims' described in Section 3 below that the Company may have against any Covered Employee shall be resolved exclusively through final and binding arbitration . . . ." (Italics added.)

Section 3, which appears on pages 2 and 3, sets forth a list of "Covered Claims." Those claims are divided into 10 general categories and include the names of specific statutes where pertinent, as follows: (1) "Discrimination or harassment on the basis of race, color, gender, sexual orientation, religion, national origin, age, disability, or any other unlawful basis," citing, among other laws, the Age Discrimination in Employment Act of 1967 (29 U.S.C. §§ 621-634), title VII of the Civil Rights Act of 1964 (42 U.S.C. §§ 2000e to 2000e-4), the Americans with Disabilities Act of 1990 (42 U.S.C. §§ 12101-12117), and the Family and Medical Leave Act of 1993 (29 U.S.C. §§ 2601-2654); (2) "Violations of any common law or constitutional provision, federal, state, county, municipal, or other governmental statute, ordinance, regulation, or public policy relating to workplace health and safety, voting, meal or rest breaks, state service letters, and [wage and hour issues]"; (3) "Violations of any common law or constitutional provision, federal, state, county, municipal, or other governmental statute, ordinance, regulation, or public policy, including, but not limited to, claims alleged under the following statutes: . . . Employee Polygraph Protection Act of 1988 [(29 U.S.C. §§ 2001-2009)]; Employee Retirement Income Security Act of 1974 [(29 U.S.C. §§ 1001-1461)]; Fair Credit Reporting Act [(15 U.S.C. §§ 1681-1681x)]; . . . The Occupational Safety and Health Act [of 1970 (29 U.S.C. §§ 651-678)]; . . . and Worker Adjustment and Retraining Notification Act [(29 U.S.C. §§ 2101-2109)]"; (4) "Personal injuries except those covered by workers' compensation"; (5) "Retaliation for filing a protected claim for benefits . . . or exercising rights under any statute"; (6) "Breach of any express or implied contract, breach of a covenant of good faith and fair dealing, and claims of wrongful termination or constructive discharge"; (7) "Breach of any common law duty of loyalty or its equivalent"; (8) "Exceptions to the employment-at-will doctrine"; (9) "Any common law tort claim, including, but not limited to, wrongful discharge, malicious prosecution, wrongful arrest/wrongful imprisonment, negligence, gross negligence, defamation, slander, fraud, misrepresentation, invasion of privacy, tortious interference, trespass to chattel, conversion, negligent and intentional infliction of emotional distress, or 'whistleblowing'"; and (10) "All other employment-related legal disputes, controversies, or claims arising out of, concerning, or relating in any way to, employment or cessation of employment with the Company."

A choice-of-law clause, in section 16, states that the Agreement is to be governed by Texas law and the FAA.

Section 20 of the Agreement declares: "This Agreement is not, and shall not be construed to create, any contract of employment, express or implied, nor shall this Agreement be construed in any way to change the status of any Covered Employee from at-will status. The parties can each end the employment relationship with the other at anytime for any reason, with or without cause. The arbitrator has no authority to alter the at-will nature of any employee's employment with the Company."

The Agreement is 10 pages long and is not part of another document such as an employee handbook or manual. It is a stand-alone agreement that addresses only one subject: arbitration.

Peleg opposed the motion to compel arbitration, arguing that the Agreement was unconscionable based on several allegedly invalid provisions. In the alternative, he asserted the Agreement was illusory and unenforceable in light of the following provision: "This Agreement to arbitrate shall survive the termination of the employer-employee relationship between the Company and any Covered Employee, and shall apply to any covered Claim whether it arises or is asserted during or after termination of the Covered Employee's employment with the Company or the expiration of any benefit plan. This Agreement can be amended, modified, or revoked in writing by the Company at anytime, but only upon thirty (30) days' advance notice to the Covered Employee of that amendment, modification, or revocation. However, any 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." (Italics added.)

The motion to compel was heard on February 2, 2009. By order of the same date, the trial court granted the motion and stayed further judicial proceedings pending the outcome of arbitration.

C. Arbitration Proceedings

Under the Agreement, arbitration is to be administered by the AAA and conducted by one arbitrator. In accordance with the trial court's ruling, the case was so assigned. The arbitrator set the case for hearing from June 21 to June 23, 2010. At the request of Neiman Marcus, the parties agreed that the hearing could be rescheduled to begin on September 28, 2010. Thereafter, at Peleg's request, the parties agreed to reset the hearing to commence on October 19, 2010. In making his request, Peleg asserted that his attorney of record, Astineh Arakelian, was unavailable, and "she was the only one who knew the case."

One week before the October 19, 2010 hearing date, Peleg sought another continuance. Arakelian notified the arbitrator that her colleague, Carney Shegerian, was unavailable for the hearing due to back-to-back trials in Los Angeles Superior Court. Arakelian stated that Shegerian was the only attorney Peleg had "authorized" to represent him at the arbitration hearing. Arakelian had known about this scheduling conflict two weeks before she sought a continuance. Shegerian had not informed the superior court he had any conflict regarding the arbitration hearing. Neiman Marcus opposed the continuance.

The arbitrator denied the continuance, explaining that Shegerian had done virtually no work on the case and Arakelian had handled the arbitration herself. On the day of the hearing, Neiman Marcus appeared with its two attorneys of record and in-house counsel, ready to proceed. Arakelian appeared together with Peleg but stated she could not go forward because she was not authorized to represent Peleg at the hearing.

By order dated on or about November 4, 2010, the arbitrator dismissed the case with prejudice pursuant to AAA rules on the ground Peleg had failed to comply with an order, namely, to present his case at the hearing on October 19, 2010. Peleg moved for reconsideration, which was denied. By separate order dated December 18, 2010, the arbitrator awarded Neiman Marcus sanctions of $40,350.22 in attorney fees and expenses.

The parties filed cross-motions to vacate and confirm the award. Peleg argued the arbitrator had improperly denied a continuance (see Code Civ. Proc., § 1286.2, subd. (a)(5)) and lacked the authority to impose sanctions. Neiman Marcus argued to the contrary.

At the hearing on the motions, the trial court ruled that the arbitrator had not erred in denying the continuance. It granted the motion to confirm the award. A written order was filed to that effect. Peleg appealed.


We review de novo the trial court's order confirming an arbitration award. (See Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 376, fn. 9.) The pertinent facts are not in dispute.

On appeal, Peleg contends -- as he did in opposing the motion to compel arbitration -- that the Agreement is illusory because Neiman Marcus retained the unilateral right to amend, modify, or revoke it on 30 days' advance written notice, with the change to apply to any unfiled claim. We agree with that contention.

"[Peleg is] attacking the authority of the trial court to compel [him] to submit the matter to arbitration. An order to compel arbitration is an interlocutory order which is appealable only from the judgment confirming the arbitration award, or in certain exceptional situations is reviewable by writ of mandate. . . . 'A party does not waive his right to attack the order [compelling arbitration] by proceeding to arbitration; the order is reviewable on appeal from a judgment confirming the award.'" (United Firefighters of Los Angeles v. City of Los Angeles (1991) 231 Cal.App.3d 1576, 1581-1582.) "If a trial court compels arbitration . . . , the party resisting arbitration may seek review of the ruling on appeal from an order that confirms the award. . . . If the arbitration process is found to be invalid, the responsibility for a waste of resources would then lie with the trial court, not the litigant . . . .' . . . Thus, '[w]ith respect to an order compelling arbitration, the question is not whether an aggrieved party is entitled to appellate review, but when. . . . [N]o immediate, direct appeal lies from an order compelling arbitration. . . . But such an order is subject to review on appeal from the final judgment.'" (Fagelbaum & Heller LLP v. Smylie (2009) 174 Cal.App.4th 1351, 1359, citation omitted.) "'The rationale of this rule is that the order compelling arbitration is interlocutory in nature and works no hardship on the litigant because the party who objects to arbitration may win at the arbitration hearing, and if he does not, the issue is reviewable on appeal from the order of confirmation.'" (Maddy v. Castle (1976) 58 Cal.App.3d 716, 719-720, disapproved on another point in Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 188.)

Under the FAA, "[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2, italics added.)

In general, an arbitration contract consists of the parties' mutual promises to arbitrate their claims against each other. (See, e.g., Ticknor v. Choice Hotels Intern., Inc. (9th Cir. 2001) 265 F.3d 931, 944; Hull v. Norcom, Inc. (11th Cir. 1985) 750 F.2d 1547, 1549-1551; Hellenic Lines, Ltd. v. Louis Dreyfus Corporation (2d Cir. 1967) 372 F.2d 753, 758; Clutts v. Dillard's, Inc. (D.Kan. 2007) 484 F.Supp.2d 1222, 1224, fn. 1; In re Odyssey Healthcare, Inc. (Tex. 2010) 310 S.W.3d 419, 424 (Odyssey Healthcare).)

"Words of promise which by their terms make performance entirely optional with the 'promisor' . . . do not constitute a promise. Although such words are often referred to as forming an illusory promise, they do not fall within the present definition of promise. They may not even manifest any intention on the part of the promisor. Even if a present intention is manifested, the reservation of an option to change that intention means that there can be no promisee who is justified in an expectation of performance." (Rest.2d Contracts, § 2, com. e, p. 10; accord, id., § 77, com. a, p. 195; 1 Corbin on Contracts (rev. ed. 1993) § 1.17, p. 47.) "One of the most common types of promise that is too indefinite for legal enforcement is the promise where the promisor retains an unlimited right to decide later the nature or extent of his or her performance. This unlimited choice in effect destroys the promise and makes it illusory." (1 Williston on Contracts (4th ed. 2007) § 4:27, pp. 804-805, fns. omitted; accord, 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, §§ 230-231, pp. 264-266.)

A. Arbitral Claims

As a preliminary matter, we must decide who should decide whether the Agreement is illusory. Neiman Marcus contends the arbitrator should decide that question. Peleg presses for a judicial determination.

This issue is comparable to determining (1) which claims, if any, are arbitrable -- arbitrability -- or (2) whether an agreement is unconscionable. Questions of this type are reserved for the court unless the parties clearly and unmistakably delegate them to the arbitrator. That did not happen here.

In discussing who -- an arbitrator or a judge -- decides arbitrability, the United States Supreme Court has explained: "We believe the answer to the 'who' question . . . is fairly simple. Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, . . . so the question 'who has the primary power to decide arbitrability' turns upon what the parties agreed about that matter. . . . [¶] . . . [¶]

"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state-law principles that govern the formation of contracts. . . . The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration. . . .

"This Court, however, has (as we just said) added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability: Courts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so. . . . In this manner the law treats silence or ambiguity about the question 'who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguity about the question 'whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement' -- for in respect to this latter question the law reverses the presumption. . .

"But, this difference in treatment is understandable. The latter question arises when the parties have a contract that provides for arbitration of some issues. In such circumstances, the parties likely gave at least some thought to the scope of arbitration. And, given the law's permissive policies in respect to arbitration, . . . one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. . . . On the other hand, the former question -- the 'who (primarily) should decide arbitrability' question -- is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers. . . . [G]iven the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the 'who should decide arbitrability' point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide." (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 943-945 [115 S.Ct. 1920], citations omitted.)

The court discussed this subject again in Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79 [123 S.Ct. 588] (Howsam), saying: "'[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.' . . . Although the Court has also long recognized and enforced a 'liberal federal policy favoring arbitration agreements,' . . . it has made clear that there is an exception to this policy: The question whether the parties have submitted a particular dispute to arbitration, i.e., the 'question of arbitrability,' is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.' . . .

"Linguistically speaking, one might call any potentially dispositive gateway question a 'question of arbitrability,' for its answer will determine whether the underlying controversy will proceed to arbitration on the merits. The Court's case law, however, makes clear that, for purposes of applying the interpretive rule, the phrase 'question of arbitrability' has a far more limited scope. . . . The Court has found the phrase applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.

". . . [A] gateway dispute about whether the parties are bound by a given arbitration clause raises a 'question of arbitrability' for a court to decide. . . . Similarly, a disagreement about whether an arbitration clause in a concededly binding contract ...

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