California Legal Brief

The Rule of The Merchant of Tennis is that when putative class members rescind individual settlement agreements obtained through fraud or duress to join a class action lawsuit, they must be notified in the curative notice that they could be responsible for repayment of settlement consideration at the conclusion of litigation pursuant to Civil Code sections 1689, 1691, and 1693, under circumstances where an employer has obtained nearly 1,000 individual settlement agreements from employees during pending class certification proceedings through misrepresentations about the litigation.

Appeal from order in Superior Court, San Bernardino County.

Petitioner Appellant was The Merchant of Tennis, Inc. — the employer who entered into approximately 954 individual settlement agreements with employees using allegedly fraudulent representations.

Respondent was Superior Court of San Bernardino County — the trial court that ruled on the curative notice language.

Real Party in Interest was Jessica Garcia et al. — the employees who filed the class action for wage and hour violations and moved to invalidate the individual settlement agreements.

The suit sounded in employment law violations, including failure to pay wages and provide proper rest breaks under California Labor Code and federal employment laws.

The key substantive facts leading to the suit were that Garcia and other employees filed a class action against their former employer for wage and hour violations, and while class certification was pending, the employer obtained 954 individual settlement agreements from employees paying over $875,000 in cash payments, which the trial court found were obtained through false and misleading representations about the scope of litigation, claims released, and likely recovery percentages.

The procedural result leading to the Appeal: The trial court partially granted Garcia's motion to invalidate the ISAs, finding them voidable due to fraud or duress, but ruled that the curative notice to class members did not need to include language that they may have to pay back settlement amounts if the employer prevailed, instead allowing only offset language against any recovery.

The key question(s) on Appeal: Whether California's rescission statutes (Civil Code sections 1689, 1691, and 1693) require that putative class members be notified in curative notices that they may need to repay settlement consideration if they rescind their agreements and the employer ultimately prevails in the class action litigation.

The Appellate Court held that California's rescission statutes require curative notices to inform putative class members that if they rescind their individual settlement agreements to join the class action, they could be responsible for repayment of the settlement consideration at the conclusion of litigation, though the trial court maintains discretion under Civil Code section 1692 to adjust equities between parties at the time of judgment.

The case is inapplicable when the settlement agreements are found void (rather than voidable), when federal employment statutes like Title VII are involved (which may have different tender-back requirements), when the employer has not engaged in misrepresentations to obtain settlements, or when substantial prejudice to the employer from delayed repayment can be demonstrated.

The case leaves open whether trial courts have discretion under Civil Code section 1692 to completely excuse repayment at the outset of litigation rather than at judgment, the extent of equitable authority in cases involving different types of employer misconduct, and what constitutes "substantial prejudice" sufficient to require immediate rather than delayed restoration under Civil Code section 1693.