Reported / Citable
Background
Jessica Garcia filed a wage and hour class action against her former employer, The Merchant of Tennis. While the case was pending, the employer entered into approximately 954 individual settlement agreements with current and former employees, paying out more than $875,000 in exchange for releases of wage claims. Garcia moved to invalidate these settlements, arguing they were procured through fraud and coercion.
The trial court partially agreed and ruled the agreements were voidable. It ordered the parties to send a curative notice to all putative class members allowing them to revoke their settlements and join the class action. The parties then disagreed about what the notice should say. Merchant wanted the notice to warn employees that, under California’s rescission statutes, they might have to repay the settlement money to Merchant if they rescinded the agreements and Merchant later prevailed. Garcia argued, relying on federal authority, that no repayment should be required and the settlement should simply be offset against any judgment.
The trial court sided with Garcia, ruling that the curative notice need not warn class members about potential repayment. Merchant petitioned for a writ of mandate to require compliance with California Civil Code sections 1689 and 1691.
The Court’s Holding
The Fourth District Court of Appeal, Division Two, granted the writ. The court held that the curative notice must include language warning class members that if they rescind their individual settlement agreements, they could be required to repay the settlement consideration to Merchant if Merchant prevails in the litigation. Civil Code section 1689 allows rescission of contracts procured by fraud or duress, but section 1691 generally requires the rescinding party to restore the consideration received.
The court rejected the trial court’s reliance on federal cases such as Marino v. CACafe and McClellan v. Midwest Machining. Those decisions did not analyze California’s rescission statutes; the McClellan exception to the tender-back doctrine was carved out for federal Title VII claims, not state wage and hour cases. Under California law, the controlling framework is sections 1689, 1691, 1692, and 1693.
However, immediate repayment is not required. Section 1693 permits delayed restoration of consideration where the defendant will not be substantially prejudiced. Section 1692 gives the trial court equitable discretion to adjust the obligations between the parties at the time of judgment. Combining these provisions, the court held that the curative notice must inform class members of potential repayment liability at the end of the case while making clear the trial court retains equitable authority to adjust the result. A dissenting opinion argued that the trial court should have broader discretion to forgive repayment up front.
Key Takeaways
- Curative notices in class action wage and hour cases involving rescinded individual settlement agreements must accurately describe California’s rescission statutes, including the potential obligation to repay settlement funds if the employer prevails.
- Federal class action and Title VII tender-back precedents do not displace California’s Civil Code rescission framework when state wage claims are at issue.
- Civil Code section 1693 allows a court to delay restoration of consideration until final judgment, so long as the defendant is not substantially prejudiced.
- Civil Code section 1692 permits the trial court to adjust the equities between the parties at the time of judgment, but the majority view is that this discretion is exercised at judgment, not at the outset of the litigation.
- Trial courts retain broad authority to control class actions and supervise communications with class members, but that authority cannot rewrite substantive contract law.
Why It Matters
This published decision provides the first appellate guidance in California on how to handle curative notices when a court invalidates employer-procured individual settlement agreements in a class action. Plaintiffs’ counsel should expect resistance to notice language that omits potential repayment, and employers will use this opinion to insist on repayment warnings as a condition of any rescission opportunity.
The decision creates real strategic tension. A truthful warning that class members might have to repay potentially deters participation in the class action, which is precisely the chilling effect the trial court tried to avoid. Plaintiffs’ counsel may need to negotiate fee arrangements, indemnification structures, or escrow mechanisms to make rescission practical for low-wage employees who have already spent their settlement funds.