Non-Severability Clause Dooms Arbitration Agreement

A case that was published two years after it was decided is an unusual turn of events, but that’s the situation in Montano v. Wet Seal. The holding is straightforward, and should be instructive to employers and their counsel drafting arbitration provisions: Do not under any circumstances include a non-severability clause. Here, the arbitration agreement barred arbitration of representative claims, including claims under the Labor Code Private Attorney Generals Act, contrary to the state’s public policy per Iskanian. This need not have been fatal except that the agreement also contained a non-severability clause that prevented the offending PAGA waiver from being severed: “In terms of severing the PAGA waiver provision, the paragraph in which it is contained states that if the waiver is found to be unenforceable for any reason by a court, then the entire arbitration agreement is void and unenforceable by the parties.” Under these circumstances, the Court of Appeal held that trial court correctly ruled that the agreement was unenforceable as to all of the plaintiff’s claims, not just PAGA. Bad news for Wet Seal.

The case also confirms another point — that unless there is a formal stay of proceedings, the parties can conduct discovery and the court can rule on a discovery motion at the same time it rules on the petition to compel arbitration. Wet Seal had objected to responding to discovery pending the hearing on its motion. Plaintiff moved to compel, and the court heard that motion immediately after denying the motion to compel arbitration: “When the court ruled on the discovery motion, the motion to compel arbitration was no longer pending, and the request for arbitration had been denied.” Moreover, regardless of the outcome of the motion to compel arbitration, the discovery motion was not moot in light of Montano’s intention to pursue her representative PAGA action, which could not be arbitrated. Plaintiff’s counsel in this case (Scott Cole & Associates) certainly deserve a round of applause on all counts.

Montano v. The Wet Seal Retail, Inc. (Cal. Ct. App., 2nd Dist. Jan. 30, 2017) 2017 S.O.S. 482. Click here for full opinion.