California Legal Brief

The Rule of The Merchant of Tennis is that when employers obtain individual settlement agreements from putative class members through fraud or misrepresentation, a curative notice must inform those employees that rescinding their agreements to join the class action may require repayment of settlement funds at the conclusion of litigation, under Civil Code sections 1689, 1691, and 1693, even though the trial court retains discretion to adjust equities between the parties at judgment.

Appeal from order granting petition for writ of mandate in Superior Court, San Bernardino County.

Petitioner was The Merchant of Tennis, Inc. — the employer who obtained approximately 954 individual settlement agreements from employees through allegedly fraudulent means while a class action was pending.

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

The suit sounded in employment law violations, specifically 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 Garcia worked for Merchant from July 2019 through December 2019. In May 2022, she filed a class action for wage and hour violations. In May-June 2024, while her class certification motion was pending, Merchant entered into 954 individual settlement agreements with employees, paying over $875,000 in exchange for releases of claims. Garcia moved to invalidate these agreements, claiming they were obtained through fraud and coercion.

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, and ordered curative notices to be sent. However, the court ruled that the curative notice did not need to inform employees they may have to repay settlement amounts if Merchant prevailed, only that amounts may be offset against recovery.

The key question(s) on Appeal: Whether California's rescission statutes (Civil Code sections 1689, 1691, and 1693) require that a curative notice inform putative class members that rescinding fraudulently obtained settlement agreements may require repayment of settlement funds.

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 consideration to the employer at the conclusion of litigation, though the trial court maintains discretion under section 1692 to adjust equities between parties at judgment.

The case is inapplicable when the settlement agreements were not obtained through fraud, duress, or misrepresentation, when substantial prejudice to the defendant from delayed repayment can be shown under Civil Code section 1693, or when the underlying claims do not involve California wage and hour laws but rather federal discrimination claims with specific statutory protections.

The case leaves open whether the trial court's equitable authority under Civil Code section 1692 could justify different approaches in cases involving more egregious employer misconduct, the extent to which federal cases addressing similar issues should influence California state court practice, and how courts should balance deterring employer misconduct against protecting rescission statute requirements.