Contributors

Eric P. Weiss

Principal

Facts

Edgar Gonzalez was employed by Nowhere Santa Monica (“Nowhere Santa Monica”), one of 10 related limited liability companies (“non-Santa Monica entities”) operating Erewhon markets in Los Angeles. During his employment, Gonzalez signed an arbitration agreement in which he agreed to resolve any employment-related disputes with “Nowhere Santa Monica, LLC DBA Erewhon-Santa Monica” through arbitration. Gonzalez was terminated after only five months of employment. After his termination, Gonzalez filed a putative class action lawsuit against Nowhere Santa Monica and the other non-Santa Monica entities, alleging various wage and hour violations of the California Labor Code. He alleged that all ten entities were his joint employers.

All defendants (Nowhere Santa Monica and the non-Santa Monica entities) filed a motion to compel Gonzalez to arbitrate his claims on an individual basis and to dismiss the class allegations. The trial court granted the motion as to Nowhere Santa Monica but denied the motion as to all other nine non-Santa Monica entities because they were not signatories or named in the arbitration agreement. In denying the motion, the trial court rejected defendants’ argument that the arbitration agreement is enforceable as to the non-signatory entities under a theory of equitable estoppel. Rather, the court held equitable estoppel did not apply because Gonzalez’s claims against Nowhere Santa Monica were not “intimately founded in and intertwined with” his claims against the other non-Santa Monica entities.

After the trial court’s ruling, Gonzalez then dismissed his complaint against Nowhere Santa Monica to avoid arbitration and dismissal of his class claims. The nine non-Santa Monica entities appealed.

Court of Appeal’s opinion

On appeal, the non-Santa Monica entities argued they may enforce the agreement under the doctrine of equitable estoppel because Gonzalez’s (and the absent class member’s) claims against all of the Nowhere entities depend upon and are intertwined with Nowhere Santa Monica’s obligations under the arbitration agreement. The Court of Appeal for the Second Appellate District agreed. The opinion can be found on the court's website.

The Court first noted arbitration is a “matter of contract” and, as such, “the basic rule is that one must be a party to an arbitration agreement to be bound by it or invoke – with limited exceptions.” One such exception is the doctrine of equitable estoppel “which as a general matter precludes a party from asserting rights it otherwise would have had against another when its own conduct renders assertion of those rights inequitable.” The Court explained the doctrine as it applies to arbitration:

In the arbitration context, “[I]f a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot . . . ‘on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a nonsignatory.

In Gonzalez, the Court of Appeal concluded that Gonzalez could not, on the one hand, allege that all Nowhere entities were his joint employer and/or responsible for Labor Code violations while, on the other hand, disavow his agreement to arbitrate claims that arose from his employment. The Court of Appeal reasoned that based on the plaintiff’s allegations, liability for the non-Santa Monica entities as his joint employers is derived solely from their share in Nowhere Santa Monica’s legal obligations. Specifically, the Court held:

“Because Gonzalez agreed to arbitrate his wage and hour claims against Nowhere Santa Monica, and because his theory of liability against the non-Santa Monica entities is that they exercised significant control over Nowhere Santa Monica’s employees so as to share its legal obligations, he is equitably estopped from raising the non-Santa Monica entities’ nonsignatory status to oppose arbitrating his wage and hour claims against them.”

In sum, the Court held that plaintiff’s inconsistent position unfairly deprived the Nowhere entities of the ability to enforce the arbitration agreement.

In so doing, the Court of Appeal disagreed with three opinions (including one from the same judicial district) that had come to opposite conclusions on the same issue in Jarboe v. Hanlees Auto Group (2020) 53 Cal.App.5th 539 (First District), Soltero v. Precise Distribution, Inc. (2024) 102 Cal.App.5th 887 (Fourth District), and Hernandez v. Meridian Management Services, LLC (2023) 87 Cal.App.5th 1214 (Second District). The court declined to follow the holdings of these cases and convincingly distinguished its reasoning from these prior decisions.

Key takeaways

The Gonzalez opinion is a clear victory for employers, especially corporate employers who have numerous related entities. The opinion also underscores the importance of clearly defining the scope of the claims and entities covered by arbitration agreements and provides new ammunition for non-signatories to enforce employment arbitration agreements when they are alleged to be a joint employer or legally responsible for claims covered by the agreement. As such, employers should regularly review and update their arbitration agreements to keep up with ever-changing California labor law and optimize enforceability.

We expect Gonzalez to appeal this opinion to the California Supreme Court. Given the conflict in the courts of appeal on this issue, we expect the Supreme Court to grant the petition to review and, eventually, issue an opinion that resolves all issues relating to how the doctrine of equitable estoppel applies in the arbitration context.