federal and state law. In May and June 2024, Merchant entered into approximately 954
individual settlement agreements (ISAs) with employees to give up their wage and hour
claims against Merchant in exchange for cash payments. Merchant paid over $875,000
in cash payments to former and current employees.
Garcia moved for class certification in May 2024. She also filed a motion to
invalidate the ISAs, insisting they were obtained by Merchant through coercion and
fraud. The trial court did not grant the motion to invalidate the ISAs in total but agreed
that the ISAs were voidable. It ordered the parties to meet and confer regarding a
curative notice to be sent to all putative class members advising that they could revoke
their ISAs and join the class action lawsuit. The parties could not agree on the language
of the curative notice. A hearing was held on February 28, 2025, at which the trial court
ruled on the curative notice to be sent to all putative class members who had signed
ISAs. The trial court ruled that the curative notice did not need to include that if the
parties chose to revoke their ISAs, they may have to pay back the settlement amount if
Merchant prevailed. It did advise the class members that the amount of recovery,
2
should they prevail, may be offset by the settlement payments. The trial court agreed to
stay its order on the curative notice until March 31, 2025, in order for Merchant to seek
review.
Merchant filed a petition for writ of mandate (Petition) asking this court to issue
a peremptory writ of mandate directing the trial court to vacate its February 28, 2025,
ruling; that the trial court be instructed to comply with California’s rescission statutes,
Civil Code sections 1689 and 1691, as part of the curative notice; that the trial court be
instructed the curative notice must inform putative class members that if they revoke
their ISAs to join the class action lawsuit, they are required to immediately return the
settlement payment. Merchant requested a further stay of the trial court’s order until the
issue has been resolved by this Court, which we granted. We then issued an order to
show cause why relief should not be granted.
FACTUAL AND PROCEDURAL HISTORY
Garcia worked for Merchant from July 18, 2019, through December 31, 2019.1
Merchant is a California corporation conducting business in San Bernardino County.
In May 2022, Garcia filed a third amended consolidated class action complaint
against Merchant for failure to pay wages and give proper rest breaks in violation of
various provisions of the California Labor Code, and other employment-related
violations under federal and state law. She filed on behalf of herself and all other
1 Two other named plaintiffs, Jose Hernandez Solis and Rudy Jimenez, worked for Merchant “from approximately April 2020 to June 2020” and “for approximately nine months through March 13, 2020” respectively.
3
individuals over the age of 18 who were victims of Merchant’s policies and practices.
On May 30, 2024, Garcia filed her motion for class certification; Merchant filed
opposition to the motion on August 15, 2024. In its opposition, Merchant noted that a
“substantial portion of the putative class entered into arbitration or settlement
agreements,” which included a class action waiver. Garcia had not entered into a
settlement agreement, but 954 former and current employees had signed the ISAs.
On November 12, 2024, Garcia filed her motion to invalidate the ISAs (Motion)
entered into between Merchant and 954 putative class members. The Motion asserted
that Merchant had procured the agreements based on fraud and coercion. Merchant had
obtained the settlements by including false statements concerning the scope of the
litigation, the claims released, and the percentage employees would likely recover in a
class action lawsuit. She also asserted that Merchant had coerced the class members
into signing arbitration agreements after the class action complaint was filed. Merchant
filed an opposition to the Motion on December 18, 2024, arguing that Garcia did not
have standing to challenge the ISAs and had provided no legal basis to set aside the
valid agreements. Merchant included an example of the ISAs signed by putative class
members. Garcia filed a reply brief on January 8, 2025.
On January 23, 2025, the trial court partially granted the Motion, concluding that
the agreements were “voidable at the election of each settling putative class member
within 45 calendar days of the date of mailing a court-approved curative notice,”
because they were procured through fraud or duress. (Boldface omitted.) The court
4
also ordered the parties to send curative notices to the putative class members, but to
meet and confer to decide on the language to be included in the notices.
The parties could not agree on the language to be included in the curative notice.
They both provided to the trial court their own curative notice letter. Merchant sought
to have the following language included: “By revoking your acceptance of the
settlement agreement, you will not immediately be required to return any payment you
have received from [Merchant] in exchange for your release. [¶] Should [Merchant]
later be found to owe you any monies, the monies they have already paid to you through
the ISA may potentially be offset against the total amount that [Merchant] ultimately
owes to you. However, if you revoke your release and [Merchant] is found not to be
liable in this action, you may later be required to return the monies you were paid in
exchange for entering into your settlement.”
The court held a hearing on the matter on February 7, 2025. At the hearing,
Merchant asserted that recission principles required that the curative notice include
language that notified the class members they may be required to refund Merchant the
amounts they were paid as part of the individual settlements. Specifically, it asserted
that the class members should be notified that, if Merchant were to successfully defend
against the claims in the class action, the class members would have to return the
amount they received as a part of their rescinded ISAs, and that the proposed curative
notice did not adequately notify class members of that possibility. Merchant proposed
that language should be included “You could also be required to refund to [Merchant]
all or some of the settlement amount you received based on what happens at trial in this
5
action.” It further argued that the proposed notice’s omission of that language was
tantamount to the court taking one million dollars from Merchant. Garcia countered
that advising the putative class members that they may owe the settlement money back
to Merchant would dissuade potential class members from joining the suit, that
Merchant obtained the settlements fraudulently, and that the matter could be addressed
at a later time. Garcia relied on the federal case of Marino v. CACafe, Inc. (N.D. Cal.
Apr. 28, 2017) 2017 WL 1540717 (Marino) in which the court found that class
members may have an offset for settlement amounts against the judgment but would not
be required to return the payment. The parties were ordered to provide supplemental
briefing.
In a supplemental brief, Merchant asserted that California recission law—Civil
Code section 1691—requires immediate repayment of consideration the employees
received if an agreement was rescinded. Merchant argued that the unpublished federal
case of Marino was not on point and was not controlling authority. To the extent the
case allowed employees to keep their settlement funds, this contradicted California
statutory and case law. Garcia responded that the trial court should follow Marino.
Merchant had provided no case that held a curative notice for a voidable release should
include language requiring putative class members to pay back consideration. Garcia
also relied on another federal case, McClellan v. Midwest Machining, Inc. (6th Cir.
2018) 900 F.3d 297, 308 (McClellan), to support her claim that the repayment of the
consideration for the ISAs was not required in order to join the class action lawsuit.
6
On February 28, 2025, the trial court filed its tentative order. In its reasoning,
the court first noted that neither party had presented binding California authority
concerning whether the curative notices should include language requiring the class
members to repay the settlement payments prior to their joining suit. The court then
concluded that the notice did not need to inform the class members that they would be
required to return any payments to Merchant because relevant federal case law, namely,
Marino and McClellan, did not require any refund prior to the class members joining.
The trial court noted that California class action law was a mixture of federal and state
law. The trial court found the argument that California recission law should apply was
“simplistic legal analysis,” noting that the employee/employer relationship involved a
higher risk of coercion and abuse than regular contracts. The trial court concluded, “In
light of the following, the curative notice shall include language similar to the language
in Marino that any amount already paid pursuant to a later-voided agreement will be
treated as an offset to any other recovery by the putative class member. The Court may
determine at a later date whether [Merchant] is entitled to any offset. The putative class
member will not be required to return any payment they previously received from
[Merchant].”
The hearing was held on February 28, 2025. Merchant insisted that the binding
authority was Civil Code sections 1689 and 1691. The trial court noted that it was
aware of California’s rescission statutes. It stated, despite these California statutes, “in
all those other federal cases there was, I'm sure, rescission statutes in the background,
right.· I mean, there's always rescission.” The trial court maintained that the settlement
7
agreements in the employment context were “unique.” Merchant responded that the
rescission statutes were not mentioned in the federal cases, and the issue of return of
consideration was not brought up in the federal cases. California statutes were clear that
if a contract was rescinded, the settlement money must be returned. The trial court was
concerned that those employees who entered into the ISAs would not be able to pay
back the money and would be discouraged from joining the class action lawsuit.
Merchant argued that the purpose of the curative notice was to give the class members
all of the relevant facts, not to discourage or encourage joining the class action. Garcia
argued that Merchant had a remedy if they were to prevail in the lawsuit, in that they
could individually sue each of those who signed an ISA. Merchant argued this made
their point that the curative notice should inform the class members that they may owe
the settlement money. The trial court adopted the tentative ruling.
On March 24, 2025, Merchant filed its petition for writ of mandate.
DISCUSSION
Merchant claims the trial court erred by finding that putative class members who
entered into ISAs should be allowed to keep their settlement payments if they decided to
rescind their agreements. Merchant asks this court to issue a peremptory writ directing
the trial court to vacate its February 28, 2025, ruling and order that the proposed class
members must comply with California’s rescission statutes, Civil Code sections 1689
and 1691, by immediately returning any settlement payment if they choose to rescind
their ISAs and join the class action litigation.
8
Employers may obtain releases of wage claims directly from employees, and
such releases bar the plaintiffs from proceeding with litigation. (Chindarah v. Pick Up
Stix, Inc. (2009) 171 Cal.App.4th 796, 803 [“[T]here is no statute providing that an
employee cannot release his claim to past overtime wages as part of a settlement of a
bona fide dispute over those wages”].) This is based on the principle that “ ‘[t]he law
favors settlements.’ ” (Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1382.) The
rescission of contracts is governed in California by Civil Code section 1689, subdivision
(b), which provides in part, “A party to a contract may rescind the contract in the
following cases: [¶] (1) If the consent of the party rescinding, or of any party jointly
contracting with him, was given by mistake, or obtained through duress, menace, fraud,
or undue influence, exercised by or with the connivance of the party as to whom he
rescinds, or of any other party to the contract jointly interested with such party.” Civil
Code section 1691 provides, “Subject to Section 1693, to effect a rescission a party to
the contract must, promptly upon discovering the facts which entitle him to rescind if he
is free from duress, menace, undue influence or disability and is aware of his right to
rescind: [¶] (a) Give notice of rescission to the party as to whom he rescinds; and [¶]
(b)(1) Restore to the other party everything of value which he has received from him
under the contract or offer to restore the same upon condition that the other party do
likewise, unless the latter is unable or positively refuses to do so.”
“ ‘[W]hen a plaintiff seeks to rescind a settlement agreement, he must effectuate
that rescission before he is free to pursue the released claim. ‘[P]laintiff must restore
what he has received in settlement of the disputed claim before suing upon it. He
9
cannot retain the benefits of the release and sue, for to sue would violate the terms of his
bargain. To hold otherwise would frustrate the very purpose of the release and destroy
its effectiveness as a favored device for eliminating litigation. Hence rescission is
necessary; and may be effectively accomplished only by returning the entire
consideration received, for if plaintiff should fail to establish his cause of action, he
would not be entitled to retain anything.’ ” (Myerchin v. Family Benefits, Inc. (2008)
162 Cal.App.4th 1526, 1535, italics omitted, disapproved of on other grounds in Village
Northridge Homeowners Association v. State Farm Fire & Casualty Co. (2010) 50
Cal.4th 913 (Village).)
Civil Code section 16932 permits a party who is unable to restore consideration
received from settlements and releases to delay such payment until final judgment, so
long as the defendant shall not be substantially prejudiced by delay. (See also Village,
supra, 50 Cal.4th at pp. 921, 929.) “[T]hrough section 1693, permitted plaintiffs who
are unable to restore the consideration received in their original settlements and releases
to delay the restoration of consideration until final judgment consistent with equitable
2 Civil Code section 1693 reads as follows: “When relief based upon rescission is claimed in an action or proceeding, such relief shall not be denied because of delay in giving notice of rescission unless such delay has been substantially prejudicial to the other party. [¶] A party who has received benefits by reason of a contract that is subject to rescission and who in an action or proceeding seeks relief based upon rescission shall not be denied relief because of a delay in restoring or in tendering restoration of such benefits before judgment unless such delay has been substantially prejudicial to the other party; but the court may make a tender of restoration a condition of its judgment.
10
principles, including that defendants not be substantially prejudiced by the delay.”
Tender of restoration may be a condition of the judgment. (Id. at pp. 928-929.)
There are no published cases directly addressing rescission of settlements, and
proper curative notices in class action lawsuits. However, trial courts have broad
authority and a “duty to exercise control over the class action to protect the rights of all
parties, and to prevent abuse which might undermine the proper administration of
justice.” (See Howard Gunty Profit Sharing Plan v. Superior Court (2001) 88
Cal.App.4th 572, 581.)
Merchant could, and did, seek out employees and offer settlements in relation to
wage and hour claims that had already accrued. (Chindarah v. Pick Up Stix, Inc., supra,
171 Cal.App.4th at p. 803.) Moreover, based on the plain language of Civil Code
section 1689, if the settlement was obtained through duress, menace, fraud, or undue
influence, the employee had the option to rescind the contract and join the class action
litigation. However, the party rescinding the contract, under California law, must
restore what was received in settlement of the disputed claim before suing upon it.
(Civ. Code, § 1691, subd. (b)(1); Myerchin v. Family Benefits, Inc., supra, 162
Cal.App.4th at p. 1535.) Accordingly, pursuant to Civil Code sections 1689 and 1691,
even if the rescission was based on fraud or duress, the putative class members would
be required to repay Merchant the amount they accepted in their settlement agreements
Merchant argues that such payment should be immediate because the $900,000
paid to employees would essentially be impounded during the pending litigation.
However, as noted, Civil Code section 1693 provides that repayment can be delayed
11
until judgment. In light of the fact that Merchant requested below only that language be
included in the notice that payment may be required at the end of the litigation, a delay
until judgment seems appropriate. Merchant was concerned with notifying the
employees that they may at some point need to repay the settlement amount. Merchant
did not provide any evidence below of “substantial prejudice” if the repayment was
delayed. As such, in this factual scenario, section 1693 statutorily requires a curative
notice that repayment of the settlement amount may be required if there is a judgment in
favor of Merchant.
The trial court relied on Marino and McClellan in concluding that Merchant was
not entitled to repayment from those rescinding their ISAs.
In Marino, supra, 2017 WL 1540717, an employee filed a class action complaint
alleging causes of action pursuant to the Fair Labor Standards Act and California state
wage and hour laws against her former employer. The employer emailed putative class
members release claims and offered to pay $500 for signing the releases. The email did
not state that a class action lawsuit had been filed. (Id. at pp. [1], 5.) The district court
found that the releases were invalid. It found that the employer was prohibited from
“requesting any reimbursement of payments made. The Court will determine at a later
date whether [the employer] would be entitled to any offset.” A curative notice was to
be sent to all putative class members that the releases were invalid. (Id. at pp. [3]-4.)
While this case is similar to the facts of the instant case, the court in Marino never
discussed the impact of California’s rescission statutes. Moreover, it provided no
authority for its conclusion that the employer had no right to request reimbursement of
12
the payments made if it prevailed in the litigation. The district court did not consider
what would happen to the payments if the employer were to be successful, finding that
it could only be offset if the class action lawsuit was successful. The Marino court
simply concluded that repayment was not required by the employees without citation to
any controlling authority.3
In McClellan, supra, 900 F.3d 297, a terminated employee, who was pregnant,
brought an action against her former employer to enforce her rights under Title VII of
the Civil Rights Act of 1964. She claimed that she was terminated when she advised
her employer that she was pregnant. At termination, she was told she had to sign an
agreement that she would waive any past, current or future claims she had against her
employer if she wanted any severance payment. She signed the agreement under duress
and the employer paid her $4,000. (McClellan, at p. 300.) She filed suit against her
employer for pregnancy discrimination, and the employer responded by filing a motion
for summary judgment, contending that the severance agreement barred any claim by
her. The employer also argued that the “tender-back doctrine” barred her claims as she
had not returned the severance payment prior to filing her lawsuit. The trial court
granted summary judgment, finding that the tender-back doctrine required that “ ‘even
if a party signs a release under duress, she must “as a condition precedent to suit, . . .
3 We do note that the decision in Marino involved void agreements, while in this case the trial court found that ISAs were “voidable.” We express no opinion if the opt- out agreements are all found invalid.
13
return the consideration in exchange for a release.” ’ ” The employee filed an appeal.
(Id. at pp. 300-302.)
The Sixth Circuit concluded, after reviewing several cases including Hogue v.
Southern R.R. Co. (1968) 390 U.S. 516 (Hogue), “we worry that requiring recently-
discharged employees to return their severance before they can bring claims under Title
VII and the EPA would serve only to protect malfeasant employers at the expense of
employees’ statutory protections at the very time that those employees are most
economically vulnerable. We therefore hold that the tender-back doctrine does not
apply to claims brought under Title VII and the EPA.” It also found, relying on Hogue,
that any payment made to the employee would be offset against any award. (McClellan,
supra, 900 F.3d at p. 308.) As such, it carved out an exception to the tender-back rule,
finding it did not apply to lawsuits brought pursuant to Title VII and the EPA.
This case involves California’s wage and hour laws and does not involve cases
under the limited exception carved out in McClellan. In Hogue, supra, 390 U.S. 516,
the United States Supreme Court decided that an employee who was injured at work did
not have to return the consideration he received for entering into a release prior to filing
an action under the Federal Employee’s Liability Act. It found that “[I]t is more
consistent with the objectives of the Act to hold, as we do, that it suffices that, except as
the release may otherwise bar recovery, the sum paid shall be deducted from any award
determined to be due to the injured employee.” (Id. at p. 518.) This case did not
involve a class action lawsuit on wages and rest breaks and did not address what would
happen if the employer was successful in the litigation. Moreover, in both McClellan
14
and Hogue, the courts did not discuss what would happen to the payment of
consideration if the employer was successful, and provided no authority that the
employer was not entitled to reimbursement if successful in the litigation.
Neither Moreno nor McClellan discussed or analyzed the relevance of
California’s rescission statutes. In McClellan, the court examined federal claims under
Title VII, brought by an individual plaintiff, not a class action. Additionally, it did not
address what would happen to the payment of consideration if the employer was
successful. (McClellan, supra, 900 F.3d at pp. 299, 308-309.) Moreover, while the
court in Marino prohibited the defendant company from requesting reimbursement of
payments made to putative class members, it did not resolve any question concerning
rescission nor actually forewarn the putative class members of the effect of any
rescission statutes. (Marino, supra, 2017 WL 1540717 at p. [8].)
California’s relevant recission statutes do not prevent Merchant, if Merchant was
successful in the litigation, from seeking to be paid back the consideration it paid to
class members who decided to rescind their ISAs and join the class action lawsuit. We
note there is some language in section 1692 which states, “[i]f in an action or
proceeding a party seeks relief based upon rescission, the court may require the party to
whom such relief is granted to make any compensation to the other which justice may
require and may otherwise in its judgment adjust the equities between the parties,”
which Garcia has argued gives the trial court the ability to forgive any repayment at the
outset of the proceedings based on equity, except for the offset of the money from the
judgment. Garcia presented some evidence to the trial court that it would be difficult
15
for some of the class members to pay back the settlement amount, and it may deter them
from joining the lawsuit.
However, the plain language in the statute only discusses this equity principle at
the time of judgment. This is further shown by the language in section 1693, which
gives the trial court the ability to postpone the restoration of benefits “before judgment”
but allows the trail court to make “tender of restoration a condition of its judgment.” It
seems prudent, rather than the trial court at the outset of this class action lawsuit, to
forgive almost $900,000 in payments to employees, to consider the repayments at the
time of judgment taking into account equity principles. While we acknowledge
Garcia’s concern that some employees may be discouraged from joining the class action
lawsuit, the plain language of the rescission statutes do not authorize the trial court to
forgive repayment at the outset of the litigation.
Therefore, the curative notice should include language that if a class member
chooses to rescind their ISA, they could be responsible for repayment of the
consideration to Merchant at the conclusion of litigation pursuant to Civil Code sections
1689, 1691 and 1693, though the trial court maintains discretion to adjust the equities
between parties under section 1692 at the time of judgment.4 The dissent contends the
trial court could order that the repayment of the settlement funds was not required at the
beginning of the case despite the tender-back clause of section 1691, subdivision (b).
4 Section 1692 provides in pertinent part, “If in an action or proceeding a party seeks relief based upon rescission, the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.”
16
We agree that pursuant to section 1693, repayment can be delayed until the end of the
litigation, and further, under section 1692, the trial court maintains discretion to adjust
the equities between the parties. However, the proper interpretation of the statutes is
that the equities should be considered at the conclusion of the litigation. The dissent has
failed to make a reasonable argument that the trial court could forgive the repayment in
total of the settlement funds at the beginning of the litigation under the current language
of sections 1691, 1692 and 1693.
Further, the dissent insists that the majority has misinterpreted the plain language
of section 1692 by concluding that the exercise of such equities should not be
considered until the time of judgment. The dissent states that section 1692 “authorizes a
trial court to adjust the equities ‘in its judgment’ but does not require the decision to be
made at the time of judgment.” The dissent contends that we improperly construe the
statute as requiring that the equities be considered “at” the time of judgment rather than
“in” its judgment. This is a distinction without a difference. Judgment is defined as
“[a] court or other tribunal’s final determination of the rights and obligations of the
parties in a case.” (Black’s Law Dictionary (12th ed. 2024).) Whether section 1692 is
considered to state that the equities should be considered “at” the time of judgment or
“in” the judgment makes no difference. These considerations are to be made when the
final determination as to the rights and obligations of the parties is made, not at the
beginning of the action. We find that Merchant failed to show that it would suffer
17
“substantial prejudice” if the repayment was delayed until the end of the litigation.
(Civ. Code, § 1693.)5
DISPOSITION
Let a writ of mandate issue directing the Superior Court of San Bernardino
County to vacate its order of February 28, 2025, and reconsider the curative notice in
accordance with this opinion.
CERTIFIED FOR PUBLICATION
MILLER Acting P. J.
I concur:
CODRINGTON J.
5 At oral argument, Merchant contended it was not given an opportunity to address section 1693. However, section 1691 clearly states that it is subject to section 1693, which Merchant argued below required repayment, and it clearly should have addressed section 1693.
18
[The Merch. of Tennis v. Superior Court, E085766]
RAPHAEL, J., dissenting.
This case requires us to consider a trial court’s equitable authority to craft a
remedy where a corporate defendant in a proposed class action case has used
misrepresentations to convince its workers, who are putative plaintiffs, to accept
payments for releasing their claims. The trial court allowed the workers to void their
agreements. But the court recognized that requiring low-income workers to pay back
the money before joining the class—or even warning them that they may owe
repayment later—can deter workers from joining the class. That could achieve one aim
of this type of employer effort, to torpedo the class action by picking off plaintiffs with
settlements.
Here, the trial court addressed the wrongful corporate conduct as California
federal courts have. The court ordered the workers informed that if they rescind their
release and join the class, they will have to repay the money the company paid them for
their release only as an offset to any recovery in the class action. Where an employer
has used misrepresentations to extract settlements from employees, this is an equitable
remedy. The majority holds the California Civil Code statutes governing rescission of
contracts preclude it.1 I respectfully dissent because I find no such restriction.
FACTS
The Merchant of Tennis, Inc. (Merchant) faced this lawsuit alleging an array of
labor law violations. With the class certification motion pending, Merchant pulled
1 Undesignated code sections herein refer to the Civil Code.
1
hundreds of its employees into mandatory meetings with management and asked them
to sign settlement agreements. The employees released their claims in exchange for
payments averaging about $918.
As this case comes to us, the wrongfulness of Merchant’s conduct is not at issue.
The trial court found voidable 954 individual settlement agreements because Merchant
used “false and misleading” representations to obtain them. The court found Merchant
made “baseless” representations that class members typically receive less than 40
percent of a settlement; falsely informed workers that the class action plaintiffs had
dismissed certain claims; told workers that the case was in discovery without explaining
that Merchant’s summary judgment motion had been denied after four years of
litigation; described the workers’ release as limited when it released all claims; marked
cover letters “confidential,” suggesting the information should not be shared with class
counsel; and misleadingly stated that arbitration agreements precluded participation in
the action without disclosing that only 40 percent of the workers had such agreements.
Finding the agreements voidable, the trial court ordered a curative notice to the
workers that corrected the misrepresentations and gave workers the option to void their
individual settlement agreements and join the class.
The parties disputed what the curative notice should say about repayment of
funds. Merchant asked the trial court for such language as: “You could also be
required to refund to The Merchant of Tennis all or some of the settlement amount you
received based on what happens at trial . . . or through motion practice.” Merchant
2
argued that otherwise “it doesn’t sound like they have much risk at all” if they revoke
the agreement and join the class. Plaintiffs’ counsel responded that when Merchant
“made the decision to communicate with class members, they did so at their own peril.”
He said that telling “putative class members who live check to check” that “returning a
thousand dollars to the Merchant of Tennis after they’ve already received and been
taxed and now they got 750 and now they got to return 1000, that is a real . . .
impediment. . . . These are people who are making just above the minimum wage here,
most of them.”
Finding no California law on point, the trial court followed a federal case that
had ordered a curative notice stating that workers who void an agreement need not
return their payment from the defendant, though it may be an offset against recovery.
The trial court stated that Merchant’s view that the California rescission statutes
precluded that approach ignored both “the complexity of the employer/employee
relationship” and the court’s duty to prevent abuses that undermine the proper
administration of justice. Requiring payback, the court said, would likely deter some
workers from participating in the class due to their inability to repay Merchant.
The curative notice before us states that workers who void their agreements “will
not be required to return any payment they previously received” from Merchant but that
the amount “may . . . be treated as an offset to any other recovery.”
3
ANALYSIS
A person may rescind a contract where he or she consented to it “with the
connivance of the party as to whom he rescinds.” (Civ. Code, § 1689, subd. (b)(1).) A
contract also may be rescinded “[i]f the public interest will be prejudiced by permitting
the contract to stand.” (Id., § 1689, subd. (b)(6).) In the dispute before us about the
curative notice, we assume that the court properly allowed workers to rescind their
litigation releases because Merchant made misrepresentations to obtain them.
This case then presents an important question: what procedures may a court
fashion to rescind contracts in this context involving employer misinformation and the
public interest in deterring it. With a class certification pending, a defendant company
may contact its workers in hopes of deterring them from joining the class. But courts
have repeatedly addressed situations where defendants have used misinformation in
doing so. (See Guifu Li v. A Perfect Day Franchise, Inc. (N.D. Cal. 2010) 270 F.R.D.
509, 517 [courts “have found that ex parte communications soliciting opt-outs, or even
simply discouraging participation in a case . . . require curative action by the court”]; 2
McLaughlin on Class Actions (22nd ed. 2025) § 11:1 [“Misleading or coercive
communications to putative or certified class members concerning the litigation threaten
to undermine the fairness of the litigation process, the adequacy of representation, and
the administration of justice generally”].) Where a company has deployed
misinformation to obtain litigation releases from its workers, those workers may not
have made an informed decision to forgo the class action. And if companies can benefit
4
from releases bought with misinformation, they will not be deterred from doing so.
Warning putative plaintiffs that they may owe money if they join the class action
discourages participation in it. Here, the court’s curative notice followed an approach
used by some California federal courts and informed the workers that they may need to
pay back the money only as an offset to recovery. (See Dominguez v. Better Mortgage
Corp. (9th Cir. 2023) 88 F.4th 782 [company may not request payment back though it
may be an offset]; Marino v. CACafe, Inc. (N.D. Cal. Nov. 9, 2017, No. 16-cv-6291
YGR) 2017 U.S. Dist. Lexis 186307 [informing employees that they would not have to
pay back money, though it may be an offset]; County of Santa Clara v. Astra USA, Inc.
(N.D. Cal. July 8, 2010, No. C 05-03740 WHA) 2010 U.S. Dist. Lexis 78312 [checks
cashed to be deducted from recovery]; see also Kirby v. Kindred Healthcare Operating,
LLC (C.D. Cal. May 1, 2020, No. 5:19-cv-00833-JLS-DFM) 2020 U.S. Dist. Lexis
146449 [stating that amount paid may be treated as an offset without stating outright
that it would not otherwise be paid back]; Cheverez v. Plains all American Pipeline, LP
(C.D. Cal. Mar. 3, 2016, No. CV 15-4113 PSG (JEMx)) 2016 U.S. Dist. Lexis 27818
[leaving open the possibility that amount paid will be treated as an offset without stating
outright that it would not otherwise be paid back].)
The trial court explained the reason for its approach, which was grounded in the
“context of [the] employer-employee relationship” where some courts have “found it
inequitable” to require an employee who signed an invalid release repay the money to
exercise his or her rights. It quoted Oubre v. Entergy Operations, Inc. (1998) 522 U.S.
5
422, 427, where, in an analogous context, the United States Supreme Court explained
that requiring repayment from low-wage employees might mean that the employer
would profit from its misconduct. The Supreme Court stated that employees may have
spent the money and “lack the means” to return it, which might “tempt employers” into
improper conduct “knowing it will be difficult to repay the monies.” (Ibid.) The
Supreme Court stated that it “ought not to open the door” to encouraging improper
conduct in that way. Here, likewise, the trial court said, “concern over the inability of
an employee (who accepted a settlement procured through incorrect means) to repay the
money in order to exercise his or her right to participate in a lawsuit permeates the
instant case.” Preventing putative plaintiffs from voiding contracts “procured by
[Merchant’s] false, inaccurate, and/or misleading information unless they pay
[Merchant] back would likely force some putative class members to choose between
their desire to participate as a putative class member and their financial ability to repay
[Merchant]. The putative class members should not have to pay the price for
[Merchant’s] malapropos.”
Merchant argues that this remedy is forbidden under California’s statutes
governing the rescission of contracts, Civil Code sections 1688-1693. No case has
addressed that issue. The majority, though acknowledging that employees may be
discouraged from participating in the class, holds that the statutes prohibit what the trial
court did in excusing repayment at the outset. (Maj. opn., ante, at p. 16.) Under the
majority’s rule, no matter how egregious a corporate defendant’s misstatements to
6
convince workers to waive their claims, California law renders a court powerless to
limit repayment to an offset. Instead, the court must give notice that the workers may
owe money.
We need not read California law that way, and we should not. The rescission
statutes empower the trial court to act equitably, authorizing the considered equitable
remedy it imposed. That simple reason warrants denial of the petition.
But the interaction of the provisions in the rescission statutes is not simple, so,
below, I will explain why I conclude that the majority’s reading is wrong. The statutes
governing the rescission of contracts, found at Civil Code sections 1688 to 1693, are an
amalgam of two former causes of action (legal and equitable), demanding careful
consideration of the interplay of the provisions. In section I, below, I will discuss the
terms of the statutes, and in section II, I will briefly discuss the statutory history.
I. The Rescission Statute
A. The Statute’s Express Equitable Authority
Civil Code section 1692 provides the trial court with the power to fashion the
equitable remedy it did. The last sentence of that section provides: “If in an action or
proceeding a party seeks relief based upon rescission, the court may require the party to
whom such relief is granted to make any compensation to the other which justice may
require and may otherwise in its judgment adjust the equities between the parties.”
(§ 1692.) Our Supreme Court has stated that this provision allows a party to invoke the
“traditional and deep-rooted principles of courts of equity.” (Runyan v. Pacific Air
7
Industries, Inc. (1970) 2 Cal.3d 304, 318 (Runyan).) “ ‘Rescission for mistake, duress,
menace or undue influence . . . is a remedy by means of which a party may be relieved
of the burdens and may procure restitutionary redress respecting a contract which was
defective at its inception because consent was not freely or knowingly given.’ ” (Id. at
p. 317, fn. 16.) “[I]n the light of section 1692 of the Civil Code[,] [e]xercising its
equitable powers, the court can adjust the equities of the parties and grant such relief as
will achieve substantial justice under the circumstances of the case presented to it.”
(Snelson v. Ondulando Highlands Corp. (1970) 5 Cal.App.3d 243, 258.)
Here, the trial court aptly decided how it will “adjust the equities between the
parties” in any judgment. It had reasons for doing so that tracked those in the federal
courts. Because Merchant made misstatements to extract releases in this
employer/employee context, the trial court would not require return of the funds
Merchant paid for that purpose, except as an offset to other recovery by the employee.
Warning of possible repayment could deny putative plaintiffs the benefit of an informed
choice to participate in the class action. It also could undermine the California class
action mechanism by allowing wrongful conduct directed at undermining it to succeed.
To be sure, if there is no class action recovery, then Merchant will have “lost” the
money it paid for litigation releases without gaining a benefit. But Merchant engaged in
wrongful conduct here. Section 1692 provides the trial court the power to act as it did.
The majority reads the “plain language” of the rescission statutes to allow equity
only “at the time of judgment.” (Maj. opn., ante, at p. 16.) It concludes a court cannot
8
forgive repayment “at the outset of the litigation,” but a court can adjust the equities
“under section 1692 at the time of judgment.” (Ibid.) This is not the plain language of
section 1692. The section authorizes a trial court to adjust the equities “in its judgment”
but does not require the decision to be made at the time of judgment. The majority’s
construction of “in” as “at” makes a critical difference in this situation: the workers
must be given notice that joining the class action means the trial court might later
require them to pay. This is precisely why the trial court made its equitable decision
now.
Although section 1692’s words refute the majority’s “plain language” reading,
one might reasonably ask whether the restitution statutes, read as a whole, make the
majority’s conclusion the best one. The balance of this section explains why it is not.
B. The “Tender Back” Clause
A superficially plausible argument for why the trial court lacks the power it
exercised here gives primacy to section 1691, subdivision (b), which I will call the
“tender back” clause. (See maj. opn., ante, at p. 11.) That sentence states that to effect
a rescission, a person is to restore to the other party the value he or she has received on
the contract.2 Because the tender back clause is the object of the directive word “must”
2 Section 1691 reads, in full: “Subject to Section 1693, to effect a rescission a party to the contract must, promptly upon discovering the facts which entitle him to rescind if he is free from duress, menace, undue influence or disability and is aware of his right to rescind: (a) Give notice of rescission to the party as to whom he rescinds; and [footnote continued on next page]
9
at the outset of section 1691, it appears mandatory if read in isolation. But the clause
also is “[s]ubject to section 1693,” and that section provides that, absent prejudice, a
person “shall not be denied relief because of a delay” in restoring the value. (§ 1693.)
Section 1693 also provides that the trial court “may” make a tender of restoration a
condition of its judgment. Because of section 1693, the text of the tender back clause
does not foreclose the trial court from excusing repayment. That is, section 1693 means
repayment is not required immediately, and it states that the court “may” make
repayment a condition of judgment, not that it “shall” do so. Even without considering
the equitable authority in section 1692, the tender back clause does not constrain the
trial court’s equitable authority to excuse repayment.
But we need not decide that point ourselves. Our Supreme Court has held that a
trial court can excuse repayment despite the tender back clause. In Carruth v. Fritch
(1950) 36 Cal.2d 426, 427-428 (Carruth) the Court considered an action for damages
from a traffic accident where the plaintiff, under financial pressure, had executed a
release of her damages claim for $2,000, which she claimed had been induced by false
promises. She sought to rescind that agreement and proceed on her damages claim but,
unable to tender the $2,000, she invoked the court’s equitable authority to adjust the
(b) Restore to the other party everything of value which he has received from him under the contract or offer to restore the same upon condition that the other party do likewise, unless the latter is unable or positively refuses to do so. When notice of rescission has not otherwise been given or an offer to restore the benefits received under the contract has not otherwise been made, the service of a pleading in an action or proceeding that seeks relief based on rescission shall be deemed to be such notice or offer or both.”
10
equities between the parties. (Id. at pp. 428, 430.) Despite section 1691’s tender back
clause, the court held that under the circumstances, “there is no legal reason for
requiring [plaintiff] to restore the consideration received by her.” (Carruth, at p. 431.)
Carruth therefore holds that the tender back clause does not prohibit a court from
equitably excusing repayment. That case is 75 years old, and the statute was
significantly amended in 1961 after it was decided, as will be discussed in section II
below. But the statute was amended in a way that expanded the trial court’s equitable
authority, including by adding section 1692, with its express grant of equitable authority
to the court. (See Village Northridge Homeowners Association v. State Farm Fire and
Casualty Co. (2010) 50 Cal.4th 913, 923, 928 [statutory revision “codified much of
Carruth’s rule” and Carruth “remains good law”].) Carruth supports, if not requires,
concluding that the trial court here had the power to excuse repayment despite the
tender back clause.
Carruth cited no source for the court’s equitable authority, but its holding aligns
with an equitable principle found in our Civil Code since its 1872 enactment: “No one
can take advantage of their own wrong.” (Civ. Code § 3517.) The principle provides a
backdrop for interpreting statutes that do not contradict it. (See Witt v. Jackson (1961)
57 Cal.2d 57, 72 [§ 3517 qualifies Labor Code reimbursement remedies, so a negligent
employer cannot benefit from them]; see also Runyan, supra, 2 Cal.3d at p. 317 [where
the nonrescinding party is at fault, California cases have prevented the party from being
“unjustly enriched” by requiring restitution damages to the rescinding party]; Farina v.
11
Bevilacqua (1961) 192 Cal.App.2d 681, 685 [“Where a defendant has been guilty of
fraud, ‘courts of equity are not so much concerned with decreeing that defendant receive
back the identical property with which he parted . . . as they are in declaring that his
nefarious practices shall result in no damage to the plaintiff”].) Where a defendant has
acted improperly, section 3517 bolsters Carruth’s conclusion that a court has equitable
authority to excuse a party from tendering back value in rescinding a contract.
In any event, the Legislature’s post-Carruth amendments to the statute confirm
that equitable authority. Now, section 1693 provides that the trial court “may” include
repayment as a condition of the judgment and section 1692 grants the court power to “in
its judgment adjust the equities” between the parties. The combination of these two
provisions supports what the trial court did here, that is, to determine that the judgment
will not require repayment except as an offset against recovery. (See Neptune Society
Corp. v. Longanecker (1987) 194 Cal.App.3d 1233, 1245-1246 [holding that trial
court’s § 1692 authority to adjust the equities justified its decision not to restore
property under § 1691].)
All these considerations show that the tender back clause does not supersede the
court’s section 1692 equitable authority to dispense with it.
C. The Statutory Alternative to the Tender Back Clause
A tender back is not required even by section 1691, despite the use of “must” in
the first sentence of that section. The last sentence of that subdivision provides an
alternative for a party to seek “relief” based on rescission without repaying the funds:
12
“When notice of rescission has not otherwise been given or an offer to restore the
benefits received under the contract has not otherwise been made, the service of a
pleading in an action or proceeding that seeks relief based on rescission shall be deemed
to be such notice or offer or both.” (As will be discussed in section II, below, this
provision was adapted from the former statutory equitable action for rescission, which
had no tender back requirement.)
Under this provision, a person seeks relief based on rescission of a contract
without returning the funds received but by serving a pleading in court. This is in
substance what the trial court authorized in this case, though in the context of an
existing class action. Putative plaintiffs can opt to join the class action, the equivalent
of serving a pleading declaring that the employee wishes to rescind the contract with
Merchant. The equitable relief has been determined by the court: they can rescind their
release, participate in the class action, and they may owe the value received as an offset
against later recovery. The last of section 1691 thereby confirms that repayment is not
always essential, as the “must” clause applying to the first sentence might superficially
indicate.
II. The Former Equitable Action for Rescission
An understanding of the 1961 amendments to our rescission statute underscores
why the tender back clause should not be read to foreclose the equitable authority the
trial court exercised here. The clause applied in an action at law but not in an action at
equity. The current issue arises from an equitable claim.
13
Before 1961, sections 1689 to 1691 of the Civil Code provided for “an action to
enforce a prior rescission.” (Isenberg, Statutory Changes in the Law of Rescission in
California (1968) 19 Hastings L.J. 1248, 1248 (Isenberg).) “Having rescinded the
contract by his own act, the rescinding party then brought an action to enforce the out-
of-court rescission.” (Runyan, supra, 2 Cal.3d at p. 312.) The action was one at law,
not at equity, with a jury trial right. (Isenberg, supra, at p. 1248.) The action did not
seek rescission but recovery from a rescission the plaintiff had made. (See Philpott v.
Superior Court (1934) 1 Cal.2d 512, 517 (Philpott) [where plaintiff had rescinded out of
court, “[a] judgment of rescission in this cause would be entirely superfluous”]; Bennett
v. Superior Court (1933) 218 Cal. 153, 162 [contract rescinded out of court and lawsuit
sought “the aid of the court in securing . . . fruits of the rescission”].) Because a party
could rescind a contract only for “ ‘one or more of the causes enumerated in section
1689,’ ” a plaintiff who sought to “enforce” the rescission had to prove “that he had a
good right to rescind” to recover. (McCall v. Superior Court (1934) 1 Cal.2d 527, 538.)
In contrast, former sections 3406 to 3408 of the Civil Code provided for an
equitable “action for a judicial rescission” with no jury right. (Runyan, supra, 2 Cal.3d
at p. 312; Isenberg, supra, at p. 1248; Woodard v. Glenwood Lumber Co. (1915) 171
Cal. 513, 522 [“action to obtain a judicial decree of rescission” under former § 3406].)
Unlike the legal action to enforce a previous rescission and obtain damages, this claim
sought to “invoke the power of a court of equity to effect a rescission which has not
theretofore been made.” (Philpott, supra, 1 Cal.2d at p. 523.) The purpose of the action
14
was “specific judicial relief for the wrong giving rise to the right of rescission.”
(Runyan, at p. 312.) In addition to the reasons that a party could rescind under former
section 1689, a court could declare a rescission for two more: (1) where the contract
was unlawful for reasons not in its terms and the parties were not equally at fault, and
(2) where the public interest would be prejudiced by letting the contract stand. (Runyan,
at p. 312, fn. 11.)
The tender back clause in section 1691 was a requirement of the legal action, as
it described what a party had to do to rescind out-of-court before the lawsuit. But the
requirement was nowhere in former sections 3406 to 3408 as it was not a requirement
for an equitable action seeking rescission. As our Supreme Court put it, equitable
rescission was accomplished by “ ‘decree of the court,’ ” but for “ ‘legal
rescission. . .the act of plaintiff in avoiding the contract reinvests him with his legal title
or right to sue, and must therefore be accompanied with restitution of the thing received
by him.’ ” (McCall v. Superior Court (1934) 1 Cal.2d 527, 535; see Rosemead Co. v.
Shipley Co. (1929) 207 Cal. 414, 422 [no tender of funds needed to sue “in equity where
fraud is the basis of the claim”].) Instead, former section 3408 granted court discretion
as whether to require restoration: “ ‘On adjudging the rescission of a contract, the court
may require the party to whom such relief is granted to make any compensation to the
other which justice may require.’ ” (Gentry v. Kelly Kar Co. (1961) 193 Cal.App.2d
324, 337 [quoting § 3408].)
15
To be sure, a court’s equitable remedy in declaring a rescission might typically
include requiring a tender back from the plaintiff. But it did not need to do so. (See,
e.g., Rosemead Co. v. Shipley Co., supra, 207 Cal. at pp. 420-421 [“exceptions” to the
tender back requirement “have been specified in actions in equity” including
circumstances where “restoration cannot be made without injuriously affecting the
rights of the party seeking rescission”]; Matteson v. Wagoner (1905) 147 Cal. 739, 744-
745 [where a contract was procured by fraud, “offer to return the [$165]” was
unnecessary; discretion to determine restoration was “authorized by section 3408 of the
Civil Code”; and the plaintiffs could keep the $165 even if they failed in the action].)
To “eliminate the confusing and complex duality of rescission procedures,” the
Legislature amended the law. (Runyan, supra, 2 Cal.3d at p. 313.) The Legislature
repealed the equitable action in former sections 3406 to 3408 but meshed the content of
those sections into the legal action. So it placed the broad equitable authority of former
section 3408 in a new section 1692. (See Runyan, at p. 313.) Also, it added a new
section 1693, and it added to section 1689 the two bases for rescission that had been
available only in an equitable action. (Isenberg, supra, at p. 1249.) Further, it added the
statutory alternative to the tender back clause discussed in section I.C, above. (Id., at p.
1255.)
Our Supreme Court in 1970 said: “We perceive in this fusing of the two former
rescission procedures no intention on the part of the Legislature to disturb, much less
eradicate, substantive differences theretofore underlying such procedures.” (Runyan,
16
supra, 2 Cal.3d at p. 313.) The statute “in essence restates the equity jurisprudence
applicable in the rescission context.” (Hedging Concepts, Inc. v. First Alliance
Mortgage Co. (1996) 41 Cal.App.4th 1410, 1422; Nmsbpcsldhb v. County of Fresno
(2007) 152 Cal.App.4th 954, 963 [“if a rescission action seeking to recover something
other than the consideration paid was an equitable action prior to the 1961 amendments,
then it is an equitable action today”].)
We have today an equitable claim that would have been governed by section
3406 to 3408 before 1961. It seeks a judicial rescission rather than enforcement of an
earlier one; it seeks cancellation of the contract and no other relief for the putative
plaintiffs; it would not carry a jury right for its remedy as it simply seeks to join the
class action; and it implicates the “public interest” rescission ground that formerly was
only equitable. (See § 1689, subd. (b)(6).)
The tender back clause would not have applied under pre-1961 law. That clause
was part of the legal action and not the equitable one. This understanding helps explain
how the various parts of the current rescission statute should interact, as the Legislature
did not “disturb” the “substantive differences” in the actions by amending. (Runyan,
supra, 2 Cal.3d at p. 313.) The better view is that this case is governed by the court’s
broad equitable authority in section 1692, not by a strict tender back requirement.
Misrepresentations to putative plaintiffs in a class action differ from the contexts
addressed in other California cases, but the principle does not: “case law recognizes the
trial court’s broad power to fashion an appropriate remedy in cases of rescission.”
17
(Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1147.) As Judge Posner put it, the
“spirit of equity” recognizes the need to apply “strict rules of law” so that “the spirit of
the law is not sacrificed unnecessarily to the letter.”3 The majority finds a strict rule in
the statute that precludes the trial court’s judicious remedy here. The statute is in fact
more flexible, and it should be construed to empower the trial court to ensure that
wrongful acts are not rewarded. We should deny Merchant relief.
RAPHAEL
J.
3 The quotation comes from Law and Literature (1988), in which Judge Posner addressed the role of Portia from Shakespeare’s The Merchant of Venice, and can be found in Conter, Eagleton, Judge Posner, and Shylock v. Antonio (1990) 35 McGill L.J. 905, 910.
18
AI Brief
AI-generated · verify before citing
Holding. The court held that a curative notice for putative class members who rescind their individual settlement agreements must inform them that they may be required to repay the settlement consideration to the employer at the conclusion of the litigation, pursuant to California Civil Code sections 1689, 1691, and 1693. While the trial court has discretion to adjust equities under section 1692, such determinations regarding the repayment of consideration should be made at the time of judgment rather than at the outset of the litigation.
Issues
Whether a curative notice for putative class members who rescind individual settlement agreements must inform them of the potential obligation to repay settlement consideration.
Whether California's rescission statutes, Civil Code sections 1689, 1691, and 1693, require the repayment of settlement consideration by putative class members who rescind their agreements to join a class action.
Whether a trial court has the authority to forgive the repayment of settlement consideration at the outset of litigation based on equity principles.
Disposition. granted
Quotations verified verbatim against the opinion
“the party rescinding the contract, under California law, must restore what was received in settlement of the disputed claim before suing upon it.”
“the curative notice should include language that if a class member chooses to rescind their ISA, they could be responsible for repayment of the consideration to Merchant at the conclusion of litigation”
“the plain language of the rescission statutes do not authorize the trial court to forgive repayment at the outset of the litigation.”