September 17, 2020 Practice Points

California Federal Court Enjoins Ohio Arbitration

Although plaintiffs won the case primarily because of collateral estoppel, the court took time to emphasize that the arbitration and forum selection clauses would be ineffective regardless.

By Michael Ferrara

In Aguilera v. Matco Tools Corp., 2020 U.S. Dist. LEXIS 16457* (2020), a California federal court temporarily enjoined defendant Matco Tools Corporation from proceeding with arbitration in Ohio. Although plaintiffs won the case primarily because of collateral estoppel, the court took time to emphasize that Matco’s arbitration and forum selection clauses would be ineffective regardless.

Matco, which is headquartered in Ohio, sells mechanic repair tools, diagnostic equipment, and toolboxes through a nationwide network of franchise distributorships. Emanuel and Rocio Aguilera, husband and wife, were distributors for Matco. In December 2018, they brought a class action on behalf of themselves and other distributors in California state court, alleging that Matco was misclassifying them as independent contractors rather than employees. Matco removed their suit to federal court where it was dismissed without prejudice. Matco then sued the Aguileras in the Ohio federal court to compel arbitration of the dismissed California claims as well as other claims. Matco also filed an arbitration demand in Ohio with the American Arbitration Association. The Aguileras then filed suit in California federal court seeking a temporary restraining order enjoining the arbitration in Ohio. 

The Aguileras asserted that Matco’s agreements with its franchise distributors violated California’s Private Attorney General Act (PAGA). PAGA allows an employee to act as a private attorney general and sue the employer, on behalf of himself and fellow employees, for Labor Code violations. Most of the proceeds from such lawsuits go to the state and benefit the public-at-large. The Aguileras also asserted that Matco’s agreements violated California Business and Professions Code § 20040.5 which voids provisions in franchise agreements that restrict venue to a forum outside California when the claims are related to a franchise business that is operating within California. 

The federal court ruled that collateral estoppel prevented Matco from litigating these issues with the Aguileras, because Matco had lost similar claims in a separate suit brought by a different Matco distributor. However, the California court went on to explain why, in any event, Matco’s arbitration and forum selection clauses were invalid. 

Matco’s agreement included a clause that waived the distributor’s rights to litigate in a private attorney general capacity, and a waiver of that right is illegal in California. Matco’s agreements also required arbitrations to be limited to one individual’s claims and required all arbitrations to be in Summit or Cuyahoga counties in Ohio. Additionally, the agreement specified that, “if the provision prohibiting class wide or private attorney general arbitration is deemed invalid, then the provision requiring arbitration of breaches between the parties shall be null and void and there shall be no obligation to arbitrate such breaches.” The court referred to the quotation above as a “blow-up provision” that, when read in combination with the PAGA claim waiver, invalidated the arbitration agreement. The court also stated that the forum selection clause violated California Business and Professions Code § 20040.5 and was also invalid. As a result, the Aguileras’ application for a temporary restraining order was granted and the arbitration Matco filed in Ohio was enjoined.  

Michael Ferrara is a 2020 J.D. candidate at DePaul University College of Law in Chicago, Illinois.

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