What 954 workers didn't know about their settlements – and what it means for employers
A California employer's mass settlement strategy during a pending class action unraveled when a court found the company misled workers into signing away their claims.
On January 14, 2026, a California appeals court delivered a split decision in The Merchant of Tennis, Inc. v. The Superior Court of San Bernardino County that carries both warning and guidance for employers navigating wage and hour class actions. The case centers on The Merchant of Tennis, Inc., which paid out more than $875,000 to approximately 954 employees while a class certification motion was pending.
The dispute began when Jessica Garcia, who worked at the California-based company from July through December 2019, filed a consolidated class action alleging violations of state wage laws and rest break requirements. In May 2024, she moved for class certification. That same month, and into June, Merchant approached employees and former employees with individual settlement offers in exchange for releasing their claims.
Garcia challenged the settlements, arguing the company had used fraud and coercion to obtain them. The trial court partially agreed, finding the agreements were voidable because Merchant had used false and misleading representations.
According to the court's findings, Merchant made several problematic statements to workers. The company made what the court called baseless representations that class members typically receive less than 40 percent of a settlement. Merchant falsely told workers that the class action plaintiffs had dismissed certain claims. The company described the case as being in discovery without explaining that its own summary judgment motion had been denied after four years of litigation. Merchant also described the release workers were signing as limited when it actually released all claims, and told workers that arbitration agreements precluded participation without disclosing that only 40 percent of workers had such agreements.
After finding the settlements voidable, the trial court ordered both sides to develop a curative notice for workers who had signed agreements, informing them they could rescind within 45 days and join the class action. But the parties could not agree on crucial language about repayment.
Merchant wanted the notice to warn workers that if they rescinded their settlements and the company ultimately prevailed, they may have to return the money they had received. Garcia's attorneys objected, arguing that warning workers about potential repayment would discourage them from joining the lawsuit. They pointed out that these were people making just above minimum wage, living paycheck to paycheck, who had already spent and been taxed on the settlement money.
The trial court sided with Garcia, ruling that the notice should tell workers that settlement payments may be treated as an offset to any other recovery, but not that they would be required to return the payments. The judge reasoned that the employer-employee relationship involves higher risks of coercion and abuse than ordinary contracts, and that workers would be discouraged from participating in the class action if they thought they could not repay Merchant.
The Fourth District Court of Appeal granted Merchant's petition in a divided decision. The majority held that under California's contract rescission statutes, putative class members who rescind their settlement agreements would be required to repay Merchant, even if the rescission is based on fraud or duress. The court acknowledged that repayment could be delayed until final judgment, but rejected the trial court's decision to excuse repayment entirely. The majority directed that the curative notice should tell class members they could be responsible for repaying Merchant at the conclusion of the litigation.
Justice Raphael dissented, arguing the trial court had acted within its equitable authority. The dissent expressed concern that requiring repayment, or even warning workers they may owe it, would deter participation in the class action and allow the employer to benefit from its wrongful conduct.
For HR professionals, the case offers clear lessons. Any communications with potential class members during pending litigation must be scrupulously accurate. The court's finding that Merchant's agreements were voidable stemmed from specific misrepresentations about the litigation's status, the scope of the release, and the likelihood of recovery in the class action.
The case also confirms that while employers can pursue individual settlements during class certification proceedings, courts will closely scrutinize those efforts. Misleading communications can result in hundreds of settlement agreements being declared voidable. At the same time, the appeals court decision confirms that California's rescission statutes may require workers to understand potential repayment obligations if they choose to rescind and join the class action.
