How Liberal And Conservative Justices On The US Supreme Court Have Parted Ways Over Arbitration Cases.
My article entitled, "The Politics of Arbitration", appears in California Litigation, The Journal of the Litigation Section, State Bar of California, Vol. 29, No. 3, 2016. As my article explains, arbitration has become one more "hot button issue" for the U.S. Supreme Court Justices to disagree about. The article is republished here with the permission of the California State Bar.
Customer Agreement With Verizon And Samsung Product And Safety & Warranty Agreement In The Box Failed To Bind Plaintiff To Arbitrate.
In Norcia v. Samsung Telecommunications America, LLC, et al., No 14-16994 (9th Cir. 10/17/17) (Ikuta, Thomas, Bea), Judge Ikuta provides in depth analysis of whether a 101 page brochure containing an arbitration provision and placed in the box containing a purchaser’s Galaxy S4 phone bound Daniel Norcia to arbitrate. For a number of reasons, the panel concludes that Mr. Garcia was not bound to arbitrate. He had not signed the brochure, the box did not state that opening it meant he agreed to the terms found in the brochure, generally, “silence or inaction does not constitute acceptance of an offer” (Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal.App.4th 1372, 1385 (1993), and the brochure stated that Norcia was entitled to “the benefits of the Limited Warranty” regardless whether he opted out of the arbitration agreement. As the party seeking to compel arbitration, Samsung bore the burden of proving the existence of an arbitration agreement, and it failed to carry its burden.
Samsung also argued that Norcia agreed to arbitrate by signing a Customer Agreement with Verizon, an argument that Judge Ikuta dismissed in three paragraphs as “meritless.” Samsung was not a signatory, nor was there evidence that Samsung was intended as a third-party beneficiary of the Verizon agreement.
COMMENT: The Federal Arbitration Act, embodying the national policy favoring arbitration, applies to this case. However, the parties agreed that California law governs the issue of contract information, and thus Judge Ikuta applies basic principles of California contract law.
Samsung sought to rely on several cases involving licenses and warranties, arguing that those cases are analogous to the brochure in the box. Because the panel’s analysis involves contract law, the opinion examines differences between contract, license, and warranty cases. For example, a shrink-wrap license imposing limits on the number of authorized licenses has been held to be enforceable in California. Wall Data Inc. v. L.A. Cty. Sheriff’s Dep’t, 447 F.3d 769, 782 (9th Cir. 2006). Such a license states that by opening a package or wrapper, the user agrees to the terms of the license. In Wall Data Inc., the court avoided the issue of contract formation. Norcia explains it makes sense that a user who opens a box with notice of a shrink-wrap license cannot do more than what the license permits -- say, installing software on 6,007 computers when the license is only for 3,663 computer. In Norcia, “the outside of the Galaxy S4 box did not notify the consumer that opening the box would be considered agreement to the terms set forth in the brochure.”
Ninth Circuit Case of Morris v. Ernst and Young Is One Of The Three Cases.
On December 9, 2016, I linked my article on "The Politics of Arbitration" to this blog. In that article, I predicted, "Morris [v. Ernst and Young] could serve as a springboard for sending divergent opinions about the enforceability of arbitration provisions used to prevent 'concerted activity' by employees to the Supreme Court for review." It has now happened.
Mediator and arbitrator Ross Runkel reports today that SCOTUS agreed on January 13, 2017 to hear three cases relating to arbitration class action waivers: Morris v. Ernst and Young, NLRB v. Murphy Oil, and Epic Systems Corp. v. Lewis.
Plaintiff Kum Tat Limited sued in California state court in connection with its attempted purchase of residential property for approximately $40M, after its attempted purchase went sideways. Defendant Linden Ox Pasture removed to federal court. Plaintiff then moved unsuccessfully to compel arbitration and to stay the action pursuant to California Code of Civil Procedure sections 1281.2 and 1281.4. The trial court denied the motion, concluding the parties failed to form a contract.
Under the California Arbitration Act, California Code of Civil Procedure, section 1294, a party whose motion to compel arbitration has been denied can appeal. Similarly, under the Federal Arbitration Act, 9 U.S.C. section 16(a)(1), one can file an interlocutory appeal from an order denying a petition to order arbitration. So, given that the district court denied Kum Tat's motion to compel arbitration, should the Ninth Circuit have entertained an interlocutory appeal?
No. The reason is that Kum Tat invoked the California Code of Civil Procedure as the basis for an appeal, rather than the Federal Arbitration Act. So the Ninth Circuit dismissed the appeal for lack of federal jurisdiction. Gotcha.
Ironically, Linden Ox's answering brief did not contest jurisdiction. But of course the federal court gets to exercise its "independent obligation to ensure jurisdiction."
COMMENT. Kum Tat's motion to compel arbitration was explicitly brought under California arbitration law, and Kum Tat later emphasized that the motion was not made under the FAA. Suppose the arbitration motion had been more ambiguous, and failed to cite state or federal arbitration law? Could such a motion have been brought "under" the FAA for purposes of the interlocutory appeal? The Ninth Circuit expressly states that it does not decide that question. Kum Tat, footnote 3. Generally, parties seeking to compel arbitration find themselves in a stronger position when they proceed under the FAA. Apparently Kum Tat's motion to compel arbitration sought to distinguish some unfavorable case law interpreting the FAA, explaining why Kum Tat was at pains to stake the position that it was proceeding under state law. Kum Tat, footnote 1.
The Setting: Dispute Is More Than Ten Years Old, This Is Second Appeal, And There's Still Plenty Of Fight Left In the Old Boys . . .
Early on the Court's opinion oozes frustration: "As much as we are loathe to drag on this protracted litigation any longer, we conclude we must reverse and remand for a more detailed statement of decision on certain issues." La Melza v. Lindsay, No. G051506, G051514 (4/3 1/13/17) (unpublished). Evidently, this case is one of those cases for associates yet unborn. I won't even bother to recite the gnarly facts. What caught my attention was the impassioned plea by Justice Moore that the parties try and mediate their differences:
"This case has been dragging on for more than a decade. As the Gilroy defendants' counsel noted in a motion for calendar preference, all of the principals are now in their 70's or 80's. We urge both the parties and the court to take all practical steps to reach a judgment in the trial court as quickly as possible. In the same vein, we also urge the parties to set aside what are obviously long-held and deep-seated emotions about this matter and work with an experienced mediator to settle this case. The alternative, even in the best case scenario, is another two or three years spent in the trial court and in our gracious company, resulting in thousands upon thousands of dollars in fees and costs. The parties would be far better served, and would probably find the ultimate outcome far more satisfactory, if they reached a resolution among themselves."
Adding to the overwhelming sense that the parties are lost in a Dickensian quagmire located near the ruins of Bleak House is that the majority opinion, penned by Justice Moore with Justice Thompson concurring, draws a dissenting opinion! Justice Aronson, dissenting, "would invite the parties to brief whether we can correct our earlier opinion and retrace our steps to a proper path so the trial court may perform its factfinding function and enter a new judgment consistent with its findings." Justice Aronson in turn quotes from the dissent by a frustrated Justice Frankfurter: "Wisdom too often never comes, and so one ought not to reject it merely because it comes too late."
To which I add a few additional words of legal wisdom gleaned from dead practitioners:
"About half the practice of a decent lawyer consists of telling would-be clients that they are damned fools and should stop." -- Elihu Root.
"An incompetent attorney can delay a trial for years or months. A competent attorney can delay one even longer." -- Evelle J. Younger.
But Charles Dickens gets the last word, with the characters in Bleak House explaining the end to the seemingly interminable, intractable, and ridiculous case of Jarndyce and Jarndyce:
"Mr Kenge," said Allan, appearing enlightened all in a moment. "Excuse me, our time presses. Do I understand that the whole estate is found to have been absorbed in costs?"
"Hem! I believe so," returned Mr Kenge. "Mr Vholes, what do you say?"
Employer Cannot Compel Employee To Arbitrate Individual Aspects Of PAGA Claim While Maintaining Representative Claim In Court.
We blogged about Hernandez v. Ross, E064026 (4/2 1/3/17) on December 8, 2016. Hernandez is one more California case holding that a court cannot split a representative PAGA claim into arbitrable and non arbitrable parts. We can now report that the case was ordered to be published on January 3, 2017.
Just Because There Is An Arbitration Provision, Don’t Take The Existence Of An Arbitration Agreement For Granted . . .
The mere existence of a contractual provision requiring arbitration does not mean that the parties have established the existence of an agreement to arbitrate the claims between the parties. At a minimum, a checklist would include: is the agreement signed; are the parties correctly identified; are the claims within the scope of the agreement; is the agreement properly authenticated. Flores v. Nature’s Best Distribution, LLC, No. G052410 (4/3 filed 12/2; order pub. 12/27/16) (Fybel, O’Leary, Moore) (published) affirms an order denying an employer’s petition to compel arbitration, because the employer failed to establish the existence of an arbitration agreement, even though there was an arbitration provision.
The problems here with the employer/employee agreement included: (1) the arbitration provision, while stating it was between employee and employer, failed to identify either term; (2) the agreement failed to identify which disputes would be arbitrated before the AAA and which would be subject to a collective bargaining agreement grievance procedure; (3) the agreement failed to identify which set of AAA rules applied, with the employer attaching rules that became effective 12 years after the employment relationship began. Here, the authentication of the agreement was also questioned by the employee, but the Court didn’t even need to address the issue in order to affirm the order denying the petition to arbitrate.
On September 11, 2016, we posted about the Uber Drivers cases, Mohamed v. Uber Technologies, Inc., et al., and Gillette v. Uber Technologies, Inc., Nos. 15-16178 and 15-16181 (9th Cir. 9/7/16). The 9th Circuit opinion penned by Judge Clifton held that the issue of arbitrability was effectively delegated to the arbitrator by "clear and unmistakable" language. Similarly, the issue of arbitrability of the PAGA claims was clearly and unmistakably delegated to the arbitrator in Mohamed's case, but Gillette's PAGA claim could proceed in court on a representative basis under the holding of Iskanian v. CLS Transp. L.A., LLC, 327 P.3d 129 (Cal. 2014).
On December 21, 2016, an Order and Amended Opinion was issued, deleting a single sentence from a single footnote in a 28 page opinion. With this amendment, the panel voted to deny the Petition for rehearing en banc. The Petition was circulated to the full court, without garnering any support.
Very interesting. So what was footnote 6, and what was deleted from it?
Footnote 6 noted that Plaintiffs had raised the argument that the class and collective action waivers in the arbitration agreements may violate the NLRA. However, since this was raised for the first time in a sur-reply, the untimely submission waived the argument. Okay so far. The argument that class and collective action waivers violate NLRA rules prohibiting "concerted activity" was adopted by two judges on the panel in the 9th Circuit case, Morris v. Ernst & Young, with Judge Ikuta strenuously dissenting. See our August 23, 2016 blog post on Morris.
This is what has been deleted from footnote 6:
"Even if the argument had been properly raised, however, the option to opt out meant that Uber drivers were not required 'to accept a class-action waiver as a condition of employment,' and thus there was 'no basis for concluding that [Uber] coerced [Plaintiffs] into waiving [their] right to file a class action' in violation of the NLRA. Johnmohammadi v. Bloomingdale's, Inc., 755 F.3d 1072, 1075 (9th Cir. 2014); see also Morris v. Ernst & Young, No. 13-16599, 2016 WL 4433080 at n.4 (Aug. 22, 2016)."
Perhaps some judges felt uncomfortable with dictum in footnote 4 of Morris, stating that there is no violation of the NLRA just because an employee could have opted out of the individual dispute resolution agreement and chose not to?
Usually changes to footnotes are not very important. This change strikes us as important, because of the ongoing issue regarding concerted activity, class action waivers, and the NLRA.
Ordinarily, Denial Of A Motion To Compel Arbitration Is Appealable – But Not Here, And The Court Explains Why . . .
Hayward Renaissance Walk Corporation v. Olson Urban Housing, LLC, A148372 (2/1 12/20/16) (Margulies, Humes, Dondero) (unpublished) does something satisfying that we like cases to do: it makes sense and imposes order on somewhat confusing rules. In this instance, the rules are those governing the appeal of arbitration rulings under Code of Civ. Proc., section 1294.
Here is the context. Plaintiff, a homeowners association, sued various parties, alleging construction defects. Plaintiff then filed a petition for an order staying its action and compelling arbitration. However, plaintiff and defendants, while ultimately agreeing about a right to arbitrate, disagreed over which provision in the CC&Rs governed the arbitration. The trial court agreed that the provision preferred by defendants, a so-called limited warranty provision, governed. Because that provision required a demand for arbitration, the trial court gave plaintiff 14 days to submit a demand for arbitration. When the association failed to submit proof of a timely demand, the court denied the petition to arbitrate, and plaintiff appealed the denial of its petition.
As the Court of Appeal helpfully explains for those of us who could not otherwise remember all the rules governing the appeal of arbitration rulings, “what each of these appealable orders has in common is that they effectively terminate further proceedings with respect to the arbitration.” In other words, the orders are sufficiently final to be appealable. For that very reason, the denial of a petition to compel arbitration, which ordinarily terminates further arbitration proceedings, is appealable.
But not here. The trial court’s order denying the petition to arbitrate did not put an end to arbitration. If the trial court’s order were affirmed, the trial HOA would probably file a demand for arbitration under the limited warranty, whereas if the trial order were reverse, the HOA would probably seek an order compelling arbitration under its preferred section. So because the trial court’s order lacked sufficient finality to be appealed, the Court of Appeal dismissed the appeal.
What happens next? Query whether there is room for more do-si-do in the trial court, because plaintiff failed to seek arbitration within 14 days.