The Important Distinction Is Whether Fraud In The Inducement Applies To The Contract Or To The Arbitration Clause.
Though unpublished, Milder v. Holley, B267974 (2/5 1/31/17) (Kumar, Kriegler, Baker) has facts that neatly clarify an important gateway issue: does a judge or an arbitrator get to decide whether there was fraud in the inducement in entering to an arbitration agreement in California? Whether there was fraud in the inducement affects whether a dispute is arbitrable, making it a "gateway issue."
The key facts are these: Milder sued his former attorney Holley and Holley's law firm in connection with legal representation. Defendants successfully demurred because Milder had previously initiated arbitration of the dispute pursuant to the parties' retainer agreement, and therefore there was another action pending (assuming arbitration is an "action" – an issue that the Court of Appeal did not even have to address, as we shall see). Furthermore, the trial court ruled that it was for the arbitrator, not the judge, to decide Milder's claim that defendants fraudulently induced him to agree to the arbitration provision. Milder appealed.
Milder's complaint alleged he had been fraudulently induced into entering into the arbitration agreement, and he argued that the issue of fraudulent inducement was a gateway issue that the court, rather than the arbitrator must decide. The superior court had disagreed, because case law is clear that fraudulent inducement to enter into a contract, which happens to contain an arbitration clause, is decided by the arbitrator in California. Ericksen, Arbuthnot, McCarthy, Kearney & Walsh Inc. v. 100 Oak Street, 35 Cal.3d 312, 323 (1983). The important distinction, however, is that when the claim of fraud in the inducement is directed to the arbitration clause itself, rather than to the whole contract– and Milder had pleaded his claim as fraudulent inducement to enter into arbitration – then the claim must be decided by the judge. Id. The Court of Appeal reversed the judgment, and at the same time reversed an award of attorney's fees against Milder in another appeal, because defendants were no longer prevailing parties entitled to attorney fees. Milder v. Holley, B270385 (2/5 1/31/17) (unpublished).
HAT TIP to my friend and colleague Mike Hensley for bringing the Milder v. Holley cases to my attention. Mike and I co-contribute to the California Attorney's Fees blawg, and Mike is an avid reader of slip opinions.