California Mediation and Arbitration

Arbitration/Nonsignatories/Equitable Estoppel: Ninth Circuit Puts Brakes On Toyota’s Attempt To Compel Prius Plaintiffs To Arbitrate Their Claims

District Court Could Decide Whether Nonsignatory Could Compel Arbitration

     Toyota has been enmeshed in arbitration concerning the ABS braking system of its 2010 Prius.  In Kramer v. Toyota Motor Corporation, et al., Case No. 12-55050 (9th Cir. January 1, 2013) (Quist, D. J., author 3-0) (published), owners of 2010 Priuses, parties to arbitration agreements with Toyota dealerships, were able to fend off a motion to compel arbitration by Toyota Motor Corporation and Toyota Motor Sales, U.S.A., Inc. (Toyota), nonsignatories to the arbitration agreement.

     The first issue addressed in Kramer was whether the district court or the arbitrator had authority to decide if Toyota, a nonsignatory, could compel arbitration.  This is typically a “threshold issue” determined by the courts, unless the arbitration clause explicitly and clearly delegates the authority to the arbitrator.  Here, the arbitration clause provided that it “applies to any claim or dispute about whether a claim or dispute should be determined by arbitration.”   Okay, that may work to delegate the authority to decide the issue of arbitrability as to signatories.  But as to nonsignatories, “[g]iven the absence of clear and unmistakable evidence that Plaintiffs agreed to arbitrate arbitrability with nonsignatories, the district court had the authority to decide whether the instant dispute is arbitrable.”

      Second, Kramer includes a detailed analysis of whether Plaintiffs were “equitably estopped from avoiding arbitration.”  To determine whether Toyota, a nonsignatory, could invoke equitable estoppel and require arbitration under the Federal Arbitration Act, the Court looked to California state contract law.  In particular, the Court drew on the test in Goldman v. KPMG LLP, 173 Cal.App.4th 209 (2009), whether the claims that the nonsignatory sought to arbitrate were “intimately founded in and intertwined with the underlying contract obligations.”  Id. at 221.  Without getting deep in the weeds, let’s just say that the Court did not find the Prius owners’ claims against Toyota sufficiently intertwined with the underlying contract obligations between the Prius owners and the dealerships to require arbitration of the claims against the nonsignatories.

     The panel affirmed the district court’s order denying Toyota’s motion to compel arbitration.

     Blawg Bonus:  Theodore J. Boutrous Jr., one of Toyota’s attorneys, was the lead attorney for Wal-Mart in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), the case resulting in the decertification of a huge class of Wal-Mart female employees.

Arbitration: Second District Division 1 Construes 3 Separate Agreements And Concludes Parties Did Not Agree To Arbitrate

Incorporation By Reference Argument Fails

     Freedom Films, LLC sued Nu Image, Inc., and M3 Media, Inc. for breach of contract, accounting, and fraud, adding doe defendants later as alleged alter egos.  Defendants moved to compel arbitration under an arbitration provision.  The trial court denied the motions on the ground that the parties had not agreed to arbitrate Freedom Film’s rights as to the picture entitled The Mechanic.  The original named defendants and the doe defendants appealed. Freedom Films, LLC v. Nu Image, Inc., et al., Case Nos. B236216, B236765 (2nd Dist. Div. 1 August 30, 2012) (Rothschild, J., author) (unpublished.).

     The problem for defendants was that there were three different agreements knocking about, rather than working smoothly together – and because an agreement to arbitrate the rights at issue could not be incorporated by reference, both the trial court and the Court of Appeal concluded that there was no agreement to arbitrate. 

      Freedom Films sued upon a January 23, 2009 letter agreement entered into with Nu Image and Home of the Brave Productions.  But the letter agreement did not contain an arbitration provision.

     A 2006 distribution agreement between MGM, and Nu Image did contain a dispute resolution provision.  Furthermore, a February 10, 2009 settlement agreement entered into by MGM, Nu Image, Home of the Brave Productions, and Freedom Films, incorporated the dispute resolution provision in the distribution agreement.  So why didn’t that result in a binding agreement to arbitrate?  Two problems here.

     First, Freedom Films sued on the letter agreement, not the settlement agreement, and the settlement agreement did not exist at the time of the letter agreement. 

     Second, though the letter agreement did refer back to audit rights in the 2006 distribution agreement, it failed to clearly incorporate the 2006 arbitration provision that was incorporated in the February 2009 settlement agreement.  See Amtower v. Photon Dynamics, Inc., 158 Cal.App.4th 1582, 1608 (2008) (“subject document must contain some clear and unequivocal reference to the fact that the terms of the external document are incorporated”)..

     Defendants made the additional argument that it was for the arbitrator to decide whether the dispute was subject to arbitration.  Here the court distinguished between deciding whether there was an agreement to arbitrate (decision for the court) and whether the dispute was within the scope of the arbitration provision (maybe a decision for the arbitrator, but not at issue).

     The orders denying motions to compel arbitration were affirmed.

     Comment:  the lesson for practitioners is that one must be very careful with incorporations by reference.  The incorporation should be clear and unambiguous to be effective.  A further problem arises when the document one would have liked to incorporate doesn’t yet exist.

     Blawg Bonus:  “Hollywood accounting (also known as Hollywood bookkeeping) refers to the opaque accounting methods used by the film, video and television industry to budget and record profits for film projects.”  Wikipedia entry, “Hollywood accounting.”

Arbitration: 1st District, Div. 5, Finds No Error In Trial Court’s Decision Invalidating One-Sided Arbitration Clause in Employment Agreement

 

Delegation to the Arbitrator of the Power to Decide Whether the Arbitration Clause is Unconscionable Is “Horse of a Different Color” That Must Satisfy High Evidentiary Standard

     The employer, CantorCo2e, L.P., and an executive, appealed from an order denying their petition to compel arbitration of the claims under the Federal Arbitration Act (FAA) brought by an employee who was a broker. The FAA can give some advantage to the employer seeking to compel arbitration, because arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions – e.g., unconscionability. Furthermore, here, the employer, who of course drafted the arbitration provision, had the beginning advantage of a broadly worded arbitration provision indicating that arbitration might be conducted under the rules of an arbitration service (AAA) giving arbitrators the power to decide the validity of arbitration agreements.

     However, under all the circumstances here, that was not enough to satisfy the trial court or the Court of Appeal that the parties intended to delegate authority to the arbitrator to decide the threshold issue of whether the arbitration provision was conscionable. Ajamian v. CantorCO2e , L.P., Case No. A131025 (1^st Dist. Div. 5 Feb. 16, 2012) (certified for publication).

     Given the broadly worded arbitration provision, why couldn’t the arbitrator, rather than the trial court, decide whether the employment dispute had to be arbitrated? The chief reason is that ordinarily it is the expectation of the parties that a court, rather than an arbitrator, will decide whether the arbitration provision is unconscionable. Therefore, delegation of that decision – contrary to what is typically the expectation of the parties – requires “clear and convincing evidence.”

    The Court of Appeal drew a distinction between the power of an arbitrator to decide substantive claims, and the power of the arbitrator to decide whether the arbitration clause itself is unconscionable. “Language such as ‘any disputes, differences or controversies’ may well be adequate and necessary for the parties to express their intention to arbitrate all substantive claims, since the number and diversity of potential future substantive claims is so great as to defy a specific enumeration of each type. But the issue of who would decide the enforceability of the arbitration clause itself is a horse of a different color.”