California Mediation and Arbitration

Arbitration/Agents/Third Party Beneficiaries/FINRA: Financial Advisor May Be Allowed to Compel Arbitration As Agent and Third-Party Beneficiary of Defunct Member of FINRA

The Twist Here:  A Defunct Member of FINRA Cannot Compel Arbitration – But Its Agent or Third Party Beneficiary Could Do So Here (Maybe)

     The Ronay Family Limited Partnership (Ronay) sued its financial advisor Robert R. Tweed, his investment firm TFI, and others, claiming Ronay had lost $4M as a result of bum investment advice.  Tweed, in his capacity as a registered representative of CapWest Securities, Inc., had signed an arbitration agreement between Ronay and CapWest covering the subject matter of Ronay’s claims.  However, CapWest, a member of the Financial Industry Regulatory Authority (FINRA), was defunct, and under the rules of FINRA, it could not compel arbitration.  The issue here is whether anyone can enforce the arbitration provision.

     Tweed moved to compel arbitration, and the trial court denied his request, reasoning that because CapWest could not compel arbitration, neither could its agent Tweed.  Tweed appealed.  Ronay Family Limited Partnership v. Tweed, D062195 (4th Dist. Div. 1 May 23, 2013) (Irion, J., author 3:0) (certified for partial publication except for part III.C).

     Held:  Tweed and TFI may enforce the arbitration clause of the account agreement between Ronay and CapWest as agents and third-party beneficiaries.  Though CapWest became defunct and under FINRA rules lost its right to enforce the arbitration clause, Tweed and TFI retained rights to do so.  It probably helped that, though Tweed himself was not a member of FINRA, he was registered as an associated person with FINRA at all relevant times.

      Note that we’ve said Tweed “may be allowed to compel arbitration.”  It is hardly a foregone conclusion, however, because the Court, in the unpublished part of the opinion, remanded for further consideration of an issue that wasn’t briefed:  whether the possibility of conflicting rulings among multiple parties should lead to denial of arbitration under Cal. Code Civ. Proc. section 1281.2(c).

     Que sera, sera.

 

Que Sera, Sera.

Arbitration/Enforcement: Arbitration Provision Fails Because Health Care Power of Attorney Is Invalid

Invalid Power of Attorney Did Not Constitute Sufficient Evidence of Ostensible Authority

    Grandma’s birthday. 1896. Library of Congress.

     Mother, in her 90s, suffering from dementia and osteoporosis, allegedly slipped and fell at a residential care facility for the elderly, after being left unattended in the dark on a wet pavement.  Found lying in a pool of blood, mother was transported to a hospital, where she died.  When daughter sued for elder abuse, fraud, wrongful death, and violation of a Health & Safety Code medical records provision, care facility unsurprisingly sought to compel arbitration.  What defendant wants to try such a case before a jury?  The trial court denied the motion to compel, and an appeal followed.  Root v. Emeritus Corporation and Emeritus At Westwind Gardens, A134748 (1st Dist. Div. 5 May 17, 2013) (Needham, J., author 3:0) (unpublished). 

     First, the daughter signed an Agreement to Resolve Disputes by Binding Arbitration.   But her authority to do so on behalf of her mother relied on an invalid health care power of attorney that was neither acknowledged by a notary nor signed by the requisite witnesses.

     Second, the invalid health care power of attorney was insufficient to confer ostensible authority on the daughter to act on behalf of her mother.   If it were otherwise, then it would permit health care and other decisions to be made based on the principal’s alleged signature alone, without the protective statutory formalities of acknowledgment before a notary or two witnesses.

     Affirmed.

Arbitration/Employment/Enforcement/ Construction: Signed Acknowledgment of Employee Guidebook Failed to Establish Employee Was Bound By Arbitration Provision in Guidebook

 

Guidebook Disclaimers Were Self-Destructing

     In the next case, the Court of Appeal would not let the employer “have its cake and eat it too.”  On the one hand, the employee Guidebook provided for arbitration.   On the other hand, the employee Guidebook contained disclaimers that relieved the employer of contractual obligations.  The employer could not have it both ways.

      In an employment lawsuit between Plaintiff Tamayo and her employer, a golf club, the golf club moved to compel arbitration, based on the employee’s signed acknowledgment that she received the employer Guidebook with an arbitration provision.  The trial court denied the employer’s motion to compel arbitration, and the employer appealed.  Tamayo v. Cordevalle Golf Club, LLC, H037983 (6th Dist. April 26, 2013) (Bamattre-Manoukian, J., author 3:0) (unpublished). 

     One key disclaimer in the Guidebook provided that it “does not constitute a contract of employment.”  The Court of Appeal concluded, “the parties did not enter into a binding agreement to arbitrate because no document contained in the record can be reasonably construed to manifest the mutual assent of the parties to an agreement to arbitrate.”

     Query whether the result would have been different if, instead of the self-destructing language that there was no contract of employment, the Guidebook had only said that the employer could unilaterally modify, revoke, suspend, terminate, or change the policies and procedures in the Guidebook.  Under those circumstances, might the Court of Appeal have reached into its toolkit, and pulled out the implied covenant of good faith and fair dealing to conclude that the contract was not unilateral and illusory, because it had to be interpreted reasonably so as not to frustrate its purpose?  See my April 28, 2013 post on Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published) (applying covenant of good faith and fair dealing to save arbitration clause from “illusory” interpretation).

Arbitration/Unconscionability/Arbitrability: Sixth District Rules Tort Claims, Including Battery, Are Arbitrable

Decision Reversing Trial Court’s Findings of Unconscionability and Non-Arbitrability of Tort Claims is Very Fact Specific – But Ruling On Tort Claims Is Worth Noting

      Bigler v. The Harker School, Case No. H037450 (6th Dist. February 6, 2013) (Elia, J., author 3:0) (published) is a reminder judicial determinations of unconscionability and arbitrability are often nuanced and fact specific, and the burden of proof may tip the balance in reaching an outcome.  Here, the Court of Appeal signaled the outcome twice, by emphasizing that the party opposing arbitration “had the burden of proving the defense of unconsionability”, and the burden to “demonstrate than an arbitration clause cannot be interpreted to require arbitration of the dispute.”  The superior court thought the plaintiff, who sued her private school, met the burden for opposing arbitration, but the Court of Appeal held otherwise.

     Plaintiff Shivani, enrolled as a student in The Harker School, sued the school alleging she had been wrongfully accused of an honor code violation, and that a teacher who humiliated her, had pushed her to the ground.  The school petitioned to compel arbitration, under a broad-based arbitration clause.  The superior court denied the petition, finding the contract unconscionable, and finding that it was “highly unlikely” that the plaintiffs agreed to arbitrate, expecting tort claims would be included in the process.

     On the issue of unconscionability, here are examples of what I mean by “nuanced” and “fact specific”:  The Court of Appeal agreed that the failure to attach AAA rules is “of minor significance”; was “less convinced than the superior court that the other circumstances indicate procedural unconscionability” and was “not as troubled as was the superior court” by a carve-out of tuition disputes from arbitration.  Put this all on a scale and weigh it, and it is the burden of proof that tips the scale against plaintiff.

      What probably made this case worthy of publication is the Court of Appeal’s effort to distinguish other cases, holding that tort claims were not arbitrable, Victoria v. Superior Court, 40 Cal.3d 734 (1985) and RN Solution, Inc. v. Catholic Healthcare West, 165 Cal.App.4th 1511 (2008):  “In each of these cases, the lawsuit focused on conduct that was so removed from the professional relationship between the parties that it could not have been contemplated when they executed their agreement to arbitrate disputes.”  Here, however, alleged battery, negligent infliction of emotional distress, defamation, and negligent hiring, took place on the school campus, with students present, and/or related to the student’s relationship with the school.  Indeed, the plaintiffs were somewhat hoist by their own pleading, having alleged that torts were committed by persons “acting in the course and scope of their employment and agency . . . “

     And if that’s not enough, there is always the burden of proof.

     The Court of Appeal opinion ends:  “Harker may well be found liable under the parties’ contract, on a tort theory, or both, but it is the arbitrator who must resolve the questions presented in Shivani’s complaint.”  “Well”?  Is that an oblique caution, or what?

    

    

Arbitration/Employment/Enforceability/FAA/CCP 1281.8: Second District, Div. 1 Reverses Order Denying Motion To Compel Arbitration – Mutuality Of Employer/Employee Provisions Is Key

“In particular, we do not find unconscionable a provision in the arbitration agreement allowing either party to seek provisional remedies . . . “

     For the practitioner, Baltazar v. Forever 21, Inc., Case No. B237173 (2nd Dist. Div. 1 Dec. 20, 2012) (Mallano, J.) (published), is worth reading because it provides employers and employees with an example of a “final and binding” arbitration provision that survives various challenges and passes muster with the Court of Appeal.

     Maribel Baltazar sued her former employer, Forever 21, Inc., for racial and sexual harassment and other employment-related wrongs.  Employer and two employees filed a motion to compel arbitration, which motion the employee opposed, arguing the arbitration agreement was unconscionable.  The trial court denied defendants’ motion, and defendants appealed.

     Agreeing that the “take it or leave it” employment contract was one of adhesion, the Court of Appeal nevertheless held that it was not substantively unconscionable. 

     Preliminarily, the Court of Appeal concluded that the agreement was governed by the California Arbitration Act, not the Federal Arbitration Act, because no evidence was offered that the employment or any pertinent transaction involved interstate commerce.  This preliminary conclusion supported the Court’s analysis that carving out provisional equitable relief from the arbitration agreement was entirely permissible.

     Because California Arbitration Act applied, Cal. Code of Civ. Proc. section 1281.8 necessarily applied to the agreement.  And section 1281.8 allows either party to the arbitration provision to apply to the court for a provisional remedy in connection with an arbitrable controversy.  (We note in passing that sometimes other contractual arbitration provisions include carve-outs for provisional relief.  Seeking provisional relief from an arbitrator may be unwieldy, because it must be enforced quickly and through a court.  For example, the standard California Association of Realtors contracts for the purchase and sale of real estate typically have ADR provisions requiring mediation and arbitration with a carve-out for provisional remedies, allowing recourse to the court).

      The Court also rejected the employee’s argument that the carve-out for provisional remedies did not result in a lack of mutuality.  Here, the carve-out did not exempt claims more likely to be brought only by the employer.  For example, of the employee’s nine claims, virtually all could be a source of injunctive relief.  Thus, while ‘[a]n arbitration agreement is substantively unconscionable if employees are required to submit their disputes to arbitration while the employer remains free to pursue its claims in any forum,” such was not the case here.

     The employee also argued that a provision allowing for all necessary steps to be taken to protect trade secrets and proprietary and confidential information from public disclosure was unduly harsh and one-sided.  One-sided, perhaps, but not unreasonable.  After all, the provision was limited to protecting trade secret or similar provision, “consistent with the duties imposed by the Uniform Trade Secrets Act (Civ. Code, sections 3426-3426.11)”.  Besides, “courts have upheld confidentiality and nondisclosure agreements of general application,” allowing the Court to invoke the maxim that “the greater contains the less.”

     Concluding that the agreement to arbitrate was not unconscionable, the Court of appeal reversed the order denying arbitration, ordering the trial court on remand to enter a new order granting the motion to compel arbitration.

Arbitration/Enforceability/Homeowners: California Supreme Court’s Decision In Pinnacle Requires Reversal In Another Case Of Order Denying Developer’s Motion To Compel Arbitration

     On August 16, 2012, we blogged about the California Supreme Court’s decision (actually, a majority, concurrences, and a dissent) in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012).  That case held that covenants, conditions and restrictions of a recorded declaration created by a developer, which contain an arbitration clause, will be honored and enforced to compel arbitration as long as they are not proven to be unreasonable.

      That Supreme Court holding compelled the Second District, Division 1, in Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc., Case No. BC225086 (2nd Dist. Div. 1 Dec. 6, 2012) (Mallano, J) (unpublished) to vacate its prior decision in the Promenade case affirming an order denying the developer’s motion to compel arbitration.  On remand, the trial court is to enter a new order granting the developer’s motion to compel arbitration.

Arbitration/Employment/Unconscionability: Implied Restriction On Employer’s Express Right To Unilaterally Change Arbitration Agreement Saves Arbitration Agreement From Unconscionability Attack

Arbitration Requirement In Employment Contract of Casino Security Director Survives Unconscionability Attack

    Plaintiff Gatewood sued his former employee Hustler Casino and its owner El Dorado Enterprises, Inc., for various employment-related claims.  The employer moved successfully to compel arbitration.  Apparently unsatisfied with the arbitration award, Mr. Gatewood appealed the award and the order compelling arbitration on grounds of substantive and procedural unconscionability.  Gatewood v. El Dorado Enterprises, Inc., et al., B237435 (2nd Dist. Div. 4 November 6, 2012) (Manella, J.) (unpublished).

     The Court of Appeal first analyzed enforceability of the arbitration agreement under the four “minimum requirements for the arbitration of nonwaivable statutory claims” set forth in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83 (2000).  Three of the four requirements were “indisputably” satisfied:  no limit on statutorily imposed remedies such as punitive damages and attorney’s fees; a written arbitration decision allowing for review; the employer bears any type of expense the employee would not be required to bear in a court action.  While there was a disagreement about a fourth factor, adequate discovery, the Court believed this issue had been forfeited, or else satisfied by a provision stating “[e]ach party shall have the right to conduct reasonable discovery, as determined by the arbitrator as provided in [the] California Code of Civil Procedure.”

     The Court found “minimum elements of procedural unconscionability” to be present, because signing the agreement was required to obtain the job.  But the agreement was not so one-sided as to create the substantive unconscionability also necessary to find an agreement unconscionable. 

     The most interesting one-sidedness issue arose because the language permitted Hustler Casino to “change in [its] sole discretion” all the policies, procedures and conditions of employment.  But the employer’s discretionary power to modify the terms of the employment agreement “indisputably carries with it the duty to exercise that right fairly and in good faith.”  24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199, 1214 (1998).

     The Court distinguished another “unilateral modification” case that we have posted about on April 18, 2012:  Peleg v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012).  In Peleg, Texas law governed.  The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466.  This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.

     The judgment was affirmed.

Arbitration/Enforceability: District Court of Nevada Finds “Browsewrap Agreement” To Arbitrate Unenforceable

“Browsewrap Agreement” Did Not Evidence That Plaintiffs Consented To Arbitrate, Plus It Was An Illusory Agreement That Could Be Changed At Any Time

     Generally, we focus on California law, but the next case, arising from the United States District Court for the District of Nevada, is an important one for e-commerce.  In Re Zappos.Com, Inc., Customer Data Security Breach Litigation, 3:cv-00325-RCJ-VPC  MDL No. 2357 (filed 9/27/12).

     This lawsuit arose from “a security breach of servers” belonging to Amazon.com, Inc., doing business as Zappos.com, and Zappos.com, Inc. (Zappos).  Since Zappos is the largest online shoe store, we assume that quite a few people may have been affected. 

     Zappos moved to compel arbitration based on an arbitration provision in what the court characterized as a “browsewrap agreement.”  A browsewrap agreement is one whereby a website owner seeks to bind users to terms and conditions “by posting the terms somewhere on the website, usually accessible through a hyperlink located somewhere on the website.”  In contrast, “a ‘clickwrap’ agreement requires users to expressly manifest assent to the terms by, for example, clicking an ‘I accept’ button.” 

     The court concluded that, “[w]ithout direct evidence that Plaintiffs click on the Terms of Use, we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use.”  (If only Zappos had used a “clickwrap” contract . . . )

     There was a second problem with the arbitration agreement:  the Terms of Use, including the Arbitration Clause, could be changed at any time, without notice to the customer.  “We join those other federal courts,” wrote Chief Judge Robert C. Jones, “that find such arbitration agreements illusory and therefore unenforceable.”  This reenforces another theme of ours:  companies that want enforceable arbitration provisions should strive to make them fair (or at least, not illusory or unconscionable).

   Blog Bonus:  “Zappos.com is an online shoe and apparel shop currently based in Henderson, Nevada.  In July 2009, the company announced it would be acquired by Amazon.com in an all-stock deal worth about $1.2 billion. Since its founding in 1999, Zappos has grown to be the largest online shoe store.”  Wikipedia (footnotes omitted).

Arbitration/Enforceability: First District, Division 1 Affirms Order Denying Sprint’s Motion To Compel Arbitration, Based On Trial Court’s Limited Jurisdiction Following Remittitur

 

Dispositional Language Of Prior Appellate Opinion Deprived Trial Judge Of Jurisdiction To Rule On Motion To Compel Arbitration

     On September 26, 2012, we posted about Phillips v. Sprint, a case in which a 2006 denial of a motion to compel mediation was reversed in 2011 only after the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, __ U.S. __, 131 S.Ct. 1740 (2011), making it easier to compel arbitration.  The Court of Appeal, First District, Division 3, affirmed the trial judge’s reversal of the earlier denial of the motion to compel arbitration.  In Phillips v. Sprint, the Court of Appeal explained that an earlier effort by Sprint to compel arbitration would have been futile before Concepcion was decided.

     In Ayyad v. Sprint Spectrum, L.P., Case No. A133824 (1st Dist. Div. 5 October 29, 2012) (Needham, J.) (certified for publication), the Court of Appeal, in one of the so-called “Cellphone Termination Fee Cases”, rejected Sprint’s argument that it should be allowed to compel arbitration because an earlier effort to compel arbitration before Concepcion was decided would have been futile.

      The different outcomes in Ayyad v. Sprint Spectrum, L.P. and in Phillips v. Sprint hinge on a procedural/jurisdictional issue:  In Cellphone Termination Fee Cases, 193 Cal.App.4th 298 (2011), the Court of Appeal “affirmed the trial court’s order granting Plaintiffs a partial new trial on the issue of Sprint’s actual damages and the calculation of a setoff to which Sprint might be entitled.  In our disposition, we remanded for further proceedings limited to those issues.” (italics added for emphasis).  Ayyad was a plaintiff in the Cellphone Termination Fee Cases, and thus the trial court was jurisdictionally limited by the directional language in the remittitur to consider the remaining issues, which issues did not include the right to arbitrate.  (In the appellate context, the remittitur is the order by which the Court of Appeal hands back jurisdiction to the trial court to retry the case, or to enter orders in conformance with the appellate court’s directions.  See Cal.Rules of Court, Rule 8.272).

     Does the outcome mean that Sprint was completely deprived of any opportunity to ask the the appellate courts to address the question of arbitrability?  Not entirely.  The Court of Appeal noted a window of opportunity in footnote 6: “While its petition for review was pending, Sprint could certainly have requested that the California Supreme court examine the effect, if any, of Concepcion on this case.”  But once the remittitur issued, the window of opportunity had closed.  Sprint failed to sprint. 

      Evidently the Court of Appeal felt rather strongly about Sprint’s argument.   Saying that it was “extremely troubled by Sprint’s argument” that “rests on a refusal to acknowledge the very obvious limitations our prior opinion imposed on the remand proceedings in this case,” the Court of Appeal called Sprint’s arguments “spurious.”  Ayyad v. Sprint Spectrum, L.P., at footnote 5.    Ouch.

Arbitration/Employment/Estoppel/Implied in Fact Agreement: Court of Appeal Concludes That Trial Court Properly Denied Motion to Compel Arbitration With Former HR Director Charged With Getting Employees to Sign Arbitration Provision, Yet Not Signing Herse

Employer’s Equitable Estoppel and Implied-in-Fact Arbitration Agreement Arguments Are Both Rejected

     Plaintiff, Susan Gorlach, sued her former employer, The Sports Club Company, for wrongful termination, retaliation, paramour sexual harassment, intentional infliction of emotional distress, defamation, breach of contract, and negligence.  She did not sign an arbitration agreement.  When the employer petitioned to compel arbitration in the trial court, it lost – after all, the employee had not signed the arbitration agreement.  Seems pretty straightforward so far.  Oh, we should mention that the Plaintiff was the HR Director, charged with the task of getting all the employees to sign the arbitration provision.  Also, she purportedly led her employer to believe that she had signed the agreement, and did not mention that she was one of four holdouts among several hundred employees, the rest of whom had signed.  Also, the arbitration agreement had to be signed as a condition of continued employment.  The Sports Club appealed. Gorlach v. The Sports Club Company, B233672 (2nd Dist. Div. 4 October 16, 2012) (Suzukawa, J.) (certified for publication).

     The Sports Club argued that its employee was equitably estopped from denying the existence of the arbitration agreement, because she misled the executive committee into believing she signed the agreement.  However, an element of estoppel is that the party claiming estoppel must rely upon the conduct to its injury.  Though The Sports Club advised that signing the agreement was a “condition of employment,”  there was “no evidence that, as of the date of Gorlach’s resignation, Sports Club had decided what it would do if an employee refused to sign the arbitration agreement or had terminated any employee for failing to sign the agreement.”  Absent evidence of detrimental reliance on the part of The Sports Club, there could be not equitable estoppel.

     What about an employed-in-fact agreement to arbitrate, based on the fact that Ms. Gorlach continued to work for The Sports Club, and the employer had insisted that the employees sign an arbitration agreement as a condition of continued employment?  As the Court of Appeal acknowledges, “California law permits employers to implement policies that may become unilateral implied-in-fact contracts when employees accept them by continuing their employment.  Whether employment policies create unilateral contracts is ‘a factual question in each case.’”

      Here, the messy fact for the employer was that its handbook told employees, “As a condition to employment, all Team Members must sign the Mutual Agreement to Arbitrate Claims.” (italics added in the Court’s opinion).  And Ms. Gorlach had not signed – evidencing an intention not to be bound.  That messy fact also distinguished her case from Craig v. Brown & Root, Inc., 84 Cal.App.4th 416 (2000), a case in which the employee was not asked to sign an arbitration agreement, was informed that any employment-related dispute would henceforth be subject to arbitration, and was found to be bound by an implied-in-fact agreement to arbitrate.

     Moral:  If you are the employer, be careful what you ask for.  If the employer insists on getting a signature, and does not get it, the employer could have a problem.  So if you do decide to ask for a signature, get it.  And if you decide not to ask for a signature, take a look at Craig v. Brown & Root, Inc., supra.