Fees Request Treated As “Hot Potato” By Arbitrator And Judge.
A nice post dated October 20, 2016 in California Attorney’s Fees summarizes the convoluted procedure in Miceli v. Staples, Inc., Case No D070676 (4th Dist., Div. 1 Oct. 20, 2016) (unpublished), describing the case as one “where the arbitrator and court tossed an attorney’s fees request like a ‘hot potato.’” Unfortunately for the respondent who was claiming fees, the “hot potato” was dropped, and the respondent never recovered fees.
Miners panning gold by Anton Refregier at Rincon Annex Post Office located near the Embarcadero at 101 Spear Street, San Francisco, California. Carol M. Highsmith, photographer. 2012. Library of Congress.
California Attorney’s Fees, the blawg that my colleague Mike Hensley and I have contributed to since 2008, has an August 28, 2016 post on Kent v. The Wine Group, A145104 (1/1 Aug. 19, 2016) (unpublished), in which the Court of Appeal upheld an arbitrator’s fee award of $3.25M and almost $357K in costs, against a CEO who sued The Wine Group, which had offered him $29M under a separation agreement over time. But he wanted $95M. He got an award of $29M alright, but he did not prevail, because he came up a bit short of accomplishing his objective. The moral is that arbitration, like litigation, can be very expensive. And perhaps there is another moral.
Interview In Orange County Lawyer Is Summarized Today In California Attorney’s Fees Blawg.
My colleague Mike Hensley and I publish a blawg about California Attorney’s Fees. A post today (July 10, 2016) in that blawg summarizes highlights of an interview appearing in the July 2016 edition of the Orange County Lawyer, in which the co-chairs of the Orange County Bar Association’s Mandatory Fee Arbitration Committee offer tips on what arbitrators look for in mandatory attorney fee arbitration.
On May 4, 2016, I posted about the Committee on Mandatory Fee Arbitration of the State Bar of California’s two new Advisories on Mandatory Fee Arbitration (MFA) brought under the Business & Professions Code. Advisory 2016-01, replacing Advisory 2011-02, is about the application of the Statute of Limitations for MFAs. Advisory No. 2016-02, replacing Advisory 2003-01, is an analysis of bill padding and other billing issues.
The Fifth Circuit, Division Two, holds that because a law firm’s cause of action to compel arbitration with its client “admitted the existence of a binding agreement to arbitrate the fee dispute, the trial court’s jurisdiction over the merits of plaintiff’s claims was initially limited to a determination of the gateway issue of arbitrability.” Cox, Castle & Nicholson, LP v. Wan et al., B262017 (2/5 6/23/16) ((Kumar[judge of the superior court], author, Baker, concurring); Turner (dissenting)) (unpublished). Alternatively, plaintiff was judicially estopped from seeking default judgments because it “admitted in its complaint that the fee dispute was subject to binding arbitration and defendants relied to their detriment on that admission.” As a result, plaintiff was not allowed to pursue defaults, and an order denying defendants’ motion to vacate and the default judgments were reversed.
This case has a somewhat unusual procedural history. It was originally argued on October 8, 2015, when Justice Richard Mosk was a member of the panel. Because Justice Mosk was unable to further participate, the Court vacated the submission, and appointed Judge Kumar to the panel. Letter briefs were submitted on the issue of judicial estoppel on March 22 and 25, 2016. Justice Mosk died on April 17, 2016. On March 30, 2016, the case was re-argued, and on June 23, 2016, the unpublished opinion was filed.
The majority conclusion that the cause of action to compel arbitration constituted “a binding agreement to arbitrate,” and stripped the Court of jurisdiction, may not be intuitively obvious, given that the cause of action, unlike a free-standing petition to arbitrate, was not verified, did not include evidence, and was denied in an answer, which, however, was only lodged and not filed, because a default had occurred. Furthermore, in other cases, the existence of an arbitration agreement has not resulted in a loss of jurisdiction. At least, the majority conclusion was not obvious to Justice Turner, who penned a pithy dissent.
Presiding Justice Turner’s dissent made several points: first, that existence of an arbitration agreement does not preclude a party from pursuing claims (citing Brock v. Kaiser Foundation Hospitals, 10 Cal.App.4th 1790, 1795 (1992) and cases in accord); second, that the cause of action did not accrue, because plaintiff failed to allege that defendants refused to arbitrate – a necessary element; third, that the record was inadequate, because there was no transcript; fourth, that the defendants were not artless rubes, as one was a certified public accountant, and the other a licensed realtor; and finally, that there were questions of credibility, leading to Justice Turner’s belief that the trial court did not abuse its discretion in denying the motion to set aside the default.
Though the case is unpublished, today’s post in California Attorney’s Fees rightly observes: “This decision, if correct, counsels that plaintiffs carefully think about whether they should include an arbitration claim in a complaint; otherwise, the trial court may not be able to proceed on the merits.” So be aware of another trap for the unwary.
Given that there is a majority opinion and a dissent, we wonder whether the case will be appealed. As far as the parties themselves are concerned, this may be a tempest in a teacup, for if the lawsuit does not proceed further in the trial court, the parties could end up in arbitration. And there is always the option to settle . . .
What Does It Mean For An Arbitration To “Have Been Had In Accordance With The Terms Of The Agreement” When A Party Is Unable To Pay Arbitration Fees?
We revisit a recurring problem that occurs in arbitration. In federal court, a party successfully moves to compel arbitration under the FAA, and the court stays litigation. Arbitration commences. Next, one of the parties to the arbitration is unable to pay the costs of arbitration, and therefore stops paying. Under the rules of the AAA, the AAA can suspend the arbitration if the other party does not pay for the arbitration. The other party refuses to pick up the tab, and the AAA suspends the proceeding. What happens next? Are the parties definitively done, because they agreed to arbitrate, and the arbitration has not been had, or can they proceed in court? Under such circumstances, just what does it mean for an arbitration to have been had? That is the scenario the Ninth Circuit confronted in Tillman v. Rheingold Firm, No. 13-56624 (9th Cir. 6/15/16) (Berzon, Gould, Steeh) after defendant/appellant ReneeTillman stopped paying arbitration fees.
Relying on Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010 (9th Cir. 2004), the district court had erroneously held that it “lack[ed] the power to allow further litigation.” Lifescan, Inc. was a case in which, “despite Premier’s non-payment of its share of arbitration fees, there was ‘no basis for an order requiring Premier to pay the fees, or compelling arbitration.’” Compelling arbitration would have been inappropriate, because the arbitration had been had according to the agreed-upon AAA rules, allowing the AAA to suspend the proceeding in Lifescan upon non-payment. However, in Tillman, the Ninth Circuit pointed out that “Lifescan’s only conclusion was that compelling arbitration would be inappropriate. . . Nothing in the FAA requires dismissal of the litigation under Lifescan’s circumstances or the present ones.”
In Tillman too, the arbitration had been had according to the rules of the AAA, allowing for dismissal upon a non-payment of arbitration fees. Because the FAA “provides that district courts must stay pending proceedings on issues subject to arbitration until such arbitration had been had, 9 U.S.C. section 3,” the stay could now be lifted. Nor was there a basis to compel arbitration, because ReneeTillman had not failed, neglected, or refused to arbitrate.
In dictum, the panel suggests that the outcome could be different if Tillman had willfully refused to pay the arbitrator’s fees, or if Tillman was the one seeking a stay in federal court, “as that would frustrate the Rheingold firm’s attempts to have the case heard in either the court or the arbitral forum.”
NOTE: On February 29, 2012, I posted on a similar scenario in Cinel v. Christopher, in which failure to pay fees resulted in termination of an arbitration that then bounced back to federal court.
The Committee on Mandatory Fee Arbitration of the State Bar of California has two new Advisories on Mandatory Fee Arbitration (MFA) brought under the Business & Professions Code. Advisory 2016-01, replacing Advisory 2011-02, is about the application of the Statute of Limitations for MFAs. Advisory No. 2016-02, replacing Advisory 2003-01, is an analysis of bill padding and other billing issues. The Advisories are dated March 25, 2016.
1. Opinions Change: Statute of Limitations for Fee Arbitrations.
In a previous Advisory, the Committee “opined that the one-year statute of limitations in CCP Section 340.6 for wrongful acts or omissions by an attorney, other than for actual fraud, did not apply to fee arbitration under Bus. & Prof. Code Section 6200.” That conclusion was based on the special nature of MFA, which focuses on legal fees. The MFA arbitrators cannot award damages for legal malpractice or professional misconduct in MFA.
The new Advisory reaches a different conclusion: MFA cannot be commenced if a civil action requesting the same relief would be barred by an applicable statute of limitations set forth in the Code of Civil Procedure, and that includes Section 340.6, and recent case law, applying the one-year statute to disputes involving the propriety of the attorney’s legal services. Therefore, the Committee concludes that if the dispute over fees involves the propriety of the attorney’s legal services, the statute of limitations does apply. But there are many exceptions under Section 340.6, and Section 340.6 will not apply to claims where an attorney converted a client’s funds or defrauded the client. My advice about the Advisory: read it.
The new Advisory focuses on over-billing; other Advisories have more generally focuses on determining the reasonableness of attorney’s fees. I refer advisedly to “over-billing” rather than “bill padding”, because over-billing can result from billing procedures that involve no intentional effort to pad bills.
The Advisory, which does provide an analysis of potential bill padding and other issues, proposes that arbitrators do at least the following four things:
Evaluate the process by which the fee bill was prepared and the specificity of the time entries;
Evaluate the staffing used on the matter;
Evaluate the work performed against the time billed, and
Look for certain patterns in the descriptions of the work performed, including time entries.
This Advisory provides many useful tips for investigating whether a bill is inflated, and is useful reading not just for persons involved in MFA, but for anyone who wants to probe deeper into the propriety of a legal bill.
Dissent By Justice Rubin Emphasizes That Disclosure Rules Must Be Broader Than Disqualification Rules
I have a sidebar category for “disclosures.” Perhaps I should add one for “disqualification”, because as the lengthy dissent of Justice Rubin explains in Safarian, Choi & Bolstad, LLP v. Minassian, No. B262526 (2/8 April 7, 2016) (Bigelow, P.J.) (unpublished), the requirements for disqualification of an arbitrator are not identical with those for disclosure. As the dissent also points out, the standards for disqualification and disclosure are often confused – so for now, I will stick to one sidebar category, faithfully reflecting the current state of confusion in case law.
The underlying fee dispute between the law firm (SCB) and its client Minassian was straightforward. The client believed that a handshake agreement superseded the written agreement, and that he had been overbilled. The law firm and the client engaged in fee arbitration under a program administered by the LACBA. The arbitration panel determined that the engagement letter was void, because SCB failed to issue monthly invoices and the invoice it did issue failed to clearly identify who worked on what. However, the panel awarded an amount for the value of services rendered. The trial court affirmed the award, and the client appealed.
The issue dividing the appellate majority and the dissent was whether the panel chair should have disclosed the fact that much of his practice consisted of the representation of lawyers against lawyers. The majority held that there was no reasonable basis to believe that the panel chair could not be fair to a client in a fee dispute simply as a result of the nature of his legal practice, in a case where the dispute to be arbitrated was between a law firm and a client, not between lawyers. The majority refused to extend the holding of a key case, Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4th 40 (2011), in which the “arbitration award in favor of a law firm in a fee dispute with a client was reversed because the chief arbitrator failed to disclose his representation of large law firms in similar cases, including of a law firm in a fee dispute with a client and of another law firm in a malpractice action against it.”
While agreeing that the current case was “less egregious” than the Benjamin, Weill case, Justice Rubin wryly adding, “’not as egregious’ arguments rarely take us very far.” Justice Rubin explored the historical development of disqualification rules for arbitrators and for judges, explaining that they have “different blood lines” and that they are not identical. “But the standard for disclosing information that is reasonably relevant to potential disqualification should be identical,” he concludes, “even though the specific grounds for disqualification may differ from judge to arbitrator.”
Justice Rubin also had no doubt that the information that the panel chair’s “law practice was in large measure devoted to representing lawyers was ‘reasonably relevant’ to the issue of disqualification.”
Two themes run through the dissent. One theme is that rules of disclosure must be more broader in their application than rules of disqualification. Otherwise, judges and arbitrators could simply disqualify themselves, and there would be no need for disclosure.
The second theme is that case law and standards are muddled by confusing terms such as “might”, “could”, and "would", with would “used pretty uniformly throughout to describe the judge’s likely ability to be impartial, not the state of mind of the litigant that triggers disclosure.” For example, the majority wrote, “We fail to see how this [failure to disclose] would cause a person to reasonably entertain a doubt that Rolston would be able to be impartial to a client.” (italics added). Justice Rubin believes that proper application of the test would be whether the failure to disclose “might” or “could” cause a person to reasonably entertain doubt that the arbitrator would be impartial.
DISCLOSURE: The panel chair, Berne Rolston, was a founder of Fulop, Rolston, Burns & McKittrick, a Beverly Hills law firm. Rex McKittrick moved on to found McKittrick, Jackson, DeMarco & Peckenpaugh. I was a shareholder of the latter firm. I don’t know Berne Rolston. But as you can see, I do have a connection, which, however, has not affected my absolute impartiality.
Under California Law, Where Party Challenges An Entire Contract As Illegal Or In Violation Of Public Policy, The Question Of Enforceability Is For The Court To Decide.
A substantial fee dispute between Sheppard, Mullin, Richter & Hampton, LLP and its client J-M Manufacturing Co., Inc., resulted in an arbitrator’s award to Sheppard, Mullin that the trial court confirmed, that the client appealed, and that the Court of Appeal has now reversed in a published opinion. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., No. B256314 (2/4 Jan. 29, 2016).
The problem with the arbitrator’s award in favor of Sheppard, Mullin was that Sheppard, Mullin simultaneously represented adverse parties, albeit in unrelated matters. This nevertheless violated Cal. Rules of Prof. Conduct, Rule 3-310, requiring that attorneys avoid the simultaneous representation of adverse interests.
The rule that an arbitrator’s mistakes of law and fact does not provide a basis for refusing to confirm an award is not ironclad, because under California law, the court gets to decide the enforceability of a contract where a party challenges an entire contract as illegal or in violation of public policy. Here, the Court of Appeal readily found a violation of Rule 3-310 to be a violation of an expression of public policy:
“As discussed in Flatt, SpeeDee Oil, American Airlines v. Sheppard Mullin, and Fiduciary Trust, the attorney’s duty of undivided loyalty that forms the basis of Rule 3- 310 constitutes the very foundation of an attorney-client relationship. The Agreement, which violated Rule 3-310(C), therefore violated an expression of public policy. The trial court erred in holding that the Agreement was valid and enforceable.” (slip op., p. 26).
Agreeing with cases holding that “[t]here is no requirement that a contract violate an express mandate of a statute before it may be declared void as contrary to public policy,” the Court of Appeal rejected Sheppard, Mullins’ argument that courts may consider only public policy as expressly declared by the Legislature.
A January 30, 2016 post in Mike Hensley’s and my blog, “California Attorney’s Fees,” describes the end result here as a “brutal reversal”, because “the reviewing court found that S, M was not entitled to fees during the conflict as a matter of law under Rule 3-310, but remanded for a determination of when the actual conflict arose.” So a fee award of $1.3M got reversed.
NOTE: This is the third published California opinion in recent months that addresses the “public policy” exception to the general rule that arbitration awards can’t be reviewed for a mistake of law or fact, the other two being SingerLewak v. Gantman, 241 Cal.App.4th 610 (2015) (See Oct. 22, 2015 post) and Epic Medical Management v. Paquette, B261541 (2/8 filed Dec. 29, 2015, ord pub. Jan. 28, 2015).
Fees And Costs Provision In Consumer Arbitration Was Unconscionable Here.
This case involves a common scenario in which a business sells a good or service that is financed, the business is unable to fully perform, and the lender seeks to enforce an arbitration provision when it gets sued. Here, the Court of Appeal held that the arbitration clause was enforceable, with one exception: the provision that shifted fees and costs to the prevailing party in a consumer arbitration was held to be substantively unconscionable. Why? Because a prevailing plaintiff consumer would have been entitled to fees under the Consumer Protection Act, the “loser pays” provision only benefits a prevailing defendant. Brinkley v. Monterey Financial Services, Inc., D066059 (4/1 Nov. 11, 2015) (Aaron, McIntyre, O’Rourke). However, the Court also determined that because the agreement was not permeated with unconscionability, the one unconscionable provision could be severed, saving the rest of the arbitration provision.
This is also a case in which incorporation by reference of AAA arbitration rules resulted in incorporation by reference of the AAA Supplementary Class Arbitration Rules. And that in turn meant here that the decision to determine whether a class-wide arbitration will be allowed is a decision delegated to the arbitrator under the AAA rules. The same delegation of the decision to decide whether to allow class-wide arbitration, with the same result, has been addressed in a case we blogged about earlier on August 20, 2015, Universal Protection Services, LP v. Superior Court of Yolo County (Michael Parnow, et al., Real Parties in Interest), C078557 (3d Dist. August 18, 2015)(published).
California Attorney’s Fees has a short post dated February 18, 2015, with tips for successful enforcement of arbitration clauses in fee retainers found in a recent article in the Daily Report, authored by Randy Evans and Shari Klevens of McKenna Long.