Arbitral Award Was Properly Corrected To Take Into Account That Labor Code Section 1194 Is A One-Way Fee Shifting Award.
California Attorney’s Fees posts today on Ling v. P.F. Chang’s China Bistro, Inc., Case No. H039367 (6th Dist. Mar. 25, 2016) (published), an employment law case in which the Court of Appeal agreed (in part) with the trial judge that Labor Code section 1194 works as a one-way fee shifting provision in favor of the employee, such that a substantial arbitral award fee award in favor of the employer required correction. This is an example of the “public policy” exception to arbitral finality applied in the employment law context.
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).
I posted about SingerLewak v. Gantman on July 31, August 31, and September 1, 2015. This is an interesting case discussing the so-called “public policy exception” that will sometimes justify review of an arbitral award by the superior court – though in the end, not in this case.
Previously, the Court of Appeal had ordered the case published in the morning, only to revoke the publication order in the afternoon, when it realized that the time to order publication had expired. The Justices then wrote a letter to the Supreme Court asking for publication. Yesterday, the Supreme Court ordered publication.
Ted Bacon, Mike Hensley, and Matt Hansen, my colleagues at AlvaradoSmith, represented SingerLewak, the appellant/plaintiff prevailing on the appeal. I was pleased to see publication was ordered, as I had written the letter to the Court of Appeal requesting publication.
Court of Appeal’s Jurisdiction To Authorize Publication Expired.
Just yesterday, in the preceding post, I reported the Court of Appeal, Second District, Division 8, had authorized publication of SingerLewak v. Gantman, a case offering an excellent discussion of the so-called “public policy exception” that, when it is found it exist, allows for judicial review of an arbitral award.
By the end of the day, however, the following case docket entry appeared:
Pursuant to California Rules of Court, rule 8.264(b)(1), the court's opinion became final on August 28, 2015. The court's order filed August 31, 2015, granting certification to publish the opinion is hereby vacated as improvidently issued. Forthwith, the court will comply with the provisions of California Rules of Court, rule 8.1120(b) regarding publication of the opinion upon order of the Supreme Court.
As Arte Johnson would say, “Very interesting . . . but not very funny.”
Rule 8.1120(b) provides: “If the rendering court does not or cannot grant the request before the decision is final in that court, it must forward the request to the Supreme Court with a copy of its opinion, its recommendation for disposition, and a brief statement of its reasons. The rendering court must forward these materials within 15 days after the decision is final in that court.”
An Arbitrator Implying A Geographic Limitation Under Bus. & Prof. Code Section 16602 Did Not Violate An Important Public Policy, And Thus Did Not Expose The Arbitral Award To Judicial Review.
On July 31, 2015, I posted about SingerLewak, LLP v. Gantman, B259722 (2/8 July 29, 2015; pub. Aug. 31), a case providing a detailed discussion of the “public policy exception” that can sometimes justify judicial review of an arbitral award, though not in that specific case. On August 31, 2015, the Second District, Division 8, ordered that the case should be published.
NOTE: My colleagues Ted Bacon, Mike Hensley, and Matt Hansen represented the successful plaintiff/appellant. I wrote a letter to the Court of Appeal in support of publication.
SingerLewak LLP v. Gantman Contains Excellent Discussion Of The “Public Policy Exception” That Sometimes Permits Judicial Review Of An Arbitrator’s Decision – But Not Here.
It is well-established that arbitrators do not exceed their powers just because they assign an erroneous reason for their decision. Therefore, the vast majority of arbitrator’s awards are immune to judicial review and easily get confirmed as judgments. Sometimes, however, an arbitrator’s award clearly violates public policy, resulting in judicial review and vacatur. Our next case, SingerLewak, LLP v. Gantman, B259722 (2/8 July 29, 2015) (Bigelow, Flier, Grimes) (unpublished) has an excellent discussion of the public interest exception.
SingerLewak, an accounting firm, and its employee, Gantman, were parties to a partnership agreement containing an arbitration provision. The partnership agreement included a provision that if a partner left the firm and competed, then a cost was imposed on the departing partner who serviced partners of the firm. The arbitrator concluded that Gantman was a partner, that the provision was not a true covenant not to compete, and that the restriction was not void for lack of an express geographical limitation, because there was an implied limitation – locations accessible to the firm’s client’s locations. In other words, the arbitrator “blue-penciled” a geographic limitation. Ordinarily, that would be the end of the matter, because whether the arbitrator was right or wrong could not be second-guessed by the courts.
The trial court, however, concluded judicial review of the arbitration award was required because it violated California non-compete policy, and vacated the award, leading to SingerLewak’s appeal.
Though unpublished, the case addresses an issue of first impression. Because California Bus. & Prof. Code section 16602 allows for an agreement that a departing partner “not carry on a similar business within a specified geographic area where the partnership business has been transacted . . . “, does an arbitrator who implies a geographic limitation run afoul of an important public policy, exposing the arbitral award to judicial review?
No, says the Court of Appeal. Unlike Bus. & Prof. Code section 16600, the general non-compete provision that draws a bright line in California, section 16602, applying to partnerships, applies a “rule of reason.” That rule of reason, which is not a bright line, allows the arbitrator to imply a geographic limit. Therefore, by implying a geographic limit, the arbitrator does not fall within the “public policy exception” that would open up the award to judicial review.
This case discusses in detail the public interest exception, carefully distinguishing many other cases that address the public interest exception. For example, on one side of the spectrum is Ahdout v. Hekmatjah, 213 Cal.App.4th 21 (2013), in which the Court concluded judicial review of an arbitration award was required because the award implicated “the explicit legislative expression of public policy embodied in section 7031 regarding unlicensed contractors.” On the other side of the spectrum is the SingerLewak case, involving no explicit legislative expression of public policy prohibiting an arbitrator (or the courts, for the matter), from implying a geographic limitation on business activities under section 16602.
One important takeaway is that the public policy exception will not be lightly applied. Absent a clear expression of illegality or public policy, the strong presumption in favor of arbitration means that the award will generally be immune from judicial scrutiny.
Congratulations to my colleagues at AlvaradoSmith, Ted Bacon, Mike Hensley, and Matt Hansen, who successfully briefed this matter in the Court of Appeal and obtained the reversal. Mike Hensley, my co-contributor to the California Attorney’s Fees blawg, argued the case for Appellant SingerLewak.
“Exotic” Choice Of Law Clause Is The Key To This Case.
Stained glass in Neiman Marcus store, San Francisco. Carol M. Highsmith, photographer. 2012. Library of Congress.
Neiman Marcus drafted an ingenious choice of law clause that the First District, Division Four, describes as “exotic” – perhaps a euphemism for “too clever by half”, because it ultimately led the Court of Appeal to find the arbitration agreement unconscionable in an employee-employer putative class action/wage-hour dispute. Pinela v. Neiman Marcus Group, Inc., A137520 (1/4 June 29, 2015) (Streeter, Reardon, Rivera).
The choice of law clause provided Texas law applied, “except that for claims or defenses arising under federal law, the arbitrator shall follow the substantive law as set forth by the United States Supreme Court and the United States Court of Appeals for the Fifth Circuit. The arbitrator does not have the authority to enlarge, add to, subtract from, disregard, or . . . otherwise alter the parties’ rights under such laws, except to the extent set forth herein.” The agreement also included a broad delegation provision allowing the arbitrator to decide pretty much any disputed issue.
Ordinarily an agreement can specify choice of law and delegate decisions to the arbitrator. Indeed, typically such provisions are enforced, but such was not their fate here. The Court performed an unconscionability analysis, and found the arbitration provisions both procedurally and substantively unconscionable.
The Court did not like the fact that the agreement disabled the arbitrator from applying California law to a labor dispute involving California workers, and therefore it refused to enforce the Texas choice of law provision, explaining that California has an important interest “in ensuring that its statutory protections for California-based workers are not selectively disabled by out-of-state companies wishing to do business in this state . . .” (My ball, my rules.) The Texas choice of law disadvantaged California workers both as to substantive claims that they might have in California, but not in Texas, and as to defenses to the enforceability of an arbitration agreement, e.g., California law concerning unconscionability.
“[B]ecause the ability of the arbitrator to call upon California law in deciding the enforceability questions entrusted to him is a ‘consideration  inextricably bound up in the question of the validity of the choice of law provision, ‘”, once the choice of law provision was jettisoned, the delegation of the enforceability decision to the arbitrator was too.
Having concluded that the delegation clause was uneforceable, the Court then analyzed the arbitration agreement as a whole and found several instances of substantive unconscionability.
The Court’s bottom line: “We conclude that the delegation clause and the agreement are both unconscionable and therefore unenforceable under California law.”
COMMENT: The Court notes, “In Peleg [v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012)], Division One of the Second District Court of Appeal held an arbitration agreement identical in form to the agreement at issue in this case was illusory under Texas law (which the appellate court applied pursuant to a choice of law provision) and therefore unenforceable).” I have previously posted about Peleg on November 7, 2012:
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.
See also my post of April 18, 2012. Note that Peleg and Pinela reach the same result – invalidation of the arbitration agreement – but by different routes. Peleg finds the arbitration agreement illusory under Texas law. Pinela refuses to apply Texas or Fifth Circuit law, and finds the agreement unconscionable under California law.
Arbitration of Unlawful Group Boycott Claim Under California Cartwright Act Was The Juicy Florida Choice Of Law Law Issue.
HCF Insurance Agency v. Patriot Underwriters, Inc., Case No. B257715 (2/5 May 27, 2015) (unpublished) involved a dispute between plaintiff insurance broker, and defendant program administrator/underwriter, partially governed by an arbitration clause. The Court of Appeal affirmed the trial judge’s order that causes of action for contract breach and breach of the covenant of good faith and coverage were within the scope of the arbitration agreement, but that causes of action for fraud and intentional interference with economic advantage were not within the scope.
However, the cause of action for unlawful group boycott, in violation of California’s Cartwright Act, raised an interesting issue of public policy and choice of law. The dispute, which was within the scope of the arbitration clause, was governed by a Florida choice-of-law provision. Florida law did not provide a remedy for losses resulting from antitrust violations outside Florida, and plaintiff’s alleged damages were sustained in California. Florida law also provides an arbitration agreement is unenforceable if it violates public policy, and such a violation occurs when an arbitration agreement diminishes available remedies. Thus, the Court of Appeal reasoned that the arbitration clause must be invalid under Florida law, because arbitration under Florida law would diminish the remedies of plaintiff for injury in California under the Cartwright Act, violating Florida public policy.
COMMENT: Under the Federal Arbitration Act, claims that an arbitration provision violates state public policy don’t get much traction these days. However, even under the FAA, the parties can agree to choice of law, and here, the parties agreed to apply Florida law to their dispute.
Fourth District, Division Three Ruled Earlier In Citibank v. McGill That “Broughton-Cruz” Rule Fell Prey To Federal Arbitration Act Preemption.
Fallen Prey. Circa 1934-39. Library of Congress.
Under California’s “Broughton-Cruz” rule, arbitration provisions are unenforceable as against public policy if they require arbitration of Unfair Competition Law, False Advertising Law, or Consumer Legal Remedies Act injunctive relief claims brought for the public’s benefit. Broughton v. Cigna Healthplans , 21 Cal.4th 1066 (1999). The reasoning behind the Broughton-Cruz rule is somewhat similar to that behind Iskanian v. CLS Transportation Los Angeles, LLC, which held that claims brought under California’s Private Attorney General Act of 2004 are really brought on behalf of the public, and therefore not subject to Federal Arbitration Act preemption governing claims between private parties.
On December 18, 2014, I posted about McGill v. Citibank, N.A., the Fourth District, Division 3 case holding: “The Broughton-Cruz rule falls prey to AT&T Mobility’s sweeping directive because it is a state-law rule that prohibits arbitration of UCL, FAL, and CLRA injunctive relief claims brought for the public’s benefit.” The Court of Appeal walked a fine line, distinguishing the rationale for preserving the right to sue in court under PAGA (consistent with Iskanian), from the rationale for the Broughton-Cruz rule, by explaining that the PAGA action “is fundamentally different than the injunctive relief action under the other statutes [UCL, FAL, or CLRA].” In other words, PAGA is practically sui generis. So PAGA survived pre-dispute arbitration waivers, whereas the Broughton-Cruz rule was swept away by FAA preemption.
On April 1, 2015, the California Supreme Court granted a petition to review this case, No. S224086. Cantil-Sakauye, C.J., Werdegar, Chin, Liu, Cuéllar and Kruger, JJ. voted in favor, and Corrigan, J., was recused and did not participate. The case presents the issue whether the Federal Arbitration Act preempts the Broughton-Cruz rule that statutory claims for public injunctive relief are not subject to compulsory private arbitration.
California Supreme Court Leaves Employer’s “Honest Belief Defense” Unsettled.
This case fits under the rubric “no harm, no foul.”
Plaintiff Richey sued his employer AutoNation, Inc., for terminating his employment after he went out on sick leave, thereby violating his right to reinstatement under the California Family Rights Act (CFRA). While on sick leave, Mr. Richey worked to start up a restaurant, in violation of his employer’s policy that employees must not seek outside employment.
The arbitrator rejected Richey’s claims, concluding the employer could terminate Mr. Richey if it had an “an ‘honest’ belief that he is abusing his medical leave and/or is not telling the company the truth about his outside employment.” The trial court confirmed the award. The Court of Appeal reversed, concluding the arbitrator violated plaintiff’s right to reinstatement by applying an “honest belief” defense of the employer to the employee’s claim, thereby eliminating the employee’s unwaivable statutory right to reinstatement. The employer appealed. Richey v. AutoNation, Inc., S207536 (Cal. S. Ct. Jan. 29, 2015) (Chin, J., author).
In fact, “[a]rbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy.” And the interesting question in this case is whether the arbitrator exceeded his powers by adopting the employer’s “honest belief” defense that it can terminate an employee based on a reasonable belief the employee is violating company policy while on sick leave under the California Family Rights Act or its federal counterpart.
The Court acknowledges this is “an unsettled question of law.” Unsettled it remains, for the Court concluded that the question need not be resolved here, because the “arbitrator found plaintiff’s firing was based on a clear violation of company policy – a legally sound basis for upholding the arbitrator’s award . . . “As for the employee’s argument that the company policy “forbidding outside employment in this context is an illegal restraint on his CFRA leave”, that had been forfeited by a failure to raise it in the trial court.
An interesting case for the narrow issue it resolves, as well as for the important issues it leaves unresolved.