California Mediation and Arbitration

Arbitration/Consumers/FAA/Unconscionability: 9th Circuit Holds Arbitration Clause In Consumer Credit Contract Lacking “Holder Rule” Language Is Not Unconscionable, And Doesn’t Fall Under “Public Injunction” Exception to Arb

Dissenting Judge Pregerson Attaches “Dense, Small Print, And Blurry Nine-Page Contract” As Appendix

     We posted on December 16, 2012 about the Kilgore v. Keybank oral argument to the Ninth Circuit, sitting en banc.  The case involves a putative class action by former students of a failed helicopter flight-training school seeking injunctive relief against the bank that originated their student loans and the loan servicer.  The complaint alleged defendants violated the California Unfair Competition Law (UCL), because the Note and contracts with students failed to include language required by the Federal Trade Commission’s “Holder Rule.”  This rule requires consumer credit contracts to include language that a holder of the consumer credit contract is subject to claims and defenses which the debtor could assert against the seller of goods or services.  In the case of the flight school, students took out loans that the lender quickly resold on the secondary market, and the students of the failed school were left “holding the bag.”  The district court found the contractual arbitration clause to be unconscionable.  The Court of Appeals, sitting en banc, has now reversed, holding that the arbitration requirement, which includes a class waiver, is not unconscionable, and does not fit into the narrow “public injunction” exception to the arbitration requirement.  Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013) (Hurwitz, J., author) (for publication).

     The en banc majority rejected the argument that the Note’s ban on class arbitration is substantively unconscionable under California law; that issue was foreclosed by AT&T Moblility v. Concepcion, 131 S.Ct. 1740 (2011).  The risk that students will be saddled with prohibitive arbitration costs was rejected as “too speculative”.  The procedural unconscionability argument was also rejected, primarily because the arbitration clause allowed “students to reject arbitration within sixty days of signing the Note.” 

      A carve-out from the arbitration requirement has been judicially created in Broughton v. Cigna Healthplans of Cal., 988 P.2d 67 (Cal. 1999).  Where plaintiffs function as a private attorney general, enjoining future deceptive practices on behalf of the general public, injunction claims are not arbitrable.  The hot issue is whether Broughton has also been preempted by the Federal Arbitration Act and Concepcion.  However, the Court avoided deciding this important issue by determining that the students were acting to further their own interests, and the action complained about was past rather than prospective action.  

     Judge Pregerson, dissenting, attaches an an Appendix “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.” 

       Among the points made by Judge Pregerson are that this is a “take it or leave it” consumer contract introducing at least some procedural unconscionability under the circumstances.  Of course, there is the 60 day provision allowing for an opt-out – tough to get around, and never mind that students don’t read the provisions.  As to “substantive unconscionability”, a confidentiality provision requires the parties to maintain confidentiality of any claim they arbitrate.  This works against plaintiffs who can’t share information, and in favor of the defendant that gets to arbitrate separately with each plaintiff.  Filing a civil action costs less than $500; filing the same claim in arbitration runs more than $4000.  Finally – and this is interesting – one of the two arbitrators named in the contract ruled in favor of banks and credit card companies, and against consumers 94 % of the time.  Judge Pregerson is alone in his dissent.

Arbitration/Landlord and Tenant/Public Policy: First District, Division 1 Holds That Arbitration Clause In Rental Agreement Is Void As Against Public Policy

 

As A Result, Tenant Who Wants To Arbitrate Can’t

     California Code of Civ. Proc. section 1953(a) provides, “Any provision of a lease or rental agreement of a dwelling by which the lessee agrees to modify or waive any of the following rights shall be void as contrary to public policy:  . . . (4) His procedural rights in litigation in any action involving his rights and obligations as a tenant.”  The tenant’s “procedural rights” include rights to jury trial.  So what happens when the landlord sues the tenant, and the tenant moves to compel arbitration of the dispute under an arbitration clause in the parties’ rental agreement?  The tenant loses in Freile v. Lincecum, Case No. A135010 (1st Dist. Div. 3 Feb. 20, 2013) (Siggins, J., author 3:0) (unpublished).

     The result follows from the plain language of the statute:  the arbitration clause, which changes the tenant’s procedural rights, is “void” and therefore unenforceable.

     Two comments:  First, to reach the result, the Court must conclude that any provision altering the tenant’s procedural rights is void, even when it is the tenant who seeks to invoke it, for his own good or convenience.  Second, the Court did not address the viability of such a provision under the Federal Arbitration Act.

    

San Francisco Apartment Building.  820 O’Farrel Street.  Library of Congress.

Arbitration/Public Policy/Standard of Review: Licensing Requirement for Contractors Constitutes Explicit Legislative Expression of Public Policy, That If Not Enforced By Arbitrator, Constitutes Grounds for Judicial Review

Trial Court Must Conduct De Novo Review To Determine Whether Licensing Statute Requires Disgorgement of Compensation By Unlicensed Contractor

     Our next case addresses an important exception to the general rule that an arbitrator’s award cannot be vacated because of an error of fact or law:  the “public policy exception.”

     The setting is a condominium project that suffered numerous construction setbacks, took six years to complete, and received a Certificate of Occupancy on January 29, 2008 – bad timing.   That left Plaintiff Ahdout and Defendant Hekmatjah, the members of a company formed to develop the project, arbitrating their dispute over the accounting for distributions.  Ahdout was unhappy with the arbitrator’s award.  He appealed from a judgment entered following the superior court’s denial of his petition to vacate the arbitration award and from the court’s order confirming the award.  Ahdout v. Hekmatjah, Case No. B236764 (2nd Dist. Div. 4 January 25, 2013) (Willhite, J., author) (published).

     The fly in the ointment was Bus. & Prof. Code section 7031(b), permitting an action for disgorgement of compensation from an unlicensed contractor.  Both the person who provides construction services himself and one who does so through others qualifies as a contractor.  Ahdout claimed that Hekmatjah had provided construction services through an unlicensed general contractor.  Ahdout’s and Hekmatjah’s agreement for distribution of profits provided that Hekmatjah’s capital account would be credited more than Ahdout’s account for construction costs.  However, Ahdout opposed such a credit, based on Hekmatjah’s involvement in the alleged use of an unlicensed contractor. 

     Hekmatjah’s argument was simple: even if the arbitrator’s decision contained errors of fact or law, the trial court properly deferred to the trial court.  Though Hekmatjah correctly stated the general rule, there is an important “public policy exception,” and that was the hook upon which the Court of Appeal hung its opinion:

“We find that Ahdout’s claims under section 7031 fall within the ‘public policy’ exception to the general prohibition of judicial review of arbitration awards, because 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor.  Thus, the trial court erred in deferring to the arbitrator’s finding that section 7031 does not apply.  We remand the matter to the trial court to conduct a de novo review.”

     The Court rejected Ahdout’s other argument that the arbitrator exceeded his powers by enforcing an illegal contract, because the illegality in the instant case did not infect the entire contract.

      Blog Bonus:  The arbitral forum in this case was a “Bais Din” or “Beth Din” (“house of judgment”), a Jewish rabbinical court.

Arbitration/1286.2 Vacatur: Second District, Div. 2 Affirms Judgment Confirming Arbitration Award in Attorney-Client Fee Dispute

“Manifest Disregard of the Law” Doctrine Inapplicable to Arbitrator’s Decision Concerning Attorney’s Fees Dispute Between Law Firm and Client

     Appellant Fuchs & Associates, Inc. (Law Firm) sued former client, Elke Lesso, for unpaid attorney’s fees of $647.688.13.  An arbitrator found Law Firm was not entitled to recover additional fees, and its attorney fee lien was invalid.  On appeal, the Law Firm attacked the arbitration award – unsuccessfully.  Fuchs & Associates, Inc. v. Lesso, Case No. B239246 (2nd Dist. Div. 2 January 8, 2013) (Doi Todd, Acting P.J., author) (unpublished). 

     The Court of Appeal rejected arguments that the Arbitrator exceeded his powers by rewriting the fee agreement, failing to decide issues submitted, or deciding issues not submitted.  The Court also rejected an argument that the arbitration hearing should have been continued, because the Law Firm did not identify what additional evidence it wished to present that it was precluded from presenting, or how it was prejudiced.

     The Law Firm also argued that the arbitration award should be vacated because of the Arbitrator’s “manifest disregard of the law.”  This is a basis for rejecting an award in federal cases, but in state cases, a strict review standard for legal error “does not include a ‘manifest disregard’ exception, while at the same time leaving open the possibility of greater judicial review . . . in the case of rulings inconsistent with the protection of statutory rights.”  (citing Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665, 679, n. 3 (2010)). 

      Evidently, however, the Court of Appeal viewed this attorney-client fee dispute as a private affair that did not trigger protection of statutory rights and heightened scrutiny, for it observed:  “[Law Firm] has not cited any authority showing than an arbitrator’s decision on a law firm’s action for attorney fees has ever been reviewed on the merits by a trial court under the exceptional circumstances involving a statutory or public policy decision.”

     Is it possible that the Court’s view of the case was somewhat colored by Law Firm’s failure to “advise Lesso to seek independent legal counsel before she signed the loan” (to make possible the payment of in pendente lite attorney fees); by Law Firm’s concession “that it did not inform Lesso that it would be taking the position that the [attorney’s fees] lien would attach to all of her assets”; or by the fact that at the time of the arbitration, the attorney had been disciplined by the State Bar three times?  See Fuchs & Associates, Inc., n. 3.

FAA’s National Policy Favoring Arbitration Requires Arbitrator In First Instance To Determine If Noncompetition Agreements Are Null And Void

 

SCOTUS Smackdown of Supreme Court of Oklahoma

     On November 26, 2012, in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. _______ (2012) (per curiam), the Supreme Court of the United States found it necessary to remind the Supreme Court of Oklahoma that “[i]t is a matter of great importance . . . that state supreme courts adhere to a correct interpretation” of the Federal Arbitration Act (FAA).  “Here, the Oklahoma Supreme Court failed to do so.  By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law.”  The Oklahoma decision was therefore vacated. 

     Consider for a moment how this would play out in California, a state with a strong public policy that protects employees from unlawful restraints of trade and promotes competition.  Cal. Bus. & Prof. Code section 16600.  As in Nitro-Lift Technologies, the issue would have to be decided by the arbitrator, assuming the arbitration provision is enforceable.  If the arbitrator incorrectly applied the law, that would ordinarily be no ground for judicially reversing the arbitrator’s award, notwithstanding the failure to carry out California’s strong public policy that protects employees and promotes competition. 

     On March 27, 2012, we posted about Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012) (per curiam).  The Supreme Court of West Virginia had refused enforcement of an arbitration clause because it violated the state's public policy against arbitrating personal injury or wrongful death claims against nursing homes.  The per curiam Nitro-Lift Technologies opinion quotes the per curiam Marmet opinion:  “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:  The conflicting rule is displaced by the FAA.”  Hence, state law cannot prohibit outright the arbitration of a noncompete claim – the arbitrator decides the issue “in the first instance.”

     We would simply add that in the case of binding arbitration, “in the first instance” usually means “in the last instance” too! 

Arbitration/Employment/Enforceability/Standard of Review/Public Policy: Ninth Circuit Refuses to Vacate Arbitration Award Prohibiting Retired Football Player from Pursuing Workers’ Comp Claims Under California Law

 

Football Player Bruce Matthews Did Not Allege Sufficient Contacts With California To Show Workers’ Comp Claim Came Within Scope of California’s Workers’ Comp Regime

     Bruce Matthews, a former American college and professional football player, was an offensive lineman in the NFL for 19 seasons.  He played college football for  USC, was an All-American, and played professionally for the Oilers/Titan Franchise, retiring in 2002.  In 2008, Matthews filed a workers’ compensation claim in California related to injuries incurred during his career as a professional football player.  After Matthews filed his claim, the Titans and the NFL Management Council filed a grievance against Matthews, arguing he breached his employment agreement when he applied for benefits in California, because the agreement provided all workers’ compensation claims would be decided under Tennessee law.  Because the NFL collective bargaining agreement contained a binding arbitration clause, the parties arbitrated their dispute. 

     The arbitrator found the choice of law clause in the agreement constituted a promise to resolve workers compensation claims under Tennessee law, and Matthews violated the agreement by pursuing workers’ compensation claims in California.  Therefore, the arbitrator ordered Matthews to “cease and desist” from seeking California benefits.  Matthews filed suit in federal district court to vacate the arbitration award.  The district court denied Matthews’ motion, and confirmed the award.  Matthews appealed.  Matthews v. National Football League Management Council; Tennessee Titans, Case No. 11-55186 (9th Cir. August 6, 2012) (Fisher, J., author).

     The standard of review is a narrow one here:  “Arbitration awards are ordinarily upheld so long as they represent a plausible interpretation of the contract.”  Furthermore, to vacate an award on public policy grounds, “we must ‘(1) find that an explicit, well defined and dominant policy exists . . . and (2) that the policy is one that specifically militates against the relief ordered by the arbitrator.’” (Matthews, citing United Food & Commercial Workers Int’l Union, Local 588 v. Foster Poultry Farms, 74 F.3d 169, 174 (9th Cir. 1995)).  Because the facts did not appear to be in dispute, the Court of Appeals reviewed de novo the district court’s resolution of legal questions.

     The Court of Appeals noted that one narrow exception to the rule that arbitration awards are ordinarily upheld “is when the arbitration award is contrary to public policy.”  However, even if the California Labor Code can be interpreted to bar an employer from using a contractual choice of law clause to prevent an employee from receiving workers’ compensation benefits under California law, Matthews had failed to allege sufficient contacts with California to bring his claims under California law.  Thus, “[h]e did not allege any specific injury in California or a need for medical services in California.”

     Mathews also argued that the arbitration award violated federal labor policy providing that an employee may not, through a collective bargaining agreement, bargain away state minimum labor standards.  Same problem:  “it is not clear that Matthews’ workers’ compensation claim falls within the scope of California’s workers’ compensation regime.”

     Finally, Matthews argued that the arbitrator’s award showed “manifest disregard of the Full Faith and Credit Clause of the United States Constitution.”  Hardly manifest, concluded the Court of Appeals, because California’s interest “is highly attenuated in this case.”

     One may ask why there is no express discussion of FAA preemption of a California rule that would bar contractual waiver of workers’ compensation benefits.  This is our explanation:

      First, it was unnecessary to consider preemption, because the Court of Appeals concluded that Matthews’ contacts with California were too attenuated to give him the protection of California law.  Thus, anything that the Court of Appeals would have said about federal preemption of California law would have been dictum. 

     Second, there is no preemption of state law by federal law when federal law itself provides that there is an exception to preemption.  Here, the Court of Appeals restated Matthews’ argument that federal labor policy “provides that an employee may not, through a collective bargaining agreement, bargain away state minimum labor standards.  See Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 755-56 (1985).”  In other words, if this is the law, then federal labor law provides an exception to preemption by carving out agreements that bargain away state minimum labor standards. In another case, where the employee establishes contacts to California, the Court of Appeals has left itself room to reach a different conclusion, i.e., that the employee is protected by the California Labor Code and by California public policy, from waiving a right to assert California workers’ compensation claims through an arbitration clause applying Tennessee law.  However, by concluding that Matthews had failed to establish the contacts with California necessary to stake a claim under California law, the Court of Appeals did not need to delve into the effect of federal labor policy, as such a discussion was unnecessary to reach its conclusion. 

    The district court’s judgment was affirmed.