Also, California Code of Civil Procedure, Section 1281.2, Did Not Prevent Arbitration, Because Federal Arbitration Act Applied And Preempted State Provision
Defendants/appellants in the next case lost a petition to compel arbitration in the trial court. At first blush, they had waived their right to arbitrate, because they delayed bringing their motion to compel, and they chose a litigation route, filing an (unsuccessful) motion for summary judgment. However, defendants, who appear to have given particular attention to the risk of waiver, fared better when they appealed, managing to convince the Court of Appeal that they had not lost their right to arbitrate. Gloster v. Sonic Automotive, Inc., A137081 (1st Dist. Div. 1 filed 4/23/14, certified for partial publication 5/21/14) (Margulies, Dondero, Banke).
First, defendants appealed the denial of their summary judgment motion – a motion they brought arguing that plaintiff, an employee who was a party to numerous agreements requiring arbitration, had forfeited his right to bring any claims, by not following the arbitration route. This appeal issue was easily shot down, because absent extraordinary circumstances, an order denying summary judgment is not appealable.
Second, defendants had obviously given thought to the risk of waiving their right to arbitrate, because they were careful to assert the right to arbitrate as an affirmative defense, and because along with filing their motion for summary judgment, they petitioned to arbitrate in case they lost. While they delayed petitioning to compel arbitration, they were careful to consistently assert their right to arbitrate, and to only respond to discovery rather than to propound discovery. Furthermore, the motion for summary judgment was not viewed by the Court of Appeal as deciding the merits of the employee’s substantive claims. In sum, there was no convincing showing that the defendants’ delay resulted in an advantage in litigation to the defendant – hence, no showing of waiver of the right to arbitrate.
Third, Cal. Code of Civ. Proc., section 1281.2(c) allows the court to deny a petition to compel arbitration under circumstances where, for example, pending litigation and an arbitration would present the possibility of conflicting rulings on a common issue of law or fact. However, here, the arbitration provisions were contractually governed by the Federal Arbitration Act, which preempts 1281.2(c). The FAA is not concerned with the possibility of conflicting rulings; if the parties agree to arbitrate, then section 1281.2(c) offers no escape hatch.
Fourth, several defendants argued that another defendant, Toyota, should be deemed a third party beneficiary of the arbitration agreement, because Toyota was labeled an “agent” of the other defendants in boilerplate complaint allegations. However, the defendants making the argument did not concede the truth of the boilerplate allegations. The issue is resolved conclusively by a case we have posted about on April 18, 2013, Barsegian v. Kessler & Kessler, 215 Cal.app.4th 556 (2013): a third party cannot be deemed an agent under an arbitration agreement based on boilerplate allegations, particularly when the party advocating agency status denies the allegations, as was the case here.
DRAFTING TIP. Many arbitration provisions contain confusing language to the effect that the arbitration agreement is governed by some combination of the FAA, California law, the rules of the AAA, or some other rules. Because of confusion about what law governs, there may be confusion about whether section 1281.2 applies, allowing the court to deny a request for arbitration because of the possibility of conflicting rulings. One can resolve that issue upfront by spelling out the result one desires in the arbitration clause. Here, for example, one of the contracts provided: “the court may not refuse to enforce this arbitration agreement and may not stay the arbitration proceeding despite the provisions of California Code of Civil Procedure section 1281.2 [subdivision] (c).” The Court of Appeal concluded that the parties could not have stated their intent “any more clearly.”