“(1) Whether, when the Federal Arbitration Act (‘FAA’) governs an arbitration, the FAA’s judicial review standards apply in state court and preempt application of different state-law judicial-review standards; and (2) whether, when arbitrators have jurisdiction to resolve a contract dispute, the FAA prohibits a court from holding that they ‘exceeded their powers’ based on the court’s conclusion that their contract interpretation is ‘plainly’ and ‘irrationally’ incorrect on the merits.”
But Court’s Decision On Fee Award Is Vacated, Because There Was No Reasonable Basis For Assigning Different Hourly Rates To Two Attorneys.
Baxter v. Bock, A142372, A142984, A143689 (1/1 May 18, 2016) (Margulies, Humes, Dondero) (unpublished) rather starkly illustrates the application of different standards of review to the arbitration award in an attorney’s fees dispute, and to the trial judge’s award of attorney’s fees to the client who successfully defended against the attorney’s efforts to collect more.
Although the parties acknowledged that the arbitrator erred in stating the amount of fees paid by the clients when calculating the amount in dispute in fees between attorney and client, that was no basis for the trial court, which confirmed the award, to vacate the award. As we know, mistakes of law or fact are ordinarily not a basis for overturning an arbitrator’s award.
However, when the clients then moved the trial court successfully for an award of attorney’s fees expended defending against the attorney’s claims, a different standard of review applied – an abuse of discretion standard when reviewing a trial court order awarding attorney fees. Here, the Court of Appeal found no reasonable basis in the record for applying different rates to two of the client’s attorneys. therefore, the matter was remanded to the trial court solely for reconsidering the lodestar compensation rate for one of the attorneys.
Another issue involved in this case is whether the arbitrator should have made an additional disclosure relating to bias, because part of his business involved auditing attorney client bills. The Court of Appeal concluded that the general disclosure requirements of the MFAA and the California Arbitration “are, for practical purposes, the same, and decisions under the ‘impartiality’ disclosure requirements of the CAA may be applied in evaluating arbitrator disclosure obligations under the MFAA.” However, the arbitrator’s practice was not devoted exclusively to one side of fee disputes; his law firm’s expertise was “in reviewing attorney bills, rather than in representing one side or the other in fee disputes.” So the disclosures were adequate.
State Law Unconscionability Principles Are Not Preempted By The Federal Arbitration Act – So Long As They Do Not Uniquely Target Arbitration Agreements.
Carlson v. Home Team Pest Defense, Inc., A142219 (1/4 Aug. 17, 2015) (Ruvolo, Reardon, Streeter) (certified for publication) affirms an order denying an employer’s motion to compel arbitration, on grounds that the arbitration provisions are procedurally and substantively unconscionable. Finding the agreement permeated with unconscionability, the Court agrees that it would be improper to rewrite the agreement and sever unconscionable provisions. The analysis seems conventional and thorough, aided by a “substantial evidence” standard of review, because “[i]n this case the trial court made factual findings based on at least some material disputed evidence.”
NOTE: The California Supreme Court recently addressed the test for unconscionability in Sanchez v. Valencia Holding Co., LLC (See my August 4, 2015 post.) The Sanchez Court did not find the automobile sales arbitration provision to be unconscionable in Sanchez. However, the Court in Carlson does find the employment agreement provision to be unconscionable, while relying on the Sanchez test “which stated that all of these formulations essentially embrace a central idea requiring a degree of unfairness, beyond ‘a simple old-fashioned bad bargain.’”
Though the same legal test is applied, there is, perhaps, one high-level factual difference between Sanchez and Carlson. Sanchez was the purchaser of a two-year old pre-owned Mercedes Benz, with a sales price of $53,498.60. Perhaps that influenced the way the Supreme Court viewed unconscionability, because it did not view the transaction as an ordinary consumer purchase, in which, for example, affordability of arbitration could be a significant factor in the unconscionability analysis. By way of contrast, Carlson was an employee, not the purchaser of a high-end automobile. Among other things, the Carlson Court noted that requiring the employee to pay a $120 filing fee within 90 days after making an initial Request for Dispute Resolution, after which all fees and expenses incurred in connection with the arbitration are to be split between the parties, puts arbitration and litigation on an unequal footing, and becomes a factor in the unconscionability analysis.
“Manifest Disregard Of The Law” Federal Standard For Vacating Award Worked To Employee’s Advantage Here.
Our next case involves arbitration issues addressed in three forums: a Labor Management Committee, state courts, and federal district court. Plaintiff/Petitioner Wawock petitioned for a writ of mandate, seeking an order directing the superior court to deny defendant CSI’s petition to confirm arbitration brought by CSI – and the Court of Appeal granted the petition. Wawock v. Superior Court (CSI Electrical Contractors, Inc., Real Party in Interest), No. B261315 (2/5 April 8, 2015) (Mosk, Kriegler, Goodman) (unpublished). Plaintiff Wawock was able to leverage a win on the issue of arbitrability in federal court to obtain the Court of Appeal’s order directing the superior court to deny CSI’s petition to confirm arbitration. The opinion is a scant 7 pages, but the case is procedurally gnarly and interesting.
Wawock filed a class action complaint against CSI alleging failure to pay wages to electricians for time spent attending mandatory training classes. CSI successfully petitioned to compel arbitration pursuant to a collective bargaining agreement. The superior court committed the threshold issue of arbitrability to the “Labor Management Committee.” Wawock petitioned for review, and the Court of Appeal, in an earlier 2013 case, agreed that the parties intended to commit the question of arbitrability to the Labor Management Committee. Critically, back then, the court did not decide the question of arbitrability –important later on, when CSI argued that the issue of arbitrability had been decided and collateral estoppel applied.
Wawock then invoked federal question jurisdiction, and sued in federal district court to vacate the adverse arbitration award on the ground that the Labor Management Committee “manifestly disregarded federal law” in finding his statutory claims arbitrable. The federal court agreed, and granted granted Wawock’s request to vacate the award.
CSI then petitioned in state court to confirm the award, but the superior court stayed the matter, and Wawock filed his petition for writ of mandate.
Because “full faith and credit must be given to a final order or judgment of a federal court”, the superior court was held to be bound by collateral estoppel and the order of the federal court vacating the arbitration award. Therefore, the superior court could not confirm the arbitration award. Nor could CSI rely on “law of the case”, because rather than deciding the issue of arbitrability, the trial court and court of appeal had simply directed the issue of arbitrability to the Labor Management Committee.
COMMENT: The key to the outcome here is that in federal district court, the judge was able to apply the “manifest disregard of the law” standard to vacate the arbitration award. That standard does not apply in state court, where an arbitrator’s mistakes of law or fact generally do not provide a basis for vacating the award. See Siegel v. Prudential Insurance Company of America, 67 Cal.App.4th 1270 (1999). Plaintiff’s attorney showed tenacity in seeking the federal forum.
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.
Court Distinguishes Recent Cases Finding No Waiver Of Right To Arbitrate.
In Bower v. Inter-Con Security Systems, Inc., Case No. A135940 (1/3 Dec. 31, 2014) (McGuiness, Pollack, Siggins), the Court of Appeal held that substantial evidence supported the trial court’s finding that defendant waived its right to arbitrate individual claims with plaintiff in a putative class action wage lawsuit. Therefore the Court affirmed the trial court’s order denying the petition to compel.
Preliminarily, the Court makes an interesting observation about the substantial evidence standard of review. Waiver is usually a question of fact, and therefore the substantial evidence standard is typically appropriate. Here, even though the parties did not appear to contest the facts, the substantial evidence standard was still appropriate. “Independent review is appropriate only when the facts permit just one reasonable inference,” explained the Court, adding: “Here, the facts do not ineluctably lead to one conclusion on the issue of waiver.” Therefore, the Court applied the substantial evidence standard.
The Court found substantial evidence that defendant was aware of its right to arbitrate, because defendant acknowledged as much by pleading the right to arbitrate as an affirmative defense. Additionally, defendant acted inconsistently with its right to arbitrate only individual claims, by participating in class action discovery, by propounding discovery, and by participating in class action settlement discussions. As for the element of prejudice necessary to establish waiver, the Court explained:
“The crux of the prejudice suffered by Bower is that he suffered delay and incurred costs in litigating and attempting to settle class claims that Inter-Con led him to believe would be encompassed within the litigation. As a result of Inter-Con reversing course and choosing to pursue arbitration limited to Bower’s individual claims, Bower suffered prejudice in that much of the expense incurred and effort expended would have no value in arbitration.”
Along the way to concluding that defendant waived its right to arbitrate, the Court distinguished two recent cases. In Gloster v. Sonic Automotive, Inc.,
226 Cal.App.4th 438 (2014) [blawg post May 21, 2014] the claim of prejudice was based solely on legal expenses largely incurred as a result of plaintiff’s own discovery efforts, whereas in Bower, defendant propounded discovery. The Court also distinguished Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) [blawg post June 23, 2014], in which a finding of waiver was reversed, because in that case, defendant timely filed a petition to compel arbitration.
Backflip and Cisco entered into a software license and escrow agreement, whereby Backflip’s software was to be released to Cisco upon the occurrence of certain events, one of which was Backflip’s discontinuing its software maintenance/support. If the release event occurred, Cisco could send a notice to escrow, Backflip could send a counter-notice if it disagreed, and the parties could arbitrate the dispute.
After giving notice Backflip would stop responding to maintenance requests from Cisco, a former Backflip CEO “authorized” release of the software from escrow to Cisco. Escrow closed, and the software was released to Cisco. Backflip, however, contended Cisco should have known action by Backflip’s former CEO was not authorized, resulting in Cisco’s misappropriation of the software.
The Court of Appeal agreed with the trial court and with Backflip that the scope of the parties’ arbitration agreement, as set forth in the license and escrow agreements, only “encompassed a dispute regarding the release of Backflip’s escrow materials while those materials remained in the possession of the escrow agent.” The parties contemplated arbitration would occur before the software was released from escrow. Thus, the arbitration clause became irrelevant here, once the software was released.
The Court distinguishes cases in which the arbitration requirement continues, as cases where the arbitration clause was broader than here or explicitly survives termination of an agreement.
An Episode Of “Real Real Estate Owners Of Orange County” . . .
The opening paragraph clues us that the panel found this appeal tiresome:
“This case is the result of a business relationship gone so bad that the arbitrator likened it to ‘a highly contested family law dissolution replete with acrimony, significant monetary loss, lack of trust, and “hard ball” tactics . . . ‘ Consistent with that assessment, both sides challenge the judgment rendered below.”
The underlying dispute was between equal owners of Newport Harbor Offices and Marina, LLC (NHOM). Plaintiff McNaughton was the tenant of NHOM, and McNaughton and defendant Copenbarger were equal owners of NHOM. “When the parties’ relationship soured, McNaughton stopped paying rent and NHOM filed an unlawful detainer . . . “ After a prolonged arbitration slugfest, the arbitrator found McNaughton breached his lease, leaving the court to determine damages. After the trial court confirmed the arbitration award and assessed damages against McNaughton, the parties predictably appealed. Newport Harbor Offices & Marina, LLC v. McNaughton, Case Nos. G047424 and G048095 (4/3 Oct. 1, 2014) (Rylaarsdam, Bedsworth, Aronson) (unpublished).
With one exception, the Court of Appeal found the parties’ various contentions without merit, upholding the judgment and concluding that in any case, an arbitrator’s errors of law and fact are generally unreviewable. The exception related to retroactive prejudgment interest that the trial court had added to the arbitrator’s award, The Court of Appeal agreed that the trial court erred by adding retroactive interest into the judgment because it was nowhere mentioned in the arbitration award. Indeed, Copenbarger’s petition specifically requested prejudgment interest from “the date of the arbitration award,” not from the date of breach to the date of the award.
“In the interest of judgment” each side gets to bear its own costs on appeal.
PRACTICE TIP FROM THE COURT: The Court found allegations of a “Cabal” – i.e., a suggestion that opponents had acted nefariously -- to be “neither legally significant nor analytically helpful.”
Appellant Akin’s opening brief stated: “All things considered . . . it was assumed that the May 30th arbitration had been cancelled.” The lesson of our next case is that one who fails to show up for a scheduled arbitration hearing had better dot i's and cross t’s . . . or else. Akin v. Prado, No. F066482 (5th Dist. June 9, 2014) (unpublished).
Akin wanted to continue an arbitration hearing to complete discovery. However, Prado refused to do so. The arbitrator held the hearing, and entered an award in favor of Prado. The trial court confirmed the award, and denied Akin’s petition to vacate. Akin appealed.
Appellant’s fate was sealed by the “substantial evidence” standard of review. “Pursuant to the applicable standard of review, we accept the version of events as found by the trial court, not the version presented by Akin.”
Interestingly, Cal. Code of Civ. Proc., section 1286.2(a)(5) specifically provides that an award shall be vacated if the court determines “rights of a party were substantially prejudiced by the refusal of the arbitrators to postpone a hearing upon sufficient cause being shown therefor . . .” (italics in the opinion).
PRACTICE TIP: The remedy for continuance is to make a proper noticed motion, rather than to assume that the hearing has been cancelled and fail to show.
COMMENT: The Court of Appeal’s application of a “de novo standard” to review the trial court’s order (not the arbitration award), coupled with a “substantial evidence” standard to the extent that the trial court’s ruling rests on disputed factual issues, may at first seem confusing. The Court of Appeal relies on Lindenstadt v. Staff Builders, Inc., 55 Cal.App.4th 882 (1997) (Masterson, J.), a case holding that a narrow exception to the rule that a court may not set aside an arbitration award even if the arbitrator made an error in law or fact, is the situation where the entire legality of a contract is at issue: public policy requires de novo review of the trial court’s order. However, the facts of Lindenstadt seem rather afield from those in Akin.
The following comment by the Court of Appeal helps us to make sense of how it applied the standard of review: “The arguments presented by Akin on appeal are based on assertions of fact that are contrary to the findings of the trial court . . . “ In other words, the Court of Appeal is telling us that the trial court had to make findings to reach its conclusion that the rights of a party were not substantially prejudiced by the refusal of arbitrators to postpone a hearing upon sufficient cause – and those findings were supported by substantial evidence.
Review Of Legal Error Here Was Job For Court Of Appeal
Though an error in law or fact is not a basis for overturning an arbitrator’s award, in California, the parties by agreement can make the arbitrator’s award reviewable for legal error. Here, the parties agreed that the award was to be reviewed for legal error, yet the trial court simply affirmed the award, declining to review for legal error. Naturally, the losing plaintiffs appealed from the judgment. Clarke v. Kilpatrick, Case No. C071313 (3rd Dist. May 28, 2014) (Blease, Nicholson, Mauro) (unpublished).
Why? The answer is to be found in the language of the arbitration agreement. The parties here agreed that “judicial review of any … legal error by the arbitrator shall proceed . . . from a final judgment . . . entered in the Superior Court. . . “ And that is what happened – the Court of Appeal, rather than the Superior Court, reviewed the final judgment for legal error, and found none.
DRAFTING TIP. If you want to empower a court to review the arbitrator’s award for legal error, it’s not enough to simply require the arbitrators to follow the rule of law – because that may allow them to apply it “wrongly as well as rightly.” Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334, 1360 (2008). Be sure to add that “legal errors are an excess of arbitral authority that is reviewable by the courts.” Id. at p. 1361. The language used in the specific agreement in Cable Connection did work to create the power to review for legal error.