And Application To Compel Arbitration Remains “Undetermined” As Long As Dissatisfied Party Is Pursuing Appellate Review.
The Fourth District, Division 2 made short shrift of this case, issuing a peremptory writ of mandate directing the Superior Court of Riverside County to vacate its order denying petitioner Carmax’s motion to stay the action for Labor Code violations while its appeal of the denial of its application to compel arbitration remains “undetermined.” Carmax Auto Superstores California, LLC v. Superior Court, E062879 (4/2 April 15, 2015) (King, Ramirez, Hollenhorst) (unpublished).
Non-Parties To The Arbitration Agreement Were Not “Third Parties” Within The Meaning Of Section 1281.2(c).
The trial court denied defendants’ motion to compel arbitration, under the third party litigation exception found in Cal. Code Civ. Proc. 1281.2(c) to the general rule requiring enforcement of an arbitration agreement. Here, only one of several defendants was a party to arbitration agreements with plaintiffs. Therefore, the trial court was concerned that litigation filed against “third parties” who were not entitled to enforce the arbitration agreements would result in inconsistent results, if one defendant was allowed to arbitrate. Defendants were smart to appeal the denial of their motion to compel arbitration. Alpert v. HDA Mortgage Fund, LLC, No. B247142 (2nd Dist. Div. 3 April 23, 2014) (Croskey, Klein, Kitching) (unpublished).
Plaintiffs were investors who had invested in an investment fund holding loans secured by deeds of trust. Plaintiff Alpert was investors’ business manager. Defendants included the company providing investment counseling and portfolio management services, the company investing in the secured loans and offering shares in the investment fund, the fund manager, and two officers. Only defendant HDA Properties Inc. was actually a party to the arbitration agreement with plaintiffs.
The Court of Appeal, however, concluded that the so-called “third parties” were in fact entitled to enforce the arbitration agreement, and therefore, they were not “third parties” for purposes of section 1281.2(c). The parties fell within the rule that a nonparty acting as an agent of a party to the agreement to arbitrate may enforce that agreement. Indeed, plaintiffs had alleged that the the defendants were all related entities and individuals and that they acted as agents for one another.
Reversed, with directions to grant the motion to arbitrate, and stay the action in whole or in part.
This left one housekeeping matter for the Court of Appeal. The trial court had to stay the pending litigation in whole or in part, because a trial court granting a motion to compel arbitration must do so. Cal. Code Civ. Proc. section 1281.4. But who decides the scope of the required stay, i.e., to what extent are the claims subject to arbitration severable from the claims to be litigated? Here, the parties’ Operating Agreement stated that the arbitrator must decide any questions concerning arbitrability of the dispute – “so any questions concerning which claims are subject to arbitration must be decided by an arbitrator, rather than the trial court.”
Court Addresses Unanswered Question As To Whether Stay Order Might Be Deemed “Final” Under “Collateral Order” Doctrine . . . No, Is The Answer
A Ninth Circuit panel has held that 9 U.S.C. section 16, the section of the Federal Arbitration Act dealing with appeals, bars appeals from a district court’s orders staying judicial proceedings and compelling arbitration of the named plaintiffs’ individual claims. Johnson v. Consumerinfo.com, Inc., Nos. 11-56520, 11-57182, and 11-57183 (9th Cir. March 20, 2014) (Hurwitz, Kleinfeld, Silverman).
To reach that conclusion, the Court shot down plaintiff’s arguments that the order being appealed from was a “collateral order”, and therefore really final, and that mandamus was justified as an alternative route to a higher court. While mandamus relief is not precluded by 9 U.S.C. section 16(b), it is an extraordinary remedy, and wasn’t justified here.
Finality Of Order Compelling Arbitration Depends On Context, “But Our Review Of That Context Is Weighted Against Finality”, Says Ninth Circuit Panel
The Federal Arbitration Act permits immediate appeal of “a final decision with respect to an arbitration,” 9 U.S.C. section 16(a)(3), which is a decision that “ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 86 (2000). So what happens when the district court compels arbitration, without explicitly dismissing nor staying the action? Appealable or interlocutory?
“We hold that such an order implicitly stays the action and thus is not ‘a final decision with respect to an arbitration’ . . . We also adopt a rebuttable presumption that an order compelling arbitration but not explicitly dismissing the underlying claims stays the action as to those claims pending the completion of the arbitration.” Appeal dismissed for lack of jurisdiction. MediVas, LLC v. Marubeni Corp., No. 12-55375 (9th Cir. Jan. 27, 2014). (Fisher, Goodwin, Clifton).
PRACTICE TIP: The Court offers its own practice tip: If the appealing party had “requested a clarifying order from the district court before taking this appeal, the substantial time and effort expended on this procedural issue could have instead been spent advancing this litigation toward its ultimate resolution.”
Corporate Counsel Article Points Out That There Is A Split Among The Federal Circuits
In an April 2, 2012 article in Corporate Counsel online, entitled “In Arbitration, a Right to an Automatic Stay Pending Appeal?”, authors Elbert Lin and J. Andrew Law point out that there is a split among the federal circuits. The majority holds that appeal of the denial of a motion to compel arbitration automatically stays district court proceedings. But the 9th, 5th, and 2nd circuits reject the majority view, making it possible for litigants to battle on in district court while the issue concerning the right to arbitrate is being appealed.
The authors explain:
“The split turns on the application of Griggs v. Provident Consumer Discount Co., 459 U.S. 56 (1982). In Griggs, the Supreme Court held that ‘[t]he filing of a notice of an appeal is an event of jurisdictional significance—it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal.’ Id. at 58 (emphasis added). The courts of appeals have disagreed over what is ‘involved in’ an appeal of an order denying arbitration.”
The authors argue that the minority view is an anachronism evincing a resistance to arbitration that the Federal Arbitration Act was intended to overcome, and that review may be “on the horizon” by a Supreme Court majority that has underscored the benefits of private arbitration.
Vestigial Powers of Court Following Stay Leave It Without Power to Lift Stay Under the Circumstances
MKJA sued 123 Fit Franchising alleging that it had been fraudulently induced to enter into franchise agreements. The defendant commenced arbitration in Colorado pursuant to an arbitration, and sought a stay in California of the lawsuit pursuant to Cal. Code Civ. Proc. section 1281.4. Apparently the arbitration in Colorado never really got underway, plaintiff concluding that it was too expensive to arbitrate in Colorado. Plaintiff asked the trial court in California to lift the stay because the arbitration was unconscionable. The trial court believed that Plaintiff should be able to pursue its claim in some forum, and had exhausted efforts to do so in Colorado. It lifted the stay. MKJA, Inc. v. 123 Fit Franchising, LLC, 191 Cal.App.4th 643 (2011).
Defendant appealed the lifting of the stay.
Held: "[A] party's inability to afford to pay the costs of arbitration is not a ground on which a trial court may lift a stay of litigation that was imposed pursuant to section 1281.4. Accordingly, we reverse the trial court's order lifting the stay.”
Query whether a helpful arbitration provision could be drafted that would address the circumstance in which a party is financially unable to pay the arbitrator’s fees.