In his August 28, 2016 post, Prof. Kenneth Jost suggests, as I did in my August 23, 2016 post about Morris v. Ernst & Young, that the split among the circuits concerning the enforceability of employment contract clauses requiring disputes to be resolved through individual arbitration is likely to be headed to the Supreme Court for resolution --especially after the Ninth Circuit panel neatly framed the split with majority and dissenting opinions in Morris.
But Jost goes one step further, drawing a parallel between the contemporary arbitration clause intended to stop concerted activity by employees and the notorious “yellow-dog contracts” of yesteryear, prohibiting employees from joining unions.
Court Of Appeal Rejects Waiver, Estoppel And Forfeiture Arguments Made By Lessor Who Failed To Timely Exercise Right To “Baseball Arbitration” In Rental Dispute.
Miss Myrtle Rowe holding a baseball bat. March 14, 2010. Library of Congress.
“Baseball arbitration” takes its name from salary arbitration in Major League Baseball, in which the arbitrator must choose which of two positions is the more reasonable position. Baseball arbitration is sometimes employed in lease disputes, as it was in Zawtocki v. Black Angus Steakhouses, LLC, No. E062969 (4/2 8/11/16) (Ramirez, Hollenhorst, Miller) (unpublished).
Zawtocki leased to Black Angus Steakhouse. The lessee exercised an offer to extend the lease, the lessor offered to do so for $220,000/year, and the lessee countered with $140,000.
However, instead of timely exercising a right to require baseball arbitration under the lease, the lessor went sideways by failing to make a timely demand. As a consequence, the trial court denied the lessor’s petition to compel arbitration. The lessor appealed, contending, among other things, that he was entitled to relief from forfeiture, and that the forfeiture should be excused by waiver or estoppel.
The Court of Appeal rejected waiver, estoppel, and forfeiture arguments, analogizing the failure to timely exercise the right to arbitrate to a failure to timely exercise an option – something that is not a forfeiture. Affirmed.
Presumably the lessor is now stuck with the $140,000 rental amount. Or, as the Court of Appeal put it: “The arbitration petition is, so to speak, the whole ball game.”
Above: Judge James Wickersham in council with Indian chiefs. Fairbanks, Alaska. c1900-1907. Library of Congress.
“As a matter of federal law, an Indian tribe is subject to suit only where Congress has authorized the suit or the tribe has waived its [sovereign] immunity.” Kiowa Tribe v. Manufacturing Tech., 523 U.S. 751, 760 (1998). The issue in Findleton v. Coyote Valley Band of Pomo Indians, No. A142560 (1/2 7/29/16) (Stewart, Kline, Richman) was whether, as a matter of law subject to de novo review, the resolutions of the Tribe’s General Council authorized its Tribal Council to waive the Tribe’s sovereign immunity for purposes of arbitrating contractual disputes with construction contractor Robert Findleton.
Reversing the trial court, the Court of Appeal concluded that the resolution of the General Council authorized the Tribal Council to waive the Tribe’s tribal immunity, and the Tribal Council did so with a broadly worded resolution. On a remand, the trial court will probably have to decide whether the court or the arbitrator needs to decide whether tribal administrative remedies were exhausted.
Panel Holds That Lengthy Amount of Time Litigating In Federal Court “Will Almost Inevitably” Cause Parties To Expend More Time, Money, And Effort Than Had They Proceeded Directly To Arbitration.
In Martin v. Yasuda, No. 15-55696 (9th Cir. 7/21/16) (Reinhardt, Wardlaw, Bennet), defendants, a cosmetology school and its principal, petitioned the 9th Circuit to hear an appeal of the district court’s order denying their motion to compel arbitration with cosmetology students who claimed they should be paid as employees. The Ninth Circuit stayed the district court action and agreed to hear the appeal, but then affirmed the district court’s order that defendants had waived their right to arbitrate by their litigation conduct.
Defendants argued unsuccessfully that (a) the issue of waiver should have been decided by the arbitrator under the broad language of an AAA delegation rule; and (b) plaintiffs were not prejudiced by the delay.
The panel disagreed, holding that waiver, like other so-called “gateway issues” involving arbitrability, must be decided by the court. The panel acknowledged that the 8th Circuit has held that the arbitrator presumptively should decide if a party has waived the right to arbitration by litigation conduct, but sought to distinguish that holding on the grounds that the litigation conduct occurred in state court. Nat’l Am. Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d 462 (8th Cir. 2003).
Though no evidence was actually presented that proceeding in arbitration will be more expensive than proceeding in court going forward, it appears that the 9th Circuit will infer that a lengthy amount of time litigating in the federal court system “will almost inevitably cause the parties to expend more time, money, and effort than had they proceeded directly to arbitration.”
Finally, the panel concluded that a motion to dismiss filed by defendants had resulted in prejudice to plaintiffs, because the dismissal of the motion without prejudice constituted an “adverse ruling”. As a consequence, any party that now brings a motion to dismiss and loses must be concerned that ipso facto they have waived their right to arbitrate.
DISCLOSURE: I participated in drafting the appellant’s petition to the 9th Circuit to stay the district court action while an appeal was pending, and my colleague Mike Hensley argued the appeal for appellants.
Employer Claimed Appeal Was Based On Entire Record, But Failed To Provide Court With Entire Record.
Employer ICC Collision Centers, Inc. appealed the trial court’s order denying its motion to compel its employee Ogannesian to arbitrate his wage/hour claims. The trial court had concluded that the employer waived its right to arbitrate by delaying too long and taking actions inconsistent with asserting the right to arbitrate. Ogannesian v. ICC Collision Centers, Inc., G049836 (4/3 6/14/16) (Ikola, Moore, Thompson) (unpublished).
On appeal, the chief problem identified by Justice Ikola was a “woefully inadequate record.” While the employer did include its motion to compel arbitration, which purported to be based on “the documents on file in this action,” in fact the employer did not include the entire court file on appeal.
In particular, the employer failed to include a case management statement filed by ICC’s prior counsel, and stating ICC “may file a Motion to Compel Arbitration and Stay Proceeding. . . “ This contradicted the employer’s implication on appeal that its prior counsel “was unaware the arbitration agreement even existed.” In addition, the employer opposed efforts to augment the record with the case management statement.
The employer’s opposition to the motion to augment the record seems to have left a sour taste with Justice Ikola. Troubled by the argument, he wrote, “it suggests we should be more concerned about [the employee’s] delay in designating a record than about [the employer’s] own apparent misrepresentation of fact.” Ouch! Affirmed.
Best line: “Apparently, ICC believes that what we do not know cannot hurt it.” Not so, since the “onus is on appellants” to provide a complete record!
ScotusBlog Analyzes Oral Argument Under Caption, “Justices have scorching criticism for California court’s refusal to enforce arbitration agreement, but debate their authority to correct it.”
Columbia Law Professor Ronald Mann has authored both an October 2, 2015 preview of arguments in DIRECTV v. Imburgia and an October 7, 2015 analysis of the oral arguments.
In his preview, Professor Mann leads: “If I start by telling you that DIRECTV includes an arbitration clause in agreements with its customers and that the California Court of Appeal in this case declined to order arbitration, it would be understandable if you immediately stopped reading and clicked back to look for another post: how far do you have to read to expect that my post is going to tell you that the Court is likely to reverse the California court and hold the agreement enforceable?”
In DIRECTV, the arbitration provisions contain a poison pill: “if the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration provision] is unenforceable.” What does “law of your state” mean?
The parties entered into the agreement when the Discover Bank rule applied in California, invalidating class action waivers, and before that rule had been overturned by AT&T v. Concepcion.
The question, as presented by DIRECTV’s petition for writ of certiorari to the Supreme Court is: “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”
Thus, DIRECTV’s position is simply that the California courts flaunt federal law and preemption.
In contrast, Imburgia argues that this is a simple matter of contract interpretation: whether the reference to “the law of your state” refers to the rule in Discover Bank, or to the state of the law in California after Concepcion. Imburgia argues that contract interpretation should be left to state judges, and if the contract drafted by DIRECTV is ambiguous, then the well-known rule that ambiguous contracts are interpreted against the drafter must apply.
Prof. Mann concludes, “[I]t seems unlikely that five of the Justices will vote to affirm the California decision. But do we know exactly how they’ll explain their decision? For that I suppose we’ll have to wait a few months yet.”
Party Wishing To Enforce Right To Have Settlement Agreement Interpreted By Arbitrator Ought To Have Sought Enforcement Before Same Issues Were Submitted To Court For Adjudication On The Merits.
The underlying dispute in Kurtin v. Elieff, G049556 (4/3 Sept. 2, 2015) (Rylaarsdam, Aronson, Fybel) (unpublished) was a messy partnership buyout and accounting. After a bifurcated trial, grant of a partial new trial, appeal, and remand, Elieff petitioned for arbitration, “seeking the arbitrator’s ‘interpretation or clarification’ of aspects of the settlement agreement, prior to the partial retrial.” The trial court denied the petition, concluding the right to arbitrate had been waived, a ruling now affirmed on appeal: “Elieff has, in effect, petitioned for arbitration in the middle of trial. Such a petition is untimely as a matter of law.”
The arbitration clause was unusual, because it expressly gave the arbitrator – the famed Tony Piazza -- the power to add or rewrite provisions in the parties’ settlement agreement if needed to save the contract from unenforceability. However, the unusual nature of the arbitration agreement did not mean that the right to arbitrate could not be waived by deeply engaging in litigation. Furthermore, the issue invoked by the petition to arbitrate was the power to interpret the agreement, not the arbitrator’s ability to amend it – and interpretive issues had already been presented to the trial court.
“Given the undisputed evidence that Elieff waited until after this case was tried, a judgment was entered, an appeal was decided and the case was remanded for a partial retrial before filing his petition,” wrote the Court, “we have no trouble concluding there was no error.”
NOTE: On June 28, 2012, I posted about an earlier phase of the Kurtin/Elieff dispute. This is a long-running dispute. Kurtin filed suit against Elieff in 2007, in connection with Elieff’s performance under an earlier settlement agreement.
Court Distinguishes Imburgia v. DIRECTV, Inc., Case Pending Before SCOTUS.
Automobile purchases and leases have generated quite a few disputes about the enforcement of arbitration clauses. Exhibit 1: The Sanchez case decided by the California Supreme Court on August 3, about which I posted on August 4, 2015. We have a sidebar category for Arbitration: Automobiles.
Now we have yet another automobile case – coincidentally as with Sanchez, involving a Mercedes Benz. Plaintiff Kaghazchi sued Mercedes-Benz Financial Services USA LLC in connection with his lease of a Mercedez-Benz. The key issue in the appeal is whether “the FAA preempts application of the CLRA’s [California Legal Remedies Act] rule prohibiting a waiver of class actions.” In Kaghazchi v. Mercedes-Benz Financial Services USA LLC, G049981 (4/3 Aug. 10, 2015) (Thompson, O’Leary, Rylaarsdam) (unpublished), the Court of Appeal answers: Yes. Perhaps not without qualms, for the Court “acknowledge[s] the CLRA’s antiwaiver section serves an important purpose of protecting California’s consumers.” But the Court concludes, relying on Concepcion, that “[s]tates cannot require a procedure that is consistent with the FAA, even if it is desirable for unrelated reasons.”
NOTE: The Court is at pains to distinguish Imburgia v. DIRECTV, Inc., 225 Cal.App.4th 338 (2014), certiorari granted sub nom. DIRECTV, Inc. v. Imburgia (Mar. 23, 2015) ___ U.S. __ [135 S.Ct. 1547] (Imburgia). As posted on SCOTUSblog, the issue in Imburgia is: “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”
The contract in Imburgia contained a reference to the “law of your state,” interpreted by the California Court of Appeal to operate as “a specific exception to the arbitration agreement’s general adoption of the FAA.” Therefore, in Imburgia, the FAA did not trump the application of California law. However, in Kaghazchi, the Court of Appeal explains that while the automobile lease stated it was “subject to” California law, arbitration under the lease was to be governed by the FAA. Thus, unlike Imburgia, there was no “specific exception” to FAA governance of arbitration. In other words, the parties in Imburgia and in Kaghazchi struck different deals as to choice of law for purposes of arbitration. Far from impairing the deal parties strike, according to Concepcion, the FAA ensures private arbitration agreements are enforced according to their terms.
Regardless of what SCOTUS does in Imburgia, we predict that automobile dealers, lessors, and financing parties will draft documents that follow the Kaghazchi model – i.e., they will preemptively make it clear that whatever substantive law applies to the contract, the FAA applies to arbitration procedure. To steal a line from one of our local judges, “that’s the way the cow chews its cud.”
14-Month Period From Filing Of Original Complaint To Filing Of Motion To Compel Is Insufficient To Support Waiver, Absent Showing Of Prejudice
Khalatian v. Prime Time Shuttle, Inc., Case No. B255945 (2/8 June 9, 2015) (Grimes, author; Bigelow concurring, Flier concurring and dissenting) (published) nicely bookends our penultimate post on Oregel v. PacPizza, about waiver of the right to arbitrate. In Khalatian, a 14-month delay, absent a showing of prejudice, was insufficient to establish waiver of the right to arbitrate, leading to reversal of the trial court’s order denying defendants’ motion to compel arbitration. In contrast, a 17-month delay in Oregel, together with a high level of litigation activity unlikely to be found in arbitration, led to affirmance of an order denying a motion to compel arbitration based on waiver of the right to arbitrate.
Why did the Court in Khalatian believe that the Plaintiff/Respondent failed to establish prejudice, despite the 14 months that elapsed between the filing of the original complaint and the motion to compel arbitration?
First, discovery was limited. (Compare the 25 depositions taken by the party moving to compel arbitration in Oregel). Second, the defendant moved to compel arbitration more than a year before the trial date. Third, the fact that the party petitioning for arbitration has participated in litigation, short of a determination on the merits, does not by itself constitute a waiver. Fourth, the party seeking to establish waiver “bears a heavy burden of proof.” Fifth, there was “no evidence that defendants stretched out the litigation process, gained information about plaintiff’s case they could not have learned in an arbitration, or waited until the eave of trial to move to compel arbitration.”
Though plaintiff filed a first amended complaint, defendant filed a demurrer and a motion to strike, plaintiff filed a second amended complaint, and defendants answered the second amended complaint, there was no merits based determination, because the demurrer was taken off calendar when the parties agreed plaintiffs could file a second amended complaint. While the Court of Appeal notes that a demurrer “may lead to a determination on the merits,” we note that a demurrer also may not lead to a determination on the merits, e.g., when it is granted without prejudice, when it is denied, and when it is simply taken off calendar, as was the case in Khalatian.
Justice Flier concurred in the holding that no waiver occurred in Khalatian. She dissented on other grounds, believing that the scope of the arbitration provision did not completely encompass the whole dispute.
“Less-Than-Candid ‘Chronology of Pertinent Events Underlying Appeal’” Chafes Court.
In Oregel v. PacPizza (1/2 June 1, 2015) (Richman, Kline, Stewart) (published), the Court of Appeal had no trouble affirming the superior court’s order denying Appellant PacPizza’s petition to compel arbitration. More than enough evidence of a high level of litigation activity inconsistent with arbitration supported the finding of waiver of the right to arbitrate: filing two answers without mentioning arbitration, paying jury fees and asking for a jury trial, attending two CMCs without mentioning arbitration, and considerable discovery – including taking 25 depositions.
Appellant’s omission of extensive discovery from its chronology of pertinent events particularly vexed the Court. Justice Richman remarked the omission “is nothing short of brazen given the trial court’s finding that Oregel was prejudiced by the discovery the parties conducted . . . . “ The lesson here is to strive for candor in describing the record to the Court of Appeal. We’re stuck with the facts.