California Mediation and Arbitration

Arbitration/Arbitrator’s Fees/Appealability: Second District, Division One, Affirms Order Denying Petition to Confirm Arbitration Award Following Upon Failure of a Party to Pay Fees in Arbitration

 

Failure of Party to Pay Fees Here Resulted in Termination of Arbitration, and Case Bouncing Back to the Trial Court

     The next case grabbed Marc’s attention, because it involved a situation he has had to confront in arbitration: what to do when a party refuses to pay its share of arbitration fees. The resulting opinion, certified for publication, scrutinizes the problem -- apparently not so rare, given the comment of long-time Superior Court Judge Malcolm Mackey: “This happens all the time. People don’t want to pay fees.” Cinel v. Christopher, Case No. B231679 (2nd Dist., Div. 1 Jan. 20, 2012; pub. order Feb. 16, 2012) (Johnson, J.).

     Cinel purchased stock, commenced an action for securities fraud and related claims against defendants, and ended up in AAA arbitration. The AAA can pull the plug on an arbitration when parties don’t pay fees. That’s what happened here: the panel terminated the arbitration due to the nonpayment of fee deposits.

     Defendant Christopher then filed a motion in the Superior Court to confirm the purported fee-related “award”.  We say “award” advisedly, because that was Defendant Christopher’s way of characterizing the outcome.  The trial court denied the motion to confirm.

     The threshold question for the Court of Appeal was whether the order “denying” the petition to confirm the arbitrator’s ruling was appealable. The statutory scheme contemplates an arbitration award may be confirmed, vacated, or corrected in the trial court; in response, a party may request the court to dismiss the petition. The statutory scheme prescribes the options: an aggrieved party may appeal from an order dismissing a petition to confirm, correct, or vacate an award. Cinel argued that an order “denying” a petition to confirm is not appealable, because it is not a “dismissal.” However, under the circumstances, the Court of appeal construed the order “denying” the petition to confirm an award as a “dismissal”, making it immediately appealable by Christopher.

     Christopher then argued that the arbitrator’s termination of the proceedings for lack of payment of fees constituted an award that had to be confirmed. The argument relies on an assumption that there was an “award”, and that the trial court’s “denial” of the motion to confirm the award was an unauthorized vacation of the award, because the trial court can only confirm, vacate, or correct the award, or else “dismiss” a petition to confirm; and, furthermore, because the trial court did not “dismiss” the petition, vacate the award, or correct it, it had to confirm the award.

     The problem with this mind-bending technical argument is that the termination of the proceedings for failure to make a payment did not constitute an “award” within the mean of section 1283.4. The arbitrator’s order did not address any of the issues in controversy.

     Along the way to its conclusions, the Court of Appeal makes some nice distinctions between whether denial of a petition to vacate an award is an appealable order (no, in Mid-Wilshire Associates v. O’Leary, 7 Cal.App.4th 1450 (1992), because the order was appealable after confirmation), and whether denial of a petition to confirm is an appealable order (yes, here, where denial was tantamount to dismissal). The court also distinguished between a termination of proceedings that resulted in an award (Young v. Ross-Loos Medical Group, Inc., 135 Cal.App.3d 669 (1982), where the termination occurred because of a failure to prosecute with due diligence), and a termination of proceedings that did not result in an award (here, where proceedings were terminated for failure to pay, and not issues were reached on the merits). And the court distinguished between a petition to compel arbitration (Lifescan Inc. v. Premier Diabetic Servs., 363 F.3d 1010 (9th Cir. 2004) (petition to compel/continue arbitration should have been denied where fees were not paid, and arbitration was terminated, but parties’ agreement provided apportionment of fees would be left to arbitrators), and a petition to confirm an award (here).

     Nor did the trial court err in lifting a stay to set the matter for trial. Once a stay is granted, the court’s “vestigial powers” include the power to rule on a petition to confirm, correct, or vacate an award. Here, where the court dismissed the petition to confirm the award, the stay terminated, and the trial court properly set the matter for trial.

     Congratulations to Benjamin Shatz, an appeals specialist at Manatt, representing Plaintiff and Respondent Washington Umberto Cinel.  Kudos too to Bob Platt, spearheading this litigation at Manatt, and to associate Emil Petrossian, who argued the case as his first appeal and obtained the favorable published decision. 

Enforcement of Settlement Agreement: Second District, Division 8 Holds Settlement Enforceable Against Employer Under CCP section 664.6 in Wage and Hours Case.

 

Court Rejects Employer’s Arguments That Agreement Lacked Material Terms and Was Obtained Through Fraud.

     Mejia v. Jhan, Inc., No. B230818 (2^nd Dist. Div. 8 January 10, 2012) (unpublished), involved an overtime dispute between the employee, Mejia, and the employer, Jhan, Inc. The parties entered into a settlement agreement calling for the employer to make a lump sum payment of $25,000, without admission of liability, and for the parties to execute a further long form agreement, a common term in short form agreements.

     You guessed it: the employer did not pay $25,000, claimed that the agreement was unenforceable for lack of material terms, argued that it had been obtained through fraud and argued that the employee had breached a confidentiality agreement.

     From the employee’s point of view, it turned out that the settlement was adequately drafted:

“The Stipulation satisfies the statutory prerequisites of section 664.6. It is a written agreement duly executed by all parties. Moreover, paragraph 6 of the Stipulation expressly provides that "[t]his mediation settlement agreement is intended to be binding and enforceable and is effective this 13th day of Oct., 2010, and reflects the final agreement between the parties to this dispute, and each of them, pursuant to Evidence Code Section 1123. This stipulation for settlement is admissible and subject to disclosure, despite the otherwise enforceable requirements of confidentiality, solely for the purpose of establishing in court that an agreement has been reached by the parties for purposes of enforcing and interpreting that agreement."

     Evidence of fraudulent inducement was lacking, and even if the employee had breached a confidentiality term, that did not render the agreement unenforceable.

     Result: Affirmed on appeal. Justice Grimes authored the opinion, in which Justices Rubin and Flier concurred.

Waiver: Substantial Evidence of Waiver of Right to Arbitrate Results in Affirmance of Trial Court’s Order Denying Petition to Compel Arbitration

 

 

     Our next case involves a business and a relationship gone sour. Slagter v. Maiao, No. D057368 (4^th Dist. Div. 1 January 5, 2012) (unpublished). However, as the Court notes that the parties are well aware of the facts, and the facts are not relevant to the present legal issue, neither we nor the Court needs to recite those facts.

     The case involves defendant/cross-complainant Maiao’s attempt to invoke an arbitration provision in a property sharing agreement in order to compel arbitration, after a lawsuit had already been filed. The case is somewhat unusual in that the trial court found a waiver of the right to arbitrate, even though the pleadings had not progressed to the point where Maiao had answered, and Maiao waited only four months to invoke the right to arbitrate. In many cases, courts have found no waiver where the defendant had only demurred, or in circumstances where even more time passed before a party petitioned to compel arbitration.

     But waiver is a question of fact that is evaluated under a multi-factor test. Saint Agnes Medical Center v. PacifiCare of California , 31 Cal.4th 1187, 1196 (2003). Significantly – to the Court of Appeal – Maiao filed a cross-complaint without seeking a stay, used a demurrer to address the merits, and attacked a lis pendens. Additionally, compelling arbitration would have resulted in continuance of a trial date.

     The Court was not sympathetic to Maiao’s argument that he was dragged into the litigation by the “hyper-aggressive litigation tactics” of Slagter. That problem could have been addressed by seeking a stay concurrently with petitioning to arbitrate.

     COMMENT: There may be good tactical reasons for delaying a request to arbitrate. For example, a demurrer that removes causes of action can sometimes result in a case becoming more suited for arbitration. Here, however, Maiao’s counsel told the trial judge that a demurrer might remove the need to arbitrate, and that was cited by the Court of Appeal as evidence that Maiao sought to use the judicial process to litigate the case on the merits. Would it have made a difference if counsel had said that the demurrer could narrow the case and make it more amenable for arbitration? Bottom line: the deeper one gets into judicial proceedings, the riskier it becomes that a waiver of the right to arbitrate will be found.

Enforceability/Unconscionability: Third District Affirms Order That Employment Application Requiring Arbitration Is Unconscionable

 

Plenty of Hurdles to Enforcement in This Particular Case

     In Wisdom v. AccentCare, Inc., No. C065744 (3^rd Dist. January 3, 2012) (certified for publication), the Court of Appeal held:

“that a clause in an application for employment with AccentCare, Inc. (AccentCare), requiring only the applicant agree that, if hired, all disputes that cannot be resolved informally will be submitted to binding arbitration is both procedurally and substantively unenforceable as unconscionable.”

     The leading case of Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) proved to be legally dispositive for finding procedural and substantive unconscionability.

     First, the Court of Appeal relied on Armendariz, supra, at 115, to affirm the finding of procedural unconscionability, i.e., that the provision was oppressive due to the unequal bargaining power of the parties: "[F]ew employees are in a position to refuse a job because of an arbitration requirement."

Second, the Court relied on Armendariz, supra, at 118, to affirm the finding of substantive unconscionability, because the provision only required the employee to arbitrate: "[I]n the context of an arbitration agreement imposed by the employer on the employee, such a one-sided term is unconscionable."

     The Court took issue with another decision that did not find procedural or substantive unconscionability in “a nearly identical arbitration agreement.” Roman v. Superior Court, 172 Cal.App.4th 1462 (2009), pretty much guaranteeing that such arbitration agreements will remain ripe for controversy.

     Query: Can a pre-employment arbitration agreement in a job application be drafted so as to avoid unconscionability? The following may help: A provision that is conspicuously placed, preferably in bold, larger type, initialed, and expressly pointed out to the prospective employee – much like a disclaimer in a consumer purchase. The prospective employee would acknowledge reading and understanding the provision – in Wisdom, the employees claimed not to know the meaning of “binding arbitration”. The provision would not be “take it or leave it.” And the mutuality would be express: e.g., both employer and employee would need to agree to arbitration, and both employer and both would have to agree and acknowledge that they are giving up their right to a trial by jury. If an arbitration forum (such as JAMS, AAA, ADR Services, JudicateWest) is referenced, the forum’s rules would also be attached. Some employers might even be willing to pay the arbitrator’s fees, removing another potential issue.  Overkill?

Illegality/Enforceability: Arbitration Agreement with Unlicensed Contractor May Still Be Enforceable

 

Fifth District Finds That The Contract Containing the Arbitration Clause Is Not Automatically Unenforceable

     With limited exceptions, an unlicensed contractor will find it impossible to collect payment, and may also have to disgorge payments already made. Can an award in favor of the client of an unlicensed contractor be set aside on the grounds of illegality? Our next case, Templo Calvario Spanish Assembly of God v. Gardner, 198 Cal.App.4th 509, 129 Cal.Rptr.3d 574 (2011), answers “no,” at least not when it is the unlicensed contractor trying to avoid the arbitration award.

     In Templo Calvario, the dispute between the church and the unlicensed contractor who had agreed to construct the church was subject to an arbitration clause. The arbitrator’s award required the unlicensed contractor to disgorge its fees. The trial court sided with the view that the contract with the unlicensed contractor could not be enforced, because void and illegal, and granted the contractor’s petition to vacate the award.

     The church appealed, and the Court of Appeal reversed the order that had vacated the award. Relying on MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal.4th 412, 30 Cal.Rptr.3d 755 (2005) (MW Erectors), the court held that the contract containing the arbitration provision was not automatically illegal and void just because the contractor was unlicensed. MW Erectors had held that a contract entered into by an unlicensed contractor was not void under circumstances where the contractor became licensed during the course of its work.

     The Court of Appeal was not persuaded by the California Supreme Court holding in an older case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949) (Loving & Evans). In Loving & Evans, the Supreme Court held that an arbitration clause could not be relied upon by the unlicensed contractor to compel arbitration. Loving & Evans is distinguishable, because in that case, it was the unlicensed contractor seeking to take advantage of the illegality of the provision to compel arbitration, and the Supreme Court refused to allow that. But the Court of Appeal noted that the Supreme Court, in MW Erectors, described Loving & Evans as not a “modern case,” implicitly overruling the holding that a contract containing the arbitration provision was void ab initio, just because the contractor was unlicensed.

Incorporation of Rules/CCP section 1281.2: Arbitration Agreement is Self-Executing Where Arbitration Clause Incorporates Existing Rules of AAA

 

“Self-executing” Means Party Does Not Have to File Petition Pursuant to CCP 1281.2 to Compel Arbitration

     In Tutti Mangia Italian Grill, Inc. v. American Textile Maintenance Co., 197 Cal.App.4th 733, 128 Cal.Rpr.3d 551 (2011) a dispute arose between ATM, a supplier of restaurant lines, and TMIG, a restaurant. ATM commenced an arbitration pursuant to an arbitration agreement. TMIG refused to participate, taking the position that an arbitration clause incorporating rules of the AAA is unenforceable, and citing Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 174 Cal.App.4th 1185, 94 Cal.Rptr.3d 918 (2009) (Gilbert Street.)

     Above: Chef in North Beach Italian Restaurant. 1941. John Collier, photographer. Library of Congress.

     The arbitrator disagreed, and rendered an award, entered as a judgment, and affirmed by the Court of Appeal. Gilbert Street was distinguishable, for in that case, the arbitration provision incorporated by reference future rules of the AAA, rendering that agreement unenforceable.

     The Court of Appeal also addressed whether the arbitration provision was self-executing, or whether a petition had to be filed with the Court under CCP section 1281.2 to get the arbitration ball rolling. Section 1281.2 was "designed to afford a remedy where the parties have not provided for the contingency that has arisen or where the contractual scheme has failed." Brink v. Allegro Builders, Inc.,58 Cal.2d 577, 25 Cal.Rptr. 556 (1962). Section 1281.2 is not the exclusive means for starting an arbitration. Where the arbitration provision was sufficiently specific, as was the case here, no petition needed to be filed. The provision was indeed self-executing.

Unconscionability/Enforceability: Incorporation by Reference of Arbitration Policy in Employee Handbook Was Procedurally Unconscionable.

 

 

Employer Failed to Attach the Rules . . .

     Petitioner Zullo sued her employer Inland Valley Publishing Co. (Inland), for wrongful termination. The superior court granted Inland's petition to compel arbitration and stayed the civil proceedings. Petitioner challenged the ruling by way of writ of mandate. Zullo v. Sup. Ct., 197 Cal.App.4th 477, 127 Cal.Rptr.3d 461 (2011).

     The Court of Appeal granted the writ of mandate, finding the arbitration provision to be unenforceable:

“Inland's arbitration policy is a contract of adhesion, fails to give adequate notice of the arbitration rules that will apply, and allows Inland the full range of remedies and forums for resolution of whatever claims it might have against petitioner while limiting petitioner to binding arbitration of her claims against Inland. It also imposes strict time limits within which petitioner must respond to any arbitration-related communication without imposing similar requirements on Inland. Accordingly, the arbitration agreement is unconscionable and cannot be enforced as written.” Id. at 487.

     Tip: A contract of adhesion need not be unconscionable. But to have the possibility of satisfying this court, the arbitration provision would need to attach the correct set of arbitration rules referred to, be symmetrical as to remedies and forums for employer and employee, and be fair and symmetrical regarding time limits for responding to arbitration-related communication.

Nonsignatories/Burden of Proof/Equitable Estoppel/Third-Party Beneficiaries: Third Party Non-Signatories Cannot Successfully Move to Compel Arbitration Agreement Where They Are Neither Sufficiently Tied to The Parties to the Agreement Nor Third Party Bene

 

Nonsignatory Has Burden of Proof to Establish It is Party to the Arbitration Agreement and Entitled to Enforce It.

     In Jones v. Jacobson, 195 Cal.App.4th 1 (2011), Societe Generale and a related entity (SG appellants) were sued along with Jacobson by the Joneses in connection with a failed investment, and sought to arbitrate. The trial court denied the motion to compel, prompting the appeal.

     The problem for the appellants was that the arbitration agreement was between the Joneses and an entity named SG Americas Securities LLC (SGAS) an entity different from the SG appellants.

     The appeal was unsuccessful. The nonsignatory SG appellants and Jacobson had the burden to prove that they “are a party to, and thus are entitled to enforce, the arbitration provision in the account agreement.” It was not enough for nonsignatories to establish the existence of a valid and broadly worded arbitration provision.

     Here, the third parties were unable to sustain their burden, for they could not establish either a close enough relationship to SGAS to justify being able to compel arbitration, nor a third-party beneficiary relationship. The SG appellants were unable to argue that they were agents or employees of SGAS.

     The doctrine of equitable estoppel can sometimes be used by a nonsignatory to argue that it would be inequitable for the party to base its claims on a contract containing an arbitration provision, but then avoid arbitration under an arbitration clause in the contract. Here, however, the account agreement containing the arbitration provision was not the basis of the claims against the SG appellants.

     Finally, the Jacobson appellants relied on the additional argument that he was a “broker-dealer” and entitled to arbitrate as a “third party beneficiary.” However, that argument was also rejected on the grounds that there was an insufficient nexus between the account agreement containing the arbitration provision and the claims against the Jacobson appellants.

     The opinion was authored by Justice Benke in San Diego.

Enforceability/Mandatory Fee Arbitration/Fee Dispute/Standard of Review: Binding Fee Arbitration Under the Mandatory Fee Arbitration Act is an Oxymoron and Resulting Award is Unenforceable

 

 

Arbitration Agreement Containing Inconsistencies Between California Arbitration Act (CAA) and Mandatory Fee Arbitration Act (MFAA) is Interpreted Against the Law Firm That Drafted It

     “The fundamental problem in this case . . . arises from an internal inconsistency in the arbitration clause, which states that "[a]ny dispute pertaining to the fees owed under this agreement . . . shall, to the extent permitted by law, be submitted to binding arbitration pursuant to the rules of the Bar Association of San Francisco [BASF], and shall take place in San Francisco." Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4^th 40 (2011).

     The law firm (BWM) sued its client, Nancy Kors, for fees, and she moved to compel arbitration under the CAA. Binding arbitration pursuant to the rules of the BASF took place. The arbitrator did not make disclosures required under the CAA, but not under the BASF, and did not disclose a purported institutional bias representing law firms in malpractice disputes. The outcome of the arbitration was not to Ms. Kors’ liking, and she moved to vacate the award, based on the arbitrator’s failure to disclose, and also moved for attorney’s fees incurred in enforcing the arbitration position. The trial court denied the motion to vacate the award, as well as the request for fees. She appealed.

Unconscionability: Delegation Clause in Arbitration Agreement Does Not Render Entire Arbitration Agreement Unconscionable

Arbitration Agreement Wasn’t Permeated With Unconscionability

     Htay Htay Chin sued Advanced French Concepts Franchise Corp. (AFC) over a sushi franchise. AFC then moved to compel arbitration. Chin argued that the arbitration agreement, which included a “delegation provision”, was unconscionable – and the trial court agreed, denying the motion to compel arbitration. This resulted in an appealable order, and Chin duly appealed. Chin v. Advanced Fresh Concepts Franchise Corp., 194 Cal.App.4^th 704, 123 Cal.Rptr.3d 547 (2011).

 

     Above:  Bowl of sushi by Hiroshige.  Wikipedia.