California Mediation and Arbitration

Judicial Arbitration: Losing Party in Arbitration’s Dismissal of Complaint Repudiated Request for Trial De Novo

 

Result: 1^st District, Div. 5 Holds That Trial Court Properly Vacated Dismissal and Entered Judgment on Unfavorable Reward

     In Lee v. Kwong, 193 Cal.App.4^th 1275, 123 Cal.Rptr.3d 633 (2011), plaintiff entered into an agreement to purchase a Chinese restaurant from seller, but seller ended up selling to a third party, leaving buyer with a sour taste. The purchase and sale agreement included an arbitration provision, and judicial arbitration ensued.

     The outcome of the arbitration was unfavorable to the buyer, who moved for a trial de novo, and then voluntarily dismissed the complaint without prejudice. As a result, the trial court vacated the dismissal, and entered judgment on the award.

     Appellants argued that, since they requested a trial de novo, and since they had only judicially arbitrated, they were entitled to a dismissal without prejudice. Unfortunately for them, precedent was to the contrary: "[A]n arbitration is viewed as a trial on the merits," pursuant to section 581. [citations omitted] Accordingly, appellate courts have uniformly held that a party repudiates its request for a trial de novo after judicial arbitration when it subsequently voluntarily dismisses a complaint. Such action by a party who has received an unfavorable judicial arbitration award triggers finalization of the judicial arbitration award as judgment.”

     For a blog post on the other part of the opinion concerning attorney’s fees, see the post on California Attorney’s Fees.

Arbitration/Stay: Inability to Pay Costs of Arbitration Not Good Enough Reason to Lift Stay of Lawsuit

 

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.

  Vestigial:  Human appendix.  Wikipedia.

Confidentiality: Supreme Court Holds That Confidentiality in Mediation Means That Client Cannot Use Its Attorney’s Statements As Evidence

 

 

Concurring Opinion By Justice Chin Expresses Discomfort With Result

     In Cassel v. Superior Court, 51 Cal.4^th 113, 119 Cal. Rptr. 3d 437 (2011), the California Supreme Court addressed whether the mediation confidentiality protection applies to attorney-client communications when the client sues the attorney for malpractice. (Ordinarily, the attorney-client privilege flies out the window when the client sues for malpractice).

     The trial court sided with the attorney, based on the plain language of the statute. Evidence Code section 1119(a) provides, "[n]o evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, a mediation ... is admissible or subject to discovery ...." The petitioner/client sought mandate.

     Siding with the client, the Court of Appeal believed, “mediation confidentiality statutes are intended to prevent the damaging use against a mediation disputant of tactics employed, positions taken, or confidences exchanged in the mediation, not to protect attorneys from the malpractice claims of their own clients.” Cassel, supra, 51 Cal. 4^th at 118. Falling back on the “plain language of the statute”, the Supreme Court agreed that confidentiality protected against the admissibility of evidence in the malpractice dispute. The Court’s opinion was authored by Justice Baxter.

     Justice Chin concurred in the result, “but reluctantly,” inviting the Legislature to consider the effect of the statutory provision, as drafted, in shielding an attorney from malpractice.

Confidentiality:  P.E. Hadlick, Secretary of the National Oil Marketers Association, whispers a bit of information into Senator's Guy M. Gillette’s ear.  March 31, 1938.  Library of Congress.

Confidentiality: California Supreme Court Holds That Mediator Cannot File Report Disclosing Communications In Order To Show Sanctionable Conduct

 

Exceptions To Confidentiality of Communications Are Very Limited, and Showing Sancitonable Conduct Is Not One of the Exceptions

     In Foxgate Homeowners’ Association, Inc. v. Bramalea California, Inc., 26 Cal.4^th 1, 108 Cal.Rptr.2d 642 (2001), the Supreme Court faced,”the intersection between court-ordered mediation, the confidentiality of which is mandated by law (Evid.Code, §§ 703.5, 1115-1128), [footnote omitted] and the power of a court to control proceedings before it and other persons "in any manner connected with a judicial proceeding before it" (Code Civ. Proc, § 128, subd. (a)(5)), by imposing sanctions on a party or the party's attorney for statements or conduct during mediation.” Cutting to the chase, the court concluded that mandated confidentiality in mediation trumped the ability of the court to impose sanctions.

     The mediator, in a report to the Court, had slammed defense counsel for purportedly sandbagging the mediation. The problem was that the mediator’s report disclosed confidential information. The Court of Appeal had fashioned a narrow exception to absolute confidentiality, allowing the mediator to include statements that supported sanctions. But the mediator’s report had gone beyond that, enabling the Court of Appeal to reverse the trial court order imposing sanctions.

     The Supreme Court concurred in the result, but disagreed with the Court of Appeal’s reasoning: “Neither a mediator nor a party may reveal communications made during mediation. The judicially created exception fashioned by the Court of Appeal is inconsistent with the language and the legislative intent underlying sections 1119 and 1121. We also conclude that, while a party may do so, a mediator may not report to the court about the conduct of participants in a mediation session.” 26 Cal.4^th at 644-645.

Enforcement of Settlement Agreement Reached Through Mediation/Confidentiality: Settlement Agreement Containing Material Terms May Be Enforced

 

. . . And Confidentiality Requirement in the Agreement Also Applies, Even if Local Rules Governing Settlement Communications Do Not Apply in Federal Court

     Sometimes the tone of a Court’s opinion gives a good clue as to the outcome. Such was the case in Facebook, Inc. v. Pacific Northwest Software, Inc., 640 F.3d 1034 (2011), in which Justice Alex Kozinski observed of the Facebook dispute between Mark Zuckerberg and his nemeses, the Winkelvosses, that the litigation “gave bread to many lawyers,” suggesting a certain judicial weariness with the epic dispute.

     The Winkelvosses challenged enforcement of a short (1 and 1/3^rd pages) agreement reached through mediation, resulting in Facebook’s attorneys drafting an additional 130 pages of documents to implement the mediation agreement. Agreeing with Facebook that the agreement should be enforced, the Court of Appeals distinguished between material terms that are “necessary” and material terms that are “important.” Here, the necessary terms were included, because the contract was sufficiently specific to determine if it was breached, and to allow for a remedy of specific performance or damages: “This is not a very demanding test, and the Settlement Agreement easily passes it: The parties agreed that Facebook would swallow up ConnectU, the Winklevosses would get cash and a small piece of Facebook, and both sides would stop fighting and get on with their lives.” Incidentally, Justice Kozinski added, “[t]he district court got it exactly right when it found the Settlement Agreement enforceable but refused to add the stack of documents drafted by Facebook's deal lawyers.”

     The Court of Appeals expressed doubt that the federal district court Local Rules applying to ADR could create a “privilege” for confidential communications in a mediation, because privileges are created by the Federal Rules of Evidence, which rules cannot be overruled by Local Rules. Not to worry: the settlement agreement, by its terms, made the communications in the mediation confidential, and thus they could not be introduced to undermine the settlement agreement.

     If the remark about lawyers getting much “bread” at the beginning of the opinion suggested weariness with the litigation, so too did the ending of the opinion: “At some point, litigation must come to an end. That point has now been reached.”

Mediation/Costs/Attendance: Trial Courts Do Not Have Authority to Order Parties In a Complex Civil Action to Attend and Pay for Private Mediation

Court of Appeal Reminds That “The Essence of Mediation Is Its Voluntariness”

     Jeld-Wen was a minor player in a complex construction dispute. It was ordered by the trial court to attend a mediation and pay its share of costs. Jeld-Wen refused to attend, and was duly ordered to attend and sanctioned. Jeld-Wen sought a writ of mandate directing the trial court to set aside its ruling, and the Court of Appeal duly issued an order to show cause. Jeld-Wen, Inc. v. Superior Court, 146 Cal.App.4th 536, 53 Cal.Rptr.3d 115 (2007).

     Held: “[A] case management conference order requiring that parties in complex cases attend and pay for mediation is not authorized by the statutory scheme . . . and is contrary to the voluntary nature of mediation.” (Distinguishing Lu v. Superior Court, 55 Cal.App.4th 1264 (1997): “a referee appointed under section 639 may conduct a mandatory settlement conference in a complex case . . . “).

Construction of Mediation-Arbitration Clause/Venue/Severability: Third District Rules that California Subcontractor Refusing to Mediate in Nevada Did Not Violate Terms of Agreement Purporting to Require Mediation or Arbitration in Nevada

 

Case Involves Application of CCP Section 410.42 to Mediation/Arbitration Provision in Construction Contract

     Before becoming Chief Justice of the California Supreme Court, Justice Cantil-Sakauye authored the opinion in Templeton Development Corporation v. Superior Court [Dick Emard Electric, Inc. Real Party in Interest], 144 Cal.App.4th 1073, 51 Cal.Rptr.3d 19 (2006). Emard, an electrical contractor, sued petitioner Templeton, a general building contractor, for breach of contract and other claims. Templeton, relying on a contractual provision calling for mediation and arbitration in Nevada, unsuccessfully moved to dismiss Emard’s complaint on the ground of inconvenient forum. The trial court ruled that CCP section 410.42 rendered the out-of-state mediation provision unenforceable. Templeton sought a writ of mandate setting aside the trial court’s order denying their motion to dismiss for inconvenient forum, or alternatively remanding to determine whether the Federal Arbitration Act (FAA) preempted the California statute.

     Section 410.42 provides in pertinent part that, a “contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state, shall be void and unenforceable: (a) A provision which purports to require any dispute between the parties to be litigated, arbitrated, or otherwise determined outside this state.”

     First, the Court of Appeal concluded that section 410.42 applied to the dispute, because the mediation provision requiring Nevada mediation purports to require a dispute between the parties to be “otherwise determined outside this state.” Therefore, the subcontract was void under section 410.42 to the extent that any mediation was to be held in Nevada.

     Second, however, section 410.42 did not entirely void the mediation provision, because the doctrine of severance could be applied to allow for mediation, but in California -- and apparently Emard offered to mediate in California, but Templeton failed to respond to that request.

     Third, Emard was not compelled to arbitrate in Nevada, because mediation was a condition precedent to arbitration, not to litigation. Under the contract, the only consequence of refusing to mediate was that it could ultimately affect an award of attorney’s fees (and it was not clear that Emard refused to mediate, only that it refused to mediate in Nevada).

     The Court of Appeal did not reach the issue of FAA preemption.

Arbitrability of FEHA Claims/Minimum Requirements/Unconscionability/Severability/Employment

 

Leading Case of Armendariz v. Foundation Health Psychare Services, Inc. Sets Forth Minimum Requirements for Valid Arbitration Provision

     The leading case Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83 (2000), was authored by the late great Justice Stanley Mosk (1912 to 2001). The opinion is important because it provides that FEHA claims may be arbitrated, if arbitration meets certain minimum standards described in the case:

     “In this case, we consider a number of issues related to the validity of a mandatory employment arbitration agreement, i.e., an agreement by an employee to arbitrate wrongful termination or employment discrimination claims rather than filing suit in court, which an employer imposes on a prospective or current employee as a condition of employment. The employees in this case claim that employees may not be compelled to arbitrate antidiscrimination claims brought under the California Fair Employment and Housing Act (FEHA) (Gov.Code, § 12900 et seq.) We conclude that such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights. As explained, in order for such vindication to occur, the arbitration must meet certain minimum requirements, including neutrality of the arbitrator, the provision of adequate discovery, a written decision that will permit a limited form of judicial review, and limitations on the costs of arbitration.

     The employees further claim that several provisions of the arbitration agreement are unconscionable, both because they fail to meet these minimum requirements and because the arbitration agreement is not bilateral. We conclude that the agreement possesses a damages limitation that is contrary to public policy, and that it is unconscionably unilateral.

     Finally, the employees contend that the presence of these unconscionable provisions renders the entire arbitration agreement unenforceable. The employer argues that even if some of the provisions are unconscionable or contrary to public policy, the proper remedy is to strike or restrict those clauses pursuant to Civil Code section 1670.5, and to enforce the rest of the arbitration agreement. The trial court chose the employees' preferred solution of refusing to enforce the arbitration agreement, but the Court of Appeal sided with the employer and enforced the agreement minus the one provision it found unconscionable. We conclude . . . that the arbitration agreement is unenforceable and that therefore the Court of Appeal's judgment must be reversed.” (italics added for emphasis).

Mediation/Confidentiality: Confidentiality of Communications in Mediation Does Not Mandate Disqualification of Attorney Who Learns Confidential Information in Mediation from Litigating Later Cases Against the Same Party

 

Dire Implications for Mediation Would Follow from Disqualification

     Plaintiff’s attorney became involved in two related lawsuits against the same defendant, a builder of an apartment building severely damaged by the Northridge earthquake and subsequently demolished. In the first lawsuit the attorney represented the builder’s lender and attended mediation. In the second lawsuit, the same attorney represented the tenants of the apartment building against the builder. The trial judge disqualified the attorney from the second representation, reasoning that otherwise the confidentiality of mediation communications would be destroyed. After losing a motion for reconsideration, the attorney appealed. Barajas v. Oren Realty and Development Company, 57 Cal.App.4th 209 (1997).

     California Code of Civil Procedure section 1152.5 provides that evidence of anything said in a mediation is generally not discoverable or admissible, that documents prepared for mediation are generally not discoverable or admissible, and that “all communications, negotiations, settlement discussions” in a mediation “shall remain confidential.” In Barajas, an opinion authored by Justice Zebrowski, the court held that an attorney who mediates one case is generally not disqualified from litigating later cases against the same party. The Court of Appeal was troubled by the implications of the trial court’s ruling, believing that vulnerability to disqualification would make it more difficult for parties (especially plaintiffs) to get representation in products liability, employment, insurance coverage, civil rights, lender liability, and construction cases. The court also believed that disqualification could become problem in cases where mediation was unsuccessful and an attorney involved in mediation went on to try the case after being exposed to confidential information in the mediation.

The imperfect solution is that in mediation a party must make its own decisions about disclosures in mediation.

Mediation/Attorney’s Fees: Prevailing Parties Are Barred From Recovering Attorney Fees Because They Refused to Mediate

 

Standard Form Residential Agreement Typically Provides That Prevailing Party in Litigation or Arbitration Who Refused a Request to Mediate Before Commencement of Such Proceedings is Barred From Recovering Fees

     Buyers sued home sellers for specific performance and lost the lawsuit. Sellers filed two motions for attorney’s fees, both of which were granted. The buyers appealed the order awarding attorney’s fees. Frei v. Davey, 124 Cal.App.4th 1506, 22 Cal.Rptr.3d 429 (2004), arguing that the sellers had refused to mediate.

     In an opinion authored by Justice Fybel, the Fourth District, Division 3, ruled that, “[t]he new provision barring recovery of attorney fees by a prevailing party who refuses a request for mediation means what it says and will be enforced.” Also, the court found that there was a lack of substantial evidence to support the trial court’s finding that the sellers did not refuse to mediate. They had refused to mediate, improvidently, and as a consequence, even though they prevailed, they lost their award of attorney’s fees on appeal.