California Mediation and Arbitration

Arbitration/Standard of Review: Trial Court Properly Vacated Arbitraiton Award, In Light of Unfair Procedure and Lack of Actual Notice

 

Fundamental Fairness Issue Involving Lack of Notice Resulted in De Novo Standard of Review

     Plaintiff and Respondent Roland Hansalik signed a promissory note with Wells Fargo Advisors, LLC, with a provision calling for arbitration before the Financial Industry Regulatory Authority (FINRA). Then Mr. Hansalik moved to Switzerland. Wells Fargo initiated arbitration through FINRA, and obtained an award by default, because Mr. Hansalik never appeared. When enforcement procedures commenced in Switzerland against Mr. Hansalik, he immediately filed a petition in California to vacate the arbitration award, claiming he never received notice. Repeated notices had been sent to the wrong address. The trial court granted his petition, and a timely appeal followed. Hansalik v. Wells Fargo Advisors, LLC, Case No. B232151 (2nd Dist. Div. 2 April 25, 2012) (Ashmann-Gerst, J., author) (unpublished).

     The interesting wrinkle here is that FINRA rules provide in part: "The panel has the authority to interpret and determine the applicability of all provisions under the [FINRA rules]. Such interpretations are final and binding upon the parties." Wells Fargo contended that the arbitrator had the power to interpret the notice rule to determine if service was proper, and that it did so. End of story. Not quite.

     The Court of Appeal had a very different view of the matter, for it characterized Wells Fargo's position thusly:

     "What Wells Fargo is truly advocating is this: If the arbitrator has the contractual authority to determine the sufficiency of notice to a party, then the arbitrator's finding of adequate notice cannot be overturned even if the arbitration was unfair and a party was denied notice and an opportunity to be heard." (italics in the original).

     The Court of Appeal viewed this as a question of fairness and lack of notice, presenting a mixed question of fact and law. Such an issue is reviewed under a "de novo" standard. The Court of Appeal concluded: "Based on the unique facts of this case, FINRA's procedure was unfair." The trial court's order was affirmed.

Arbitration/Employment/Enforceability: Bad Facts For Employer Result in Unenforceable Arbitration Agreement

 

Employer Fired Employee Hours After He Signed Arbitration Agreement – How Much More Do You Need to Know?

     Plaintiff Ruzanno instituted arbitration proceedings against defendants Spectrum, Larson, Blake, and National University. The salient fact in this case is that Ruzanno signed the arbitration agreement hours before the employer fired him, purportedly without his knowing the employer believed his performance was substandard.

Above:  The coming of the cat.  Udo J. Keppler.  1911.  Library of Congress.    

     When Ruzzano learned during the course of arbitration that Spectrum had been secretly planning "adverse employment action against him" even before his signing the arbitration agreement, he withdrew from the arbitration, and filed a lawsuit. Defendants responded by filing a petition to compel arbitration. Ruzzano opposed, and the trial court denied the petition to compel arbitration, finding that "[t]he preponderance of the evidence demonstrates no valid arbitration agreement exists because it was procured by deceit on the same day [Ruzzano] was placed on administrative leave." Ruzzano v. Spectrum Pacific Learning Company, LLC, Case No. D059377 (4th Dist. Div. 1 April 24, 2012) (not for publication)(authored by Nares, J.).

     The Court of Appeal agreed with the trial court. The legal principles here are straightforward. An arbitration clause may be rescinded for fraud. Fraud includes intentional concealment or nondisclosure of material facts which induce an innocent party to enter into a contract. Civ. Code §§ 1571-1574; Odorizzi v. Bloomfield School Dist., 246 Cal.App.2d 123, 128 (1966). The proponent of arbitration has the burden of showing that the arbitration a valid arbitration clause – a burden that was not met here.

     A couple loose ends needed to be tied up. Ruzanno was suing upon the employment contract that he was seeking to rescind. But the court brushed that aside, explaining that he was not required to rescind the employment agreement as a whole – severance could apply to invalid or unenforceable clauses.

     Hadn't Ruzzano waived the right to file a lawsuit, by commencing arbitration? Nope. "Where a party first discovers the basis to oppose arbitration after proceedings commence, it may withdraw from the proceedings and commence litigation." (quoting Knight et al., Cal Practice Guide: Alternative Dispute Resolution (The Rutter Group 2010), 5:77, p. 5-59.)

     Result: Affirmance.

     Moral:  It’s better for the employer to enter into an arbitration agreement at the time of hiring, rather than hours before firing.

Arbitration/Class Action Waiver: Party Cannot Be Compelled To Arbitrate Class Arbitration Where Arbitration Provision Neither Authorizes Nor Prohibits Class Action

 

But Rule in Gentry Allowing For Invalidation of Class Arbitration Waiver Where Nonwaivable Statutory Rights Are At Issue Manages to Maintain Toehold

     Once again, the Court of Appeal ventures into the thicket of class action arbitration waivers, threading its way around ATT&T Mobility LLC v. Concepcion, __ U.S. __ , 131 S.Ct. 1740 (2011), Discover Bank v. Superior Court, 36 Cal.4^th 148 (2005) (overruled by Concepcion), and Gentry v. Superior Court, 42 Cal.4^th 443 (2007)(Gentry). Kinecta Alternative Financial Solutions, Inc. v. Superior Court of Los Angeles County, B235491 and B236084 (2nd Dist. Div. 3 April 25, 2012) (certified for partial publication) (authored by Kitching, J.)

     Malone filed a class action for violation of California wage and hour laws against Kinecta. But Malone had signed an agreement containing an arbitration provision providing: "I further agree and acknowledge that [Kinecta] and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context." Based on the arbitration provision that neither authorized nor prohibited class actions, the employer, Kinecta, moved to dismiss class allegations from Malone's complaint. The trial court ordered arbitration, but refused to dismiss the class allegations. Kinecta then petitioned the Court of Appeal to issue a writ of mandate directing the trial court to vacate its order denying Kinecta's motion to dismiss class allegations from the complaint.

     First, the Court reviewed the status of Discover Bank. In that case, the California Supreme Court stated that when consumer contracts of adhesion contain a class action waiver, when the disputes involve small amounts of damages, when the party with unequal bargaining power schemes to cheat large numbers of consumers out of small sums of money, the class action waivers are unconscionable and should not be enforced. However, Discover Bank has been expressly overruled by Concepcion – the Federal Arbitration Act does not allow arbitration agreements to be enforced differently than other agreements.

     Second, the Court reviewed the rule in Gentry. Gentry requires analysis of four factors to determine whether a class action arbitration waiver is unconscionable in circumstances where an employee seeks damages for the employer's alleged violations of wage and hour statutes: (1) the modest size of potential individual recovery; (2) potential retaliation against class members; (3) absent class members may not be informed about their rights; and, (4) existence of other obstacles to vindication of class member's rights through individual arbitration. Based upon an analysis of those factors, a trial court may invalidate the class arbitration waiver in California.

     Third, the Court points out that Discover Bank and Gentry established different tests of whether to enforce a class arbitration waiver. Briefly, Discover Bank looked at a consumer situation, and a very carefully drafted arbitration provision, whereas Gentry concerned a situation in which nonwaivable employee statutory rights were involved – and the tests for invalidating a class action waiver were different in the two cases. Discover Bank has been overruled by Concepcion. However, at least for now, because Gentry, "has not been expressly abrogated or overruled, Gentry appears to remain the binding law in California." The Court added in dictum: "A question exists about whether Gentry survived the overruling of Discover Bank in Concepcion, but it is not one we need to decide."

     Fourth, Malone failed to provide evidence as to any of the four Gentry factors, there was no "factual basis that would require a declaration that the arbitration agreement was unenforceable."

     Fifth, because the arbitration agreement was not unenforceable under Gentry, and because the parties' arbitration agreement did not authorize class actions, the employer could not be compelled to arbitrate. Stolt-Nielsen v. Animalfeeds International Corp., 559 U.S. __, 130 S.Ct. 1758 (2010). (holding that under FAA, party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that party agreed to do so.).

     The Court granted a writ of mandate directing the Superior Court to vacate its order denying the employer's motion to dismiss class action allegations, and also granted a writ directing the Superior Court to vacate its order granting the employee's discovery motion relating to class action discovery.

Arbitration/Fees/Appealability: Order Denying Petition to Compel Arbitration Is Not (Necessarily) An Appealable Order

 

Some Orders Denying Petitions to Compel Arbitration Are More Equal than Others

     Defendant and Appellant Zani Mansouri spent over $200,000 in a patio improvements dispute with her HOA, Plaintiff and Respondent Fleur Du Lac Estates Association.  Naturally, she hoped to recover her fees and costs after the trial court earlier granted the HOA’s motion to compel arbitration, and the Court of Appeal, in a prior writ proceeding, reversed, agreeing with Mansouri that the HOA had failed to establish that it had requested arbitration and that she had refused.

      Mansouri sought fees and costs on the theory that she was the prevailing party in a proceeding to compel arbitration.  But the trial court concluded her fee motion and costs memoranda were untimely.  She moved for reconsideration, or relief due to excusable neglect.  The trial court denied that motion too in a May 2011 order.  All that law and commotion led to a writ petition, denied on the ground that Mansouri had a remedy by appeal, followed by her present appeal from the May 2011 order.  Fleur du Lac Estates Association v. Mansouri, C0968693 (3d Dist. April 23, 2012) (certified for publication) (authored by Justice Robie).

        In the opinion now certified for publication, the Court of Appeal holds that the May 11 order appealed from was non-appealable.  Why?

     First, an order denying reconsideration is typically non-appealable – to hold otherwise would permit, in effect, two appeals from every appealable decision.

     Second, the appealability of an order under the California Arbitration Act is governed by Cal. Code of Civ. Proc. section 1294 – and Mansouri was unable to successfully  shoehorn her appeal into an appealable situation under section 1294.   Mansouri argued that under Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796 (2008), an order denying a petition to compel arbitration is a “judgment” in a petition to compel proceeding, and that a subsequent order denying fees is an appealable post-judgment order, expressly appealable under section 1294 (e).

     The Court of Appeal drew a distinction between an order in an arbitration proceeding resolving the only issue before the court in that proceeding – essentially a judgment and therefore appealable – and an order in an arbitration proceeding that did not foreclose the HOA here from “making a proper demand for arbitration under the CC&R’s on remand . . . .”  And that is what the HOA did here:  after its motion to compel arbitration was nixed by the Court of Appeal earlier because the HOA failed to demand arbitration and failed to establish a refusal to arbitrate, the HOA simply retraced its steps, and made the demand required by section 1281.2 as a predicate for bringing a petition to compel. The second time around, Mansouri didn’t oppose arbitration – the HOA had dotted its i’s and crossed its t’s. 

     There are several lessons to be drawn from this case.  First, before seeking to compel arbitration under section 1281.2, establish that you asked for arbitration, and that the opposing party refused.  Second, appealing from denial of a motion to reconsider may be futile – you may be appealing from a non-appealable order.  Third, not all orders denying a petition to compel arbitration are created equal:  some resolve all issues in a case, some do not.  Fourth, an order denying a motion to compel arbitration that resolves all issues in a case may be a final and appealable order.  Fifth, a special order after final judgment is appealable in a proceeding under the California Arbitration Act – but only if you first have a final judgment.

     Is the door shut to Mansouri’s recovery of fees?  No:  “because it appears that Mansouri still has an adequate remedy by appeal from the final judgment in this matter by which to seek review of the trial court’s denial of her motion for attorney fees and the granting of the Association’s motion to strike her costs memoranda. . . “  In fact, that was the basis for denying her alternative request to treat her premature appeal as a writ petition.  It ain’t over. . . .

    

Above:  Kirsten Flagstad

Arbitration: Parties Are Entitled To Prejudgment Interest During Time The Trial Court Vacated Arbitration Award In Their Favor And Reinstatement Of The Award

 

Issue of First Impression in California

     Tenzera, Inc. v. Osterman, B228189 (2^nd Dist. Div. 3 April 19, 2012) presents “what appears to be an issue of first impression in California.” That issue is whether prevailing parties in an arbitration “are entitled to prejudgment interest between the time the trial court vacated the arbitration award in their favor and our reinstatement of the award in the previous appeal in this case.”

     Before an earlier appeal (Tenzera I), the trial court had vacated the arbitration award in favor of the Ostermans as to all parties, even though the company, Tenzera, Inc., did not seek to vacate the award. In Tenzera I, the Court of Appeal held the trial court should have modified the award to reflect that only the company was liable. On remand, the trial court did not award interest that would have accrued during the pendency of the appeal in Tenzera I, reasoning that during this appeal, the company was “prevented by law” from paying the arbitration award.

     Not so said the Court of Appeal this time around. A prevailing party in arbitration is entitled to prejudgment interest as of the date of the final award to entry of judgment. Thoughout the appeal in Tenzera I, “damages were certain and there was no dispute between the parties concerning the basis of computing those damages.” Nor was the company “prevented by law” from paying – that exception is very narrowly construed, and did not apply under the facts here.

     The opinion was authored by Justice Aldrich. It is certified for partial publication – the unpublished part pertains to attorney’s fees, and the published party pertains to the prejudgment interest “issue of first impression”.

Arbitration/Enforceability/FAA/Construction: Arbitration Clause That The Employer Can Change Turns Out To Be Illusory

 

Problem Here: Modification Provision Was Not Sufficiently Restricted So As To Exempt All Employee Claims, Accrued Or Known, From A Contract Change

     Magician, Illusionist, Entertainer.  1913.  Library of Congress.

     The next case takes us back to law school days:  is a contract illusory?  The case required the Court of Appeal to determine (1) who was responsible for deciding whether the arbitration provision was illusory; (2) what law applied; (3) what Texas law would hold on the issue; (4) whether Texas law is contrary to California public policy; and (5) whether the arbitration provision was illusory. Peleg v. Neiman Marcus Group, Inc., B231634 (2nd Dist. Div. 2 April 17, 2012) (certified for publication).

     The plaintiff, who worked in the fragrance department of Neiman Marcus, sued his employer for violations of the FEHA, breach of an implied-in-fact contract requiring good cause for termination, wrongful termination, and defamation. The employer, Texas-based Neiman Marcus, was successful in compelling arbitration of the dispute. The employee appealed after an adverse result.

     The contract contained a modification provision stating that the employer may amend, modify, or revoke the arbitration contract on 30 days' written notice; at the end of the 30-day period, a contract change applies to any claim that has not been filed with the AAA. The employee argued that the employer's ability to change the arbitration contract on 30 days' notice made the contract illusory. The employer pointed to a saving provision in the contract: "[A]ny amendment, modification, or revocation will have no effect on any Claim that was filed for arbitration prior to the effective date of such amendment, modification, or revocation." Illusory or not?

     In a lengthy analysis of the issues, the Court of Appeal determined:

     First, that the issue was for a judge, not an arbitrator to decide. The issue is "comparable" to determining arbitrability or unconscionability – issues determined by the court "unless the parties clearly and unmistakably delegate them to the arbitrator." And, "[t}hat did not happen here."

     Second, the Court of Appeal upheld the choice of law provision requiring the application of Texas law and the FAA, because "Neiman Marcus has a substantial relationship to Texas and engages in interstate commerce."

     Third, the Court held that under Texas law, the arbitration provision was illusory, because it made it possible for the employer to change the contract after giving a "trivial" 30 days notice, so long as no claim was filed before the expiration of the 30 day period. Under Texas law, the provision would need to be more protective, and exempt claims accrued, or known, from a contract change, in order not to be illusory.

     Fourth, the Court held that Texas law was not contrary to California fundamental public policy – it simply required an express provision (absent here) that in California would be implied by the covenant of good faith and fair dealing.

     Thus, the Court majority, in an opinion authored by Justice Mallano, with Justice Johnson, concurring, held that the change provision created an illusory contract.

     Justice Rothschild dissented, arguing essentially that Texas cases had found such agreements were not illusory, and that the majority had teased out distinctions that do not yet exist under Texas case law.

Arbitration/Nonsignatories/Third Party Beneficiaries: Financial Advisor of Corporation Can’t Compel Arbitration With Corporation’s Creditors on Third-Party Beneficiary Theory

 

Corporate Creditors Would Have Benefited Alright If Advisor Had Successfully Obtained Financing for Corporation -- But Benefit Alone Does Not a Third-Party Beneficiary Make

     One exception to the rule that a nonsignatory cannot be compelled to arbitrate a dispute is when the nonsignatory is a third-party beneficiary of the contract containing the arbitration agreement. Crowley Maritime Corp. v. Boston Old Colony Ins. Co., 158 Cal.App.4^th 1061, 1069 (2008). A financial advisor tried to avail himself of that exception to compel arbitration with secured creditors of a corporation who sued him for allegedly fraudulent misrepresentations made to induce the creditors to forbear from foreclosing on their security. The refinancing efforts did not succeed, and the corporation became bankrupt. Defendant Kann, the financial advisor, argued the nonsignatory creditors were third-party beneficiaries of the contract between him and the corporation who could be compelled to arbitrate. The trial court disagreed, and denied the financial advisor’s motion. The financial advisor appealed. Epitech, Inc. v. Kann, B230197 (2^nd Dist. Div. 3 April 16, 2012) (for publication) (Croskey, J.).

     The Court of Appeal also disagreed with Kann’s third-party beneficiary argument. For the creditors to qualify as creditor beneficiaries, Kann’s performance of the contract to obtain refinancing would have had to satisfy the corporation’s preexisting obligation to the creditors. But Kann did not contract to pay the creditors any money, or even to obtain financing; he only agreed to perform certain acts “geared toward possibly obtaining financing.” The corporation’s “only obligation to the secured creditors was to repay them, which Kann simply did not contract do do.” The mere fact that the corporate creditors might benefit by a successful refinancing was not enough to make them intended beneficiaries of the financial advisor’s contract with the corporation. Therefore, the order denying arbitration was affirmed.

     Third-party beneficiary analysis can be tricky. This case resulted in an opinion certified for publication.

One Hundred Years Ago: 1912 Nobel Peace Prize Goes To Elihu Root For Work In International Arbitration and Cooperation

Elihu Root Negotiated Some 40 International Arbitration Treaties

     Elihu Root (1845-1937) was awarded the 1912 Nobel Peace Prize for his work in negotiating some 40 reciprocal international arbitration treaties and in promoting international cooperation.  Root was a prototype for the twentieth-century  “wise man” – enormously successful as a private attorney, he also accepted appointments from Presidents McKinley, Roosevelt, and Wilson.  He is little remembered, though he had considerable influence in his own time.  In addition to serving as US Attorney for the Southern District of New York, Secretary of State, Secretary of War, Senator from New York, and delegate to the Washington Naval Conference, he was also the first president of the Carnegie Endowment for International Peace.

 

Arbitration/Nonsignatories: Second District, Division 5 Refuses to Enforce Arbitration Agreement Against Nonsignatory Broker

 

Opinion Not For Publication Rejects Dictum In Published Opinion

     Nonsignatories to arbitration agreements may find themselves bound to arbitrate if they are agents of a signatory party to the transaction. But that didn’t happen to the real estate brokers here. 3118, LLC v. CBD Investment, Inc., B234706 (2^nd Dist. Div. 5 April 10, 2012) (not for publication).

Plaintiff, 3118, LLC, the purchaser of a building, successfully obtained an arbitration order against defendant brokers in a separate action. The Plaintiff appealed from an order denying its motion to compel arbitration and to stay litigation of claims against defendants, including defendant brokers, in the instant action. The real estate purchase agreement included a common mediation/arbitration provision, and a NOTICE provision, requiring initialing. The defendant brokers did not initial the NOTICE provision.

     The published case of Nguyen v. Tran, 157 Cal.App.4^th 1032 (2007) (4th District, Div. 3) needed to be addressed. In Nguyen v. Tran the purchasers signed the purchase agreement. The Court of Appeal stated in that case: “As such, [purchasers’] brokers could have been compelled to arbitrate the claims against them although they did not sign the agreement and were not parties to it.” Id., at p. 1037. That statement would seem to be dispositive and require the brokers to arbitrate in 3118, LLC. However, the statement is dictum in Nguyen v. Tran that the 2^nd District, Division 5 refused to follow.

     The express language of the real estate form in 3118, LLC provides: “Buyer and Seller agree to . . . arbitrate disputes or claims involving either or both Brokers, . . . . provided either or both Brokers shall have agreed to such . . . arbitration prior to, or within a reasonable time after, the dispute or claim is presented to Brokers.” The capitalized NOTICE provision states in part, “BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’”. The brokers did not initial that NOTICE provision.

     The Court of Appeal simply gave effect to the provision, concluding that the brokers, who did not sign the arbitration agreement, could not be compelled to arbitrate claims by plaintiff, the buyer, in light of the explicit language of the agreement. Refusing to apply equitable principles to override the contract, the Court of Appeal also noted that this was not a case where a nonsignatory wanted to be bound by an arbitration agreement.

     However, the court reversed the order refusing to stay the judicial action against the brokers pending arbitration, because of the existence of overlapping issues and the risk of inconsistent results.

     The opinion is unpublished and therefore cannot be cited as precedent. Nevertheless, if you are a real estate broker or litigator, this is a case you might want to keep in mind.

Arbitration/Pending Cases: Consumer Car Arbitration Riding on New Treads As Ninth Circuit "Recalls" Opinion in Kolev v. Euromotors West/The Auto Gallery

 

Axle of Evil:  Opinion Withdrawn in Kolev v. Euromotors West/The Auto Gallery Was Critical of Pre-Dispute Binding Arbitration Where Automobile Problems and Magnuson-Moss Warranty Act Are Concerned

     On April 11, 2012, the Ninth Circuit withdrew the Opinion in Kolev v. Euromotors West/The Auto Gallery, 586 F.3d 1024 (9^th Cir. 2011), explaining that it cannot be cited as precedent. This "recall" of an automobile arbitration decision offers the strategic advantage of mooting a petition for rehearing en banc. The parties may still file a petition for rehearing and rehearing en banc – but first the California Supreme Court needs to decide Sanchez v. Valencia Holding Co. LLC, No. S199119 (previously heard by the 2^nd Dist., Div. 1, and published at 201 Cal.App.4^th 74 (2011)). What's all that about?

     Ms. Kolev bought a pre-owned (i.e., used) Porsche that turned out to have serious mechanical problems during the warranty period. Having purchased a car that she believed was a lemon, she may now believe that her court case is a lemming headed off a cliff.

     In the now withdrawn Kolev opinion, Judge Reinhardt, writing for a majority of two, concluded: "We hold that written warranty provisions that mandate pre-dispute binding arbitration are invalid under the [Magnuson-Moss Warranty Act ("MMWA")] and that the district court therefore erred in enforcing Porsche's warranty clause by compelling mandatory arbitration of Kolev's claims." Judge Reinhardt's opinion deferred to FTC regulatory interpretation of the MMWA that IDSMs ("informal dispute settlement procedures" or "Mechanisms" under the MMWA) were not intended to be binding on consumers. The majority opinion also concluded that binding arbitration fails to protect consumers from being forced into involuntary agreements they can't negotiate.

     Judge Reinhardt's majority opinion drew a dissent from Judge Smith, who argued that the majority conflated Mechanisms – a narrow class of warranty dispute resolution procedures – with any ADR remedy adopted in a private contract. Judge Smith also believed the majority view to be "incompatible with the clear federal policy favoring arbitration under the Arbitration Act."

     The state case awaiting Supreme Court review, Sanchez v. Valencia Holding Company, supra, also involves a consumer, an automobile, and arbitration. The opinion of the Second District, Div. 2, was written by Justice Mallano. That opinion concluded that an arbitration provision in the sales contract was unconscionable – regardless of the fact that it also contained a class action waiver:

"the provision is adhesive – involving oppression and surprise – and contains harsh one-sided terms that favor the car dealer to the detriment of the buyer. Because the provision contains multiple invalid clauses, it is permeated by unconscionability and is unenforceable."

     We'll be interested to see whether the fact-driven unconscionability defense in Sanchez survives further legal review, and also whether the holding in Kolev that pre-dispute binding arbitration is invalid under the MMWA is able to avoid a crack-up.