California Mediation and Arbitration

Arbitration/Employment/Unconscionability: Second District, Division 5 Affirms Denial of Petition to Arbitrate Wrongful Termination Employment Dispute

 

Majority Opinion Identified Many State Law Contractual Problems With Arbitration Provision

     Plaintiff Sparks sued for wrongful termination, and employer Vista Del Mar Child and Family Services petitioned to arbitrate the dispute.  The trial court denied the petition, and the employer appealed.  Sparks v. Vista Del Mar Child and Family Services, Case No. B234988 (2nd Dist. Div. 5, July 30, 2012) (partially certified for publication, except for issue concerning timeliness of filed response).

     The Court of Appeal affirmed, with Justice Mosk writing the opinion for the majority, Justice Armstrong concurring, and Justice Turner dissenting and concurring.

      The majority opinion identified the following problems with arbitration as grounds for affirmance: the arbitration clause was buried within a lengthy employee handbook; the arbitration clause was not called to plaintiff’s attention; plaintiff did not acknowledge or agree to arbitration; the handbook was not intended to create a contract; the handbook could be amended unilaterally by employer, rendering any agreement illusory; the arbitration rules were not provided to plaintiff; and, the arbitration was procedurally and substantively unconscionable (in this case, an adhesion contract that did not provide for discovery). 

     Justice Turner distinguished between pre- and post-2009 claims, because the employee had been provided a new employee handbook in 2009 that supplanted the earlier handbook.  In contrast with the situation regarding the earlier handbook, there was no evidence the employee was advised of the contents of the newer handbook, or that the employee signed acknowledgment of the 2009 handbook.  Justice Turner would reverse “the trial court’s findings as to all pre-2009 agreement claims and direct they be arbitrated; allow the trial court to sever the non-arbitrable claims; and order arbitration on the arbitrable claims even though such may be impractical.” 

     The Sparks case provides plenty of grist for attacking and for defending an arbitration provision in an employee handbook.  Want an enforceable provision?  Solve the problems identified by the majority, and borrow arguments from Justice Turner’s dissent in support of arbitration.  Want to attack arbitration?  Follow the majority, and Justice Turner, in the concurring part of his opinion that found no binding provision in the 2009 handbook.

     Fellow blogger Kimberly A. Kralowec points out today in the UCL Practitioner that Sparks underscores that the United States Supreme Court in Concepcion did not eliminate state law unconscionability as a defense to the enforcement of arbitration agreements subject to the Federal Arbitration Act (as was the arbitration agreement in Sparks).

News: FINRA Reinstates Arbitrators; Tips for Making Mediation Work; Homeless Mediation; Sex Abuse Mediation

Arbitrators Axed By FINRA After Deciding Against Merrill Lynch Are Reinstated 

     Suzanne Barlyn reports July 25, 2012 (Reuters) that the Financial Industry Regulatory Authority (FINRA) reinstated three securities arbitrators axed after an arbitration panel awarded $520,000 against Merrill Lynch.  Because FINRA routinely cycles arbitrators through its roster, crossing an arbitrator off its roster is not, in and of itself, especially notable.  But the proximity in time to the negative award (negative, from the point of view of a large firm), and the reinstatement of three arbitrators is unusual.  Does anyone believe that just because a major firm was dinged with an adverse arbitration award, FINRA would exercise anything less than absolute impartiality in the choice of arbitrators for its roster?  

Making Mediation Work

     Attorney Richard Shore has a July 25, 2012 article online in Forbes proposing “Four Tricks That Make Mediation Work”:  “1.  Let the other side pick the mediator . . . 2. Don’t argue about who is right . . . 3. Leave the litigators at home . . . 4.  Deal with hard issues last.”  Our comments:  No. 4 – Generally a good idea to build a dialogue before cutting to the chase.  No. 3 – Having one team of settlement counsel, and another team of litigation counsel is a luxury that many clients cannot afford.  No. 2 – Generally a good idea, though “venting” may sometimes be a necessary part of the process.  No. 1 – There is plenty of lore about picking a mediator.  Mr. Shore’s suggestion has the merits of speeding up the process and putting a mediator in place who may have leverage to convince your opponent – though you may have reservations about a mediator your opponent has chosen.  It would be interesting to see empirical studies relating satisfaction with outcomes to the process used to select a mediator.

San Luis Obispo Homeless Mediation

     On July 26, 2012, Nick Wilson reported in The Tribune (SanLuisObispo.com):  “Lawyers litigating over whether people can live and sleep in their cars in the city of San Luis Obispo formally agreed to mediation in San Luis Obispo Superior Court on Wednesday [July 25, 2012].”

Mediating Sex Abuse Cases

     Tom Gallagher reports in the July 20, 2012 National Catholic Reporter about, “Mediation: A new model for settling sex abuse cases.”  The Spokane, Washington, diocese announced a new settlement culminating nearly a decade of litigation concerning sex abuse cases and a bankruptcy filing earlier that cost the diocese $48 million. 

     Because we thought that Bishop Blase J. Cupich’s comments about the mediation process were insightful, we repeat his comments, as reported by Mr. Gallagher:

• “Understand that you are not going to control the outcome,” he said. “The solution is not going to be immediately evident. It’s key to have ongoing dialogue with the mediator. You have to see your opponents as your partners, to trust each other and for both sides to let go of trying to control the outcome.”
• “Understand that this is going to take a long time to accomplish.”
• “You cannot get mad. If you get mad, you will lose.”
• “Revisit your goals because you may have had a certain expectation or a certain aspect of a goal, but you should be willing to keep testing these expectations.”

    

Arbitration/Severability: First District, Division 1 Severs Part of Arbitration Provision Providing “Less-Than-Neutral Arbitration Forum”

In Which the Dream of A Bed and Breakfast Becomes A Dog’s Breakfast

    “A partnership to run a bed and breakfast in Nicaragua soured.”  Not an auspicious beginning.  Plaintiff Lawler sued his partners, the Caseys, and their former corporation (collectively Casey) in California for fraud and related causes of action.  Casey moved to compel arbitration.  The trial court concluded it had “discretion to toss the whole arbitration agreement” because the arbitration provision appointed defendant Casey’s lawyer as the arbitrator.  Lawler v. Casey, Case No. A132620 (Dist. 1, Div. 1 July 27, 2012) (Banke, J., author) (unpublished).  Casey appealed.

Steamboat landing on beautiful Lake Nicaragua. 1902. Library of Congress.

     The Court of Appeal reversed and remanded, “because the trial court should have severed the biased appointment from the remainder of the arbitration clause, instead of voiding the clause in its entirety.”

     The unfair provision did not result in an agreement “permeated” by unconscionability.  While the trial court had some discretion, it did not exercise its discretion, providing no findings or statement of reasons on the question of severance versus invalidation.

     Of relevance is the fact that Cal. Code of Civ. Proc. section 1281.6 provides that, where an arbitration agreement does not provide a method for appointing an arbitrator, the parties may agree on a method, and if they can’t agree, or if the agreed method fails, the court, on petition, appoints the arbitrator.  The situation here is analogous to one in which the parties agreed to a method, but the agreed upon method failed, allowing the court to appoint an arbitrator.

     Also noteworthy is the fact that the contract between business parties, though flawed, was not a contract of adhesion, and therefore not unconscionable.

     On remand, the trial court will still need to consider arguments concerning choice of law, illegality, and waiver.  But at least the severance issue is resolved.

 

Arbitration/Disclosures/Fees: Second District, Division 8 Affirms Significant Fee Award and Rejects Argument Arbitrator Failed to Make Required Disclosures

Profession Relationships Were Too Attenuated To Justify Disqualification

     Our next case is a lawsuit between a law firm and a lawyer/client over a significant amount of attorney’s fees – confirmation of the mission statement in our other blog, California Attorney’s Fees (brought to you by Mike Hensley and Marc Alexander), that attorney’s fees are often the “tail that wags the dog in litigation”.  The interesting legal issue at the heart of this case is disclosure of professional relationships by an arbitrator.  Nemecek & Cole v. Horn, case No. B233274 (2nd Dist. Div. 8, July 23, 2012) (Bigelow, J., author) (not for publication).

     Attorney Horn was retained by the Hoffmans to represent them in a lot line dispute.  That case did not go so well, and the next dispute – over fees – was between Mr. Horn and his erstwhile clients.  In the dispute with the Hoffmans, Mr. Horn was represented by Nemecek & Cole (Nemecek).  After a jury trial and an appeal, Mr. Horn was order to pay approximately $380,000 in attorney’s fees to the Hoffmans (settled for $250,000).  Believing that the negligence of Nemecek was the cause of the “disastrous results” in his suit with the Hoffmans, Mr. Horn submitted his dispute with Nemecek to arbitration with JAMS.

     Nemecek prevailed in the arbitration.  The arbitrator, retired U.S. District Judge George Schiavelli, awarded $289,028.85 in attorney’s fees to Nemecek.  Mind you, this all started with a lot line dispute!

    Attorney Horn hired an investigator who discovered professional relationships between the arbitrator and Nemecek.  Specifically, the arbitrator was a member of the appellate courts executive committee with the head of Nemecek’s appellate department; Nemecek’s expert and the arbitrator appeared together as panelists; Nemecek had appeared before the arbitrator earlier when he had been a district judge; and, the arbitrator was of counsel to a law firm that had, since its founding, provided representation in three legal malpractice actions.

     Those professional relationships did not warrant disqualification of the arbitrator.  The cases recognize the practicalities of the profession:  lawyers and judges who have been around for a long time will know a lot of attorneys and will have served on panels and in professional organizations.  Specific matters that must be disclosed, such as an arbitrator’s financial interest, the arbitrator’s knowledge of disputed facts relevant to the arbitration, and the arbitrator’s membership in any organization that practices invidious discrimination, were not at issue here. 

     Nor did the Court of Appeal see an abuse of discretion in the calculation of the fee award in a case that the arbitrator characterized as complex “requiring a great deal of work.”

     Judgment affirmed.

      We note that arbitrator disclosure issues tend to be fact specific.  A good place to begin is Code Civ. Proc. section 1281.9, subd. (a)(1)-(6), laying out disclosure requirements.  The ethics standards adopted by the Judicial Council require disclosure of “specific interests, relationships or affiliations” and other “common matters that could cause a person aware of the facts to reasonably entertain a doubt that the arbitrator would be able to be impartial.”

In the News: San Bernardino Skips Mediation, Venture Capital Firm Kleiner Perkins Is Denied Request to Arbitrate, and California State Attorney General Gets To Mediate With Madoff Bankruptcy Trustee

San Bernardino:  Do Not Pass Mediation, Go Straight to Bankruptcy

     The Associated Press reported on July 18, 2012, that the San Bernardino City Council voted 5-2 to declare a fiscal emergency, thereby allowing it to skip the mediation step now required by California law, and head straight to bankruptcy.

     How quaint and optimistic are the lyrics of The Vandals’ song, “San Berdu”: 

I wanna go with you and leave all this behind us
We'll live in San Berdu and sell the place in Cypress

Venture Capital Firm’s Request to Send Employment Discrimination Suit to Arbitration Is Declined

      David Streitfeld reports in the July 20, 2012 New York Times that San Francisco Superior Court Judge Harold E. Kahn denied the request of venture capital firm Kleiner Perkins Caufield & Byers to arbitrate a sex discrimination claim brought by partner Ellen Pao.  The article quotes Silicon Valley attorney Melinda Riechert, who represents employers, as saying:  “People who want to keep cases out of the press and the blogosphere should seriously consider arbitration agreements.”  That’s definitely the trend.

Collision of Madoff Bankruptcy Trustee and California Attorney General Produces Mediation

     Collisions in the CERN supercollider yield exotic particles such as the Higgs boson.  On July 18, 2012, Bloomberg reporter Linda Sandler reported in the San Francisco Chronicle that a legal super collision between the Madoff bankruptcy trustee Irving Picard and California State Attorney General Kamala Harris has yielded another byproduct:  mediation.

     The collision has occurred over the estate of Stanley Chais, the “financial wizard”who funneled gazillions in investor funds to Madoff, earning $270M in fees between 1995 to 2008.  Mr. Chais, like the Blue Norwegian parrot in the Monty Python skit, is defunct, having joined the choir invisible.

 

    

 

     At issue is whether the bankruptcy trustee’s powers trump the powers of California’s State Attorney General to protect consumers from fraud.  Unsurprisingly, as discretion is the better part of valor, Mr. Picard chose not to pick that fight in his (or Mr. Madoff’s) home state of New York against the NY State Attorney General. 

     The parties will pursue mediation, says Bankruptcy Judge Burton Lifland.

Arbitration/Employment/Class Actions/Enforceability: First District, Division 1 Affirms Order Compelling Employee To Individual Arbitration

Viability of Gentry v. Superior Court is Sidestepped By Court of Appeal

     Plaintiff/employee Lorena Nelsen filed a putative class action lawsuit against her former employer LPI for multiple Labor Code violations.  Because Nelsen signed an arbitration agreement when she was hired, the employer, LPI moved, successfully, to compel arbitration with Nelsen all alone.  Nelsen appealed the order compelling arbitration, arguing it was unconscionable, and the order violated state or public policy, because it precluded class arbitration by its terms.  Nelsen v. Legacy Partners Residential, Inc., A132927 (1st Dist. Div. 1 July 18, 2012) (Margulies, J., author) (certified for publication).

     First, the Court of Appeal had to deal with the issue of appealability, because ordinarily an order compelling arbitration is not appealable.  An exception is the “death knell doctrine” when it is unlikely that the case will proceed as an individual action. Szetela v. Discover Bank, 97 Cal.App.4th 1094, 1098 (2002).  Here, however, there was no explanation by Nelsen as to whether her complaint could proceed as an individual action.  Nevertheless, the Court exercised its discretion to treat her appeal as a petition for a writ of mandate, thereby preserving her claims long enough to dispatch them.

    Second, unconscionability had to be considered.  While several factors supported a finding that the agreement was procedurally unconscionability, that was not enough to nix the agreement to arbitrate, unless there was also substantive unconscionability.  Because nearly the same arbitration clause language had already passed muster in Little v. Auto Stiegler, Inc., 29 Cal.4th 1064 (2003), LPI’s agreement was not substantively unconscionable.  The only difference between the agreement in issue in Little and that in Nelsen actually weighed in favor of finding Nelsen’s agreement was not unconscionable.  In Little, only awards exceeding $50,000 required the arbitrator’s “written reasoned opinion”  -- precisely the awards an employer would be more likely to appeal -- whereas in Nelsen’s case, there was no such distinction to favor the employer.   The agreement in Nelsen did not appear to work in a lopsided, unilateral fashion.

     Third, all the relevant contractual language contemplated a two-party arbitration, not class arbitration.  See Kinecta Alternative Financial Solutions, Inc. v. Superior Court, 205 Cal.App.4th 506 (2012), also concluding there was no contractual basis for finding an arbitration agreement authorized class arbitration.

     And this takes us to the issue of enforceability under Gentry v. Superior Court, 42 Cal.4th 443 (2007) – the important issue the Court sidestepped.  In Gentry, the California Supreme Court concluded that, in wage and hour cases, a class action waiver would frequently have an exculpatory effect and would undermine enforcement of the statutory right to overtime pay.  Gentry treated the statutory Labor Code rights as unwaivable, regardless of unconscionability.

     However, “the continuing vitality of Gentry has been called into serious question by a recent decision of the United States Supreme Court holding [AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011)] that a state law rule requiring classwide arbitrations based on public policy grounds rather than the parties’ arbitration agreement itself does violate the FAA.”  

     The Court of Appeal avoided having to address whether Gentry has been vitiated by Concepcion with an explanation that there was no evidence in the record of the “Gentry factors” – “a predicate showing that (1) potential individual recoveries are small; (2) there is a risk of employer retaliation; (3) absent class members are unaware of their rights; and (4) as a practical matter, only a class action can effectively compel employer overtime law compliance.”  So Gentry, like Wile E. Coyote¹, is still “up in the air.”

     Finally, the Court of Appeal was not persuaded by the argument in D.R. Horton, Inc., 27 NLRB No. 184 (2012) that it was a violation of the National Labor Relations Act to require employees as a condition of employment to waive the filing of a class action claim regarding wages.  The Court of Appeal treated Horton as an outlier case, and instead followed the analysis in Iskanian v. CLS Transportation, 206 Cal.App.4th 949 (2012), , 206 Cal.App.4th that the NLRB went beyond its administrative expertise in interpreting a statute.  Besides, Horton is not a California state court decision.

     For some of our related blawg posts see:  June 14, 2012, June 4, 2012, May 3, 2012, March 18, 2012 (Concepcion); April 25, 2012 (Kinecta); June 5, 2012 (Horton); April 25, 2012 (Gentry). June 14, 2012, June 5, 2012 (Iskanian).

     ¹BLAWG BONUS:  The animator Chuck Jones based his Wile E. Coyote on Mark Twain’s description of the coyote as "a long, slim, sick and sorry-looking skeleton" that is "a living, breathing allegory of Want. He is always hungry."   

In the News: More About Mediation and Municipal Bankruptcies

More Mediation for Stockton, and Possibly Mediation for San Bernardino

     No sooner did Stockton end mediation and file for bankruptcy, than Judge Christopher Klein, the bankruptcy judge overseeing Stockton’s bankruptcy ordered the city and its creditors to mediate with bankruptcy Judge Elizabeth L. Perris next month.  So reported Steven Church at bloomberg.net on July 13, 2012.

     Looks like San Bernardino may be next up at the plate.  On July 12, 2012, Reuters reported that San Bernardino’s city council “will receive an opinion from the city’s legal staff on July 16 on whether the city needs to enter into pre-bankruptcy mediation with its creditors . . . .”

 

 

How to build and destroy a house of cards . . . .

Appealability: Court Of Appeal Dismisses Appeal From Order Staying Action And Compelling Arbitration

Affirm? Reverse? No, Dismiss, Because the Order is Unappealable

     Plaintiff Brian Zulli “purports to appeal from an order staying an action and compelling arbitration . . . “  Purports?  Yes, “purports”, because the order is not appealable.  Zulli v. Toll Brothers, Inc., Case No. B231622 (2nd Dist. Div. 6 July 10, 2012) (Perren, J., author) (not to be published). 

     “’The rationale behind the rule making an order compelling arbitration nonappealable is that inasmuch as the order does not resolve all of the issues in the controversy, to permit an appeal would delay and defeat the purposes of the arbitration statute. .  . However, a party compelled to arbitrate is entitled to have the validity of the order reviewed on his appeal from a judgment confirming an award.’. . . “ State Farm Fire & Casualty v. Hardin, 211 Cal.App.3d 501, 506 (1989).  “Accordingly, the appeal must be dismissed.”

Arbitration/Federal Arbitration Act: Ninth Circuit Affirms District Court’s Decision Affirming Denial of Motion to Compel Arbitration Where Conflict Existed Between Dischargeability Purpose of Bankruptcy Code and Arbitration

How to Reconcile the Federal Arbitration Act With the Bankruptcy Code?

     The threshold issue that the Ninth Circuit had to resolve In the Matter of:  Jose Eber, Case Nos. 10-56772 and 11-55341 (9th Cir. July 9, 2012) (for publication) was “how to reconcile the FAA with the Bankruptcy Code, and, more specifically, a bankruptcy court’s jurisdiction to determine dischargeability pursuant to sections 523(a)(2), (4) and (6).”  Those subsections are the bases for nondischargeability of a debt in bankruptcy: fraud or deception ((a)(2)), fiduciary fraud, embezzlement, or larceny ((a)(4)); and willful and malicious injury to person or property ((a)(6)).  The debtor in the bankruptcy, Jose Eber, is the well-known celebrity hairstylist (i.e., a celebrity himself, as well as a stylist for celebrities), and author of the books “Shake Your Head, Darling,” and “Beyond Hair:  The Ultimate Makeover Book.”  Mr. Eber earns a Wikipedia entry.

     The appellants, Ackerman and Kuriloff, had sought to compel arbitration with with Jose Eber, based on an arbitration agreement.  The problem, according to the Bankruptcy Court, was that the arbitration, which had not yet commenced, could result in findings to which collateral estoppel applied -- “for all practical purposes” the arbitrator would end up determining the issue of nondischargeability.  The district court agreed, and the appeal followed.

     The Ninth Circuit noted that disputes involving the Bankruptcy Code and the FAA often “present a conflict of near polar extremes:  bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution.”  (quoting In re United States Lines, 197 F.3d 631, 640 (2d Cir. 1999).

     Polar extremes.  1924.  Library of Congress.

     Here, there is “no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code.”  But that is not the sole test of preemption here.  “The relevant inquiry then becomes ‘whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.’”  Ins. Co. v. Thorpe Insulation Co., 671 F.3d 1011, 1020 (9th cir. 2012).  And because dischargeability is especially within the purview of the Bankruptcy Court, here, the Ninth Circuit found that there was no abuse in denying the motion to compel arbitration because it would have conflicted with the underlying purpose of the Bankruptcy Code.

     The opinion, authored by District Judge Marbley, invites future examination.  Why?  Because:  “Our holding in no way extends beyond the particular facts of this case or to all cases in which a bankruptcy judge makes this determination prior to the commencement of an arbitration.”

Mediation/Confidentiality/In the News: Judge in Stockton Bankruptcy Limits Release of Mediation Information to Public

When Mediation Involves The Public’s Interest, How Confidential Is The Mediation Under Federal Law?

     On July 6, 2012, Steven Church reported in Bloomerg, “[t]he judge overseeing Stockton, California’s bankruptcy limited the amount of information the city and its creditors can make public about a months-long mediation process that failed.”  Mediation is required under California law before a city can file for bankruptcy.  Mr. Church reports that Bankruptcy Judge Christopher Klein ruled that the City’s offer can eventually be made public, but that counter-offers remain confidential.  Interestingly, the City asked for release of the information, while bondholders asked for the release of some of the information.

     The issue is noteworthy to us, because the confidentiality of mediation-related matters is somewhat unsettled under federal law, though the privilege is strong under California law (Cal. Evid. Code 1119).  Thus, we have posted about Facebook, Inc. v. Pacific Northwest Software, Inc, 640 F.3d 1034 (9th Cir. 2011), in which the Court of Appeals Court 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.  See also Phyllis G. Pollock, Mediation Confidentiality:  A Federal Court Oxymoron, The Resolver 8, available at http://www.pgpmediation.com/blog/wp-content/uploads/2009/08/mediation-confidentiality-a-federal-court-oxymoron31.pdf  (urging adoption by the states of the Uniform Mediation Act to create consistency and provide “a framework for the federal courts,” and urging codification of a federal mediation privilege); Joseph Lipps, The Path Toward A Federal Mediation Privilege:  Approaches Toward Creating Consistency for a Mediation Privilege in Federal Courts (google the title to find the article).