California Mediation and Arbitration

Arbitration/Federal Arbitration Act: District Two, Division Three Holds Section 9 Of The Federal Arbitration Act Is Not An Impediment To Enforcement Of Award In State Court

 

Beware of 9 U.S.C. Section 9:  It Provides For Judicial Confirmation Of Arbitral Awards Only Upon Consent Of The Parties

     Swissmex-Rapid S.A. de C.V. and SP Systems, LLC arbitrated a commercial dispute concerning backpack agricultural sprayers manufactured by Swissmex, a Mexican corporation.  The arbitration resulted in a net award in favor of Swissmex in the amount of of $1,424,039, which award was confirmed by the trial court.  SP appealed, arguing “that the parties did not agree in their arbitration agreement that the award could be judicially confirmed, and therefore the trial court erred in confirming the award.”  Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC, Case No. B238054 (2nd Dist. Div. 3 Dec. 28, 2012) (Klein, J., author) (published).

     Why, you may well ask, is this even a problem?  After all, the trial court has statutory jurisdiction to enforce an arbitration agreement entered into in California, and that includes entering judgment on an award under the agreement.  Code of Civil Procedure section 1293.  Alas, the Federal Arbitration Act (FAA) works differently.  Because this matter involved international commerce, it implicated the FAA.  Unlike the California Arbitration Act (CAA), the FAA provides for judicial confirmation of arbitral awards only upon consent of the parties. 

     Thus, the questions presented in Swissmex are whether the FAA rule, requiring consent of the parties for judicial enforcement of an arbitral award, preempts California law, and if so, whether the parties had in fact consented to judicial confirmation of the arbitral award.

       First, the Court of Appeal held that Section 9 of the FAA is procedural and therefore inapplicable to state court proceedings (the procedural rule would only apply in federal court).  The fundamental substantive rule of the FAA is that courts are to enforce arbitration agreements, and that fundamental substantive rule preempts state law.  But purely procedural aspects of the FAA, which apply in federal court, do not preempt. In footnote 6 of the Swissmex opinion, the Court of Appeal notes that “various other courts have characterized section 9 of the FAA as ‘substantive.’ . . . . However, those decisions are not binding on this court.”  Given this footnote, it would seem prudent to cover the bases and consider the consequences if Section 9 of the FAA is viewed as substantive and preemptive of state law, rather than as merely procedural.  That is exactly what the Court did next.  

     Second, the Court of Appeal considered the possibility that Section 9 of the FAA was applicable, and concluded the result would be the same, because here the parties agreed to submit to the Commercial Arbitration rules of the American Arbitration Association.  Under Rule R-48(c) the parties are deemed to consent to judicial confirmation of an award.  Idea Nuova, Inc. v. GM Licensing Group, Inc., 617 F.3d 177 (2d Cir. 2010) “is on point.”

     That left just one last hurdle (or maybe pebble) to get over.  The matter was administered by the International Centre for Dispute Resolution (ICDR) of the AAA.  SP contended the arbitration was conducted in accordance with the AAA’s International Dispute Resolution Procedures, not the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award.  The Court of Appeal resolved this last conundrum by focusing on the ICDR’s notification to the parties “that the matter would be ‘administered under the International Dispute Resolution Procedures . . . unless the parties agree otherwise.’”  Here, the parties did “agree otherwise” by incorporating the Commercial Arbitration Rules.  Thus, the matter could be administered by the ICDR, but arbitrated under the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award.

      Presto!  Judgment affirmed.

      Drafting tip:  If the arbitration is likely to be covered by the FAA, expressly provide that the arbitral award can be enforced in state or federal courts of competent jurisdiction.

      

Arbitration/Waiver: Post-Judgment Post-Appeal Post-Concepcion Request To Arbitrate Comes Too Late

Issue Presented Is One Of First Impression And Perhaps Sui Generis

     Our next case presents as a “threshold matter” an arbitration issue that turns out to be one of first impression.  Guitierrez v. Wells Fargo Bank, N.A., Case Nos. 10-16959 and 10-17468 (9th Cir. Dec. 26, 2012) (McKeown, J.) (published).  Wells Fargo sought to compel arbitration in a case after certain issues had been decided adversely to it, arguing that it would have been futile to seek to compel arbitration before the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) (holding that the Federal Arbitration Act preempted California’s Discover Bank rule that had rendered class-wide arbitration waivers unenforceable in consumer cases involving unequal bargaining power and large numbers of small consumer claims).    However, Wells Fargo litigated at length before seeking to arbitrate after Concepcion was decided.  “The effect of Concepcion, as intervening Supreme Court law, on a judgment on appeal after trial, is an issue of first impression.”

     The Ninth Circuit waiver of arbitration test is a three-factor test requiring:  “(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.”  Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986).

      Wells Fargo’s strongest argument was that any “existing right” could exist only after Concepcion.  However, the Ninth Circuit believed that the futility of an arbitration demand was “not clear cut here” because “[i]n contemporaneous consumer litigation, litigants did succeed in compelling arbitration despite the existence of the Discover Bank rule.”  (Note:  For a discussion of a California case, Sprint v. Phillips, in which the court concluded a pre-Concepcion effort to arbitrate would have been futile, see my September 27, 2012 post).  This allowed the Court to focus on readily apparent prejudice to plaintiffs – time, expense, delay and uncertainty – given “Wells Fargo’s invocation of arbitration five years into this litigation . . . “

      But the Fisher analysis was not the only argument in favor of rejecting the belated effort to invoke arbitration.  The Court believed that belated arbitration here would be inconsistent with “the overarching purpose of the FAA . . . to facilitate streamlined proceedings.”  Concepcion, 131 S.Ct. at 1748.

      Finally, on the facts, denying arbitration seemed consistent with contractual intent.  The arbitration clause was only “permissive”, not mandatory.  Either party could demand arbitration, but was not required to do so.  And Wells Fargo “never made a demand for arbitration, raised it as a defense, or even mentioned it until after the Concepcion decision, at which point the trial was over and the district court had issued its judgment.” 

     The Court has suggested that its ruling on the arbitration issue is likely to be limited:  “This is an unusual, perhaps sui generis, case in which the specific circumstances counsel this result.”

     By the way, the main ruling in the case is interesting.  Wells Fargo was sued for engaging in a practice of posting payments to checking accounts in a particular order (highest to lowest amounts) so as to maximize the number of overdrafts and the amount of overdraft fees.  The panel held that the bank’s decision to post payments to checking accounts in a particular order is a federally authorized pricing decision, and that the National Bank Act preempted affirmative disclosure requirements and liability based on nondisclosure.  But the National Bank Act does not preempt claims for affirmative misrepresentations under the fraudulent prong of California’s Unfair Competition Law.

     

     

Happy Holidays !

And best wishes to my readers for 2013

Ernst Haeckel.  Ascidiae.  Kunstformen der Natur (1904).

Review in The Wall Street Journal: Boilerplate

 

End of the Rule of Law, or Useful Legal Fiction?

     Arbitration, like boilerplate, creates a private legal system that displaces the public one.  Whereas the common law depends on the rule of law, and creates a system of precedent that is available to the public, an arbitration award is typically a private affair, and even a mistake of law or fact needn’t lead to the reversal of an arbitration award.  The connection between boilerplate and arbitration is closer still, because often the agreement to arbitrate is an adhesive contract created by boilerplate-like provisions.  Because arbitration is a subject of this blawg, a review of a new book on the unlovable subject of boilerplate in The Law Wall Street Journal resonated for me.

     In the December 21, 2012 edition of The Wall Street Journal, Robert E. Nagel, professor of constitutional law at the University of Colorado, reviews Boilerplate (Princeton 2012), a new book by Prof. Margaret Jane Radin of the University of Michigan Law School.  Prof. Nagel describes Boilerplate as “a sophisticated and thought-provoking treatment of the boilerplate contracts that everyone signs yet few read or understand.”

     “Because the terms aren’t bargained over,” writes Prof. Nagel, summarizing arguments in Boilerplate, “it follows that they aren’t consented to in any traditional sense; there is no meeting of the minds between the parties.”  The “moral basis” for using state power to enforce contracts is lacking in the case of boilerplate, because mutual agreement of the parties is the justification for using “the power of the state to enforce the transfer of one person’s property to another . . . “  But in the case of boilerplate, mutual agreement must be a legal fiction.  Furthermore:  “The party that constructs the boilerplate makes a kind of private legal system that displaces the public one.”

     Prof. Nagel, however, suggests that the contractual treatment of boilerplate may be a useful legal fiction, and that “our bewilderingly complex political system exhibits many contradictions more alarming than the tension between boilerplate and the rule of law.”  He asks rhetorically:  “Can it be that real, bargained-for contracts remain an important practice and ideal because boilerplate removes so many transactions from the realm of law?”

     As a first-year law student, I took Peggy Radin’s real property class at UCLA, and have fond memories of spending the first six weeks reading bewildering cases about foxes, hunters, possession, ownership, and opaque forms of action.  All the best, Prof. Radin, and congratulations on the publication of Boilerplate. 

    
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Arbitration/Employment/Enforceability/FAA/CCP 1281.8: Second District, Div. 1 Reverses Order Denying Motion To Compel Arbitration – Mutuality Of Employer/Employee Provisions Is Key

“In particular, we do not find unconscionable a provision in the arbitration agreement allowing either party to seek provisional remedies . . . “

     For the practitioner, Baltazar v. Forever 21, Inc., Case No. B237173 (2nd Dist. Div. 1 Dec. 20, 2012) (Mallano, J.) (published), is worth reading because it provides employers and employees with an example of a “final and binding” arbitration provision that survives various challenges and passes muster with the Court of Appeal.

     Maribel Baltazar sued her former employer, Forever 21, Inc., for racial and sexual harassment and other employment-related wrongs.  Employer and two employees filed a motion to compel arbitration, which motion the employee opposed, arguing the arbitration agreement was unconscionable.  The trial court denied defendants’ motion, and defendants appealed.

     Agreeing that the “take it or leave it” employment contract was one of adhesion, the Court of Appeal nevertheless held that it was not substantively unconscionable. 

     Preliminarily, the Court of Appeal concluded that the agreement was governed by the California Arbitration Act, not the Federal Arbitration Act, because no evidence was offered that the employment or any pertinent transaction involved interstate commerce.  This preliminary conclusion supported the Court’s analysis that carving out provisional equitable relief from the arbitration agreement was entirely permissible.

     Because California Arbitration Act applied, Cal. Code of Civ. Proc. section 1281.8 necessarily applied to the agreement.  And section 1281.8 allows either party to the arbitration provision to apply to the court for a provisional remedy in connection with an arbitrable controversy.  (We note in passing that sometimes other contractual arbitration provisions include carve-outs for provisional relief.  Seeking provisional relief from an arbitrator may be unwieldy, because it must be enforced quickly and through a court.  For example, the standard California Association of Realtors contracts for the purchase and sale of real estate typically have ADR provisions requiring mediation and arbitration with a carve-out for provisional remedies, allowing recourse to the court).

      The Court also rejected the employee’s argument that the carve-out for provisional remedies did not result in a lack of mutuality.  Here, the carve-out did not exempt claims more likely to be brought only by the employer.  For example, of the employee’s nine claims, virtually all could be a source of injunctive relief.  Thus, while ‘[a]n arbitration agreement is substantively unconscionable if employees are required to submit their disputes to arbitration while the employer remains free to pursue its claims in any forum,” such was not the case here.

     The employee also argued that a provision allowing for all necessary steps to be taken to protect trade secrets and proprietary and confidential information from public disclosure was unduly harsh and one-sided.  One-sided, perhaps, but not unreasonable.  After all, the provision was limited to protecting trade secret or similar provision, “consistent with the duties imposed by the Uniform Trade Secrets Act (Civ. Code, sections 3426-3426.11)”.  Besides, “courts have upheld confidentiality and nondisclosure agreements of general application,” allowing the Court to invoke the maxim that “the greater contains the less.”

     Concluding that the agreement to arbitrate was not unconscionable, the Court of appeal reversed the order denying arbitration, ordering the trial court on remand to enter a new order granting the motion to compel arbitration.

Mediation: Homeowners Get To Recover Fees Spent On Pre-Litigation Mediation from Homeowner Association

Interpretation of Civil Code section 1354(c) Leads to Result

     In Grossman v. Park Fort Washington Association, Case No. F063125 (5th Dist. Dec. 19, 2012) (Franson, J.) (unpublished), the Court of Appeal held that the trial court correctly awarded fees for pre-litigation mediation to homeowners involved in a tussle with their homeowners association over construction of a backyard cabana and fireplace.  How did the court get to that result?

     Outdoor fireplace built by U.S. Forest Service.  Russell Lee, photographer.  1942.  Library of Congress.

     Civil Code sections 1354(c) reads:  “In an action to enforce the governing documents, the prevailing party shall be awarded the reasonable attorney’s fees and costs.”  The homeowner’s association, which resisted paying attorney’s fees, argued that fees incurred in pre-litigation mediation are not incurred “in the action”, and hence, should not have to be paid. 

      Nope, said the Court of Appeal.  “This text does not explicitly limit the recovery of attorney fees and costs to those items incurred in the lawsuit itself.” (italics in the original).  Three things are important:  (1) the existence of an action to enforce the governing documents; (2) a prevailing party; and (3) reasonable fees and costs.  The Grossmans, who were plaintiffs and respondents, easily satisfied the first two conditions.  As to the question of reasonableness, because the Legislature has required ADR, “a party acts reasonably when it spends money on attorney fees and costs during pre-litigation ADR.”  Thus, the third condition was also satisfied by the Grossmans.

     The pre-litigation attorneys fees related to 38.1 hours of work at $350/hour (i.e., $13,335) and pre-litigation costs were an additional $875 – a fraction of the total requested ($116,165), and a fraction of the total awarded ($112,665).

FAA’s National Policy Favoring Arbitration Requires Arbitrator In First Instance To Determine If Noncompetition Agreements Are Null And Void

 

SCOTUS Smackdown of Supreme Court of Oklahoma

     On November 26, 2012, in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. _______ (2012) (per curiam), the Supreme Court of the United States found it necessary to remind the Supreme Court of Oklahoma that “[i]t is a matter of great importance . . . that state supreme courts adhere to a correct interpretation” of the Federal Arbitration Act (FAA).  “Here, the Oklahoma Supreme Court failed to do so.  By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law.”  The Oklahoma decision was therefore vacated. 

     Consider for a moment how this would play out in California, a state with a strong public policy that protects employees from unlawful restraints of trade and promotes competition.  Cal. Bus. & Prof. Code section 16600.  As in Nitro-Lift Technologies, the issue would have to be decided by the arbitrator, assuming the arbitration provision is enforceable.  If the arbitrator incorrectly applied the law, that would ordinarily be no ground for judicially reversing the arbitrator’s award, notwithstanding the failure to carry out California’s strong public policy that protects employees and promotes competition. 

     On March 27, 2012, we posted about Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012) (per curiam).  The Supreme Court of West Virginia had refused enforcement of an arbitration clause because it violated the state's public policy against arbitrating personal injury or wrongful death claims against nursing homes.  The per curiam Nitro-Lift Technologies opinion quotes the per curiam Marmet opinion:  “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:  The conflicting rule is displaced by the FAA.”  Hence, state law cannot prohibit outright the arbitration of a noncompete claim – the arbitrator decides the issue “in the first instance.”

     We would simply add that in the case of binding arbitration, “in the first instance” usually means “in the last instance” too! 

Pending Case: Ninth Circuit Holds En Banc Hearing In Kilgore v. KeyBank

Federal Preemption Of California’s Broughton-Cruz Rule Exempting Claims For Public Injunctive Relief Is At Issue

     On March 7, 2012, we posted about Kilgore v. KeyBank, 673 F.3d 947 (9^th Cir. March 7, 2012) (authored by Judge Trott).  Kilgore held that California’s Broughton-Cruz rule, which provides claims for public injunctive relief cannot be arbitrated, is preempted by the Federal Arbitration Act (FAA).  The case was heard en banc on December 11, 2012, and the video of the hearing is available online.

     Kilgore involved students of a private helicopter vocational school alleging the school had a preferred lender who knew the school was “a slowly unfolding disaster”, yet continued to make loans to the hapless students.  The students sought to have the loans declared unenforceable and to prevent the lender from reporting defaults to credit reporting agencies.  Because the students had to first get over the hurdle of an arbitration provision, the case presented the issue of whether the Broughton-Cruz rule provides a carve-out exception to arbitration on the facts here, and whether the rule is now preempted by the FAA.  In the opinion authored by Judge Trott earlier this year, the court found preemption.     

     The estimable Kimberly A. Kralowec has posted two reports of last week’s hearing on The UCL Practitioner, the first by Eric Kingsley of Kingsley & Kingsley in Encino, the second by Edie Mermelstein of the Offices of F. Edie Mermelstein in Huntington Beach. 

Mediation/Condition Precedent: Plaintiffs Made Good Faith Effort To Mediate And Were Not Barred From Seeking Award of Attorney’s Fees

Good Faith Effort To Mediate Was Supported By Substantial Authority And Argument That Offer To Mediate Was Made To The Wrong Intermediary Had Been Forfeited On Appeal

     The DeSantises bought a commercial building occupied by a hospital tenant, only to discover too late that a hospital tenant was on the way out.  The DeSantises prevailed on their claims for breach of contract, misrepresentation, and concealment and were awarded compensatory and punitive damages. The trial court denied their claims under California’s unfair competition law. The DeSantises were also awarded attorney fees.  Both sides appealed, and in a 49 page unpublished opinion, the Court of Appeal affirmed, rejected all the parties’ claims.  DeSantis v. Oakmont LLC, Case No. A128220 (1st Dist. Div. 5 Dec. 7, 2012) (Simons, Acting P.J.) (unpublished).

     We have a side bar category:  “Mediation:  Condition Precedent,”  We have posted  about “those pesky provisions requiring that one request mediation before filing suit, or else risk losing attorney’s fees even if one prevails.”  The issue of failure to comply with mediation, a condition precedent to receiving attorney’s fees, was raised on appeal in DeSantis by the losing defendant.  Defendant ingeniously argued plaintiff’s attorney McMillan “improperly attempted to communicate with [defendant] about mediation through an insurance adjuster employed by [defendant’s] general liability carrier, and because the adjuster was not the actual or ostensible agent for [defendant], ‘McMillan could not give legally sufficient notice to Gloria Ruppert about mediation issues through’ the adjuster.”

      Well, the argument, however clever, failed because it had not been made earlier and preserved for appeal.  Besides, the Court said, no one was arguing that there was a lack of substantial evidence showing that plaintiff attempted to mediate in good faith. 

      Tip:  Check out the notice provisions in the contract when offering to mediate.  If you make an offer to mediate through an intermediary, pin down the authority of the intermediary.  That’s usually not going to present a problem if the “intermediary” is the adverse party’s attorney.

Arbitration/Enforceability/Unconscionability: Second District, Division 3 Reverses Order Denying Physician’s Motion To Compel Arbitration

Statutory Provisions Specifically Relating To Medical Care Weigh Into The Result

     Statutory provisions are the key to the next decision, Raynond v. Kram, Case No. B236552 (2nd Dist. Div. 3 Dec. 7, 2012) (Kitching, J.) (unpublished).  The case involved a malpractice lawsuit brought by the patient, Raymond, against his treating physician, Kram.  Dr. Kram appealed an order denying the his motion to compel arbitration.  The Court of Appeal held that “the arbitration agreement was not substantively unconscionable because of its provision requiring Raymond to pay the fees of his arbitrator and half the fees of the neutral arbitrator. The lack of substantive unconscionability requires reversal of the order denying defendant’s petition to compel arbitration.”

     Why didn’t the arbitration provision requiring the patient to pay the fees of the arbitrator and half the fees of the neutral arbitrator result in substantive unconscionability?  Essentially, we can identify four reasons.  First, the arbitration provisions complied with the notice language required by Cal. Code of Civ. Proc. section 1295, pertaining to any contract for medical services which contains a provision for arbitration of any dispute as to professional negligence.  This notice language explains the consequences of arbitration, includes certain capitalized words, and provides the patient with 30 days to rescind the agreement to arbitrate.  Second, Dr. Kram did something tactically smart, and not required by statute – he offered to advance certain of the costs.  Third, the Court of Appeal pointed out that Cal. Code of Civ. Proc. section 1284.2 requires each party to the arbitration to pay his pro rata share of the expenses and fees of the neutral arbitrator, unless there is a different agreement.  Fourth, the Court of Appeal pointed out that this case, unlike consumer cases that have weighed in against requiring the plaintiff to pay costs, did not involve unwaivable consumer rights.

     Additionally, the plaintiff argued that arbitration could lead to inconsistent results with a lawsuit involving a third party, a reason for which a court may decide to deny a request to arbitrate.  Here, however, Cal. Code of Civ. Proc. section 1281.2, the provision allowing a court to deny arbitration to as to avoid inconsistent results, contains an exception that applies to an agreement to arbitrate disputes as to the professional negligence of a health care provider.

     Evidently, the fact that the patient earned $24.72/per hour did not factor into the unconscionability analysis of fee shifting.  As Anatole France acidly put it, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”