California Mediation and Arbitration

Arbitration/Public Policy/Standard of Review: Licensing Requirement for Contractors Constitutes Explicit Legislative Expression of Public Policy, That If Not Enforced By Arbitrator, Constitutes Grounds for Judicial Review

Trial Court Must Conduct De Novo Review To Determine Whether Licensing Statute Requires Disgorgement of Compensation By Unlicensed Contractor

     Our next case addresses an important exception to the general rule that an arbitrator’s award cannot be vacated because of an error of fact or law:  the “public policy exception.”

     The setting is a condominium project that suffered numerous construction setbacks, took six years to complete, and received a Certificate of Occupancy on January 29, 2008 – bad timing.   That left Plaintiff Ahdout and Defendant Hekmatjah, the members of a company formed to develop the project, arbitrating their dispute over the accounting for distributions.  Ahdout was unhappy with the arbitrator’s award.  He appealed from a judgment entered following the superior court’s denial of his petition to vacate the arbitration award and from the court’s order confirming the award.  Ahdout v. Hekmatjah, Case No. B236764 (2nd Dist. Div. 4 January 25, 2013) (Willhite, J., author) (published).

     The fly in the ointment was Bus. & Prof. Code section 7031(b), permitting an action for disgorgement of compensation from an unlicensed contractor.  Both the person who provides construction services himself and one who does so through others qualifies as a contractor.  Ahdout claimed that Hekmatjah had provided construction services through an unlicensed general contractor.  Ahdout’s and Hekmatjah’s agreement for distribution of profits provided that Hekmatjah’s capital account would be credited more than Ahdout’s account for construction costs.  However, Ahdout opposed such a credit, based on Hekmatjah’s involvement in the alleged use of an unlicensed contractor. 

     Hekmatjah’s argument was simple: even if the arbitrator’s decision contained errors of fact or law, the trial court properly deferred to the trial court.  Though Hekmatjah correctly stated the general rule, there is an important “public policy exception,” and that was the hook upon which the Court of Appeal hung its opinion:

“We find that Ahdout’s claims under section 7031 fall within the ‘public policy’ exception to the general prohibition of judicial review of arbitration awards, because 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor.  Thus, the trial court erred in deferring to the arbitrator’s finding that section 7031 does not apply.  We remand the matter to the trial court to conduct a de novo review.”

     The Court rejected Ahdout’s other argument that the arbitrator exceeded his powers by enforcing an illegal contract, because the illegality in the instant case did not infect the entire contract.

      Blog Bonus:  The arbitral forum in this case was a “Bais Din” or “Beth Din” (“house of judgment”), a Jewish rabbinical court.

Arbitration/Construction of Agreements: Fourth District, Division 2 Concludes Subcontract Arbitration Clause Does Not Permit Contractor to Compel Arbitration of Payment Dispute

Result Here Depends Entirely On Contract Construction Of Prime And Subcontracts

     Our next case is entitled American Water Jetting, Inc., Plaintiff and Respondent, v. Highland Construction, Inc. et al., Defendants and Appellants, Case No. E054004 (Fourth Dist. Div. 2 January 25, 2013) (McKinster, J.) (unpublished).  I don’t usually restate the full caption of a case.  Here, however, I did so, because I find it curious that the Court of Appeal states:  “The trial court denied the motion to compel arbitration, and AWJ filed a timely notice of appeal.”  Why would the respondent, AWJ, file a timely notice of appeal, after successfully defeating Highland’s motion to compel arbitration in the trial court?  Whatever.  Let’s move on.

     This case is filled with red herrings.

    

    Red herrings.  Creative Commons Attribution 2.0 Generic license.  misocrazy, author.

    

       AWJ, a subcontractor retained by Highland, performed some of the work under a contract between Highland and Caltrans.  Evidently, Caltrans paid Highland for AWJ’s work, but AWJ did not get fully paid by Highland under the subcontract.  So AWJ sued.  Highland moved to compel arbitration, and AWJ successfully opposed the motion, contending that its subcontract with Highland gave it an option to arbitrate or litigate, and alternatively, that Highland had waived arbitration.  Let’s just say an appeal followed.

     AWJ relied on a provision in the subcontract allowing it to sue or pursue arbitration in the event that Caltrans rejected AWJ’s claims for additional payment.  But the Court of Appeal rejected that argument.  Here, the dispute was between AWJ and Highland, not between AWJ and Caltrans, and the provision relied upon by AWJ “does not answer the question raised in this case, i.e., whether Highland can compel arbitration of AWJ’s claim that Highland breached the contract.”

      Next, the Court of Appeal turned to Highland’s argument that the subcontract incorporated in its entirety the prime contract between Highland and Caltrans, and the prime contract required arbitration.  But the Court of Appeal rejected the wholesale incorporation argument, because the incorporation language was expressly limited to “work to be performed by the Subcontractor,” and did not reference provisions of the prime contract pertaining to payment or to arbitration of disputes – the issues involved here.

     In the end, the resulting contractual confusion did not help respondent Highland, because an agreement to arbitrate must be “clear and unmistakable.”  Badie v. Bank of America, 67 Cal.App.4th 779, 894 (1998).

     Because the conclusion that the subcontract did not permit Highland to compel arbitration of a payment dispute hinged on contract interpretation, the Court did not have to address respondent AWJ’s waiver argument.  I know, I know, the Court says AWJ appealed.  In any case, because the order below was affirmed, AWJ, the respondent, won its timely appeal.   Got that?

    

Arbitration/Homeowners: California Supreme Court’s Pinnacle Museum Tower Association Case Disposes Of Enforceability of Arbitration Provision In CC&Rs In Verano Condominium Homeowners Association Case

Based On Holding of Pinnacle, Fourth District, Division 1 Reverses Order Of The Superior Court That Had Denied Developer’s Request To Arbitrate

     I posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, a 4^th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in recorded covenants, conditions and restrictions (CC&Rs) was not enforceable between the homeowners association and the developer, or between the developer and a class of owners on whose behalf the HOA sued.  On August 16, 2012, I posted about Pinnacle Museum Tower Assn. v. Pinnacle Market Development (UASA), LLC, 55 Cal.4th 223 (2012), in which the California Supreme Court held arbitration clauses in CC&Rs are enforceable against an HOA, notwithstanding the fact that the HOA did not come into existence until after the CC&ARs were recorded, and the HOA’s consent to arbitrate occurred by operation of law.  I asked:  “Will today's Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?” 

     The answer to my rhetorical questions is:  Yes.  On January 25, 2013,the Court of Appeal held in Verano that the arbitration provisions in Verano “constitute a valid agreement to arbitrate within the scope of the FAA [Federal Arbitration Act],” thereby reversing the trial court’s order.  Verano Condominium Homeowners Association v. La Cima Development, LLC, Case No. D058217 (4th Dist. Div. 1 January 25, 2013) (unpublished) (Benke, Acting P.J., author).

Arbitration/Disclosures: California Arbitration Act And Ethics Standards Require Arbitrator To Disclose A Lawyer In the Arbitration Is A Member Of The Dispute Provider Resolution Organization

California Code of Civ. Proc. Section 1281.9 Enumerates Specific Instances Where Disclosure Is Always Compelled

    Plaintiff appealed an adverse judgment affirming a medical malpractice decision in favor of defendant doctor, arguing arbitrator failed to make a necessary disclosure.  The neutral arbitrator and defendant’s counsel failed to disclose that defendant’s counsel had, subsequent to the commencement of arbitration, become affiliated with the firm providing the arbitrator. Gray v. Chiu, Case No. B238404 (2nd Dist. Div. 6 January 22, 2012) (Perren, J., author) (for publication).

     The Court of Appeal reversed the judgment confirming the award, and directed the trial court to vacate the arbitration award.  The Court held that the California Arbitration Act, and the California Ethics Standards for Neutral Arbitrators in Contractual Arbitrations, require:

“(1) a neutral arbitrator to disclose that a lawyer in the arbitration is a member of the administering ‘dispute provider resolution organization’ (DRPO); and (2) section 1286.2, subdivision (a)(6) compels a trial court to vacate the arbitration award if the arbitrator fails to disclose that information.”

     It will not do to argue, as did defendant/respondent, that the arbitrator had no duty to disclose the relationship, “because there was no evidence of any ‘significant . . . financial or professional relationship or affiliation’ between the neutral arbitrator and a lawyer in the arbitration.”  The reason is that Code of Civ. Proc. section 1281.9 “enumerates specific instances where disclosure is always compelled.” (emphasis added).  Thus, for the specific instances enumerated by section 1281.9, there is a bright-line test. 

      One of those specific instances enumerated, 1281.9(a)(2), requires disclosures of “[a]ny matters required to be disclosed by the ethics standards for neutral arbitrators adopted by the Judicial Council pursuant to this chapter” – a provision encompassing the lawyer’s membership in the DRPO, under Ethics Standard 8(b)(1)(A).

Disclosure:  Daikoku, one of the Seven Gods of Fortune, descends from picture on a wall to peek.  Suzuki Harunobo, 1767-1768.  Library of Congress.

Arbitration/Homeowners: Fourth District, Division 1 Reverses Trial Court’s Order And Holds Arbitration Clause In Recorded Declaration Of Covenants, Conditions And Restrictions Is Valid

Pinnacle Museum Tower Association Dictates Result

     In Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012), the California Supreme Court held that arbitration clauses in recorded CC&Rs, requiring that a homeowners association arbitrate construction claims against a developer, are enforceable.  See my August 16, 2012 post about Pinnacle.  (“Privity, Shmivity, Says The California Supreme Court – A Provision To Arbitrate Construction Disputes In Recorded CC&Rs Will Be Honored If Not Unreasonable”).

     In Villa Vicenza Homeowners Association v. Nobel Court Development, LLC, Case No. D054550 (4th Dist. Div. 1 January 17, 2013) (Benke, Acting P.J., author) (unpublished), homeowners brought a derivative action on behalf of a homeowners association against a developer, alleging the developer failed to provide a reserve fund sufficient to repair defects.  The developer filed a motion to compel arbitration that the trial court denied, believing that recording CC&Rs is not a valid means of obtaining an arbitration agreement.  The Court of Appeal affirmed the denial.  Then the developer filed a petition for review, which was granted, and after Pinnacle was decided, the Supreme Court transferred the case back to the Court of Appeal with directions to vacate and reconsider in light of Pinnacle.

     Pinnacle was dispositive, unless the arbitration clause in Pinnacle was unconscionable.  However, because the arbitrations provision under consideration in Vicenza Homeowners Association were “materially indistinguishable from the arbitration provisions considered in Pinnacle,” the arbitration provision was not unconscionable.

     The Court of Appeal vacated its earlier decision affirming the trial court’s order denying arbitration.  In other words, the parties will have to arbitrate.

     Drafting Tip:  The arbitration clause was covered by the Federal Arbitration Act because it involved interstate commerce.  The CC&Rs stated:  “Because many of the materials and products incorporated into the home are manufactured in other states, the development and conveyance of the Property evidences a transaction involving interstate commerce and the Federal Arbitration Act (9 U.S.C. section 1, et seq.) now in effect as it may be hereafter amended will govern the interpretation and enforcement of the arbitration provisions of this Declaration.”  A developer who wants the arbitration clause to be enforceable under the FAA should consider including such language.

Arbitration/Employment/Waiver/FAA: First District, Div. 1, Affirms Judgment Compelling Employee To Arbitrate, Alone, With Macy’s Department Stores, Inc.

Court of Appeal Is Skeptical About Gentry, But Avoids Addressing Gentry Factors, Because Record Was Lacking

 

    

Macy’s Department Store’s Flagship location in Manhattan, New York.  Carol M. Highsmith Collection.  Library of Congress.

     The issue of the enforceability of class action waivers and compulsory arbitration in employment disputes is before the California Supreme Court by virtue of its grant of review in Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal.App.4th 949 (2012) (review granted Sept. 6, 2012, S204032).  See my June 5, 2012 post on Iskanian.  Meanwhile, the Courts of Appeal must still deal with cases that present those issues, sometimes skirting the issues.  Our next case, Outland v. Macy’s Department Stores, Inc., A133589 (1st Dist. Div. 1 January 16, 2013) (Margulies, J., author) (unpublished), concerns a class action brought on behalf of California residents employed as group sales managers for Macy’s, alleging they were not compensated for overtime and for missed meal and rest periods, because they were improperly classified as exempt.

     The trial court granted Macy’s motion to enforce an arbitration agreement with a class action waiver.  Plaintiff appealed, contending that AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011) was distinguishable, and that dismissal of her class claims could be avoid by relying upon Gentry v. Superior Court, 42 Cal.4th 443 (2007), and D.R. Horton, Inc., a decision of the National Labor Relations Board (NLRB).

     Courts that take the position that Gentry is still good law point out Gentry did not establish “a categorical rule that invalidates class action waivers – the type of rule that Concepcion condemned.”  Franco v. Arakelian Enterprises, Inc., 211 Cal.App.4th 314, 368 (2012).  See my November 27, 2012 post on Franco.  Unfortunately for plaintiff here, however, “plaintiff did not submit any evidence to the trial court concerning the Gentry factors.”  Thus, there was no basis on the record for finding the class action waiver unconscionable.

     The Court also says, somewhat cryptically, that notwithstanding another decision, Truly Nolen of America v. Superior Court, 208 Cal.App.4th 487 (2012), recognizing that Concepcion was inconsistent with Gentry, “we conclude we must follow Concepcion.”   See my August 13, 2012 post on Truly Nolen.  It is unclear how following Gentry is necessarily inconsistent with Concepcion, because Concepcion does not abolish unconscionability as a defense to arbitration.  In Outland, the Court explains that there is no basis in the record “for finding the class action waiver unconscionable.”  But if application of the Gentry factors, based on evidence, had led to a finding that the class action waiver was unconscionable, how would that be inconsistent with Concepcion?

     Finally, like a number of other courts (including the Iskanian court) that have considered the issue, the Court of Appeal was not persuaded by the ruling in D.R. Horton., a case that held that the NLRA barred mandatory waivers of class arbitration over wages, hours, and working conditions.  A ruling by the NLRB was not binding on the California courts.  Nor did the Court of Appeal believe that the NLRB has any special expertise in the area of arbitration and class action waivers.

     Judgment affirmed.

Arbitration/Employment: Second District, Division 5 Reverses Trial Court’s Refusal To Enforce Arbitration Agreement In Employment Handbook

Law Of The Case Allows Court To Duck More Interesting Issues Concerning Arbitrability Of PAGA And UCL Claims

     Lewis v. 24 Hour Fitness USA, Inc., Case No. B239912 (2nd Dist. Div. 5 January 15, 2013) (Turner, P.J., author) (unpublished), involved the second appeal from the trial court’s refusal to enforce an arbitration agreement between employee plaintiffs and employer 24 Hour Fitness USA, Inc.  The first time around, the Court of Appeal reversed the trial court’s order denying the employer’s motion to compel arbitration.

     On remand from the first appeal, the trial court severed Private Attorneys General Act (PAGA) and Unfair Competition Law (UCL) claims from the arbitration, and once again, the employer appealed, leading to the present decision.

     The second time around, plaintiffs/employees found themselves impaled by the law of the case doctrine:  “’[t]he decision of an appellate court, stating a rule of law necessary to the decision of the case, conclusively establishes that rule and makes it determinative of the rights of the same parties in a subsequent retrial or appeal in the same case.’”  Morohoshi v. Pacific Home, 34 Cal.4th 482, 491 (2004).  And the first time around, the Court of Appeal’s opinion adjudicated the arbitrability of plaintiffs claims under the PAGA and UCL Law.  Plaintiffs never raised the issue of the arbitrability of “any individual cause of action” and thus forfeited that issue on the first appeal.  The ruling in the first appeal became the law of the case, leading to reversal of the trial court’s later order seeking to sever the PAGA and UCL claims from arbitration.  Thus, the Court of Appeal avoided the substantive issues concerning arbitrability of PAGA and UCL claims.

Arbitration/Automobiles/Appealability: Order Compelling Arbitration Is Not Appealable, Nor Is It “Death Knell” Of Plaintiff’s Case

Second District, Division 2 Decision Motivates Us To Create New Sidebar Category – Arbitration:  Automobiles

     Our California car economy has spawned a plethora of decision concerning automobiles and arbitration.  I have posted on these over the past year.  Rather than link now to all the previous posts involving automobiles, I have simply created a new sidebar category – Arbitration: Automobiles.  I am confident that we will see more such cases. 

     In the second appeal in DeSiqueira v. Toyota Motor Insurance Services, Inc., Case No. B237534 (2nd Dist. Div. 2 January 14, 2013) (Boren, P.J., author) (unpublished), the Court of Appeal addressed the argument of an automobile purchaser that the trial court erred by staying his lawsuit and ordering contractual arbitration.  Toyota successfully challenged appellate jurisdiction, because an intermediate order compelling arbitration is not a final judgment, and thus is not appealable. 

     Plaintiff contended that the “death knell” doctrine applied, allowing him to appeal from a trial court’s order that effectively terminated his class claims.  However, the “death knell doctrine only applies ‘when it is unlikely the case will proceed as an individual action.’”  Szetela v. Discover Bank, 97 Cal.App.4th 1094, 1098 (2002).  Here, plaintiff’s argument that he might recover $1,145, coupled with the right to recover fees and costs, undercut any argument that the individual action would not proceed.  The death knell did not toll for Weber DeSiqueira.

     That left plaintiff with one remaining argument:  the Court should treat the purported appeal as a petition for writ of mandate because of exceptional or unusual circumstances.  But the Court said that there was nothing exceptional here.  Why?  “Multiple cases are pending before the Supreme Court involving the issue presented in this appeal, i.e., the effect on state law of the federal decision in Concepcion.”

     Appeal dismissed.

Mediation/Attorney’s Fees/Pending Cases: Fifth District Orders Publication Of Case Allowing Homeowners To Recover Pre-Litigation Mediation Fees From HOA

Grossman v. Park Fort Washington Association Is Ordered Published

     On December 19, 2012, I posted about Grossman v. Park Fort Washington Association, Case No. F063125 (5th Dist. Dec. 19, 2012) (Franson, J.), a case in which 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. Today, January 15, 2013, the Court of Appeal ordered the case to be published with minor changes that do not affect the judgment.

Arbitration/Consumers/Class Actions/FAA: Second District, Division 8 Rules That Consumer Legal Remedies Act’s Prohibition Against Class Waivers Is Preempted By The Federal Arbitration Act

“Saving Clause” of the FAA Doesn’t Save Consumer’s Unwaivable Statutory Rights Here

     A hot arbitration topic is whether in various circumstances the Federal Arbitration Act (FAA) preempts “unwaivable statutory rights” under state law.  That was an important question in Flores v. West Covina Auto Group, Case No. B238265 (2nd Dist. Div. 8 January 11, 2013) (Flier, J., author) (unpublished).  The lawsuit arose from the purchase of a previously owned automobile from West Covina Auto Group, LLC (WCT).  WCT successfully moved to compel arbitration based on an arbitration provision in the auto sales contact, and the consumer appealed.

     The consumer argued that arbitration was inappropriate:  “(1) a ‘poison pill’ provision in the arbitration clause prohibits arbitration; (2) WCT waived its right to arbitration; (3) the arbitration clause is unconscionable; (4) there was no meeting of the minds or mutual consent regarding the arbitration clause; and (5) as an unexpected term in an [sic] contract of adhesion, the arbitration clause is unenforceable.”  All the arguments went down in flames.

     The Federal Arbitration Act provides arbitration agreements “shall be valid, irrevocable, and enforceable,” except on “such grounds as exist at law or in equity for the revocation of any contract” – the last phrase being the so-called “saving clause” of the Act.  The consumers here argued, in effect, that their unwaivable statutory rights under the CLRA constituted grounds under the savings clause to avoid arbitration.  But the savings clause of the Act was not enough to save them from arbitration here.

     Significantly, the Court of Appeal held that the ruling in Fisher v. DCH Temecula Imports LLC, 187 Cal.App.4th 601 (2010), holding that the right to a class action lawsuit or classwide arbitration was an unwaivable statutory right under the California Consumer Legal Remedies Act, has been preempted by the Federal Arbitration Act, following the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

     No waiver by the auto dealer of the right to arbitrate was found to have occurred, despite extensive litigation.  Here, timing was important:  Fisher was decided just after the plaintiffs filed their original complaint, precluding arbitration, and within two weeks after the filing of Concepcion, the auto dealer informed the trial court that it intended to compel arbitration.  In concluding that the auto dealer had not waived its right to arbitrate, the Court “decline[d] to establish a rule that WCT should have done everything possible to compel arbitration, no matter how futile, expensive, or protracted the process.”

     Despite the fact that the contract contained a number of clauses that other courts have found to be one-sided, prejudicial, and unconscionable, the Court here found no prejudice or unconscionability.  I note the Court stated, “appellants have not shown prejudice” – and therein lies a clue as to how consumers must attack such arbitration clauses if they are to have any hope of avoiding arbitration.  They must make particularized showings, based on admissible evidence, that in their case, the contractual provisions are unduly prejudicial or unconscionable.  Given the post-Concepcion legal trend, a general argument that waiver of a statutory right to a class action is unconscionable, without a particularized showing based on evidence, is going to be a tough, if not impossible, argument to win.