California Mediation and Arbitration

Arbitration: Court Of Appeal Affirms Finding That Arbitration Agreement Is Unconscionable, But Concludes That Unconscionability May Be Cured Through Severance

Denying All Discovery In Arbitration Of Professional Malpractice Claims Is Unconscionable.

     Surgery scalpels.  1878.  Library of Congress.

     The Second District, Division Four, has affirmed the trial court’s finding of unconscionability, but concludes that unconscionability may be cured through severance in an arbitration of professional malpractice claims.  Lateral Link Group v. BLA Schwartz, Case No. B253862 (2/4 Oct. 31, 2014) (Collins, Willhite, Manella) (unpublished).

     The unconscionability problem arose here because the retainer agreement containing the arbitration clause included the proviso, “except that in no event will the parties be entitled to conduct pre-hearing discovery.”  The Court agreed that this carve-out resulted in a high degree of substantive unconscionability, because it greatly favored the attorneys over their clients.  Though the plaintiffs were entitled to their client files, they could be denied access “to other essential documents and witnesses,” whereas the attorneys would have “the bulk of such documents and records.”  The problem created by the discovery prohibition was compounded by a good faith meet-and-confer procedure requiring plaintiffs to disclose the basis of any claim against defendants before arbitrating.  The Court labeled the resulting problem as one of “informational asymmetry.”

     Interestingly, the lack of discovery also magnified problems of procedural unconscionability, because it clashed with the incorporation of AAA Commercial Rules giving arbitrators the right to control discovery.

     Because the root of the unconscionability problem derived from the single phrase denying discovery, the Court concluded that the arbitration agreement was not “permeated” with unconscionability.  Using the judicial scalpel, the Court severed the malignant provision – and presto ! – the arbitration agreement survived.

     Defendants get to arbitrate, and plaintiffs get discovery.

    

Arbitration/Employment/Unconscionability: Perplexed Court Of Appeal Offers Pointers On Drafting An Enforceable Arbitration Provision

How To Avoid Drafting An Unconscionable Arbitration Agreement.

     We usually summarize opinions, but here, the Court of Appeal does a good job itself of summing up how to draft an enforceable arbitration provision in an employment agreement.  The case is Woods v. JFK Memorial Hospital, Inc., G050286 (4/3 Oct. 30, 2014) (Moore, Rylaarsdam, Thompson) (unpublished), in which the Court of Appeal reverses an order granting a motion to arbitrate, on the grounds that the arbitration agreement is both substantively and procedurally unconscionable.

     Expressing the Court’s perplexity (exasperation?), Justice Moore explains how to draft an enforceable arbitration agreement:

     We are, frankly, perplexed that we continue to see arbitration agreements such as this one. The years since Armendariz have produced a veritable flood of cases about arbitration between employers and employees. Employers should be well aware by now that to insulate their agreements from unconscionability claims, particularly when they are adhesive contracts, there is a simple list of do’s and don’ts. The arbitration agreement should be conspicuous (and preferably labeled as such, in a document separate from a lengthy handbook). The document should be written in plain English, attach or make readily available all referenced documents, be fundamentally fair and mutual, and in all respects abide by the guidance provided in Armendariz. Further, employers should give the employee a meaningful opportunity to review the agreement and decide whether to sign it (meaning a day or two rather than a minute or two). We do not understand why any of this is particularly difficult or challenging for employers, and yet time and time again, our courts see cases with confusing, convoluted and fundamentally unfair employer/employee arbitration schemes that are deemed unconscionable and unenforceable.

Vacatur: Arbitrator’s Consideration Of Theory Allegedly Not Asserted In Complaint Was No Ground To Vacate Award

Arbitrator Did Not Exceed Powers Or Commit Misconduct.

     We see many cases in which a party seeks to vacate an award on the grounds the arbitrator exceeded his or her powers.  This is usually an uphill battle, as it was in our next case.

     The plaintiff received an arbitrator’s award in the amount of $524,069.86 for architectural services, and confirmed the award.  Defendants contended the trial court erred in declining to vacate the award, and appealed. Dighe v. Dutt, B248363 (2/1 Oct. 29, 2014) (Chavez, Boren, Hoffstadt) (unpublished).

     Appellants argued that the trial court erred in determining the arbitrator didn’t exceed his powers in granting the award based on a theory of implied-in-fact contract, when no such theory was asserted in the complaint, and furthermore, and also argued that the arbitrator’s act of considering the unpleaded theory constituted misconduct under CCP 1286.2(a)(3).  The Court of Appeal rejected appellant’s arguments.

     The arbitration clause was brought enough to include claims “arising out of or relating to” the agreement – language broad enough to include an implied-in-fact agreement.  And the complaint sought money owed for professional services – a claim not necessarily limited to the written contracts.  As for the “misconduct” argument, the Court of Appeal observed, “[a]ppellants cite no authority. . . “

     Affirmed.

Nonsignatories: Nonsignatories Are Unable To Take Advantage Of Arbitration Agreement Where There Is No Evidence Identifying Person With Whom Plaintiff Allegedly Contracted

It Helps To Be Able To Identify The Parties To An Arbitration Agreement !

     As the next case illustrates, sometimes the basics can trip one up when it comes to enforcing an arbitration agreement.

     Plaintiff filed a complaint alleging medical malpractice related to her sister’s death after lap band surgery.  Defendants – a surgical center and physicians – moved to arbitrate, alleging they were “contracting parties and/or third party beneficiaries and/or alleged agents.”  The trial court denied the motion, and defendants appealed.  Pelter v. 1 – 800 – Get-Thin, LLC, B250124 (2/1 Oct. 28, 2014) (Johnson, Rothschild, Chaney) (unpublished).

     Defendants’ problem was that only the decedent signed the arbitration agreement.  Now sometimes a party who has not signed can enforce an agreement against a party who has signed.  Here, however, the agreement did not clearly identify the parties:  “there is no evidence identifying the person or entity with whom [the decedent] allegedly contracted.”  And that made it impossible for the nonsignatory defendants to show they were entitled to enforce as third party beneficiaries or agents of . . . of whom?  That’s the problem.

     Affirmed.

     NOTE:  On June 11, 2014, I blogged about another case, Prewitt v. 1-800-Get-Thin, LLC, in which the 2nd District, Division 7, upheld the denial of a petition to arbitrate, based on delay and prejudice.

PAGA: Brown v. Superior Court Redux–6th District Again Concludes Plaintiffs Cannot Be Compelled To Waive PAGA Claim

Result Follows Iskanian, And Court Of Appeal’s Disposition Provides Trial Court With Roadmap For Trying The PAGA Claim.

     The Supreme Court directed the 6th District to vacate its previous decision in Brown v. Superior Court, 216 Cal.App.4th 1302 (2013), and to reconsider in light of Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).  Earlier, the 6th District had held that class action waivers of Private Attorneys General Act of 2004 claims are unenforceable, because the waivers prevent “the exercise of a statutory right intended for a predominantly public purpose,”  and no case had held that the Federal Arbitration Act requires enforcement of such agreements.  Thus, the 6th District was in accord with the conclusion in Iskanian.

     The Court of Appeal answers now three questions in Brown v. Superior Court, H037271 (6th Dist. Oct. 24, 2014) (Premo, Rushing, Elia) (unpublished):

     1.  Did the defendant employer waive its right to compel arbitration by failing to move to compel arbitration until after Concepcion was decided?  Answer:  No.

     2.  Is the class action waiver preempted by the collective-action requirement of the National Labor Relations Act?  Answer:  No – following Iskanian.

     3.  Does Concepcion permit arbitration agreements to override the statutory right to bring representative claims under the PAGA?  Answer:  No.

     The disposition of the case, vacating the superior court’s order and requiring entry of a new order, is interesting, because it is a reminder that after it is determined that the class action waiver is ineffective as to the PAGA claims, a decision still needs to be made as to whether the claims will be tried by a judge or by an arbitrator.

      Thus, the Court of Appeal directs the superior court to “enter a new order after determining (1) whether the parties would prefer to resolve the representative PAGA claim through arbitration; (2) if not, whether it is appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation; and (3) if such bifurcation occurs, whether the arbitration should be stayed pursuant to Code of Civil Procedure section 1281.2.”

     Decisions, decisions.

     See my earlier posts on Iskanian and on Brown.

Waiver/Agents/FINRA: 4th District, Division 3 Affirms Denial Of Petition To Compel Arbitration In One Case, And Reverses Denial Of Motion To Compel Arbitration In Another

Waiver Of Arbitration Results In Affirmance Of Denial Of Petition To Arbitrate.

    The Court of Appeal affirmed denial of a petition to compel arbitration, finding substantial evidence to support appellant’s waiver of a right to arbitrate its dispute.  LPT Properties, LLC v. Wystein Opportunity Fund, LLC et al., G048803 (4/3 Oct. 21, 2014) (Fybel, O’Leary, Rylaarsdam) (unpublished).  Nearly a year had elapsed between the date the buyer sued the seller, alleging undisclosed defects in real property, and the date seller petitioned to compel arbitration.  During that year, the seller had answered a cross-complaint without raising arbitration as a defense, demurred without mentioning arbitration, represented they needed the trial to be continued because of case complexity, and conducted discovery to gain information that could not be obtained during arbitration. 

Denial Of Motion To Compel Arbitration Is Reversed, Because Agent Of Defunct Securities Brokerage Firm Is Entitled To Invoke Arbitration Clause, Even If Defunct Firm Could Not.

     A securities brokerage firm member governed by the Financial Industry Regulatory Authority (FINRA) is not entitled to invoke a FINRA arbitration clause once the firm becomes defunct.  FINRA Rule 12202.  However, Ronay Family Limited Partnership v. Tweed, 216 Cal.App.4th 830 (2013) (Ronay), the subject of my May 28, 2013 blog post, does allow the agent or third party beneficiary of a defunct member to take advantage of the arbitration provision.

     In Susoeff v. Michie, G048578 (4/3 Oct. 23, 2014) (O’Leary, Moore, Thompson) (unpublished), the trial court denied the motion to compel arbitration, brought by Michie, an agent of the defunct securities brokerage firm Welton Street Investments, LLC.  Ronay required reversal.  As an agent of Welton Street, Michie could successfully compel arbitration under the arbitration clause between the defunct firm and plaintiffs/respondents.

Mediation/Confidentiality: Potential Error Admitting Evidence Subject To Mediation Confidentiality Was Harmless

Also, Settlement Documents May Be Admitted For Purposes Other Than Proving Liability.

     While documents subject to the mediation privilege may be inadmissible as evidence, an error in admitting the documents into evidence will not matter to the Court of Appeal, if admission of the evidence resulted in harmless error.  That was the case in Lofton v. Wells Fargo Home Mortgage, Case No. A136626 (1/3 Oct. 22, 2014) (Siggins, McGuiness, Jenkins) (certified for publication).

     Initiative Legal Group, APC (ILG) objected to a TRO freezing funds from a class action settlement while the trial court sorted out problems with the settlement.  One of ILG’s contentions was that the trial court erred by relying on inadmissible evidence subject to mediation confidentiality.  The Court of Appeal, however, brushed off this contention on the ground that “any potential error was harmless in light of the substantial admissible evidence before the court supporting its issuance of the TRO.”  The admissible evidence included attorney letters to clients, an attorney declaration, and the record of settlement approval proceedings in the class action.

     Furthermore, attorney letters related to settlement were not being introduced to establish the attorney’s liability for any loss, “but rather to establish the risk of imminent harm that would justify issuance of the TRO.”  The Court reminds us that Evid. Code section 1152 is not an absolute bar to introducing settlement documents, because such documents may be admissible for purposes other than proving liability.

     The case is a wild one involving a bungled class action settlement and the disbursement of settlement funds to clients and attorneys.  It makes for interesting reading, and is the subject of a post today on California Attorney’s Fees.

Arbitration/Vacatur/Public Policy: Arbitrator Did Not Exceed Powers By Not Providing For Greater Inspection Of Documents

Arbitrator Did Not Exceed Jurisdiction Because Awards Ruling On Access To Records Did Not Violate Public Policy.

     Sometimes the Court’s weariness with a dispute drips onto the page as in this description of an appeal from judgments entered after the trial court denied petitions “to vacate the most recent arbitration awards in a decade-long dispute pitting plaintiff against his brothers . . . “  One can hear the justices collectively sigh in a footnote reciting that the arbitrator “had issued awards concerning the parties in July 2005, September 2006, August 2008, May 2009, July 2010, and March 2011.”

     Plaintiff had filed two petitions to vacate two 2012 awards. Plaintiff’s petitions failed, and so plaintiff appealed. The plaintiff’s chief argument on appeal was that the arbitrator had exceeded its powers by denying him a right to a complete review and inspection of records of various business entities. 

     However, the parties had submitted their entire dispute to the arbitrator, agreeing to arbitrate the disclosure of the entities’ documents.  The submission agreement also covered future disputes over access to documents.  And “parties may submit for decision issues they were not contractually compelled to submit to arbitration,” in which event courts look to “both the contract and to the scope of the submissions to determine the arbitrator’s authority.”  Porter v. Golden Eagle Ins. Co., 43 Cal. App.4th 1282, 1291 (1996).  By submitting the access issue to the arbitrator in 2009, the plaintiff recognized the arbitrator’s ongoing jurisdiction over the entities’ document production obligation.

     Plaintiff had one last argument:  failure to allow further access to documentation ran contrary to public policy, and therefore provided a ground for vacating the arbitrator’s award.  Not so, said the Court of Appeal – plaintiff had been receiving copies, and whether he received copies or originals was not a public policy issue. 

     The Court of Appeal also noted that “plaintiff cites us to no case or statute that makes an ‘explicit expression of public policy’ “ behind the Corporation Code’s requirements of access to books and records.  Perhaps so, though you and I can probably think of a host of public policy reasons for requiring that shareholders and partners shoud have access to business records. 

      The affirmance was penned by Justice Aldrich.  Soroudi v. Heritage Group Associates, B245590 (2/3 Oct. 21, 2014) (unpublished).  

      NOTE:  This is the second time I have reported on a case in which the arbitral forum was a Beth Din, a Jewish rabbinical court.

News: Gang Member Hacked To Death At So-Called “Mediation”

A Failed Mediation:  Report from The Times of India

     In what is described as “a scene straight out of a curry western,” in the October 13, 2014 edition of The Times of India, rival gang members met at a gym in South-east Bangalore for a “mediation,” but “soon things started falling apart.”  One group drew its weapons, and the other, seriously outnumbered, “suffered serious injuries, while Nakhra was hacked repeatedly till he died on the spot.”  The gym owner absconded, “raising suspicion that he set up” the victim for his rivals.  A senior police officer opined that “[t]he mediation was just a pretext” providing an opportunity to “strike with precision.”

     Apparently the participants failed to follow JAMS or AAA rules for choosing a neutral mediator.

Court Of Appeal Affirms Order Denying Employee’s Petition To Compel Arbitration And Lays Out Framework For Determining Who Decides Class Arbitration Question And Whether Class Arbitration Is Appropriate

 

Fourth District, Division Three Disagrees With U.S. Supreme Court Decision That Found Class Arbitration Question Is A Procedural Issue For Arbitrators To Decide

     Affirming a trial court’s order denying an employee’s petition to compel class arbitration of his wage and hour claims, the Court of Appeal in Network Capital Funding Corporation v. Papke, G049172 (4/3 Oct. 9, 2014) (Aronson, Bedsworth, Fybel) (published) lays out a neat framework for answering the “Who Should Decide Question” and the “Class Arbitration Question.”

     The Who Should Decide Question. 

     The Court explains that the judge decides “arbitrability” gateway issues, whereas the presumption is that the arbitrator gets to decide “procedural” issues.  The Court rejects the reasoning of a non-binding plurality decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) that the question of whether class arbitration is prohibited is procedural in nature.  Absent a “clear and unmistakable agreement to the contrary,” explains the Court of Appeal, relying on other SCOTUS cases, “it is presumed the parties intended courts, not arbitrators, to decide whether the parties agreed to submit a particular dispute to arbitration.”

     In Network Capital Funding Corporation, the very broad arbitration provision did not “clearly and unmistakably” delegate the gateway issue to the arbitrator, and thus it was for the judge to decide.

     The Class Arbitration Question.

     Under Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  Unfortunately for Papke, the employment agreement with Network Capital Funding Corporation was silent about class action arbitration, and Papke was unable to point to another contractual basis requiring contractual arbitration.

     So here the trial judge correctly decided the “who should decide question” and correctly decided the ultimate issue, whether the the parties’ arbitration agreement allowed Papke to pursue class and representative claims in arbitration (it did not).