California Mediation and Arbitration

Enforceability Of Arbitration Clauses – A Spate Of Recent Cases

As Arbitration Clauses Proliferate, So Too Do Motions Concerning Enforcement Of Those Clauses.

    I have not done a statistical study, but it is certainly my perception that in recent years there is more and more law and motion practice concerning the enforceability of arbitration clauses in California courts. First, the clauses have proliferated in contracts. Second, litigators and their clients seem attuned to the fact that it can matter greatly whether the case is tried to a judge, a jury, or an arbitrator.

    Here are some recent examples in support of the proposition:

    Farrar v. Direct Commerce, Inc., A146944 (1/1 3/23/17) (Banke, Humes, Margulies).

    Trial court denied employer's petition to compel arbitration. Reversed and remanded. "While the arbitration provision is one-sided, as it excludes any claims arising from the confidentiality agreement . . . we conclude that offending exception is readily severable and, on this record, should have been severed."

    HPROF, LLC v. Bank of America, N.A., A147748 (1/3 3/21/17) (Pollak, Siggins, Jenkins) (unpublished).

    Trial court's order denying Defendants Bank of America and The Bank of New York Mellon's motion to compel arbitration is affirmed. The Banks waived the right to arbitrate by unreasonably and prejudicially delaying the arbitration. The waiver issue was not clearly delegated by the rules of the AAA to be decided by the arbitrator.

    Karel v. Dicarlo, No. D068443 (4/1 3/17/17) (Benke, Huffman, Haller) (unpublished).

    Trial court's order denying plaintiff Karel's motion to compel arbitration is affirmed. Substantial evidence supported trial court's finding of waiver. Substantial evidence supported findings of express waiver, implied waiver, including delay and prejudice.

    Williams v. Alorica, Inc., No. G052452 (4/3 3/17/17) (Bedsworth, O'Leary, Moore) (unpublished).

    Trial court's order denying employer's petition to compel arbitration is reversed. Trial court ruled employer had not established existence of an agreement to arbitrate. Court of Appeal disagreed: "Williams accepted Alorica's arbitration policy offer by continuing to work past a stated deadline."

    Mohsenin v. Adventure-16, Inc., B262528 (2/2 3/16/17) (Goodman, Ashmann-Gerst, Chavez) (unpublished).

    Trial court's order denying the motion by the employer and similarly aligned employees is reversed as to the employer, and affirmed as to the individual employees. The arbitration agreement between Mohsenin and his employer was not substantively unconscionable: the arbitration agreement was mutual, the fee provision was not substantively unconscionable, and the exclusion of equitable injunctive relief was permissible. Therefore, the employer could compel arbitration. However, the individual employee-appellants who had been sued by Mohsenin were another matter entirely, because they were not third-party beneficiaries of the arbitration agreement. So the employees aligned with the employer could not compel arbitration. .

Arbitration, Appealability: Two Recent Appeals In Arbitration Cases Dismissed For Lack Of Appealability

No Appeal From Order Denying Motion To Vacate Arbitration Award.    

    The Court of Appeal dismissed an appeal without prejudice in Porter v. AG Arcadia, LLC, No. B276183 (2/5 2/28/17) (Turner, Kriegler, Kin) (unpublished). Defendants appealed from an order denying a motion to vacate an arbitration award. The problem? "No appeal may be taken from an order denying a motion to vacate an arbitration award." However, the appeal was not frivolous, because sometimes an appeal can be treated as a writ petition – though here the necessary criteria were lacking.

No Appeal From Judgment That Is Not Final.

    Defendants appealed from a judgment confirming an arbitration award "on one of 27 causes of action." Acquire II, Ltd. V. Colton Real Estate Group, No. G052353 (4/3 2/28/17) (Aronson, Fybel, Ikola) (unpublished). No go. An arbitrator's award that does not determine all the questions presented does not qualify as an award under section 1283.4. Dismissed for lack of jurisdiction, because the trial court's judgment was not final.

Review: Special Report Of New York Law Journal Is About ADR

A Variety Of Articles Discuss Mediation And Arbitration In March 20, 2017 Special Report.

    A March 20, 2016 Special Report of The New York Law Journal covers diverse topics including collaborative divorce, a proposed New York rule that might make arbitration "truly confidential", diversity in ADR, solving interpersonal problems in mediation, preparing for successful mediation, and enforcing foreign arbitral awards against foreign corporations registered to do business in New York.

    The interesting article on the proposed New York rule to make arbitration "truly confidential" turns out to be a bit over-hyped. It is actually about a proposed rule allowing for the sealing of court records containing confidential business information. The proposed rule is not specifically tailored to arbitration, but it might be used to protect the arbitral record at the time one moves to confirm or vacate an arbitration award in court. Generally certain information needs to be disclosed to the trial court to confirm or vacate an arbitration award, and it can be a challenge to keep information confidential that had, up till the court appearance, been kept confidential in arbitration. A statutory rule allowing information to be sealed if it contains confidential business information might offer one solution. If such a rule were to be widely adopted in practice, it would further push arbitration into an alternative legal universe, where there is no published opinion to serve as precedent, and records are sealed in court.

Arbitration, Vacatur, Disclosures: No Violation Of Mandatory Disclosure Requirements By Arbitrator Awarding $7M To Manatt Against Client

Vacating The Award Would Have Required That The Arbitrator Be Actually Aware Of A Ground For Disqualification That The Arbitrator Did Not Disclose.

     ECC Capital, a former client of Manatt, Phelps & Phillips, LLP (Manatt) appealed from a superior court judgment confirming a final arbitration award of almost $7M against ECC and its subsidiary, and in favor of Manatt, for fees, expert expenses, and costs.  ECC Capital Corp. et al. v. Manatt, Phelps & Phillips, LLP, No. B265760 (2/7 2/15/17) (Segal, Zelon, Small). 

     ECC, which had a malpractice dispute with its former attorney Manatt, contended the trial court erred in confirming the arbitrator’s interim award denying ECC’s claims, because the arbitrator violated mandatory disclosure rules governing arbitrations.  ECC raised conflicts issues, including that Manatt had represented Bear Stearns, which was adverse to ECC, and then done transactional work for ECC in a matter involving Bear Stearns, without disclosing the conflict and obtaining a waiver.  ECC also complained that a Manatt attorney had participated in a Uniform Domain Name Dispute Resolution Policy (UDRP) proceeding in which the arbitrator had been a panelist, and the arbitrator failed to disclose his involvement in the UDRP matter.

     ECC commenced arbitration against Manatt in 2010, and apparently did not raise the disqualification issue with the arbitrator until October 2013, after the arbitrator had already deemed Manatt the prevailing party in the arbitration, and before Manatt filed its application for fees and costs.  The arbitrator issued the award, and the trial court confirmed it.

     The meaty issue on appeal was whether the arbitrator violated mandatory disclosure rules.  No, said the Court of Appeal, because Cal. Code Civ. Proc., section 1286.2(a)(6)(A), provides grounds for vacatur where the arbitrator fails to disclose a ground for disqualification “of which the arbitrator was then aware.”  Constructive knowledge does not suffice.  The parties did not dispute that at the time of his disclosures, the arbitrator was not aware a former Manatt lawyer had participated in the UDRP matter.  For good measure, the Court pointed out that as a factual matter, it was not unreasonable for the arbitrator to fail to disclose the UDRP matter, because he had participated in many such matters, such matters may not even qualify as genuine arbitrations, and they typically involve no in-person or telephonic hearings, no witnesses, no discovery, and no contact with the panelist. 

     Various other arguments made by ECC were rejected by the Court as meritless or forfeited.

     The Court did comment, however, “[t]hat it might have been a better arbitrator disclosure practice” for the arbitrator to disclose that he had participated in numerous UDRP proceedings that he did not bother to review, allowing the parties to undertake their own review.  But “a better practice”, absent authority, was no basis for vacating an arbitration award.

     COMMENT:  Arbitrator disclosure issues tend to lose traction when raised late in the game.  Courts like to emphasize that arbitration is final,  binding, and cost-effective.   The Legislature intended “to prevent the undoing of an arbitration award based upon an arbitrator’s unknowing failure to disclose information.”  (quoting Casden Park La Brea Retail LLC v. Ross Dress for Less, Inc., 162 Cal.App.4th 468, 477 (2009)).

          TRIVIA:   Casden Park La Brea Retail LLC successfully convinced the trial court to vacate an arbitration award on the basis that the arbitrator had failed to disclose prior business dealings.  The Court of Appeal agreed with Ross, however,  "that a neutral arbitrator who has no pecuniary interest in profits generated by his employer's business relationship with a party or a party's representative has no substantial business relationship with the party or its representative and, therefore, no duty to disclose such transactions."  Manatt represented Casden Park La Brea Retail LLC in that appeal. 

Arbitration, PAGA, Standard Of Review, FAA: Fourth District Division One Agrees Predispute Arbitration Clause Cannot Be Enforced With A PAGA Claim

The Employee Brought A Single Cause Of Action For PAGA Violations.

    At first blush, Betancourt v. Prudential Overall Supply, E064326 (4/2 March 3, 2017) (Miller, Ramirez, McKinster), another opinion holding that PAGA claims cannot be arbitrated (more about the holding), is unremarkable. However, there are interesting points in the case that help explain why it was worthy for publication.

    First, plaintiff/respondent Betancourt sued for a single cause of action: labor violations of the Private Attorneys General Act (PAGA). Betancourt's single shot approach is testimony to the recognition of plaintiffs' attorneys in employment cases that a carefully pleaded PAGA complaint is likely, for now, to avoid arbitration.

    Second, Betancourt, in his single PAGA- cause complaint, sought remedies that did not fall within a PAGA cause of action. Therefore, the employer argued that the PAGA cause of action was an effort to end-run a standard wage and hour case around the arbitration requirement. This argument did not succeed, with the trial court and the Court of Appeal explaining that the proper procedural step was a motion to strike, not a motion to compel arbitration. Query: if the employer had filed a demurrer or a motion to strike to clarify the complaint, would the employee then have argued that the employer had delayed and waived the right to move to compel arbitration? Yet in proper circumstances, a motion to clarify the complaint would seem proper, and should not necessarily result in a waiver of the right to seek arbitration.

    Third, the trial court did not issue a statement of decision. However, it did say that it was relying upon Iskanian when giving its tentative reasons for denying the motion. The Court of Appeal took this as an indication that the trial court based its ruling on a decision of law, and that therefore the de novo standard of review applied.

    Fourth, the Court agreed that PAGA claims lie outside the Federal Arbitration Act's coverage, because the claim, like a qui tam claim, is essentially between the employer and the state, not between the employer and the employee.

    Fifth, the Court of Appeal considered different interpretations of Iskanian. On the one hand, the employer argued that PAGA does not hold that PAGA claims are exempt from arbitration, only that predispute waivers of the right to bring a representative action are unenforceable, and presumably a representative PAGA action could be brought in arbitration or in court. But the Court interpreted Iskanian broadly to mean that a predispute waiver of the right to bring a representative action is unenforceable because the state cannot be bound by the predispute agreement.

    Sixth, the Court held that FAA preemption did not apply, because it was not ruling that Iskanian required a blanket prohibition against arbitration in PAGA cases, only that "a defendant's reliance on a predispute arbitration agreement to compel arbitration when an employee becomes a type of qui tam plaintiff in a PAGA action" is prohibited. This part of the ruling seems a bit murky to me, because under Supreme Court cases such as Concepcion, it is not clear that a blanket prohibition of arbitration of all PAGA cases would need to occur for FAA preemption to apply – i.e., if a Court believed that arbitration was unduly burdened, that might satisfy one formulation of what FAA preemption requires.

    However, the bottom line is that California state courts are strongly endorsing the view that PAGA claims are, like qui tam actions, really between the state and the employer, and that therefore, predispute arbitration clauses cannot bind the state and compel arbitration of PAGA claims.

    NOTE: Efforts to compel arbitration are sometimes styled as "petitions" and sometimes as "motions." As the Court explains in footnote 2, "petition" is the proper terminology for a document commencing an independent action, whereas "motion" is the proper label for a document filed in an existing action.

Review: Edith Roberts Predicts In Scotusblog That Judge Gorsuch As Justice Gorsuch Will Support Supreme Court Trend Of Robustly Enforcing Arbitration Clauses.

 

Reaching A Result Justice Scalia Would Have Approved By Means He Would Not Have Approved?

    Edith Roberts is the author of a very interesting March 6, 2017 post in Scotusblog about an otherwise bone dry topic, entitled, "Judge Gorsuch's arbitration jurisprudence." Our takeaway: "[A] look at the arbitration rulings Gorsuch has made [on the 10^th Circuit] suggests that he is likely to continue the trend on the court in favor of FAA pre-emption."

    Roberts points out that SCOTUS has agreed to review three consolidated cases asking "whether agreements to forgo class actions or collective proceedings and instead resolve employer-employee disputes through individual arbitration are enforceable under the FAA or whether, as the National Labor Relations Board has held, such agreements violate the National Labor Relations Act." By the time the cases are heard, Judge Gorsuch will likely be Justice Gorsuch. Roberts suggests because Judge Gorsuch, unlike Justice Scalia, does not adhere to Chevron deference to agencies, a future Justice Gorsuch will not hesitate to swat down the NLRB if he believes it exceeds the authority under its enabling statute. The result will be SCOTUS enforcement of FAA preemption and " a muscular interpretation of the FAA – through legal reasoning the late justice might not have endorsed."

    In an article entitled The Politics of Arbitration, I wrote in 2016: "Appointment of a ninth Justice to the Court remains undecided as of the writing of this article. When it is decided, the politics of the appointment process and the next Justice will inevitably impact the polarized politics of arbitration and the outcome of arbitration cases affecting the rights of business owners, consumers, and employees." I also suggested that Morris v. Ernst & Young "could serve as a springboard for sending divergent opinions about the enforceability of arbitration provisions used to prevent 'concerted activity' by employees to the Supreme Court for review." Morris v. Ernst & Young is one of the three consolidated cases that Roberts refers to, and that SCOTUS has agreed to hear. Roberts' instructive post does not bode well for the 9^th Circuit ruling in Morris.

     

    

Review: Article By Marc Is Entitled “Mediating Disputes Among Clients”

A Modest Proposal That Mediation May Be The Best Way To Tackle Disputes Among Clients Who Are Jointly Represented.

    In the latest issue of Orange County Lawyer (March 2017, Vol. 59, No. 3, p. 46), the publication of the Orange County Bar Association, I have written an article entitled, "Mediating Disputes Among Clients." The article suggests that when jointly represented clients have disputes among themselves, mediation may sometimes offer the best solution.

    The article, which is republished with the permission of the Orange County Lawyer, carries the usual disclaimer: "The views expressed herein are those of the author. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched."

 You can read the article by clicking here.

Arbitration, Vacatur: $30 Million Arbitration Award Is Vacated Because Arbitrator Awarded Significant Punitive Damages Without Fair Notice

Case Is A Reminder That Ordinary Constitutional Guarantees Of Due Process Do Not Automatically Exist In Private Arbitration.

    The Court of Appeal's summary of the facts in our next case provides a clear sign that it is headed towards a reversal – the interesting part is how it arrives at its destination.

    Defendant/appellant Stephen Kaplan appealed a judgment confirming a $30 million arbitration award. A substantial portion of the award consisted of punitive damages. The award was 30 times larger than the original arbitration claim, and $20 million larger than the claim in plaintiffs' original complaint. The notice of change in the arbitration claim to $30M came by email one day before the telephonic arbitration default hearing. The defendant Kaplan did not attend the hearing, and was not represented by an attorney. However, Kaplan did seek, unsuccessfully, to vacate the award, and appealed from the judgment confirming the award. Emerald Aero, LLC v. Kaplan, D070579 (4/1 2/28/17) (Haller, McConnell, Huffman).

    The most familiar obstacle to a reversal of a judgment confirming an arbitration award is that mistakes of law or fact are not a basis for reversal. Furthermore, "federal due process restrictions applicable to punitive damages imposed by a jury or trial court . . . do not apply to an arbitrator's punitive damages award. . . . The courts reason that the constitutional due process clause applies only to state action, and arbitration is 'a private proceeding, arranged by contract, without legal compulsion.'" Slip op. at 17-18.

    However, an arbitrator's award may be overturned if the arbitrator exceeds the arbitrator's powers. Here, the Court of Appeal looked to the arbitrator's powers, as derived from applicable AAA rule 6 requiring written notice before a party could materially change its claim – and this is the rule that the Court believed had been violated, believing that attaching a brief to an email less than 24 hours before the merits hearing "did not constitute notice calculated to apprise the opposing party of a new and substantially increased monetary claim, nor did it provide the opposing party with a fair opportunity to assert a challenge to the new punitive damage claim."

    The Court of Appeal also relied on case law recognizing "the fundamental requirement that arbitrations be conducted in a fair and neutral manner." Royal Alliance Associates, Inc. v. Liebhaber, 2 Cal.App.5^th 1092, 1108 (2016).

    COMMENT: An element of due process -- meaningful notice and an opportunity to be heard -- is imported into the arbitration proceeding here by the Court's recognition that an arbitrator exceeds his powers under Cal. Code of Civ. Proc. Section 1286.2(a)(4) by conducting an unfair proceeding that lacked sufficient notice.