California Mediation and Arbitration

HAPPY NEW YEAR 2018 TO ALL OUR READERS !

New Year Resolutions -- Till They Melt !  Punch.  1913.  Library of Congress.

Arbitration, Federal Arbitration Act, Public Policy: 9th Circuit Holds That FAA Does Not Apply To Agreements Between Prosecutors And Citizens Resolving Alleged Criminal Violations

And Such An Agreement  To Arbitrate Disputes Invoking The Criminal Law Would Be Contrary To Public Policy.

        The context for our next case is California's Bad Check Diversion Program (Program), created to relieve California courts of the case overload caused by the criminalization of the writing of bad checks with intent to defraud.  The statutory scheme allows district attorneys to contract with private parties to administer the Program, and participants who are diverted from the courts to the Program are given an opportunity to provide restitution, take a class, and pay fees.  Victim Services, Inc. (VSI) is a private administrator under the Program.  Defendants who elect to participate in the Program are subject to an arbitration provision purporting to be enforceable under the FAA, and entered into between the district attorneys and the private administrator.  

        When plaintiffs sued VSI for violations of state and federal consumer-protection laws, VSI filed an anti-SLAPP motion, and also sought to arbitrate with the only plaintiff who had elected to participate in the Program.  The district court denied the anti-SLAPP motion on the grounds that the case was within the so-called "public interest exception" to an anti-SLAPP motion, and also held that the FAA did not apply to an agreement between a criminal suspect and local authorities about how to resolve a potential state-law criminal violation.  VSI unsuccessfully appealed.  Breazeale v. Victim Services, Nos. 15-16549 & 16-16495 (9th Cir.  12/27/17) (Schroeder, Tallman, Whaley). 

        We focus on the arbitration issue only.

        The FAA applies to private commercial agreements.  Judge Schroeder explains, "[a]gainst this historical backdrop, it is apparent that Congress never contemplated that the FAA would apply to agreements between prosecutors and citizens resolving alleged violations of a state's criminal law."  Therefore, the FAA did not apply to the particular agreement here.

        The Court was left to consider whether California state law required that arbitration be compelled.  On this point, the Court agreed with the district court's ruling "that an agreement to arbitrate disputes invoking the criminal law would be contrary to public policy."

            COMMENT:  There are some situations in which the state's involvement in an arbitration agreement, and state interests, provide a reason to avoid FAA preemption and enforcement of arbitration.  Breazeale is an example of a case in which the state's involvement in the criminal system, something altogether different from a normal commercial transaction, provides a reason to avoid compelling arbitration.  The other outstanding example is provided by Iskanian, dealing with efforts by employers to compel arbitration of Private Attorney General Act of 2004 (PAGA) employee representative actions, brought on behalf of the state, against employers.  The state has an interest in enforcing its labor laws by incentivizing private parties through the qui tam PAGA scheme to enforce the labor laws, and the California Supreme Court has  viewed the state involvement and interest as a reason not to enforce an agreement between the employee and employer to arbitrate PAGA claims. 

Reviews: Ari Berman's "Give Us The Ballot"

Your Blogger Has Authored A Review Of Ari Berman's Book About The Voting Rights Act Of 1965.

        I've written a review of Ari Berman's book, "Give Us The Ballot."  The review, which appears in the latest  issue of California Litigation, The Journal of the California State Bar, is republished here, with the permission of the State Bar.  

           HAT TIP to Professor Justin Levitt at Loyola Law School, Los Angeles, for providing us with a link to his excellent article, The Party Line: Gerrymandering at the Supreme Court, also appearing in California Litigation, Vol. 3, No. 3 (2017).

Arbitration, Discovery, FAA: Ninth Circuit Holds FAA Does Not Grant Arbitrators Power To Order Third Parties To Produce Documents Prior To An Arbitration Hearing

Ninth Circuit Joins Majority Of Circuits On Issue That Divides The Circuits.

        Based on a reading of the "plain meaning" of the Federal Arbitration Act, specifically, 9 U.S.C. section 7, the Ninth Circuit holds:  "[T]he FAA does not grant arbitrators the power to order third parties to produce documents prior to an arbitration hearing."CVS Health Corporation, et al. v. Vividus, LLC, et al., No. 16-16187 (9th Cir.  12/21/17) (Gritzner,¹ Gould, Murguia).  In so holding, the 9th Circuit joins the 2nd, 3rd, and 4th Circuits.

        The 9th Circuit focused on the language in section 9, providing arbitrators the power to "summon in writing any person to attend before them . . . as a witness," and to compel such person "to bring with him or them" relevant documents.  Because the power to summon a person to bring documents is tied to a person who is summoned "to attend" before the arbitrator, the Court read the plain meaning to be that document production only can happen at the arbitrator's hearing.  There is no explicit provision in the FAA for pre-hearing discovery, and the policy rationale is that this places less of a burden on third parties who have not agreed to the jurisdiction of the arbitrator.  

          COMMENT:  The Eighth Circuit takes the  position that the arbitrator has an implicit power to subpoena relevant documents for production pre-hearing, and that such power is implicit in the  power to summon relevant documents for production at a hearing.  

            The Ninth Circuit holding in CVS Health Corporation highlights a limitation in arbitration that will burden the party to the arbitration most in need of discovery from third parties.  Of course, as between the parties to the arbitration, the parties could contractually agree to more expansive discovery, and that would not affect the right of third parties to resist pre-hearing discovery. 

^{1_{The Hon. James. E. Gritzner, USDC Judge for S. District of Iowa, sitting by designation.}}   

Arbitration, PAGA, Appealability: Fourth District, Div. 1 Holds That Trial Court Erred By Bifurcating Underpaid Wages Portion Of PAGA Claim And Ordering Arbitration Of That Part Of Claim

Civil Penalties Or Victim Specific Statutory Damages?

         Lawson v. ZB, N.A. et al., and ZB, N.A., et al. v. Superior Court of San Diego, D071279 & D071376 (4/1  12/19/17) (Benke, Huffman, Haller), is the latest skirmish in the ongoing battle waged between employers and employees over whether Private Attorney General Act of 2004 (PAGA) claims can be arbitrated.    

        The trial court granted appellant ZB, N.A.'s motion to arbitrate, bifurcating an underpaid wages portion of the employee's PAGA claim and ordering arbitration as a representative action of that portion of the claim, brought under Labor Code section 558.  ZB appealed the trial court's order.  Evidently ZB didn't want to deal with a representative action in arbitration, and ZB argued that the employee had waived the right to bring a class or representative action.   In any case, the Court of Appeal held that an order compelling arbitration is not appealable, instead ruling on the issue when raised by way of a petition for a writ of mandate.

        Section 558 of the Labor Code requires payment of underpaid wages, and also provides for civil penalties of $50 for a first violation, and $100 for further violations.  The seemingly dual nature of this Labor Code provision opened the door for ZB to argue that the underpaid wages issue needed to be arbitrated, because it was in the nature of a private claim belonging to the employee, unlike PAGA penalties which are obtained on behalf of the State.  In fact, ZB didn't even ask the trial court to order abitration of the $50 and $100 amounts provided for as penalties in section 558.

        The Court of Appeal now holds that section 558 provides for civil penalties, and "hence claims under section 558, including claims for underpaid wages, are cognizable under the PAGA."  Therefore, the claim for underpaid wages is a claim that the employee cannot waive as a representative action, and cannot be forced to arbitrate.  The Court also explains that section 558 claims do not create an "express right of private enforcement and instead a regulatory agency has been given the right to enforce the statute . . . "  

        So:  (1) the appeal is dismissed; (2) the writ is granted; (3) the order bifurcating the 558 claims and ordering the underpaid wage part to be arbitrated is vacated; (4) the motion to arbitrate is denied.  The result of the writ petition is that the representative PAGA claim, instead of being heard by an arbitrator, will be heard by a judge.

            COMMENT:  We now have a split among the districts, with the Fourth District, Division 1 "respectfully part[ing] company with the view recently expressed by our colleagues in the Fifth District in Esparza v. KS Industries [13 Cal.App. 5th 1228 (2017).  Esparza, the subject of my August 2, 2017 post, held that section 558 wage claims were not a representative action, and therefore could be arbitrated.

Arbitration, Gateway Issues, Delegation: USCA 4th Circuit Holds That Incorporation Of JAMS Rules Delegates Questions Of Arbitrability To Arbitrator

But There Is A Dissent . . . 

        Simply Wireless Inc. v. Mobile US Inc ., Nos. 16-1123, 16-1166 (4th Cir.  12/13/17) resulted in an interesting majority opinion authored by Judge Wynn, with Judge Harris, joining, and a dissent by Judge Floyd.  As a result, I have strayed beyond my usual beat of covering SCOUTS, 9th Circuit, and California arbitration cases, to include this 4th Circuit case.

        The lawsuit arose from a trademark dispute.  T-Mobile relied on a contract with an arbitration clause to seek arbitration.  The relevant features of the arbitration clause were:  (1) it was a broad clause, covering claims or controversies "arising out of or relating to this Agreement"; (2) the clause incorporated JAMS Rules and Procedures; (3) the parties agreed that the Federal Arbitration Act governed arbitrability of disputes.

        The district court agreed that the scope of the arbitration clause was broad enough to include the disputed claims, and dismissed the complaint.

        However, readers of my blawg will know that courts ask whether there is a "clear and unmistakable" delegation to the arbitrator of questions of arbitrability.   Here, two judges on the 4th Circuit panel believed that language covering all claims or controversies "arising out of or relating to this Agreement" was too amorphous to constitute a "clear and unmistakable" delegation to the arbitrator of authority to decide the issue of arbitrability.  Instead, the majority relies upon the incorporation of the JAMS Rules to find "clear and unmistakable intent to let an arbitrator determine the scope of arbitrability."  So the district court erred by determining the arbitrability of the claim itself, when instead it should have allowed the arbitrator to resolve all arbitrability disputes.  

        Judge Floyd, dissenting, believed that the JAMS Rules did not offer clear and unmistakable delegation of the gateway arbitrability issue, because the arbitration clause also referred to the Federal Arbitration Act, which contemplates judicial resolution of the question.  And furthermore, he did not believe that the dispute was one that arose from and was related to the Agreement.

        COMMENT:  This is the type of dispute beloved by law school students and professors.  While Simply Wireless gets another bite of the apple, and can present Judge Floyd's arguments to the arbitrator (or to the Supreme Court), the arbitrator, like the district court judge, might conclude that the dispute falls within the scope of the arbitration clause, and after all the sound and fury, the parties will be back where the district court left them -- in front of the arbitrator.  

        NOTE:  On December 14, 2017, I posted about a California Superior Court ruling concerning whether JAMS Rules delegating the issue of validity to the arbitrator "clearly and unmistakably" delegated the issue of legality.  The superior court judge concluded that the incorporation of the JAMS Rules did not constitute clear and unmistakable intent to delegate the particular issue of legality to the arbitrator.

 

Mediation/Condition Precedent: Fourth District, Division Three, Limits Mediation As A Condition Precedent In A CAR Contract For Fee Recovery

The General Rule In A California Association Of Realtors Purchase And Sale Agreement Requires Participation In Mediation As A Condition For A Prevailing Party To Recover Fees.

        The general rule under the standard CAR purchase and sale agreement requires participating in mediation as a condition precedent for fee recovery.  The rule was explained by Justice Fybel in Frei v. Davey, back in 2004.   Now Justice Fybel has explained a limitation to that rule in Toranji v. Kim, G054111 (4/3  12/15/17) (unpublished).  Shared representation alone does not necessarily mean one who shares representation with others who have rejected mediation has also refused to mediate.  See today's post in California Attorney's Fees.

Arbitration, PAGA: Court Of Appeal Rejects "Law Of The Case" Argument By Employer, And Follows Supreme Court's Decision In Iskanian

Employer Ross Stores, Inc. Had Argued That Law Of The Case Required Trial Judge To Order PAGA Claim To Arbitration.

        In Ross Stores, Inc. v. Superior Court (Rachel Goss, Real Party), A150039 (1/1  12/11/17) (Banke, Margulies, Dondero) (unpublished), the Court of Appeal addressed circumstances in which it had earlier required the arbitrability of representative PAGA claims, the Supreme Court later embraced the contrary view in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), and the employer Ross Stores, Inc. then tried to convince the trial judge that the earlier ruling of the Court of Appeal had become law of the case, requiring arbitration -- notwithstanding Iskanian.

        The trial judge did not buy that argument.  Neither did the Court of Appeal.  

        As did the trial court, the Court of Appeal concluded that an exception to the law of the case doctrine applied:  the intervening-change-in-the-law exception.  And the hands of the trial judge could not be bound by the previous ruling, because the earlier ruling was an unqualified reversal that did not direct the trial court to take any specific action on remand.

        Confused?  The bottom line is that the Court of Appeal applied Iskanian, holding that the PAGA claim could not be arbitrated, and denying a writ of mandate to compel arbitration.

Arbitration, Delegation, Gateway Issues: SF Sup. Ct. Judge Holds Judge, Not Arbitrator, Decides Whether Contract With Arbitration Clause Is Legal

JAMS Clause Delegating Validity Issue To Arbitrator Was Not Clear and Unmistakable Delegation Of Legality Issue.

        Who decides whether an arbitration agreement is part of an enforceable legal services agreement, the judge or the arbitrator?   That was the issue addressed by the Hon. Harold E. Kahn in an "Order Denying Defendants' Petition for Order Compelling Arbitration," filed December 12, 2017 in Marble Bridge Funding Group, Inc. v. Buchalter, et al., CGC-17-560501 (SF Sup. Ct.).  

        The general rule is that the legality of a contract is decided by the court.  Loving & Evans v. Blick, 33 Cal.2d 603 (1949).  But in Marble Bridge Funding Group, Inc. v. Buchalter, the issue of validity was delegated by JAMs rules to the arbitrator.  The court here decided that the delegation of the issue of validity was not a "clear and unmistakable" delegation of the issue of illegality to the arbitrator.  

        The court further ruled that Buchalter had a conflict of interest making the arbitration language in its service agreement unenforceable.  

        COMMENT:  Obviously, conflict checks and waiver agreements are intended to prevent such a problem from ever arising in the first instance.  Perhaps a delegation clause that delegated the issue of illegality to the arbitrator would have also solved the problem, at least, from the standpoint of the party seeking to compel arbitration with language that is "clear and unmistakable".

        HAT TIP to Rebecca M. Coll of Quadra & Coll, LLP, who brought Judge Kahn's order to my attention.  Ms. Coll represented Marble Bridge Funding Group, Inc.

Arbitration, Agents, Nonsignatories, Equitable Estoppel: U-Haul Can't Enforce Arbitration Provision Against Nonsignatory Employee Of Employee Renting Truck

Court Of Appeal Rejects Third-Party Beneficiary, Agency, And Judicial Estoppel Arguments Made By U-Haul.

        Unable to find "any authority addressing precisely analogous circumstances," the Court of Appeal decides a case of first impression in Jensen v. U-Haul Co. of California, E065887 (4/2   12/11/17) (Codrington, McKinster, Slough).  The case involves "an attempt to enforce an arbitration clause in an equipment rental agreement against the nonsignatory employee of the party that rented the equipment."

        Virgil Jensen was injured when the truck his employer rented from U-Haul blew a tire.  Mr. Jensen sued U-Haul for negligence, and Glenda Jensen sued for loss of consortium.  Mr. Jensen had not signed the contract with the arbitration clause with U-Haul, and did not know about the arbitration clause, but his employer had signed the contract.  The general rule is:  "persons are not normally bound by an agreement entered into by a corporation in which they have an interest or are employees."  Suh v. Sup. Ct., 181 Cal.App.4th 1504, 1513 (2010).  Could U-Haul shoehorn the case into an exception that would allow U-Haul to compel arbitration against a nonsignatory?

        Third-party beneficiary.  This exception did not work, because the contract was for the benefit of Mr. Jensen's employer, not for his benefit.

        Agency.  While there is an agency exception, allowing some nonsignatories to be bound by an arbitration provision, the Court finds that in each case where the nonsignatory was bound to arbitrate, the finding "is based on facts that demonstrate, in one way or another, the signatory's implicit authority to act on behalf of the nonsigntory."  The Court did not find the facts warranted a finding here that the employer had implicit authority to bind the employee to arbitrate.

        Equitable estoppel.  This exception comes into play when the nonsignatory asserts claims that are "dependent upon, or inextricably intertwined with" the underlying contractual obligations of the agreement containing the arbitration clause.  However, that was not the case here, because the plaintiffs did not rely on the terms of the rental agreement between the employer and U-Haul to assert their claims.

        So the Court of Appeal affirmed the trial court's denial of U-Haul's motion to compel arbitration.

        COMMENT:  Mr. Jensen was an agent of his employer for some purposes, but that did not mean that the employer had "implicit authority" to bind Mr. Jensen to arbitrate.  This is a very fact-specific finding, because it means that the focus must be not on whether an agency relationship exists (e.g., employer/employee), but on whether one party had "implicit authority" based on all the facts and circumstances, to bind another party to arbitrate.  There is no bright line here:  one must look at the facts and circumstances.  The absence of a bright line may promote fairness at the same time that it engenders litigation.