California Mediation and Arbitration

Jurisdiction, International Arb, FAA, Standard Of Review: Ninth Circuit Reminds Us Of Its Limited Ability To Fix Things In Arbitration When They Go Wrong To

It Is With A Heavy Heart That A Ninth Circuit Panel Tells Us It Can't Fix A Mess.

        "This award shows in stark terms the real risks that parties assume when they trade away their right to adjudicate their claims in court for the potential efficiencies of arbitration. When, as here, things go wrong, our power to fix them is uncomfortably, but plainly, limited under the FAA." HayDay Farms, Inc. et al. v. FeeDx Holdings, Inc., 21-55650 anhd 21-55698 (9th Cir.  12/19/22) (Smith, Nelson, Drain).

        The underlying arbitration involved a contract dispute between HayDay Farms, Inc. and Nippon Kokusai Agricultural Holdings, Inc., on the one hand, and FeeDx Holdings, Inc., on the other. A panel of three arbitrators, after four years of arbitration, issued a final award in excess of $21 million in favor of HayDay Farms, Inc. and Nippon. The trial court judge then confirmed the award in part, but removed $7 million from the award. On appeal to the Ninth Circuit, FeeDx argued that the award put HayDay and Nippon in a better shape than if both sides had fully performed the contract, something that California Civil Code § 3358 does not allow: "Except as expressly provided by statute, no person can recover a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides." That was the justification for the district court's decision to remove the $7 million component of the award.

        Before it could address the merits, the Court of Appeals had to address its jurisdiction. HayDay and Nippon had sought to confirm the award in state court, and FeeDx had removed the proceeding to federal court, purportedly under diversity jurisdiction. The federal district court did not address its jurisdiction. In fact, complete diversity was lacking, because a California, Samoa, and Cayman Island corporation were involved, and diversity jurisdiction does not apply to a foreign entity suing a foreign entity. But the Court of Appeals, analyzing its own jurisdiction, found the trial court's jurisdiction to lie in 9 USC § 203, which provides that an action or proceeding falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards shall be deemed to arise under the laws and treaties of the United States. And if the district court had jurisdiction, then the Court of Appeals had jurisdiction under 9 USC § 16 and 28 USC § 1291.

        Next, the Ninth Circuit had to address a question of first impression in its own circuit: whether the standards for vacatur in the Federal Arbitration Act applied for awards governed by the Convention, when the Convention did not specifically say so. Agreeing with other circuits, the Ninth Circuit held that the FAA standards did apply. And the standard, expressed in different ways, is exceedingly tough.

        A plausible interpretation of the contract cannot be overturned. An award that is manifestly irrational and completely disregards the law can be overturned under FAA standards. The "irrationality standard 'is extremely narrow and is satisfied only where the arbitration decision fails to draw its essence from the agreement.'" Does the decision fail to draw its essence from the agreement? Have we entered the realm of the metaphysical?

        In any case, the Court of Appeal held that the arbitral decision was not irrational, and thus it affirmed the award, while reversing the district court, which had removed $7 million from the award.

        And yet it seems to have done so with some pain. Judge Milan wrote that the losing party, FeeDx, "probably offers the best interpretation of the parties’ agreements . . .", while he assures us that the award "was not some form of vigilante justice . . . " And, he wrote, "We share the district court's concern about a seemingly unfair damages award that likely violate § 3358." 

        Small consolation for the losing party. However, these were sophisticated parties that agreed to arbitrate

Employment, Uncionscionability, Delegation: Fourth Dist. Div. 3 Agrees With Trial Court That Arbitration Agreement Is Unconscionable

Ambiguous And Unconscionable.

        The threshold question in Bernell Gregory Beco v. Fast Auto Loans, Inc., G059382 (4/3  12/14/22) (Moore, Bedsworth, Sanchez) was whether the court or the arbitrator should determine the issue of arbitrability. The arbitration agreement included a delegation provision stating that covered: "any dispute concerning the arbitrability of any such controversy or claims." The Court of Appeal held that the provision was ambiguous at best, because "arbitrability" here could refer to deciding to the arbitrability of a substantive claim, rather than to who should decide the issue of arbitrability. Therefore, the delegation of the question "who should decide" was not "clear and unmistakable," the standard for finding a valid delegation of decision-making authority to the arbitrator. Nor did incorporation by reference of AAA rules concerning arbitrability help here, because the the court concluded that Mr. Beco, an employee of a payday lender¹ who earned $13.50 per hours, was not a legally sophisticated person who should be charged with knowledge of the incorporated rules.

        The court's analysis that the arbitration provisions were procedurally and substantively "unconscionable" is unremarkable. Well, perhaps the following is worth remarking: the court found that a three-month period allotted to the employee to provide notice of a claim was "particularly onerous."

¹A US government website defines "payday loan" as follows: "While there is no set definition of a payday loan, it is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday. Depending on your state law, payday loans may be available through storefront payday lenders or online."

Arbitration: Setoff In Arbitration Award That Affected 3d Party Could Not Be Corrected By Trial Court

Can A Merits Award In Arbitration That Affects Rights Of Third Party Who Did Not Participate In Arbitration Be Corrected?

        The majority opinion in E-Commerce Lighting, Inc. v. E-Commerce Trade LLC, E074525 (4/1  12/9/22) (Raphael, Ramirez; dsst. Mentrez), answered the above question with a "no", reversing the trial judge. Judge Menetrez, dissenting, answered "yes," under circumstances where the he believed the award could be corrected without affecting the merits.

        Trade purchased ECL's assets for $11.5, financing the asset sale with several loans.

        After the sale, E-Commerce Lighting, Inc. (ECL) and E-Commerce Trade LLC (Trade) arbitrated competing claims. The arbitrator's award setoff the claims against each other: $2,756.635.66 in favor of ECL and $2,611,463.58, yielding an award in favor of ECL of $145,172.08. 

        Trade then convinced the trial court that the setoff needed to be corrected, because it affected the rights of third party lenders who did not participate in the arbitration. The trial court agreed.

        The Court of Appeal reversed, explaining that while an award on the merits could be corrected if it did not affect the merits, here, correction would affect the merits award.

        Judge Menetrez disagreed, agreeing with the trial court that the arbitrator had exceeded the arbitrator's powers by issuing an award that affected the rights of third party lenders, including their security interest. Also, he argued that the award could be corrected without affecting the merits by simply removing the setoff.

        COMMENT: This is an interesting case, and given the dissent, we will monitor to see whether there is an appeal.

Arbitration, Equitable Estoppel: Non-Signatory Plaintiffs Are Not Required By Equitable Estoppel To Arbitrate

First District Division 1 Explains What Will And What Will Not Result In Equitable Estoppel Requiring Non-Signatory To Arbitrate.

        After plaintiffs in coordinated cases hired the Fertility Center (Pacific) to provide fertility-related services, a tank used by Pacific to freeze eggs failed. The tank was manufactured by Chart, Inc., (Chart), and sold to Pacific by Praxair, which also helped with installation. Plaintiffs' contract with Pacific included an arbitration provision, and thus plaintiffs agreed to arbitrate claims with Pacific. Naturally, defendants Chart and Praxair tried to piggyback onto Pacific's arbitration agreement. Though Chart and Praxair were non-signatories to the arbitration agreement, they argued that plaintiffs were equitably estopped from refusing to arbitrate. Both the trial court and the Court of Appeal rejected Chart's and Praxair's effort to compel arbitration. Pacific Fertility Cases, A158155 (1/1  pub. 12/1/22) (Banke, Margulies, Devine).

        Chart and Praxair argued that but for plaintiffs' contract with Pacific, their claim against Chart and Praxair would never have arisen. The case is helpful because it explains that this "but-for test" is insufficient to establish equitable estoppel. In explaining why the "but-for test" was insufficient, Justice Banke distinguished the situation from that in a case in which consumers had sued Apple and AT&T for allegedly conniving to get consumers to subscribe to a network and buy an Apple phone that could not be used properly with the network. In the case involving Apple, the court had found that the consumers were equitably estopped from refusing to arbitrate. 

        Here, however, the situation was different: "[A]s the court correctly stated, the analysis is not a simple 'but for' test, but whether plaintiffs’ claims demonstrate ' "actual reliance on the terms of the [Pacific] agreement[s] to impose liability." '  Plaintiffs’ claims against Chart and Praxair do not rely on the terms of their agreements with Pacific.  Nor do plaintiffs allege concerted action or an ongoing relationship among Pacific, Praxair, and Chart.  Thus, the circumstances here are distinguishable from those in Appel II."

Arbitration, PAGA, FAA, Delegation: Second District Div. 8 Holds That Viking River Cruises Requires Reversal Of Order That Denied Motion To Compel Arbitration

Court Holds That Viking River Cruises Requires Enforcement Of Pre-Dispute Arbitration Agreement.

        Judge Harutunian explains that the trial court "understandably" denied the employer's motion to compel arbitration based on a rule in California that "predispute agreements to arbitrate PAGA claims are unenforceable." He concludes: "We hold that this rule cannot survive the U.S. Supreme Court’s recent decision in Viking River Cruises, Inc. v. Moriana (2022) ___U.S.___ [142 S.Ct. 1906] (Viking River)." Sylvester Lewis v. Simplified Labor Staffing, B312871 (2/8  12/5/22) (Harutunian, Stratton, Grimes).  

        However, because the AAA rules delegate the issue to the arbitrator, the arbitrator, rather than the court, must decide the scope of the arbitration agreement, specifically, whether non-individual PAGA claims are arbitrable in the same way that individual PAGA claims are arbitrable.

        COMMENT: The opinion rejects what Judge Harutunian describes as the "State-must-consent" rule. Cases that held pre-dispute agreements to arbitrate PAGA claims were unenforceable reasoned that the PAGA dispute was between the employer and the state, and thus the employee could not agree to arbitrate until a dispute arose and the employee was "delegated" by the state to pursue the PAGA claim on behalf of the state. But Viking River allows the employer and employee to enter into a pre-dispute arbitration agreement to arbitrate the employee's PAGA claim. So Viking River destroys the reasoning behind the "State-must-consent" rule, though it does not explicitly name such a rule. In any case, Judge Harutunian concludes that the rule is preempted by the FAA, because state law that withdraws the power to enforce an arbitration agreement is preempted.

Employers Take Heed: Promptly Pay Arbitration Fees Or Lose The Right To Arbitrate.

        California Code of Civil Procedure, sections 1281.97 and 1281.98 provide that if a company or business that drafts an arbitration agreement does not pay arbitration fees within 30 days of when fees are due, the company or business is in material breach of the agreement. The consequences are serious, as an employee or consumer can withdraw from arbitration and proceed to court. 

        That was the situation in Kail De Leon v. Juanita's Foods, B315394 (2/3  11/23/22) (Edmon, Egerton, Richards (Anne.K.)). Following the commencement of arbitration proceedings, De Leon's employer failed to timely pay fees. As a consequence, the trial court held that there was a material breach, and allowed De Leon to proceed with his claims in court.

        The upshot was that, despite various efforts by the employer to argue that De Leon was not prejudiced by a delay, the Court of Appeal affirmed the order granting De Leon's motion to vacate the order compelling arbitration. In sum, the Court of Appeal strictly applies §§ 1281.97 and 1281.98. It does not read in to the statutory language "but there was no prejudice" or other excuses.

        COMMENT: When the language of a statute is clear, the task of statutory interpretation is (usually) straightforward. As I wrote in a previous post dated 10/3/22 concerning the same statutory requirement, "Substantial Compliance With CCP § 1281.97 Just Won't Cut It."

Unconscionability, PAGA, 1281.2, FAA: CCA 2nd Dist. Div. 6 Holds Iskanian Survives, Sort Of

Court Of Appeals Affirms Denial Of Motion To Compel Arbitration.

 

It's alive, it's alive !

        We harbor the suspicion that Navas v. Fresh Venture Foods, LLC, B31288A (2/6  11/21/22) (Gilbert, Yegan, Perren), was published so that the Court of Appeal could tell us that while Viking River Cruises v. Moriana overrules Iskanian, to the extent that Iskanian does not allow PAGA claims to be split between individual and representantive claims, "Nevertheless, Iskanian still survives."

        Navas, Lopez, and Ramos sued their employer FVF for various wage and hour violations, including a PAGA claim. The trial court denied FVF's motion to compel arbitration. It held that the employer had not proved that Lopez and Ramos had signed the agreement. As to Navas, the court ruled his agreement was unconscionable. The employer appealed.,

        The Court of Appeal agreed that there was a lack of sufficient evidence to establish that Lopez and Ramos signed the employment agreement. The Court also agreed that Navas' agreement was unconscionable.

        The comments about PAGA are most interesting. The Court explains that in Viking River Cruises, "the United States Supreme Court held 'the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.'" In Viking, the trial court refused to allow arbitration of the individual claim because it could not be split from the representative claim. Under Viking, the employer and employee can agree to arbitrate an individual PAGA claim.

        In Navas, however, the Court of Appeal concludes that though an individual PAGA claim can be arbitrated by agreement, here, the employer failed to observe standards required for a purported waiver of a PAGA claim by the employee. The employer failed to explain the employee waiver to a Spanish-speaking employee and to obtain the employee's consent to waiver of the right to bring a PAGA claim in court. So here the employee will be able to bring individual and representative PAGA claims in court.

        COMMENT: The trial court also stayed the arbitration pending litigation, relying on CCP §1281.2. There is no provision in the Federal Arbitration Act like 1281.2, so defendant argued that the stay was preempted by the FAA, which required the arbitration to go forward. However, the Court of Appeal explains that while the agreement incorporated FAA law, it also incorporated California civil procedure, and California procedure had not been preempted by a reference to FAA law.