California Mediation and Arbitration

Arbitration: Choice of Law; Standard of Review: Arbitrator’s Award Of $183,000 In Allocated Fees To One Successful Defendant In Joint Defense Arrangement And Trial Court’s $21,000 In Post-Arbitration Fees To All Defendants Were Proper

Losing Plaintiff Claimed Arbitration Award Was “Manifest Disregard Of Law,” But This Was A Federal Standard Rather Than The More Limited State Standard Applicable To Review Of Arbitration Awards.

            HUB International Ins. Services v. Morales, Case No. E067095 (4th Dist., Div. 2 June 14, 2018) (unpublished) was an imbroglio involving non-interference, non-solicitation, confidential disclosure, and non-recruit provisions in certain documents between employees and an insurance company, triggered once certain employees departed and went to work for a rival insurance company. The pertinent agreements had arbitration clauses under California law, with the signatories waiving appeal rights. The real dispute was between the insurance companies, but all parties stipulated to arbitration even though some parties had agreed to contractually arbitrate previously.

            The arbitrator found against plaintiff and in favor of defendants. The thrust of the arbitrator’s decision was that a liquidated damages clause for breach of the pertinent agreements was unenforceable given that plaintiff would not introduce lost profits evidence so to allow the arbitrator to gauge whether the liquidated damages were reasonable in relation to actual damages. The arbitrator then ordered that defendant Morales recover prevailing party fees of $183,000, with the trial judge affirming the arbitration award and then further ordering that all defendants obtain post-arbitration fees of $21,000.

            Plaintiff challenged the arbitration award on the merits and on the $183,000 fee award, but none of those challenges resonated with the 4/2 DCA.

            Although the arbitrator actually did allocate out the fees attributable to arbitration efforts for the rival insurance company, plaintiff’s challenge that the arbitrator made a “manifest disregard of law” was incorrect. This was a federal criterion challenge under the FAA, not a state challenge which does not generally allow challenges to the merits of an award—especially given that the signatories to the arbitration agreement and arbitration stipulation agreed California law would apply. (Siegel v. Prudential Ins. Co., 67 Cal.App.4^th 1270, 1280, 1290 (1998).) Also, the parties did waive the right to appeal, but the appellate court construed this as waiving appellate rights except on the limited grounds applicable under the California appellate restrictions relating to arbitration awards. (Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4^th 1334, 1358 (2000).)

Arbitration/Unconscionability/Severability/Choice Of Law: CCA 1/1 Holds That Arbitration Provision Is Not Unconscionable Under Washington State Law

Washington And California State Law Unconscionability Analysis Are Different.

        DeGraff v. Perkins Coie California P.C. et al., A148405 (1/1  2/21/18) (Dondero, Humes, Banke ) (unpublished) applies Washington state law to analyze the enforceability of an arbitration provision in a dispute between an attorney and his former law firm.  Reversing the order denying the defendants' motion to compel arbitration, the Court holds that, except for two provisions, the arbitration provision is not unconscionable, and the two unconscionable provisions can be severed.

        An interesting aspect of the opinion is that it underscores how unconscionability analysis can differ from state to state.  California requires procedural and substantive unconscionability to overturn an arbitration agreement, and those two factors may be considered on a sliding scale.  "Under Washington law, an agreement may be invalidated if it is either substantively or procedurally unconscionable." 

        The Court of Appeal agreed with the trial court that the confidentiality provision providing that the arbitration "shall be strictly confidential" was substantively unconscionable under Washington state law, but also held that it could be severed.  Relying on a Washington case, Zuver v. Airtouch Communications, Inc., 153 Wn.2d 293 (2004), the Court of Appeal agreed that under Washington state law, the confidentiality provision only benefited the employer, hampered an employee's ability to prove a pattern of discrimination or take advantage of past arbitrations, and undermined an employee's confidence in the fairness and honesty of the arbitration process.  That's Washington state law, and the reasoning is worthy of consideration.  However, I could also see a California state court brushing such considerations aside, and instead saying that the provision applied to both parties, that the contract had been signed by a seasoned attorney, that confidentiality could benefit either side (or maybe that compelling business reasons allow for confidentiality) and holding that the confidentiality provision is not unconscionable. 

        

Choice Of Law, Employment, Unconscionability: Concluding That Arbitration Agreement Was Not Unconscionable Under Alabama Law, Third District Reverses Trial Court's Order Denying Employer's Petition To Compel Former Employees To Arbitrate

Arbitration Agreement Included Alabama Choice Of Law Provision.

Alabama State Flag.

        When former employees, who were hired as temporary claim adjusters, sued the insurance company that had hired them in a class action complaint alleging various employment violations, the California trial court agreed that the arbitration agreement was unconscionable.  Analyzing the trial court's order under Alabama law, the Court of Appeal reversed and remanded, finding no unconscionability.  Quiroz et al. v. E.A. Renfroe & Company, Inc., C082316 (3rd Dist. 7/26/17) (Renner, Mauro, Hoch) (unpublished).

        The agreement had an Alabama choice of law provision.  While Alabama law, like California law, provides that the party objecting to arbitration must show both procedural and substantive unconscionability, it appears that Alabama case law may make it a little harder for an employee to establish unconscionability.  In any case, I wouldn't overthink this.  Perhaps by design, the opinion quarantines its ruling by referring twenty-one (21) times to Alabama law, and by leaving the case unpublished.

        COMMENT:  Alabama law includes a colorful definition of unconscionability.  "Under Alabama law, '[a]n unconscionable contract or contractual provision is defined as a contract or provision "such as no man in his sense and not under delusion would make on the one hand, and as no honest and fair man would accept on the other."'"

Arbitration/Homeowners/References/FAA: Fifth District Affirms Order Denying Motion To Compel Arbitration In Construction Defect Lawsuit

The Key:  Close Reading Of Provision Providing For Arbitration If Reference Became “Legally Unavailable.” 

      The short but interesting opinion in Freeman v. Froehlich Signature Homes, Inc., F073374 (5th Dist. 12/15/16) (Levy, Gomes, Kane) (unpublished), merits close reading, because it reads like a finely-worded exam question.

     In a construction defect lawsuit, the trial court considered plaintiffs/homeowners’ motion to compel a judicial reference with a developer against the backdrop of a CC&R requirement that disputes be resolved by judicial reference but, “if ‘for any reason the judicial reference procedures . . . are legally unavailable at the time a dispute would otherwise be referred to judicial reference, then such dispute shall be submitted to binding arbitration.’” 

     At first blush, a motion for judicial reference would seem appropriate.  Not so fast, said the trial court:  another case involving the same development project was pending, and a reference might negatively impact judicial economy.  So the trial court, in the exercise of judicial discretion, denied the motion for judicial reference – but without prejudice.

     Therefore, plaintiffs’ attorneys took the next logical step, and moved to compel arbitration.  After all, the court had denied their request for a judicial reference. However, the motion to compel arbitration was also denied.  Plaintiffs appealed.

     The Court of Appeal upheld the order denying the motion to compel arbitration, because the denial of a reference without prejudice did not make a reference legally unavailable.

     COMMENT:  Sometimes timing is everything.  This outcome does not foreclose plaintiffs from getting a reference or an arbitration.  The trial court ordered the cases consolidated, noting that, “motions for judicial reference, and when appropriate, motions [to] compel arbitration may be renoticed.”  So another round of law and motion can be anticipated.  Nothing prevents plaintiffs from moving again for a reference, and in the alternative, arbitration,

      This is a case in which the application of the Federal Arbitration Act makes a real difference, because if California law applies, the trial court could stay a reference or stay arbitration to avoid results inconsistent with a pending court case.  Here, the Court of Appeal concluded that the FAA applies – not because interstate commerce was involved, but because the dispute resolution provision expressly provided for application of the FAA.    In this case, the preemptive effect of the FAA sweeps away inconsistent California law that would otherwise give the trial judge more discretion to deny a reference or to deny arbitration.  Let’s see what happens after the inevitable “next round.”

Choice of Law; Delegation: Delegation Clause And Agreement Arbitration Disabling Application Of California Law In Employment Dispute Are Found To Be Substantively Unconscionable

“Exotic” Choice Of Law Clause Is The Key To This Case.

     Stained glass in Neiman Marcus store, San Francisco.  Carol M. Highsmith, photographer.  2012.  Library of Congress.

     Neiman Marcus drafted an ingenious choice of law clause that the First District, Division Four, describes as “exotic” – perhaps a euphemism for “too clever by half”, because it ultimately led the Court of Appeal to find the arbitration agreement unconscionable in an employee-employer putative class action/wage-hour dispute.  Pinela v. Neiman Marcus Group, Inc., A137520 (1/4 June 29, 2015) (Streeter, Reardon, Rivera).

     The choice of law clause provided Texas law applied, “except that for claims or defenses arising under federal law, the arbitrator shall follow the substantive law as set forth by the United States Supreme Court and the United States Court of Appeals for the Fifth Circuit.  The arbitrator does not have the authority to enlarge, add to, subtract from, disregard, or . . . otherwise alter the parties’ rights under such laws, except to the extent set forth herein.”  The agreement also included a broad delegation provision allowing the arbitrator to decide pretty much any disputed issue. 

     Ordinarily an agreement can specify choice of law and delegate decisions to the arbitrator.  Indeed, typically such provisions are enforced, but such was not their fate here.  The Court performed an unconscionability analysis, and found the arbitration provisions both procedurally and substantively unconscionable.    

      The Court did not like the fact that the agreement disabled the arbitrator from applying California law to a labor dispute involving California workers, and therefore it refused to enforce the Texas choice of law provision, explaining that California has an important interest “in ensuring that its statutory protections for California-based workers are not selectively disabled by out-of-state companies wishing to do business in this state . . .”  (My ball, my rules.)  The Texas choice of law disadvantaged California workers both as to substantive claims that they might have in California, but not in Texas, and as to defenses to the enforceability of an arbitration agreement, e.g., California law concerning unconscionability. 

     “[B]ecause the ability of the arbitrator to call upon California law in deciding the enforceability questions entrusted to him is a ‘consideration [] inextricably bound up in the question of the validity of the choice of law provision, ‘”, once the choice of law provision was jettisoned, the delegation of the enforceability decision to the arbitrator was too.

      Having concluded that the delegation clause was uneforceable, the Court then analyzed the arbitration agreement as a whole and found several instances of substantive unconscionability. 

     The Court’s bottom line:  “We conclude that the delegation clause and the agreement are both unconscionable and therefore unenforceable under California law.”

     COMMENT:  The Court notes, “In Peleg [v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012)], Division One of the Second District Court of Appeal held an arbitration agreement identical in form to the agreement at issue in this case was illusory under Texas law (which the appellate court applied pursuant to a choice of law provision) and therefore unenforceable).”  I have previously posted about Peleg on November 7, 2012:

The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466.  This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.

See also my post of April 18, 2012.  Note that Peleg and Pinela reach the same result – invalidation of the arbitration agreement – but by different routes.  Peleg finds the arbitration agreement illusory under Texas law.  Pinela refuses to apply Texas or Fifth Circuit law, and finds the agreement unconscionable under California law. 

       

    

    

    

Public Policy And Florida Choice Of Law Result In Affirmance Of Order Partially Denying Defendant’s Motion To Compel Arbitration

 

Arbitration of Unlawful Group Boycott Claim Under California Cartwright Act Was The Juicy Florida Choice Of Law Law Issue.

    HCF Insurance Agency v. Patriot Underwriters, Inc., Case No. B257715 (2/5 May 27, 2015) (unpublished) involved a dispute between plaintiff insurance broker, and defendant program administrator/underwriter, partially governed by an arbitration clause.  The Court of Appeal affirmed the trial judge’s order that causes of action for contract breach and breach of the covenant of good faith and coverage were within the scope of the arbitration agreement, but that causes of action for fraud and intentional interference with economic advantage were not within the scope.

    However, the cause of action for unlawful group boycott, in violation of California’s Cartwright Act, raised an interesting issue of public policy and choice of law.  The dispute, which was within the scope of the arbitration clause, was governed by a Florida choice-of-law provision.  Florida law did not provide a remedy for losses resulting from antitrust violations outside Florida, and plaintiff’s alleged damages were sustained in California.  Florida law also provides an arbitration agreement is unenforceable if it violates public policy, and such a violation occurs when an arbitration agreement diminishes available remedies.  Thus, the Court of Appeal reasoned that the arbitration clause must be invalid under Florida law, because arbitration under Florida law would diminish the remedies of plaintiff for injury in California under the Cartwright Act, violating Florida public policy.

     COMMENT:  Under the Federal Arbitration Act, claims that an arbitration provision violates state public policy don’t get much traction these days.  However, even under the FAA, the parties can agree to choice of law, and here, the parties agreed to apply Florida law to their dispute.

Arbitration/Choice of Law/FAA/Employment/Unconscionability: Court of Appeal Concludes Plaintiff’s Wage Claims Are Encompassed By Parties’ Contractual Agreement, Reversing Trial Court’s Denial Of Petition To Compel Arbitration

 

Also, Burdens Upon The Employee Were Not So Great As To Make Arbitration Provision Unconscionable

     In our next case, the Court of Appeal, in a published opinion, reversed the trial court’s denial of a petition to compel arbitration.  Galen v. Redfin Corporation, A138642 (1st Dist. Div. 1 July 21, 2014) (Dondero, Margulies, Becton) is an indication the law concerning arbitrability of employment claims is in a state of flux, sometimes creating substantial uncertainty as to whether an arbitration provision will be enforced.

     The trial court concluded that plaintiff’s claims were based on statutory violations that were not encompassed by the parties’ agreement, and that if the claims were encompassed, the arbitration provision was unconscionable.  The Court of Appeal disagreed on both points.

     The trial court concluded that the Federal Arbitration Act (FAA) applied to the agreement; that California law applied because a Washington choice-of-law provision disclaimed the application of Washington law; that wage claims were outside the arbitration agreement; and that the arbitration provision was procedurally and substantively unconscionable.

     The Court of Appeal agreed that the FAA applied.  The Court found the choice-of-law provision, disclaiming the application of Washington “conflict or choice of law” laws  to be ambiguous, and therefore applied California law.  The Court interpreted the arbitration provision, which applied to disputes “arising out of or related to” the employment agreement, to include Labor Code section 229 wage claims.  The Court’s discussion distinguishing and disagreeing with other California appellate cases is worth reading.

     The Court assumed some element of procedural unconscionability – the contract was adhesive – but did not view the procedural issues as serious ones creating surprise or oppression.

     Most interesting were the Court’s holdings on substantive unconscionability. 

     First, the Court was not troubled by the fact that the agreement included a reciprocal attorney’s fees provision, even though California Labor Code provisions did not allow the employer to get fees: 

“It is true that a plaintiff employee is not responsible for the employer’s attorney fees if the employer prevails on an employee’s overtime claim. (Lab. Code, § 1194, subd. (a); Earley v. Superior Court (2000) 79 Cal.App.4th 1420, 1429.) Nevertheless, we cannot conclude that a mutual attorney fee provision ‘shocks the conscience’ simply because it fails to contemplate that there are some Labor Code claims that do not allow a prevailing employer to recover attorney’s fees from an employee.”

    Second, the Court did not believe that plaintiff had “shown that the forum-selection clause is so one-sided as to ‘shock the conscience,’ or that it imposes harsh or oppressive terms.”  The forum selection clause required plaintiff to arbitrate his employment claims in Washington, though he lived in Danville, California.

     Reversed.

Arbitration/Public Policy/Preemption/Choice of Law: Ninth Circuit Holds That Montana’s Interest In Protecting Consumers From Unfair Arbitration Agreements Is Preempted By The Federal Arbitration Act

And Because Montana Law Was Preempted, Choice of Law Principles Required Application Of New York Law To Consumer Transaction

 

Wild Goose Goose Island Overlook at National Glacier Park, Montana.  Author: rmhermen.  GNU Free Documentation License.

     After plaintiffs, who resided in Montana, sued their former Internet services provider Bresnan Communications, for enabling an advertiser to get customer information used to target advertising to Bresnan’s customers, Bresnan sought to enforce an arbitration provision in its customer contracts.  Relying upon Montana’s public policy invalidating adhesive agreements running contrary to the reasonable expectations of a party (such as adhesive consumer contract arbitration provisions), the Montana district court judge declined to enforce the arbitration clause and a New York choice-of-law provision.  Bresnan appealed, arguing that Montana’s public policy was preempted by the FAA and AT&T Mobility v. Concepcion, __ U.S. __, 131 S.Ct. 1740 (2011), and that a New York choice-of-law provision applied to the contract.  Mortensen v. Bresnan Communications, LLC, No. 11-35823 (9th Cir. July 15, 2013) (published) (Gould, author 3:0).

     The Ninth Circuit panel held that the FAA preempted Montana’s public policy invalidating adhesive agreements running contrary to the reasonable expectations of a party.  In so holding, the panel read the Supreme Court’s ruling in Concepcion broadly:  “Any general state-law contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA.”

     The Ninth Circuit agreed with plaintiffs that Montana had a materially greater interest than New York in the dispute, based on Montana’s reasonable expectations/fundamental rights rule.  But that since Montana law was preempted, the New York choice-of-law provision in the contract had to be applied.

     Thus, if protecting consumers from unfair agreements has a disproportionate impact on arbitration agreements, too bad for the consumers, who will be compelled to arbitrate under the preemption principle.

     I note that the Montana district court judge did not find the arbitration provision to be “unconscionable.”  Under this Ninth Circuit panel’s analysis, such a finding would have made no difference, as the panel’s opinion hinges on whether the state-law contract defense “has a disproportionate effect on arbitration.”  Still, the facts would have been different, possibly opening the door for a different analysis regarding the viability of traditional state law contractual defenses under the FAA’s “savings clause.”  (The Concepcion court stated that the FAA “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as . . . unconscionability.’”  Concepcion, supra, ___ U.S. at p. __, 131 S.Ct. at 1746 (2011)).

      

Arbitration/Employment/Choice of Law/Preemption: Massachusetts Choice of Law Enables Court of Appeal to Uphold Denial of Petition to Arbitrate Employment Discrimination Claims

Waiver of Right to Trial of Employment Claims Was Not Clear and Unequivocal

     One of the hottest areas of contention concerning arbitration is the waiver of statutory rights through arbitration, and whether such a waiver is preempted under AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).  In Harris v. Bingham McCutchen, B240522 (2nd Dist. Div. 5 March 29, 2013) (O’Neill, J., author 3:0) (published), the Court held that Massachusetts choice of law, required by the employment contract, provided that waiver of the right to try an employment discrimination claim needed to be “clear and unequivocal.”  That’s the law in Massachusetts, and the contractual language did not meet that heightened standard.

     So why wasn’t this resulted preempted by the Federal Arbitration Act and Concepcion? After all, Concepcion invalidated a class action waiver that peculiarly burdened an arbitration provision in California.

     The answer is that the heightened waiver standard under Massachusetts law does not discriminate against arbitration, because it applies as well to any contractual provision that limits statutory rights in an employment discrimination case. “[The] rule states only that as a matter of the Commonwealth’s general law of contract, a private agreement that purports to waive or limit—whether in an arbitration clause or in some other contract provision—the employee’s otherwise available right to seek redress for employment discrimination through the remedial paths set out in [Massachusetts General Law chapter] 151B, must reflect that intent in unambiguous terms.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390, 399-400 (Mass. 2009) (italics added by me for emphasis).

     TIP for California legislators:  A statute that provides a heightened standard for waiver of statutory rights might survive Concepcion if it applies to all contracts, not just to arbitration provisions.