California Mediation and Arbitration

Construction/Existence Of Agreement: CCA 4/1 Affirms Order Denying Motion To Compel Arbitration Because There Was No Agreement

Acknowledgment Of Employee Handbook Is Not Necessarily Agreement To All Its Contents.

     Courts apply the rule requiring resolution of ambiguities against the drafting party “with peculiar force in the case of a contract of adhesion.”   That’s what happened in Rollins v. Stack & Associates, CPAs, No. D069390 (4/1 11/30/16) (Nares, Benke, Huffman) (unpublished), in which the trial court denied an employer’s motion to compel arbitration of claims asserted by its former employee, and the Court of Appeal affirmed.

     The employee signed an acknowledgment that she received the employee handbook, and that it contained important information on policies, procedures, and practices.  The handbook contained the arbitration provision.

     The problem was ambiguous language.  It was not clear here that acknowledging receipt of the handbook meant agreement to a contract.  In fact, the acknowledgment explained “that the policies described in the handbook are intended as a guide only and do not constitute a contract of employment.”  Whether the signatures on the acknowledgment expressed the mutual intent of the parties to be contractually bound by the policies in the handbook – including the arbitration policy – was at best ambiguous.  And that was the employer’s problem, because ambiguity is interpreted against the drafter.

     COMMENT:  A stronger approach if binding arbitration is desired is to have a separate, conspicuous, signed arbitration provision.  Of course, there could still be problems of substantive and procedural unconscionability, but it would be more difficult to say that an agreement to arbitrate did not exist.

Arbitration, Scope, Enforceability, Construction: Employees Get To Litigate Class Action Claims, Because Arbitration Agreement Excluded Class Action Claims From Its Scope

Court Looks At Evolution Of Class Action Waiver Law In California For Help Construing Meaning Of The Contractual Language.

     In 2011, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) held the Discover Bank rule, invalidating a class arbitration waiver, had been preempted by the Federal Arbitration Act.  After Concepcion, employers frequently insert class arbitration waivers in their employment agreements and dispute resolution policies.

     But that’s not what happened in Licon v. Wish-I-Ah Skilled Nursing & Wellness Centre LLC, F070304 (Fifth Dist. 6/15/16) (Hill, Kane, Franson) (unpublished), where the Employment Dispute Resolution (EDR) Program was written before Concepcion was decided.  Instead, the EDR Program provided that it “covers only claims by individuals and does not cover class or collective actions.”  (italics in the Court’s opinion).  Construing the plain meaning of the words, the Court of Appeal agreed with the trial judge that the arbitration agreement excluded class and collective actions from its scope, so plaintiffs were not required to arbitrate class or private attorney general claims.

      Of course, the employer argued “other language in the EDR program booklet demonstrates an intent to arbitrate all claims on an individual, nonclass basis . . . “ 

      The Court found it helpful to consider the extrinsic evidence of how the employer’s EDR policy had evolved from before to after Concepcion, for after Concepcion, the employer changed the wording of its EDR policy to take advantage of Concepcion’s evisceration of the Discover Bank rule.  The Court concluded that the pre-Concepcion ERP, which governed the situation, meant what it said, because it had been drafted at a time when the employer “had to be concerned with the possibility a court would invalidate a class action or class arbitration waiver.”

Arbitration, Construction, Scope: Arbitration Agreement Governing “Any Controversy Arising Out Of” Operating Agreement Did Not Cover Malpractice, Breach Of Fiduciary Duty, And Rescission

Second District, Division One Provides In-Depth Discussion Of Whether Arbitration Clause Is Broad Or Narrow.

     An issue that comes up repeatedly is whether an arbitration clause is broad enough to encompass tort claims.  Our next case, certified for publication, is worth reading because it offers an in-depth analysis of how to determine the scope of an arbitration clause.

     Downs, an attorney, entered into an LLC operating agreement he drafted with Rice, a client, and others.  Client Rice and others sued attorney Downs for legal malpractice, breach of fiduciary duty, and breach of a written agreement.  The superior court ordered Rice to arbitrate his claims pursuant to an arbitration provision in the written agreement. After arbitration, Rice and Downs appealed, raising various contentions, including Rice’s contention that the arbitration provision did not encompass his tort claims. In an opinion authored by Justice Lui, the Court of Appeal agreed with Rice that the trial court erred by compelling arbitration of those claims, and partially reversed, while concluding other contentions on appeal were moot.  Rice v. Downs and Downs v. Rice, Nos. B261860 and B264964 (2/1 June 1, 2016).

     The arbitration agreement governed “any controversy arising out of” the LLC operating agreement.  The Court agreed that “any controversy” can included tort claims, but explained that “arising out of” language is narrower than “arising out of and in connection with” or “arising out of and relating to” language.  “Moreover, even under a very broad arbitration provision, such as ‘any controversy or claim arising out of or relating to this agreement,’ tort claims must ‘ “have their roots in the relationship between the parties which was created by the contract” ‘ before they can be deemed to fall within the scope of the arbitration provision.”  Citing Bos Material Handling, Inc. v. Crown Controls Corp.,137 Cal.App.3d 99, 105 (1982). 

      Parsing the language of the arbitration clause, which happened to be narrower than a preceding judicial jurisdiction clause in the LLC operating agreement, the Court concluded that the tort claims were not governed by the narrower arbitration clause.

Arbitration, Construction Of Agreement: Construing Agreement Between Two Communications Companies To Allow Arbitration, Ninth Circuit Avoids Gnarly Statutory Construction

Course Of Conduct By The Parties Weighed Heavily In Construing Their Conduct.

     North County Communications of Arizona v. Qwest Corporation, No. 14-35254 (9th Cir. May 31, 2016) (Scannlain, Silverman, Bea) involves two communications carriers, North County and Qwest, in a messy billing dispute, construction of their “interconnection agreement” (ICA), and the panel’s skillful avoidance of having to interpret the Telecommunications Act of 1996 (“Act”).  The issue making the case blog-worthy was whether Qwest could compel arbitration of the billing dispute between the two carriers. 

     At first blush, it appeared which party initiated the arbitration could be significant   On its face, the Act allowed competitive local exchange carriers (CLECs) to initiate negotiations and to compel arbitration.  However, the Act did not explicitly state that incumbent local exchange carriers (ILECs) that had a monopoly on local phone service in a particular geographic area prior to the Act could initiate the negotiation/arbitration process.  Qwest is an ILEC, and North County is a CLEC, and it was Qwest that sought to compel arbitration. 

     Allowing Qwest to initiate the arbitration would have required deft interpretation of the Act.  The panel would have had to conclude that the language of the Act was not determinative, that an obscure FCC footnote no. 2,087 in a 659 page document should be given great interpretive weight, and that any other interpretation would be contrary to the purpose of the Act – a process that the late Justice Scalia once colorfully characterized as “interpretive jiggery-pokery.”

      So the Court took a simpler route.  It looked to the language of the ICA – the agreement between the parties – finding there guidance that the parties intended either side could initiate arbitration (though the particular provision relied upon did not actually mention arbitration).  More persuasive was the parties’ course of conduct, for North County agreed to a series of extensions of the time to file an arbitration, specifically agreeing to extend “the period during which either party may file for arbitration” under the Act.  The repeated conduct of the parties was given great weight in interpreting their contractual intent as intent to allow either party to initiate arbitration.

Foreign Arbitration/Enforceability: Wake Up And Smell The Coffee: Ninth Circuit Holds Foreign Arbitration Foiled By Sham Agreement Concerning Coffee Franchise

. . .  In Which We Inaugurate A New Sidebar Category (Foreign Arbitration) And Petitioners Who Successfully Compelled Arbitration In District Court Lawsuit Concerning Coffee Franchise Dispute Get Roasted On Appeal.

     Our next case involves a dispute between an Italian corporation seeking to open a coffee franchise in the United States, and two entrepreneurs planning to open an Italian-style coffee house in the United States.  Casa Del Caffe Vergnano v. ItalFlavors, No. 13-56091 (9th Cir. March 15, 2016) (Korman, J., writing for maj.; Callahan, J., dissenting).  The Rabellinos’ dream of opening a successful coffee shop as a franchise of the Italian corporation, Casa Del Vergnano, failed, and the Rabellinos sued in federal district court in San Diego, alleging that they did not receive the support they had been promised.

     The parties, however, had executed a Commercial Contract with an arbitration provision providing for the application of Italian law to contract construction, and arbitration in Geneva under the UNCITRAL Arbitration Rules.  Along with the Commercial Contract containing the arbitration clause, the parties had also executed a Hold Harmless Agreement providing that the Commercial Contract “does not have any validity or effectiveness between the parties, as it was prepared and delivered by Casa del Caffe Vergnano S.p.A. solely for the purpose of allowing Mr. Hector Rabellino to submit a copy of it to the pertinent international agencies in order to obtain an entry visa to work in the United States . . .”

     The district court held that “the issue of whether the broad arbitration clause contained in the Commercial Contract survives after the [Hold Harmless Agreement] took effect should be submitted to the arbitrator.”

     The panel majority held that the parties’ Commercial Contract was not binding, because the Hold Harmless Agreement showed that there was no mutual intention to be bound – and if the Commercial Contract was a sham, the arbitration provision within it could not be enforced, anymore than other terms of a sham contract could be enforced.  To reach this conclusion, the Court had to address the parol evidence rule, because the Hold Harmless Agreement, evidencing the sham nature of the Commercial Contract, was executed after the Commercial Contract.

     However, because the Commercial Agreement and the Hold Harmless Agreement were executed on the same day, and the latter referred to the former, the panel majority construed the agreements together.  Applying principles of federal common law, the panel also held that the parol evidence rule “does not prohibit us from considering the Hold Harmless Agreement because that agreement goes to the issue of whether the parties entered into a binding contract.”

     Judge Callahan, dissenting, agreed the majority cited the applicable law, but disagreed on the factual conclusion.  She believed that the facts sufficiently supported the district court’s conclusion that the Hold Harmless Agreement was signed separately, and that a dispute over whether and when the Commercial Contract was terminated should have been referred to arbitration.  She also observed that the subsequent conduct of the parties showed that they intended to be bound by a contract.     

    

    

 

 

 

 

 

 

 

 

 

BONUS:  (1) A YouTube link to Bach’s coffee cantata.  (2) The Wikipedia article includes the translation:  “If I couldn't, three times a day, be allowed to drink my little cup of coffee, in my anguish I will turn into a shriveled-up roast goat”; (3) and – a link to Frank Sinatra’s 1946 hit, “They’ve got an awful lot of coffee in Brazil.”

Arbitration, Construction of Agreement, Scope: Law Firm’s Efforts To Compel Arbitration Of Malpractice Claim Are Doomed By Arbitration Provision That Did Not Clearly Encompass Earlier Transactional Work

Arbitration Provision Clearly Applied To Litigation, But Not To Earlier Transactional Work.

     Nordman Cormany Hair & Compton, formerly in business for 75 years in Ventura County, appealed an order denying its petition to compel arbitration of a legal malpractice lawsuit. Aggeler v. Nordman Cormany Hair & Compton, B253566 (2/6 April 27, 2015) (Gilbert, Yegan, Perren) (unpublished).

     The Nordman firm had done transactional work for plaintiffs in 2005 in connection with their ownership of a mobilehome park.  After the owners became embroiled in a legal dispute with the residents in 2009, the Nordman firm represented the owners in litigation.  The retention agreement for the litigation matter contained an arbitration provision.

      In 2013 the owners sued the Nordman firm for malpractice.  However, the owners’ alleged malpractice claims involved the Nordman firm’s “drafting of a contract” in 2005.  Unfortunately for the law firm, it was not clear that the arbitration provision, prepared in connection with the 2009 litigation, applied retroactively to cover the 2005 transactional work that was the source of the malpractice claim. 

     Affirmed.

     COMMENT:  The Court explains, “We consider how a reasonable client would interpret the provision as well as the reasons why the client sought the professional services.”  The problem here was that the agreement did not explicitly mention legal services provided in 2005, and thus a reasonable client would not necessarily know that the agreement would apply retroactively.  Lawyers get saddled with the consequences of poorly drafted retention agreements “because of the fiduciary nature of the relationship.”

Arbitration, CCP 1281.2, Construction Of Agreement, Scope: Plaintiff’s Equitable Claims Were Outside Scope Of Arbitration Agreement

Second District, Division 2, Rejects Appellants’ “Tortured” Reading Of Arbitration Provision And Affirms Order Denying Motion To Compel Arbitration.

     Plaintiffs, investors in an independent bookstore, refused the request of defendants, the bookstore and its prior owner, to arbitrate a business dispute.  The key language in the arbitration provision read:  “Notwithstanding the foregoing, no arbitrator shall have the power to render equitable relief of any kind, and requests for such relief shall be referred to a court of competent jurisdiction.”  The trial court denied defendants’ motion to compel arbitration, finding that plaintiffs’ equitable claims – the sole remaining claims at issue – were excluded from arbitration by the language in the arbitration provision.  Appellants advanced a rather creative reading of the arbitration provision, distinguishing between the arbitrator’s ability to try any action and the court’s ability to grant equitable relief.  Bachrach v. Compagno, Case No. B252454 (2/1 Jan. 6, 2015) (Johnson, Chaney, Bendix) (unpublished).

     Appellants argued that under the clear language of the arbitration provision, any action to enforce or interpret the agreement had to be arbitrated, and that once the substantive issues were resolved, a party could turn to the court to obtain equitable relief.  The Court of Appeal, however, rejected “a tortured conclusion that the trial court has the power only to perform the ministerial act of rubber-stamping an arbitrator’s conclusive ruling.” 

     Affirmed.

Sixth District Affirms Trial Court’s Order Denying Cisco’s Motion To Compel Arbitration, Based On Independent Review That Backflip’s Claims Are Not Covered By Arbitration Clause

Strong Policy In Favor Of Arbitration Yields To Court’s Independent Review Of What Parties Intended By Their Contractual Language.

     In Backflip Software, Inc. v. Cisco Systems, Inc., No. H040382 (6th Dist. Dec. 3, 2014) (Bamattre-Manoukian, Elia, Mihara) (unpublished), the Court concludes, based on its independent review of contractual language, the trial court did not err in denying Cisco’s petition to compel arbitration and stay proceedings.

      Backflip and Cisco entered into a software license and escrow agreement, whereby Backflip’s software was to be released to Cisco upon the occurrence of certain events, one of which was Backflip’s discontinuing its software maintenance/support.  If the release event occurred, Cisco could send a notice to escrow, Backflip could send a counter-notice if it disagreed, and the parties could arbitrate the dispute.

      After giving notice Backflip would stop responding to maintenance requests from Cisco, a former Backflip CEO “authorized” release of the software from escrow to Cisco.  Escrow closed, and the software was released to Cisco.  Backflip, however, contended Cisco should have known action by Backflip’s former CEO was not authorized, resulting in Cisco’s misappropriation of the software.

     The Court of Appeal agreed with the trial court and with Backflip that the scope of the parties’ arbitration agreement, as set forth in the license and escrow agreements, only “encompassed a dispute regarding the release of Backflip’s escrow materials while those materials remained in the possession of the escrow agent.”  The parties contemplated arbitration would occur before the software was released from escrow.  Thus, the arbitration clause became irrelevant here, once  the software was released.

     The Court distinguishes cases in which the arbitration requirement continues, as cases where the arbitration clause was broader than here or explicitly survives termination of an agreement.

Arbitrator: Second District, Div 2 Holds That Trial Court Committed “Multiple Errors” When It Appointed Arbitrator

Judgment Confirming Arbitration Award Is Reversed, And Appeal From Sanction Order Is Dismissed.

    

    Wendy Kronick appealed from the trial court’s judgment confirming an arbitration award in favor of her former family law attorney, Debra A. Opri.  Kronick v. Opri, B241510 (2/1 Sept. 30, 2014) (Ashmann-Gerst, Chavez, Ferns) (unpublished).  Ms. Kronick argued that the trial judge committed errors by failing to follow the procedure dictated by an arbitration clause when the judge appointed  the arbitrator in an attorney-client fee dispute.

      Kronick initially provided the names of two arbitrators to Opri, who rejected them, and Opri provided names that Kronick rejected.  Opri complained to Kronick about a “circular display of how much you seek to frustrate the arbitration process.”  Eventually, the trial judge took control of the situation, and appointed Justice Sheila Sonenshine, Ret., as the arbitrator.

     The arbitration clause provided, in relevant part:

“The initiator of the proceedings shall do so in writing by submitting two names of retired California court judges to the responding party, and if the responding party does not agree to any of the two nominees, within ten [10] days the responding party shall provide two names of retired California superior court judges from which the initiating party may choose one.  If the parties cannot agree on an arbitrator, one shall be chosen by a court of competent jurisdiction from the four nominees.”

     The Court of Appeal concluded that “[t]he trial court committed multiple errors” when appointing the arbitrator – by my count, at least six errors:  (1) the trial court required Opri to unilaterally select an arbitral forum before the arbitrator was agreed upon, whereas the arbitration clause required selection of the arbitrator to dictate the arbitral forum; (2) the trial court erroneously accused Kronick of failing to submit two nominees; (3) the trial court erred by rejecting the two nominees, requiring Kronick instead to submit two names from JAMS; (4) the court held a continued hearing date on September 23, 2010, despite having told Kronick the hearing date would be October 23; (5) the court rejected Kronick’s two nominees because unacceptable to Opri, and accepted two new nominees from Opri, essentially giving Opri four nominees; (6) the court chose Justice Sonenshine, though she was not one of Opri’s original two nominees, and did not give Kronick an opportunity to agree to a new nominee.    

      Needless to say, the Court of Appeal reversed the judgment confirming the arbitration award.

      However, Kronick’s appeal of a discovery sanction of $3,200 was dismissed, because it was less than $5,000, and non-appealable.  On the brighter side for Kronick, the Court of Appeal informs us that she and her husband “reconciled” – and it was legal work related to their marital dispute that led to Opri’s fee claim against Kronick in the first place.

     BONUS:  Ms. Opri’s website describes her as “widely considered to be one of the most recognizable female litigation attorneys of the 21st Century, both in the courtroom and on television.”  Ms. Kronick was the plaintiff in another case posted about on February 11, 2014, on California Attorney’s Fees, in which case, among other things, she claimed that the defendant kicked her seven-month old Dalmatian puppy in a park.

Construction Of Arbitration Agreement: Court Of Appeal Agrees Arbitration Clauses Were Unrelated To The Dispute For Which Respondents Seek Damages

Beware The Pleading Admission!

     “

"Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!”

     Plaintiffs/Respondents alleged Defendants/Appellants misrepresented they could raise sponsorship financing necessary for Plaintiffs to produce reality television shows, produced the show entitled “The Players Club” at considerable expense, and learned the financing was not forthcoming.  Plaintiffs alleged negligence, fraud, misrepresentation, breach of contract, and breach of the implied covenant of good faith and fair dealing, seeking $3 million in damages, minus a $750,000 commission.  Defendants sought, unsuccessfully, to compel arbitration, and appealed the order denying their request.  Baseball-Players Club, LLC v. Brand-In Entertainment, LLC, Case No. B251173 (2/4 Sept. 2, 2014) (Epstein, Manella, Edmon) (unpublished).

     The interesting wrinkle in this case is that both sides treated allegations in Plaintiffs’ unverified complaint as binding judicial admissions.  In that unverified complaint, Plaintiffs referenced three reality shows, while claiming subsequently they were only seeking damages for The Players Club.  The arbitration provision, however, did not mention The Players Club. 

     You can see where this is heading:  Plaintiffs alleged they were not bound to arbitrate, because they only sought damages related to The Players Club, a reality show not mentioned by the arbitration provisions.  Defendants, however, tried to stick Plaintiffs with judicial admissions, based on the complaint, that all three reality shows were implicated in the dispute, and therefore somehow covered by the various arbitration clauses. 

     Agreeing with Plaintiffs (and the trial court) that The Players Club dispute was not covered by an arbitration clause, the Court of Appeal explained that the doctrine that judicial admissions place factual allegations beyond dispute does not “apply when the admissions have been superseded by amendment, particularly when the original pleading is unverified. . . . To the extent respondents represent their claims are limited to ‘The Players Club,’ they have abandoned any alleged dispute regarding ‘The Natural’ or ‘Bragging Rights.’”  Thus, the Court of Appeal has saved Plaintiffs from being ensnared by their own pleadings, while at the same time clarifying Plaintiffs have abandoned any claims that might have been covered by an arbitration clause.

    Note:  In an April 18, 2013 post, I wrote about another case in which a party seeking to avoid arbitration managed to avoid a binding judicial admission.  Barsegian v. Kessler & Kessler, 215 Cal.App.4th 446 (2013) (partially certified for publication).  In Barsegian, at oral argument, the defendant seeking to compel arbitration based on plaintiff’s allegation of agency, also made it clear it was reserving its right to argue it was not bound by the allegation of agency.  Absent the agreement of the opposing party seeking a binding judicial admission, the court was not willing to treat the pleading as an admission.