California Mediation and Arbitration

Arbitration Costs: Court Has Jurisdiction To Lift Stay On Litigation If Party In Arbitration Is Indigent

The Problem To Be Solved Is How To Achieve Equal Access To Justice.

        "Does a trial court that granted a defendant’s petition to compel arbitration have jurisdiction to lift the stay of trial court proceedings where a plaintiff demonstrates financial inability to pay the anticipated arbitration costs? If so, may the court require defendant either to pay plaintiff’s share of arbitration costs or to waive the right to arbitration? We answer both questions in the affirmative . . . " Gerald Aronow v. Superior Court of San Francisco (Respondent); Emergent LLP, et al (Real Parties in Interest), No. A162662 (1/4  3/28/22) (Ross, Streeter, Brown).

        The problem presented in Aronow occurs when a party to an arbitration cannot afford to pay for the arbitration. In this case, Aronow sued his former attorneys for legal malpractice. They responded by compelling arbitration and staying legal proceedings. Aronow sought to lift the stay, arguing he was in forma pauperis. The  trial court, noting that authority was divided over whether it had jurisdiction to remove the stay, did not do so, and certified the question to the Court of Appeal. The arbitration statutes do not address the scope of jurisdiction the trial judge has to terminate a stay on arbitration because of a party's failure to pay.

        The Court of Appeal in Aronow takes the  position that, in the case of an indigent party, the trial court should give the party seeking  arbitration the choice of paying plaintiff's share of costs or  waiving the right to arbitration. Otherwise, a person like Aronow who claims to be without financial resources would not have access to justice and would be unable to air his grievances.

        We note (as did the opinion), that there are numerous instances in which the courts waive fees for an indigent party. Examples include filing fees, court reporter fees, jury fees, fees for a court ordered reference, and bonds. What is different in the case of private arbitration is that there is no way to compel the private arbitrator to waive fees. So instead, the court in Aronow gives the party seeking arbitration the choice of paying fees or waiving arbitration.

        Is this inconsistent with requirements in the California and Federal Arbitration Acts that courts must allow arbitrations to be had according to the terms of the  arbitration agreement? Depends on how one interprets "had." If an arbitration is had when a claim to arbitrate is filed, and then it does not proceed in normal fashion because a party cannot pay, the court can conclude that an arbitration has been had.

        In Aronow, the court provides some help to the party seeking arbitration, Emergent, for it recognizes that limited discovery into the financial condition of  may be appropriate. If limited discovery into financial condition takes place, the court assures Emergent that it will not waive its right to arbitrate. Such discovery should occur early, before arbitration is compelled (well, not in this case). Also, the person claiming inability to pay may be able to establish financial condition with a declaration, exhibits, or a limited evidentiary hearing.

 

 

 

Arbitration, Unconscionability: An Appellate Arbitral Review Provision Is Held Substantively Unconscionable, But Severable

Motion To Compel Arbitration Should Have Been Granted, And One Substantively Unconscionable Provision Was Severable.

        In Erendira Cisneros Alvarez v. Altamed Health Services Corp., B305155 (2/8   2/4/21) (Stratton, Bigelow, Grimes), the Court of Appeal reversed a trial court's order denying a motion to compel arbitration. The arbitration provision, which is part of an employer-employee contract, is found to be enforceable, while a provision requiring a second level of arbitral review is found to be substantively unconscionable but severable.

        Most interesting is the Court of Appeal's conclusion about the unfairness in the employer-employee context of a provision allowing for arbitral review of the  arbitrator's award. Why unfair? Because it was likely that only the employer would take advantage of this additional review, in case of a large award in favor of the employee; because it would add a layer of expense for the employee; because it would delay the ability of the employee to confirm an award; and because it was ambiguous, since it was unclear what rules for appellate arbitral review would apply. But since this was the only example of substantive unconscionability, the offending provision could be severed, and the arbitration provision could be enforced.

        COMMENT: The trial court held that the employee had not knowingly waived her right to a jury trial, and that in fact the word "jury" had not been mentioned in the relevant document. The Court of Appeal explained this was clear error, because "[t]he arbitration agreement does contain the word 'jury' and it uses the word as part of an express waiver provision ...." Twisting the knife, the Court added, "We are surprised by the trial court’s inability to find the word 'jury' or the jury provision in the arbitration agreement." Did this slip up motivate the Court of Appeal to review the case in considerable detail?

Arbitration, Costs: Cost-Splitting Provision Did Not Prevent Appellant From Recovering Costs During And After Arbitration

Plaintiff's Request For Costs Was Made In Court After Plaintiff Beat Her Section 998 Offer During Arbitration.

        Plaintiff/Appellant Helene Storm prevailed in arbitration over an uninsured motorist claim against an insurance company. Afterwards, she petitioned the trial court to confirm the award in her favor, and to award arbitration and post-arbitration costs as a prevailing party under sections 998 and 1293.2, because she did better than her 998 settlement offer in arbitration. The trial court denied her request for costs, because the arbitration agreement did not mention recovery of costs post-arbitration, and provided each side would split costs incurred during arbitration. Storm appealed. Helene Storm v. The Standard Fire Insurance Company, B299277 (2/4  7/2/20) (Willhite, Collins, Currey).

        The Court of Appeal reasoned that an agreement to divide costs during the arbitration did not preclude the arbitrator from reallocating costs to the prevailing party on a 998 settlement offer in this case. The facts are important here, because the arbitration agreement only gave the arbitrator the power to rule on damages and liability, and therefore Storm was not required to request costs from the arbitrator. This case can be distinguished from "the decisions . . . dictated by the broad powers given to the arbitrator by language of the arbitration agreements at issue."

        As for post-arbitration costs incurred, "[u]nless the arbitrator's award or the parties' arbitration agreement negates the enforceability of section 1293.2, a court must award costs incurred in post-arbitration judicial proceedings to confirm, vacate, or modify an arbitration award."

        Storm should be pleased she appealed, because the Court of Appeal reversed the order granting the insurance company's motion to tax costs and striking her memorandum of costs. The matter was remanded with directions to consider whether her claimed costs are recoverable under 998 and 1293.2. And Storm gets to recover costs on appeal.

        

 

 

Arbitration, Section 998: California Supreme Court Rules Request For Costs Timely Under Section 998 If Filed With The Arbitrator Within 15 Days Of Final Award

A Question Of Timing: Case Explains  How To Handle Costs Under Section 998 In An Arbitration.

    Heimlich v. Shivji, S243029 (Cal. S.Ct.  5/30/19) (Corrigan, J.) is good news for practitioners, because it settles a timing issue, but it is no help to the hapless appellant who helped make law. Code of Civil Procedure section 998 authorizes an award of costs to a party that makes a pretrial settlement offer when the opponent rejects the offer and obtains a lesser result at trial. Heimlich v. Shivji holds, "a request for costs under section 998 is timely if filed with the arbitrator within 15 days of a final award." The question had been somewhat in doubt, because for most purposes, an arbitrator's power to act terminates once the final award issues.

    However, the ruling makes sense, because section 998 applies to arbitration, as well as to litigation, and allowing a request for costs to be made under section 998 after the award is final puts arbitration and litigation on an equal footing. In a court case, a memorandum of costs is typically filed within 15 days of the final judgment, and the rule in Heimlich v. Shivji allows a parallel practice in arbitration. Furthermore, it is good policy not to require the party who will be asking for costs to make a settlement offer known prior to the final award, for fear it might influence the arbitrator in undesirable ways.

    The issue in Heimlich v. Shivji arose because Shivji  had a fee dispute with his attorney Heimlich, and Shivji made a settlement offer that Heimlich could not best in arbitration. Within 15 days after the final award issued, Shivji informed the arbitrator that he would request costs under section 998. Unfortunately for Shivji, the arbitrator concluded that after issuing the final award, he no longer had jurisdiction to take any further action in the matter. The trial court confirmed the arbitration award that did not include Shivji's requested costs. The Court of Appeal reversed, holding that Shivji's request was timely, and that the trial court could vacate the arbitrator's award because the arbitrator had "'refuse[ed] . . . to hear evidence material to the controversy'" when he rejected Shivji's attempt to raise the issue. (We blogged about the Court of Appeal opinion on June 15, 2017). And the Supreme Court agreed with the Court of Appeal that Shivji's request was timely.

    So that all sounds like it would be good for Shivji. But not so fast. The arbitrator made a mistake of law when he concluded that he lacked jurisdiction to rule on the post-award request for costs. His refusal to consider further evidence resulted from the mistake of law. And a mistake of law is not a basis for overturning an arbitration award. So hooray for Shivji and his attorney: they were right that Shivji's request was timely, and they made law in the California Supreme Court. Unfortunately, it won't help Shivji.

    PHRASE OF THE DAY. Apparently Heimlich relied on the ancient doctrine of "functus officio." "At common law," the Supreme Court explained, "the issuance of an arbitration award was treated as functus officio, an act that terminates the actor's authority." Here, however, the doctrine only applied after the arbitrator's assigned duties ended -- and apparently those post-final award duties can now include awarding costs to a party that prevails under section 998. "Further, common law rules are subject to legislative revision." And pursuant to the California Arbitration Act, arbitrators do have some vestigial powers after issuing an award, so the doctrine of functus officio is not absolute. And section 998 "is intended to place parties to arbitration and court proceedings on equal footing and should be read to grant arbitration parties the same shield against premature disclosure of settlement offers that parties in court enjoy."

    PRACTICE TIP. What should the practitioner do about making a request for costs under section 998 in an arbitration? The Court notes, "Shivji did not seek a stipulation that would allow the parties jointly to advise the arbitrator of a 998 offer." That could have been done before the final award was issued. If the arbitrator had then refused to accept evidence on an issue of costs that he had to decide pursuant to a joint stipulation, that might have been a solid ground for challenging the award, for squarely refusing to consider important evidence would have been more than a mistake of law. Of course, in the absence of a stipulation, the next person requesting costs within 15 days after issuance of the final award can present the arbitrator with a copy of Heimlich v. Shivji, and hope the arbitrator does not go off the rails.

    

Section 998, Costs: Insurance Company That Is De Facto Party Under Probate Code Is Party To CCP 998 Settlement Offer, And On The Hook For Litigation Costs

Because Insurance Company Controls The Litigation, Court Looks Past "Legal Fiction" That Decedent's Estate Is The Party.

    Amanda Meleski was injured when Albert Hotlen ran a red light and collided with her vehicle. But by the time Mr. Hotlen could be served with a summons, he was dead. However, Mr. Hotlen had purchased a $100,000 policy from Allstate. Ms. Meleski offered to settle with Allstate for one dollar less than policy limits, to wit, for $99,999. Allstate rejected the offer, went to trial, and took a hit from the jury for $180,613.86. Ms. Meleski then sought to recover expert witness fees and other litigation costs, in the amount of $66,017.08, pursuant to section 998, having done better at trial than the offer that Allstate rejected. However, the trial court held that her recovery against Allstate was limited by the policy limit of $100,000. She appealed. Meleski v. Estate of Albert Hotlen,  C080023 (3rd Dist.  11/29/18) (Blease, Robie, Mauro).

    The Court refused to ignore the reality that Allstate controlled the litigation, adding: "Moreover, we find it manifestly unfair that section 998 could be employed by Allstate to recover costs from the plaintiff (which costs it would have no obligation to pay to the estate), but Allstate would have no corresponding responsibility to pay costs merely because it is not the named party."

    The Court reversed the order denying an award of costs from Allstate, and modified the award to add $66,017.08 to $100,000 in damages.

 

    

 

 

Arbitration: Three Unpublished Employment Opinions Side With Employers' Positions

Issues Covered Include Class Action, Unconscionability, Powers Of Arbitrator, Enforcement, Non-Signatories, PAGA, Severability, Costs.

Martinez v. Ready Pac Produce, Inc., B279225 (2/3  11/20/18) (Lavin, Egerton, Dhanidina) (Unpublished): Waiver Of Class Action Meant Employee Could Not Participate In Pending Class Action.

    The Court of Appeal reverses order denying employer Read Pac's motion to compel arbitration. The superior court had found the arbitration agreement to be unconscionable because it included a provision waiving the right to participate in a class action, including a pending class action. Relying on Concepcion, the Court of Appeal stated, "It is well settled that class action waivers in arbitration agreements are generally enforceable." While the employee lost the right to participate in a pending class action, the employee still had the right to pursue her individual claims in arbitration.

O'Brien v. Sajahtera, Inc., B282037 (2/3  11/20/18) (Lavin, Egerton, Dhanidina) (Unpublished): Arbitrator Did Not Exceed Powers.

    The Court of Appeal affirms judgment entered after the superior court denied the plaintiff employee's petition to vacate an arbitration award in favor of defendant. 

    Plaintiff/appellant argued that the arbitrator had violated unwaivable statutory rights -- something that  would in fact be a basis for vacating an arbitrator's award. The Court of Appeal, however, disagreed, explaining plaintiff "improperly equates the violation of unwaivable statutory rights -- which may support vacatur of an arbitration award -- with an unfavorable resolution of a claim relating to unwaivable statutory right -- which does not."

Albarran v. Midwest Roofing Co., Inc., B284151 (2/1  11/19/18) (Bendix, Rothschild, Johnson) (Unpublished): Court Reverses And Orders Arbitration, Except For PAGA Claim.

    The Court of Appeal rejected trial court's finding that arbitration agreement was unconscionable because it lacked mutuality (a) because it was not signed by defendants; and (b) because it only required employees to arbitrate their claims. Generally an agreement can be enforced when signed by the parties against whom enforcement is  sought. As to the claim that the agreement was not mutual, the Court explained that the employee' agreement to arbitrate is read as mutual under existing case law. The Court added two caveats: first, certain of the cost-shifting provisions, which were unconscionable, had to be severed; second, the arbitration agreement did not apply to PAGA claims brought in the state's name.

 

    

Arbitration, Class, Severability, Delegation, Class Action: Court Of Appeal Holds Arbitration Clause Enforceable, Except For Severable Fees And Costs Provision In Consumer Arbitration

Fees And Costs Provision In Consumer Arbitration Was Unconscionable Here.

     This case involves a common scenario in which a business sells a good or service that is financed, the business is unable to fully perform, and the lender seeks to enforce an arbitration provision when it gets sued.  Here, the Court of Appeal held that the arbitration clause was enforceable, with one exception:  the provision that shifted fees and costs to the prevailing party in a consumer arbitration was held to be substantively unconscionable.  Why?  Because a prevailing plaintiff consumer would have been entitled to fees under the Consumer Protection Act, the “loser pays” provision only benefits a prevailing defendant.  Brinkley v. Monterey Financial Services, Inc., D066059 (4/1 Nov. 11, 2015) (Aaron, McIntyre, O’Rourke).  However, the Court also determined that because the agreement was not permeated with unconscionability, the one unconscionable provision could be severed, saving the rest of the arbitration provision.

     This is also a case in which incorporation by reference of AAA arbitration rules resulted in incorporation by reference of the AAA Supplementary Class Arbitration Rules.  And that in turn meant here that the decision to determine whether a class-wide arbitration will be allowed is a decision delegated to the arbitrator under the AAA rules.  The same delegation of the decision to decide whether to allow class-wide arbitration, with the same result, has been addressed in a case we blogged about earlier on August 20, 2015, Universal Protection Services, LP v. Superior Court of Yolo County (Michael Parnow, et al., Real Parties in Interest), C078557 (3d Dist. August 18, 2015)(published).

Arbitration/Costs: Public Interest Organization Public Citizen Claims Arbitration In Vast Majority Of Cases Will Increase Litigation Transaction Costs

But The Post Does Not Tell The Whole Story

    Public Citizen, a nonprofit public interest organization, in a somewhat dated (2010?) post contends:

“Not only is there no evidence that arbitration reduces the overall transaction costs of litigation (e.g. witness fees, attorney fees, discovery costs), but nobody has expounded a coherent theory to explain how arbitration could reduce such costs except in a few categories.”

     Public Citizen makes some good points:

• there is a dearth of studies showing the full costs of arbitration, and comparing those costs to litigation costs;
• the forum costs of arbitration charged by the tribunal that will decide the dispute are higher than the cost of getting into court, and thus serve as an entrance barrier in smaller disputes;
• pre-dispute arbitration agreements tend to result in higher costs than post-dispute arbitration agreements;
• arbitration clauses can be one-sided, requiring one side to arbitrate, but leaving the option of litigating or arbitrating open to the other side;
• parties that arbitrate may still need to resort to the courts to enforce arbitration clauses, to obtain subpoenas, to confirm an award, and to enforce an award.

     These points apply with greatest force in consumer arbitrations.  Here, however, California has somewhat leveled the playing field:

• arbitrators cannot administer consumer arbitrations under agreements requiring the consumer to pay the prevailing party’s fees or expenses (Cal. Code Civ. Proc. section 1284.3(a)).
• fees and costs in a consumer arbitration (exclusive of the arbitrator’s fees) shall be waived for an indigent consumer – meaning a person having a gross monthly income less than 300 per cent of the federal poverty guidelines (Cal. Code Civ. Proc. section 1284.3(b)).
• if the arbitration provisions are truly one-sided – i.e., they require one party to arbitrate, but leave open the option to arbitrate or litigate to the party with greater bargaining power – that will be evidence of substantive unconscionability of the arbitration agreement in California.

     Finally, there are plenty of reasons, other than measuring hard costs, for choosing arbitration, including:  more control over scheduling, convenience of location, input into choosing the decision maker, privacy, speed (especially where court dockets are congested), and finality.

Arbitration/Costs/CCP 1286.6: Sixth District Reverses Costs Award for Arbitration, But Remands to Allow Trial Court to Determine Costs Incurred To Judicially Confirm Arbitration Award

Both Sides Wanted To Correct Cost Award That Couldn't Be Corrected

     As with our immediately preceding post of May 19, 2013 on De Sena v. Richert, the issue here is whether cost issues should be presented to the trial judge or to the arbitrator.

     At arbitration, Plaintiffs were awarded $1,092,797, plus "costs in accordance with the California Code of Civil Procedure." Plaintiffs, however, never briefed the cost issue to the arbitrator, and did not submit evidence of costs or of a CCP 998 settlement offer. The trial court confirmed the arbitrator's award, but "corrected" the costs award by removing it. Plaintiffs appealed in order to recover their costs. Watson v. Knorr, H036430 (6^th Dist. May 13, 2013) (Rushing, P.J., author 3:0) (unpublished).

     The unpublished opinion is 40 pages long – evidence that costs issues in arbitration can be very confusing. Both Plaintiffs and Defendant had wanted to correct the ruling on costs – Plaintiffs, by filling in a dollar amount, Defendant, by deleting the reference to entitlement to costs. The bottom line, however, was that it was within the power of the arbitrator to rule on costs, and that even if the ruling was erroneous in arbitration, that was no basis for "correcting". it. If the Plaintiffs wanted the arbitrator to award costs, they would have done well to brief the issue, and submit evidence to the arbitrator.

     Costs incurred by Plaintiffs in the trial court were a different matter. "The case is remanded to the trial court for the sole purpose of determining Plaintiffs' entitlement to costs related to the proceedings in the trial court and the amount of such costs."

     Practice Tip: The Court of Appeal helpfully suggests a two-step approach in arbitration where a 998 settlement offer is made, and costs cannot be assessed before a prevailing party is determined. The parties should advise the arbitrator that a 998 offer has been made, and ask the arbitrator to conduct a bifurcated hearing, reserving jurisdiction to address costs after the liability and damages phase is completed.

 

Arbitration/Scope/Costs: Arbitrator’s Failure To Declare Prevailing Party And Denial Of Statutory Costs To Winner No Ground For Reversal

Arbitration, Law, and Equity

     Our next case reminds me of a hoary legal story.  Clarence Darrow handles a legal matter for William Randolph Hearst, and telegrams him:  “Justice has prevailed.”  Hearst’s reply:  “Appeal immediately!” 

     Appealing an arbitration result is often a long shot, because arbitration is more geared to equity and finality than to legal exactitude.

     The point is brought home in Plummer v. Day/Eisenberg, Case No. G046567 (4^th Dist., Div. 3 Mar. 22, 2013) (Ikola, J., author; 3-0) (unpublished).  The arbitrator’s failure to declare a prevailing party and denial of statutory costs to the winner did not permit a different result.  “An arbitrator does not exceed his or her powers by deciding an issue submitted for arbitration under the arbitration agreement. (Pierotti v. Torian (2000) 81 Cal.App.4th 17, 25 (Pierotti); see also Corona v. Amherst Partners (2003) 107 Cal.App.4th 701, 705 (Corona) [scope of arbitration and powers of arbitrator defined in accordance with agreement].)”  Here, the submission to the arbitrator was broad enough to include the question of costs.  And an error of fact or law is ordinarily not reason enough to reverse a judgment confirming an arbitrator’s award.

     Judgment affirmed.