California Mediation and Arbitration

Delegation, Arbitrability, Third-Party Beneficiary: Ralph's Wasn't Third-Party Beneficiary Of Agreement Between Customer And Instacart

Delegation Of Threshold Issue To Arbitrator Must Be Unmistakably Clear.

        Mahram used Instacart to purchase groceries and later sued Ralphs (The Kroger Co.) for allegedly raising prices after applying a coupon, claiming violations under false advertising and unfair competition laws. Ralphs moved to compel arbitration based on an agreement between Mahram and Instacart, even though Ralphs was not a signatory to that contract. The Court of Appeal affirmed the trial court's denial of Ralphs' motion to compel arbitration. Payam Mahram v. The Kroger Co., B324405 (2/8  8/19/24) (Wiley, J.).

        While Mahram did enter into an arbitration agreement with Instacart by signing up for its services, the agreement only applied to disputes between Mahram and Instacart.

        Whether Ralphs could compel arbitration was for the court to decide, not an arbitrator, because the contract did not make it "unmistakably clear" that Mahram agreed to arbitrate with any party other than Instacart.

        And Ralphs was not a third-party beneficiary of the contract between Mahram and Instacart, because the contract's purpose was to facilitate grocery deliveries, not to benefit Ralphs specifically.

        In sum, Ralphs could not enforce the arbitration agreement between Mahram and Instacart, and the trial court's denial of Ralphs' motion to compel arbitration was affirmed.

 

Delegation: Delegation Of Arbitrability To Arbitrator Fails When Delegation Is Not Clear And Unmistakable

Reference To The URL For AAA Rules Is Not Clear And Unmistakable Evidence Of Delegation Of Arbitrability.

        In an employment-related disputed, employee Mondragon argued that an arbitration provision that did not cover PAGA claims to the extent possible excluded all PAGA claims from arbitration, whereas the employer argued that it was only intended to exclude claims brought by the employee as a representative of other workers. Also, the employer argued that the issue of arbitrability had been delegated by reference to AAA rules to the arbitrator to decide. The employee's position prevailed in the trial court as well as the Court of Appeal. Mondragon v. Sunrun Inc., 101 Cal. App. 5th 592 (2/7  4/23/24) (Segal, Feuer, Martinez).

        Justice Segal explained, "We conclude that, by signing an arbitration agreement that (1) merely referred to the rules of the American Arbitration Association; (2) included a carve-out that arguably covered the dispute; and (3) included a severability clause stating a court may not enforce certain provisions, Mondragon, an unsophisticated party, did not delegate arbitrability decisions to the arbitrator. We also conclude the language of the arbitration agreement did not require Mondragon to arbitrate his individual PAGA claims."

Arbitrability, Delegation: When Two Arbitration Contracts Conflict, Court Decides Which One Supersedes The Other

The Supreme Court Does Not Decide Whether The Ninth Circuit's Decision Was Correct, Only Whether The Decision Was For The Court To Make.

        The parties "had executed two contracts: the User Agreement, which sent disputes about arbitrability to arbitration, and the Official Rules, which appeared to send disputes to California courts." Coinbase, Inc. v. Suski, No. 22-3 (S. Ct. 5/23/24). The Official Rules governed a sweepstakes to enter for a chance to win Dogecoin, and in fact, respondents had entered the sweepstakes. The Ninth Circuit held that the Official Rules, which sent disputes to California courts, superseded the User Agreement which would have delegated arbitration and arbitrability matters to an arbitrator. The United States Supreme Court affirmed.

        However, the Supreme Court ruling is narrow. It does not decide whether the Ninth Circuit was correct. Rather, as Justice Ketanji Brown Jackson explains, "We granted certiorari to answer the question of who—a judge or an arbitrator—should decide whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause." All the Supreme Court decides is that in a case where there are multiple agreements that conflict over whether the dispute is to be arbitrated, a court decides which agreement prevails.

        Justice Neil Gorsuch concurred with the understanding that the Court was not deciding whether the Ninth Circuit was applying contract principles correctly.

Delegation: Ninth Circuit Addresses How To State A Challenge To Delegation Of The Issue Of Arbitrability And How To Analyze Issue

Judge Eric D. Miller Agrees Majority's Analysis, But Disagrees That The Ninth Circuit Rule Is Any Different From The Rule In Other Circuits.

        Abraham Bielski has already made law in his case against Coinbase, Inc., a cryptocurrency exchange. Earlier this year, the Supreme Court held in Bielski's case that a district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing. See our 7/03/23 post about the SCOTUS decision in Bielski v. Coinbase, Inc. In the newest iteration of Bielski v. Coinbase, Inc., 22-15566 (9th Cir. 12/5/23) (Mendoza (maj.), Sanchez, Miller (partially concurring)), the Ninth Circuit examined whether a delegation clause in Bielski's contract with Coinbase, Inc. effectively delegated the issue of arbitrability to the arbitrator. Bielski continues to make law, though not necessarily in his favor.

        In deciding the delegation issue, the Ninth Circuit decided three issues, two of which Judge Mendoza described as issues of first impression. 

        The first issue of first impression is how much must a party challenging a delegation clause do to successfully allege a challenge? The answer is that specifically mentioning the delegation clause and presenting arguments against its enforceability is sufficient. Judge Mendoza suggests, however, that some other circuits require more substance in the challenge than does the Ninth Circuit.

        The second issue of first impression is how should the court conduct its analysis? Should it just look at the delegation clause, or should it be able to interpret that provision in the context of the agreement as a whole? The answer here is that "the district court correctly considered the whole context surrounding the delegation provision in its analysis of the provision’s validity." 

        The third issue is whether the delegation clause was unconscionable -- not an issue of first impression. The court found that it was not unconscionable, and therefore reversed the  district court’s order denying Coinbase’s motion to compel arbitration.  

        COMMENT: Judge Miller partially concurred in the opinion. He agreed with the court’s holding that “'to sufficiently challenge a delegation provision, the party resisting arbitration must specifically reference the delegation provision and make arguments challenging it' and that 'a party may use the same arguments to challenge both the delegation provision and the arbitration agreement, so long as the party articulates why the argument invalidates each specific provision.' I do not join it, however, because I do not agree with the court’s characterization of the rule applied in other courts of appeals." In other words, he doesn't believe there is any real difference between the Ninth Circuit test and how other circuits address delegation.

        Based on the Ninth Circuit majority opinion, there would appear to be a split among the circuits, and thus a firm basis for Supreme Court review. Based on Judge Miller's dissent there would be no reason for the Supreme Court to consider the case again, and if it did do so, it might conclude, as did Judge Miller, that the Ninth Circuit rule is a difference without a difference.

Delegation: Ninth Circuit Concludes That Delegation Clause Is Enforceable, Regardless Of Whether Arbitration Clause Is Found To Be Enforceable

Nesting dolls (Matryoshka dolls). Wikipedia. Published under GNU Free Documentation License, Version 1.2, and any subsequent versions.

        We can analogize the next case to a nesting doll problem. The delegation clause in an arbitration agreement (Agreement) is a mini-agreement nested in the Agreement. The Agreement is nested in an employment contract, consumer contract, or some other contract. The different contracts can be analyzed separately, and their relationship to one another must be considered.

        Here, a district court judge found the nested delegation clause to clearly and unmistakably delegate arbitrability issues to the arbitrator. However, the judge also found the delegation clause to be substantively and procedurally unconscionable, and therefore unenforceable. This conclusion was based on the fact that the Agreement contained a pre-dispute jury trial waiver. The waiver, however, only kicked in if the Agreement was found to be unenforceable. Having determined that the delegation clause was unenforceable, the judge then concluded that the Agreement itself was unenforceable, based on the same pre-dispute jury waiver. The defendant employer, seeking to compel arbitration, appealed the adverse ruling. Kenneth Holley-Gallegly v. TA Operating, LLC, 22-55950 (9th Cir.  7/21/23) (Smith, Hamilton, Collins).

        The Court of Appeals reversed, directing the district court to order the arbitrator to decide the arbitrability issue. The reason? The pre-dispute waiver of a jury trial did not infect the nested delegation clause. The arbitrator could still decide the issue of arbitrability. If the arbitrator decided that the case was arbitrable, then the waiver of a jury trial became irrelevant, because the case would never be litigated in court, and there could not be a jury trial. Thus, the jury waiver could only possibly have effect if the arbitrator decided the Agreement was unenforceable -- i.e., reached the same conclusion as the district court judge. Under the delegation clause, the arbitrator might conclude that the Agreement was unenforceable or enforceable, and either way, the delegation clause could be operable.

Delegation, Unconscionability: First District Div. 2 Affirms Order Denying Petition To Compel Arbitration

On-Line Gaming Was The Context For The Case.

        The world of on-line gaming presents challenges to companies wishing to bind players to arbitration. As our next case illustrates, gamers are likely to be treated as unsophisticated consumers with unequal bargaining power. Pavel Gostev v. Skillz Platform, Inc., A164407 (1/2  2/28/23) (Miller, Stewart, Richman).

        Gostev, a gamer, alleged that Skillz Platform, Inc.'s game amounted to gambling and that it engaged in predator practices. By establishing an account, tapping next, and clicking on a hyperlink to Terms of Service, Gostev allegedly agreed that disputes would be delegated to an arbitrator to decide. Skillz moved to compel arbitration, and Gostev argued that the agreement failed to delegate decisions to an arbitrator by clear and unmistakeable evidence, and that the arbitration agreement was unconscionable. The trial court agreed with Gostev, and the Court of Appeal affirmed.

        The problem with the delegation argument was that language that delegated decisions concerning disputes about Terms, Services, and Product was not clear enough. It could mean that the threshold dispute was delegated to the arbitrator to decide, or it could mean that only substantive disputes about the Terms, Services, and Product were delegated. The agreement also referenced the rules of the AAA which have sometimes been applied successfully to make a delegation argument. But the Court of Appeal explained that here, where the consumer was likely to be in a position of unequal bargaining power and sophistication, it would not accept reference to AAA rules as good enough to establish effective delegation.

        The agreement was a take-it-or leave-it agreement, and hence, there was some degree of procedural unconscionability. Also the agreement was one-sided to substantively favor the company: plaintiff's monetary damages were limited to $50, arbitration was to be held in San Francisco, though the consumer was located in Washington, there was a one-year limitations period for bringing a claim, and a split of arbitration fees and costs limited consumer rights under the California Consumer Legal Remedies Act. Given the procedural and substantive unconscionability, the court agreed the arbitration agreement was unenforceable.

First District, Div. 1 Affirms Order Denying Petition To Compel Arbitration Because Defendant Failed To Establish Existence Of Arbitration Agreement

No Evidence Of Signed Agreement.

        Bruno Fleming sued Oliphant Financial for allegedly violating the California Rosenthal Fair Debt Collection Practices Act. Oliphant unsuccessfully petitioned the trial court to compel arbitration. The Court of Appeal affirmed the trial court's order denying Oliphant's petition to compel arbitration. Fleming v. Oliphant Financial, LLC, A165837 (1/1  1/31/23) (Devine, Humes, Margulies).

        Oliphant failed to meet its burden of establishing the existence of an arbitration agreement. Fleming had signed a credit card application, but apparently there was a lack of evidence that he had signed an arbitration agreement or that he had received one. 

        This is pretty basic stuff. Rejecting Oliphant's efforts to finesse the threshold issue, the court addresses a few points.

• • As the party moving to compel arbitration, Oliphant had the burden of proof of establishing that the parties agreed to arbitrate.
  • An argument that the arbitration agreement delegates the question of arbitrability to the arbitrator fails if the arbitration agreement doesn't exist.
  • Contract formation will be addressed under state law.
  • The court, not the arbitrator, gets to decide whether an agreement to arbitrate exists.
  • Oliphant's choice-of-law argument that the arbitration agreement requires the application of Delaware law fails if there is no arbitration agreement.

 

 

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, 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.

Jurisdiction, Delegation, Stay: NY Court Is Court Of Competent Jurisdiction To Rule On Motion To Compel Arbitration Involving California Lawyer

At Play: Applicability Of Labor Code § 925 And California Code Of Civ. Proc. § 1981.4.

        The scenario in Jinshu "John" Zhang, Petitioner v. Superior Court of Los Angeles, Respondent; Dentons US LLP et al, real parties in interest, B314386 (2/8  11/9/22) (Grimes, Stratton, Wiley), while not exactly common, is also to be expected. It involves a jurisdictional turf war arising from the circumstance that California employees generally prefer to litigate claims in court on their home turf, to wit, California, whereas employers prefer to arbitrate, and if the employee can be compelled to arbitrate out of state on the employer's home turf, so much the better. But was lawyer Zhang an "employee" of Dentons US, and who decides that question? -- there's the rub!

        The spat between Zhang and Dentons arose over a multi-million dollar contingency fee for a client Zhang brought to the law firm. The lawyer and the law firm had an agreement to arbitrate disputes in Chicago or New York. The arbitration agreement also included a delegation clause providing all issues of arbitrability are to be decided by the arbitrator. Dentons moved in NY to compel arbitration in NY, alleging claims for breach of fiduciary duty, and Zhang sued in LA Superior Court for wrongful termination and other causes of action. Petitioner Zhang moved to enjoin the NY proceedings, and Respondent Dentons moved to stay the LA proceedings pending arbitration in NY.

        Two statutory provisions are particularly relevant to the outcome. First, Labor Code § 925 provides that an employer cannot require, as a condition of employment, that an employee who primarily resides and work in California, agree to adjudicate a claim arising in California outside California. In other words, if Zhang is an employee, then he gets to adjudicate California claims on his home turf. 

        Here, Code of Civ. Proc. 1281.4 comes into play, for it allowed Dentons to argue in the LA court that it should stay its proceedings pending the arbitration in NY. Section 1281.4 provides in part: "If a court of competent jurisdiction, whether in this State or not [i.e., in NY],  has ordered arbitration of a controversy [in NY] which is an issue involved in an action or proceeding pending before a court of this State [California], the court in which such action or proceeding is pending [LA Superior Court] shall, upon motion of a party [Dentons] to such action or proceeding, stay the action or proceeding [in LA] until an arbitration is had [in NY] in accordance with the order to arbitrate or until such earlier time as the court specifies."

        Much of the argument centered on whether the NY court ordering arbitration was a "court of competent jurisdiction," with Zhang arguing that it could not possibly be competent to adjudicate the motion to compel arbitration if he was an employee, because Labor Code § 925 did not allow him as an employee to be forced to adjudicate a California employment claim outside of California. The obstacle that Zhang could not overcome was that the trial court in California, and our Court of Appeal, agreed that the arbitration clause "clearly and unmistakably" delegated issues of arbitrability, including a determination as to whether Zhang was an employee, to the arbitrator. And the court in NY was competent to decide that the issue was delegated to the NY arbitrator.

        COMMENT: If the NY arbitrator decides Zhang was an employee, then jurisdiction will belong in California. But if the arbitrator decides Zhang was not an employee, then the NY arbitrator will decide the merits of the dispute.