California Mediation and Arbitration

Arbitration: Delegation/Unconscionability: Trial Court Is The One Deciding Any Contractually Applicable Defenses, Including Whether Delegation Clause Is Unlawful And Void

Arbitration Clause Was Infirm Because It Was A “Side Agreement” Neither Filed With Nor Approved By California’s Insurance Commissioner.

            Nielsen Contracting, Inc. v. Applied Underwriters, Inc., Case No. D072393 (4^th Dist., Div. 1 May 3, 2018, modified on May 23, 2018) (published) (Haller, J., author, concurred in by McConnell, P.J. and Huffman, J.) decided that the trial court is the gatekeeper on the question of whether a delegation clause in an arbitration provision is valid, extensively adopting the reasoning of SCOTUS in Rent-A-Center West, Inc. v. Jackson, 58 U.S. 63 (2010).

            The circumstances of this case were that plaintiff sued defendant insurers alleging they fraudulently provided workers’ compensation policies to plaintiff that were illegal and unconscionable in nature. Defendants moved to compel arbitration, and plaintiff opposed on the ground that the arbitration’s delegation clause was unlawful and void. The trial court agreed with plaintiff, denying the motion to compel arbitration. Defendants appealed, with the 4/1 DCA panel affirming the denial order.

            The arbitration provision in the applicable agreement said disputes and controversies had to be conducted in the British Virgin Islands under AAA rules by an arbitrator who was a disinterested official in the insurance/reinsurance industries and with the arbitrator delegated to determine the enforceability of the arbitration clause. Another related development was that the Insurance Commissioner in an earlier administrative proceeding brought by different insureds against the same defendants found that the arbitration clause was unlawful and void, including the key fact that the defendants failed to get approval for their arbitration clauses from the Insurance Commissioner such that they were illegal “side agreements”—an administrative ruling which admittedly had precedential value.

            The appellate court agreed with the trial judge’s conclusion to find the delegation clause void because (1) Rent-A-Center does allow the lower court to adjudge the enforceability of the clause; (2) the challenge to the delegation clause could also be the same as the challenge to the underlying contract, with plaintiff’s challenge being specific enough; and (3) the defendants failed to file the arbitration provisions with the Commissioner in derogation of Insurance Code section 11658.

            BLAWG OBSERVATION—For readers wanting more information on delegation cases, see my Home Page and click on the left hand category “Arbitration: Delegation.”

Delegation: Petition To SCOTUS Presents Delegation Of Arbitrability Issue

Does Delegation To Arbitrator Of Arbitrability Issue Need To Occur Even If Arbitration Claim Is Wholly Groundless?

     In the April 18, 2018 on-line issue of ScotusBlog, under "Petition of the Day," Aurora Barnes posts:

"Henry Schein Inc. v. Archer and White Sales Inc.

17-1272

Issue: Whether the Federal Arbitration Act permits a court to decline to enforce an agreement delegating questions of arbitrability to an arbitrator if the court concludes the claim of arbitrability is 'wholly groundless.'”

The boundaries of the delegation doctrine are being tested by the case.

Arbitration/Delegation: SCOTUS To Consider Who Decides Arbitrability Of Federal Arbitration Act Section 1 Exemption

Arbitrator Or Judge?

        SCOTUSBlog reports today that the Supreme Court has added an arbitration case to its next term:

            "New Prime Inc. v. Oliveira

 

Docket No.	Op. Below	Argument	Opinion	Vote	Author	Term
17-340	1st Cir.	TBD	TBD	TBD	TBD	OT 2018

 

Issues: (1) Whether a dispute over applicability of the Federal Arbitration Act's Section 1 exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and (2) whether the FAA's Section 1 exemption, which applies on its face only to “contracts of employment,” is inapplicable to independent contractor agreements."

Arbitration, Delegation, Waiver, Jurisdiction, Deadlines: Conduct Of Parties Evidenced Consent To Allow Arbitrator To Decide The Issue Of His Own Jurisdiction

To Ask The Question Is To Answer It . . . 

        My law professors seemed fond of that old chestnut, "to ask the question is to answer it."  Once you know the question presented by the Court of Appeal in Douglass v. Serenivision, Inc., B277574 (2/2  2/18/18) (Hoffstadt, Lui, Chavez) (published), you will know the answer.

 Question:  Does a party clearly and unmistakably consent to have an arbitrator decide his own jurisdiction when that party does not object to the arbitrator's jurisdiction in its answer to the arbitration petition, informs the arbitrator that it is "voluntarily" "submit[ing]" to the arbitrator's jurisdiction, appears at multiple prehearing conferences, formally asks the arbitrator to impose a bond requirement on the opposing party, and only after the arbitrator denies that request tells the arbitrator that its submission to jurisdiction was conditional on obtaining that bond?

Answer:  On these facts, we conclude that such conduct does constitute clear and unmistakable consent to allow the arbitrator to decide the issue of his own jurisdiction.  We further conclude that the party's challenge to the arbitrator's jurisdiction is untimely and that his challenges to the arbitrator's assessment of his jurisdiction and to the ultimate arbitration award are without merit.

Twenty pages of explanation follow the foregone conclusion.

        TRIVIA: Who said:  "To ask the question is to answer it?"  The phrase was used in Supreme Court cases in the 19th century, in opinions authored by Mr. Justice Brewer in In Re Debs, 158 U.S. 564 (1895), and by Mr. Justice Matthews in Heald v. Rice, 104 U.S.737 (1882).  Since then, the phrase has appeared in numerous cases.

Arbitration, Delegation, Gateway Issues: SF Sup. Ct. Judge Holds Judge, Not Arbitrator, Decides Whether Contract With Arbitration Clause Is Legal

JAMS Clause Delegating Validity Issue To Arbitrator Was Not Clear and Unmistakable Delegation Of Legality Issue.

        Who decides whether an arbitration agreement is part of an enforceable legal services agreement, the judge or the arbitrator?   That was the issue addressed by the Hon. Harold E. Kahn in an "Order Denying Defendants' Petition for Order Compelling Arbitration," filed December 12, 2017 in Marble Bridge Funding Group, Inc. v. Buchalter, et al., CGC-17-560501 (SF Sup. Ct.).  

        The general rule is that the legality of a contract is decided by the court.  Loving & Evans v. Blick, 33 Cal.2d 603 (1949).  But in Marble Bridge Funding Group, Inc. v. Buchalter, the issue of validity was delegated by JAMs rules to the arbitrator.  The court here decided that the delegation of the issue of validity was not a "clear and unmistakable" delegation of the issue of illegality to the arbitrator.  

        The court further ruled that Buchalter had a conflict of interest making the arbitration language in its service agreement unenforceable.  

        COMMENT:  Obviously, conflict checks and waiver agreements are intended to prevent such a problem from ever arising in the first instance.  Perhaps a delegation clause that delegated the issue of illegality to the arbitrator would have also solved the problem, at least, from the standpoint of the party seeking to compel arbitration with language that is "clear and unmistakable".

        HAT TIP to Rebecca M. Coll of Quadra & Coll, LLP, who brought Judge Kahn's order to my attention.  Ms. Coll represented Marble Bridge Funding Group, Inc.

Arbitration/Delegation/Gateway Issues: Contract Requiring Arbitration To Be "Generally Conducted" In Conformance with AAA Commercial Arbitration Rules Fails To Delegate Issue Of Arbitrability To The Court

What Does "Generally" Mean?

        Pristine Environments Inc. v. Signet Jewelers Limited et al., D071394 (4/1  10/13/17) (Nares, Benke, O'Rourke) (unpublished) involves an interesting wrinkle to the question:  who decides the issue of arbitrability?  Case law holds the issue of arbitrability is decided by the Court, absent clear and unmistakable evidence of the parties' intent to delegate that  "gateway issue" to the arbitrator.  And, the Commercial Rules of the American Arbitration Association delegate the decision about arbitrability to the arbitrator.  So, when those rules are incorporated by reference into the parties' agreement, the arbitrator gets to decide whether the dispute is arbitrable, right?  

        But not so fast.  Here, the agreement provided, "arbitration shall be generally conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association."  Generally?  What does that mean?  "The [trial] court determined that by using the word 'generally' to describe which AAA rules apply, the Agreement contained no clear and unmistakable evidence the parties intended to incorporate the AAA rule delegating arbitrability issues to arbitration."  And the Court of Appeal agreed with that determination.

        So Signet lost its argument that the arbitrator should have decided the gateway issue of arbitrability.  Nevertheless, Signet did well to appeal the trial court's decision that the matter was not arbitrable.  The trial court had determined that Pristine's fraudulent inducement claims were outside the scope of the agreement's arbitration provision covering claims "arising under" the agreement.  And now the other wrinkle:  Ohio law applied to the agreement.  And Under Ohio law, the Court of Appeal held, "arising under" encompasses fraud in the inducement.  As a result, the claim of fraudulent inducement could be arbitrated.

        Thus, the appellant Signet lost its argument that the arbitrator should have decided arbitrability, but won its argument that the dispute should be arbitrated, and so now it's on to the main event, arbitration of a multi-million dollar dispute in which Pristine alleges it was fraudulently induced by Signet to provide $15M worth of services for $10.5M.

Arbitration, Gateway Issues, Delegation: 2/7 CCA Reverses Trial Court's Order Denying Petition To Compel Arbitration Because Incorporated AAA Rules Delegated The Decision To The Arbitrator

Sixteen Page Majority Decision Draws Fifteen Page Concurrence And Dissent From Justice Segal.

            If an agreement to arbitrate is unconscionable, why should decisions about arbitrability ever be sent to the arbitrator?  Answer:  ordinarily, it is presumed that decisions about arbitrability are to be made by the judge, and therefore a determination that the agreement is unconscionable will not be sent to the arbitrator.  And if the judge decides that the arbitration agreement is unconscionable, the arbitrator will never get to decide anything.  The exception to this rule, however, is that the parties may agree to delegate to an arbitrator the authority to decide questions of arbitrability -- and that can include whether the arbitration agreement is unconscionable.

            In Advanced Air Management, Inc. v. Gulfstream Aerospace Corporation, B265723 (2/7  9/6/17) (Menetrez, Zelon; Segal, concurring and dissenting) (unpublished), the trial court held that an agreement between the plaintiff and the defendant was unconscionable.  Judge Menetrez, sitting by designation, and Justice Zelon, however, reversed the trial court's order denying Gulfstream's petition to compel arbitration, because the incorporation of AAA Commercial Rules delegated the decision-making authority on the unconscionability issue to the arbitrator.  As a result, the arbitrator will get to decide the unconscionability issue.

        Justice Segal concurred and dissented.  He concurred that the parties agreed to delegate the issue of arbitrability to the arbitrator.  However, he would have held that Gulfstream invited error it argued the trial court made in deciding the issue, because Gulfstream asked the court to decide the issue.  However, Justice Segal believed that the arbitration provision was not unconscionable. 

        COMMENT:  Apparently Gulfstream did not explicitly reference arbitrability in its petition to compel arbitration.  Justice Segal explains that Gulfstream argued that it asked the court to refer arbitrability to the arbitrator "by asking the court to compel Advanced Air to arbitrate the claims raised in its complaint" and that one of the claims raised in Advanced Air's complaint "was that the arbitration clause was unconscionable."  Justice Segal then sets forth verbatim the dense language in Advanced Air's  complaint, and challenges the reader to find the hook upon which Gulfstream is hanging its argument that it preserved the issue of delegating to arbitration whether the arbitration clause was unconscionable.  "Did you miss it?" asks Justice Segal, adding "So did I."  Actually, I did not miss it the first time.  But thanks to Justice Segal, I was looking for the language on which Gulfstream relied.  

        

Arbitration, Standard Of Review, Delegation, Vacatur: Second District, Div. 1 Rules Trial Court Erred By Failing To Apply Correct Legal Standard To Review Of Arbitrator's Award

Agreement Between The Parties That Award Could Be Reviewed For Legal Error Made The Difference.

        In Harshad & Nasir Corporation v. Global Sign Systems, Inc., and related appeals, B269427, B275942, B275947 (2/2  8/15/17) (Rothschild, Chaney, Lui), the Court of Appeal considered three related appeals of parties fighting over allegedly unpaid invoices amounting to $114,823.72, arising from plans to put up signs at Carl's Jr. restaurants.  The Court of Appeal, in a published opinion penned by Justice Rothschild, concluded "that the trial court prejudicially erred when it failed to apply the correct standard in reviewing the arbitrator's award."

        This is a case in which the parties' agreement that the award could be reviewed for legal error made all the difference.  Unlike the typical situation in which errors of fact or law will not provide a basis for vacating an award, here, the parties took advantage of the California rule set forth in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334 (2008), allowing the  parties to agree to limit the arbitrators' authority by providing for review of the merits.

        The results of review on the merits were severe.  The Court of Appeal held substantial evidence did not support the award for damages, and an alleged contract to be performed over a three-year period violated the statute of frauds.  Also, the arbitrator exceeded his authority by deciding a claim for lost profits the parties had not agreed to arbitrate.  As a result of this reversal of fortune, the formerly prevailing party did not prevail, and a fee and cost award in the amount of $1,142,596.20 was reversed.

        COMMENT:   A successful arbitration can be efficient and cost effective.  This arbitration is a stunning counter-example.  It took five years to get an arbitration award.  The arbitration and subsequent trial court rulings resulted in three related appeals.  Significant damage and attorney fees/cost awards, each in excess of $1 million, were reversed.   And this all started with an effort to recover $114,823.72!

        An interesting aspect of the opinion is the interaction of delegation of authority to the arbitrator with the standard of review.  Global argued that under JAMS rules, the decision about the scope of authority is delegated to the arbitrator, and the arbitrator had decided that the substantial lost profits claim was within his authority to decide.  Because, however, the parties agreed that the standard of review allowed for review of legal error, the Court of Appeal did not need to rule whether the decision about scope had been delegated to the arbitrator.  Whether or not JAMS rules allowed for a delegation of decision-making authority, the arbitrator had ruled incorrectly as a matter of law.

        NOTE:  California Attorney's Fees, the website Mike Hensley and I contribute to, has a post on the attorney's fees aspect of this case.

        

 

 

 

Arbitration, Consumers, Delegation, Gateway Issues, Unconscionability: Fifth District Vacates Parts Of Trial Court Order About Unconscionability And Arbitrability, And Upholds Delegation Clause Sending Consumer Dispute To JAMS Arbitrator

Enforceable Delegation Provision Means The Buck Does Not Stop With Court, But Gets Passed To Arbitrator.

        Aanderud v. Superior Court (Vivint Solar Developer, LLC, Real Party In Interest), F073277 (5th Dist.  7/26/17) (Gomes, Hill, Meehan), is worth reading for its analysis of how a delegation provision is applied to a consumer arbitration, where the individual stakes are low, but the cost of entry to arbitration may be high for the consumer. 

        The Aanderuds brought individual and class action claims against Vivint Solar, in connection with their entry into a 20-year solar power purchase agreement with Vivint Solar.  The trial court granted Vivint Solar's petition to compel arbitration, ordered the Aanderuds to submit their individual claims to arbitration, and dismissing class claims without prejudice.

        The Court of Appeal disagreed in part with the trial court's order, because a delegation clause, if enforceable, required the arbitrator, not the trial court, to resolve substantive issues.  Therefore, the Court of Appeal addressed the dispositive issue: whether the delegation of issues to the arbitrator was valid.  The Aanderuds contended that the delegation clause was not enforceable, because it was not clear and unmistakable and because it was unconscionable.  The Court of Appeal, however, disagreed, finding the delegation clause enforceable.

        The most interesting part of the analysis addressed the Aanderud's contention that the delegation clause was unconscionable in the context of consumer arbitration, because it was prohibitively expensive for the Aanderuds to arbitrate their consumer claim.  The Court of Appeal, however, believed that under JAMS rules for consumer arbitrations, "the Aanderuds' fees will most likely be limited to $250 . . . "  (Query: Does "most likely" contain a negative pregnant?)  The Aanderuds, however, argued that because the arbitration did not satisfy all 10 requirements under JAMS rules for JAMS to arbitrate a consumer dispute, JAMS might proceed under other than consumer rules, requiring the parties to pay pro rata costs, including a $1,200 filing fee, a  $5,000 retainer, and arbitrator's fees ranging from $5,000 to $8,500 per day.

        The Court of Appeal, however, concluded that the merits of the Aanderuds' contention regarding the sharing of expenses are for the arbitrator to decide, "as their contentions go to the 'scope and applicability' of the arbitration provision."  

        The upshot is a disposition that grants in part and denies in part the Aanderuds' petition to the Court of Appeal.  Because the delegation clause is held to be effective, the Court of Appeal vacates parts of the trial court's order finding the arbitration agreement was not unconscionable, finding all claims are arbitrable, and finding the Aanderuds could only arbitrate in their individual capacity.  However, the case will go to arbitration, and now the arbitrator will have to decide issues the trial court should not have decided.

        COMMENT:  The Court of Appeal agreed that the arbitration agreement was procedurally unconscionable, but did not believe that substantive unconscionability existed.  The Court's reasoning regarding the Aanderuds' contention that the delegation clause was invalid, in part because the allocation of expenses was unfair, seems somewhat circular.  By leaving it up to the arbitrator to decide the issue, the Court of Appeal seems to be punting, leaving it up to the arbitrator to address an aspect of unconscionability.  And, the enforceability of the delegation clause turns on whether it is unconscionable, such that if it is unconscionable, then decisions could not be delegated to the arbitrator.  Here, the Court of Appeal has finessed the issue by the the deft application of labels, explaining that "[t]he merits of the Aanderuds' contention [regarding arbitration expenses] are for the arbitrator, not us, to decide, as their contentions go to the  'scope and applicability' of the arbitration  provision."  Thus, the Court of Appeal views the argument about the potential for unfair application of the cost rules not as an issue of ambiguity or of unfairness, but as an issue concerning the "scope and applicability" of the arbitration  provision.  Problem solved?

 

 

 

        

Arbitration, Delegation, Class Action: Fourth District, Div. 3 Holds Arbitrator Must Decide Class Action Question Based On Language Of The Arbitration Agreement

In California, There Is No Universal Rule That Arbitrator Or Court Decides Whether A Class Action Can Be Arbitrated -- It Depends On The Agreement.

        The United States Supreme Court has held that a party may not be compelled to submit to class arbitration unless there is an express contractual basis for  concluding the  parties agreed to class arbitration.  Stolt Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662, 685 (2010).  However, the California Supreme Court has  held that who -- arbitrator or judge -- decides about the availability of class arbitration is a matter  of contract interpretation.  Sandquist v. Lebo Automotive, Inc., 15 Cal.5th 233, 243 (2016).  We posted about Sandquist almost exactly one year ago, on July 28, 2016.

        Following the Sandquist precedent, the Court of  Appeal has reversed the trial court's denial of an employee's petition to compel class arbitration, concluding that the arbitration agreement in Network Capital Funding v. Papke, G049172 (4/3  7/21/17) (Aronson, Bedsworth, Fybel) (unpublished) could not be meaningfully distinguished from the agreement in Sandquist.  The Arbitration Agreement in Network Capital was broadly drafted to include "any claim, dispute, and/or controversy", and it governed "all disputes that may arise out of or be related to  [Papke's] employment in any way" (italics added by the Court).  The Arbitration Agreement included exceptions, but the exceptions did not apply.  Finally, the Agreement was a form contract drafted by Network Capital and imposed on the plaintiff as a term of his employment.