California Mediation and Arbitration

Ninth Circuit Holds Jurisdiction Exists To Enforce Arbitral Document Subpoena In California For International Arbitration Pending In DC

Fighting About Obtaining Discovery In International Arbitration Pending In US . . . 

 

        A problem occasionally encountered in arbitration is getting a court to enforce a document subpoena issued by the arbitrator. That was the problem in Jones Day v. Orrick, Herrington & Sutcliffe, LLP, Michael D. Torpey, Mitchell Zuklie, 21-16642 (9th Cir.  8/1/22) (Wardlaw, Ikuta, Bade).  

        The situation here was that Jones Day sought discovery from Orrick in an arbitration involving a partnership dispute and an attorney who was a German national, the arbitration was in Washington DC, and Orrick is headquartered in San Francisco. The problem that required a solution was finding subject matter jurisdiction in federal court and a means to enforce a subpoena in California.

        The eventual solution, after some misfires, was to get the arbitrator to agree to sit for a hearing in California, have the arbitrator issue a by now "revised" subpoena, and file an action in the USDC, Northern District of California, to enforce the subpoena. While this solution eventually worked, it did not work in the USDC, Northern District, because the judge construed the Federal Arbitration Act to only allow the arbitrator to issue a subpoena where the arbitrator was sitting, i.e., DC. Jones Day then petitioned the Ninth Circuit -- successfully -- in order to enforce the arbitral summonses.

        Judge Wardlaw explains, "[W]e must decide whether an action to enforce an arbitral summons issued by the arbitrator in an ongoing international arbitration under the [New York] Convention also “falls under the Convention.” We join our sister circuits in holding that (1) if the underlying arbitration agreement or award falls under the Convention, and (2) the action or proceeding relates to that agreement or award, then the federal district court has jurisdiction over the action or  proceeding." Here, there was subject matter jurisdiction, because the international arbitration fell under the Convention, and the proceeding to issue summonses for the subpoenas related to the agreement.

        One question remained: where could the subpoenas be enforced? An arbitral subpoena can be enforced by the district court sitting in the district where the arbitration is located pursuant to 9 U.S.C. § 204, but the court in Washington DC lacked personal jurisdiction over Orrick in San Francisco. Solution: "[W]here, as here, that federal district court lacks personal jurisdiction over the party against whom enforcement is sought, we hold that the action may be brought in any district court deemed appropriate under the general venue statute, 28 U.S.C. § 1391, because [9 U.S.C.] § 204 supplements, rather than supplants, other venue rules."

        COMMENT: While Orrick may be displeased with the outcome of this discovery skirmish, the ruling will be welcomed by litigators who seek documents in international arbitration and are sometimes stymied by jurisdictional rules.

 

Arbitration, Agency, Choice Of Law, Discovery: 9th Circuit Holds District Court Should Allow Discovery To Determine If Client Authorized Attorney To Agree To Arbitrate

Factual Questions Existed As To Whether Lawyer's Client Authorized Agreement To Arbitrate.

        Plaintiff Barbara Knapke sued PeopleConnect, the owner of Classmates.com, for allegedly making unauthorized use of her name and likeness. Before filing the lawsuit, Knapke's attorney Reilly logged in to the Classmates.com website, and in doing so, agreed to arbitrate. Did Knapke authorize her attorney to agree to arbitrate? The district court ruled that there was no evidence that she had authorized her attorney to arbitrate. PeopleConnect appealed. Barbara Knapke v. People Connect, Inc., No. 21-35690 (9th Cir.  6/29/22) (Bennett, Wardlaw, Gould).

        Judge Mark J. Bennett first explained that the district court should have applied Washington State law rather than Ohio law. Knapke is a resident of Ohio, and PeopleConnect's principal place of business is in Seattle. But it made no difference, since Ohio and Washington law were not in conflict.

        Second, a question of fact existed as to whether Knapke authorized her attorney to agree to arbitrate. That question required inquiring into "the contours of Knapke’s agreement with Reilly’s law firm and the limits, if any, on Reilly’s authority to act on Knapke’s behalf." In addition to authorization, there was a question as to whether later conduct could have ratified the attorney's actions. Because of such questions, PeopleConnect should have been allowed to conduct discovery.

        When the matter returns to the district court, where PeopleConnect will get "another bite of the apple", there will be additional questions to resolve: does privilege prevent discovery into attorney communications relevant to the scope of authority? Plaintiff's claim that there was a lack of authority makes her communications with her attorney a relevant area of inquiry. Has there been a waiver of privilege? If the plaintiff rests on a claim of privilege, what effect will that have upon her claim that she did not convey authority to her attorney to agree to arbitrate? 

Arbitration, Discovery: SCOTUS Rules Federal Courts Can't Grant US Discovery For Arbitration Outside US

Foreign Arbitration Panels Are Not A "Foreign Or International Tribunal".

        A district court can order the production of evidence “for use in a proceeding in a foreign or international tribunal.” 28 U.S.C.  § 1782(a). The United States Supreme Court, in a unanimous decision authored by Justice Amy Coney Barrett, holds that a foreign arbitration panel outside the US is not a "proceeding in a foreign or international tribunal." Therefore, the district court cannot order the production of evidence. ZF Automotive US , Inc. v. Luxshare, Ltd, No. 21-401, together with No. 21–518, AlixPartners, LLP, et al. v. Fund for Protection of Investors’ Rights in Foreign States,  (S. Ct. 6/13/22).

        COMMENT: Limitations on discovery should be considered when agreeing to arbitrate (assuming one has a choice).

Arbitration, Unconscionability: CCA 2/2 Agrees Adhesive Contract Allowing Unfair Fee Shifting And Drastically Limiting Discovery Is Unconscionable

Joseph Merced Nunez v. Cycad Management LLC, B306986 (2/2  3/18/22) (Lui, Ashmann-Gerst, Chavez).

        Nunez, a gardener, sued Cycad for employment-related claims. Cycad moved, unsuccessfully, to compel arbitration. The Court of Appeal now holds: "Substantial evidence supports factual findings that the Agreement is adhesive because it was presented to Nunez as a nonnegotiable condition of his employment. It is procedurally unconscionable because it was given to Nunez in English, which he cannot read, without adequate explanation or a fee schedule. It is substantively unconscionable because it allows the arbitrator to shift attorney fees and costs onto Nunez and drastically limits his ability to conduct discovery."

        COMMENT: We have posted a number of times on cases in which the court finds that the inability of an employee to read the language in which a contract is written is a factor to be considered in a procedural unconscionability analysis. "Procedural unconscionability arises when an arbitration agreement 'was neither provided in a Spanish-language copy nor explained to respondents who did not understand written English.'" Penilla v. Westmont Corp., 3 Cal.App.5th 205, 209 (2016). Here are some things an employer could have considered doing: (1) provide a translation of the contract; (2) provide an oral explanation of the contract and arbitration provision in the language spoken by the employee; (3) obtain a receipt in the language spoken by the employee acknowledging receipt of the translation; (4) provide several days for the employee to review the contract before signing it. Perhaps the employer did consider taking those steps and simply viewed those steps as impracticable. I note that Nunez was hired before AB 51 went into effect, legislation aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration provisions. There are questions as to how effective this legislation is likely to be, and I refer readers to the article authored by Paul Dubow and me on AB 51, aimed at preventing employers from requiring employees to enter into mandatory pre-dispute arbitration agreements.

        Why is the shifting of attorney fees and costs onto Nunez a problem? Armendariz holds that the employee cannot be forced to pay costs that would not be incurred if the case were litigated in court rather than arbitrated.

 

Arbitration, Discovery, Appealability: In An Uninsured Motorist Arbitration, The Only Way To Challenge A Discovery Order Before Judgment Is With A Writ

A Case Of First Impression.

        Unless you practice in this area, you may not  know that in an uninsured motorist arbitration between the motorist with uninsured motorist coverage and her insurance company, discovery disputes are addressed to the court, not to the arbitrator. State Farm Mutual Automobile Insurance Company v. Cora Robinson, A158467 (1/1  3/14/22) (Humes, Margulies, Banke). "The question of first impression here is whether trial court discovery orders in these proceedings are reviewable on appeal from a judgment confirming the arbitration award. We hold that they are not." 

        The bases for vacating a judgment are found in California Code of  Civ. Proc. § 1286.2 (vacatur). And unhappiness with the trial judge's discovery order is not among the bases. Here, the insured argued that 1286.2(a)(4) provided a reason for  vacatur. That section allows vacatur when the arbitrator exceeded the arbitrator's power, and the award cannot be corrected without affecting the merits of the decision. However, the insured's complaint here was not addressed to the arbitrator, but rather  to the judge's discovery order. So there was no statutory route for vacating the arbitrator's decision. 

        The insured alternatively argued that her appeal should be considered as a writ. But that was not  possible, once a judgment had already been rendered.

        COMMENT: Suppose the arbitrator, rather than the judge, had issued a discovery order, as arbitrators routinely do in other types of proceedings. How easy would it be to attack the arbitrator's order in an appeal of a judgment confirming the award? Not easy. The arbitrator's discovery order would be scrutinized under the same standard as the award, and awards are not set aside just because the  arbitrator makes a mistake of law or fact.

Arbitration, Discovery, Constitutional Issues: Claimant's Avoiding Discovery In Arbitration Allowed Arbitrator To Draw Adverse Inferences

"... we compliment the arbitrator on providing a thorough and well-reasoned award and orders."

        As you have surmised from our lede, it did not go well for the plaintiff and appellant JP-Richardson, LLC, because the trial court's judgment granting the petition to confirm the arbitration award against JP-Richardson was affirmed. JP-Richardson, LLC v. Pacific Oak SOR Richardson Portfolio JV, et al., G059479 (4/2  6/29/21) (O'Leary, Moore, Fybel).

        The facts are unusual. JP-Richardson entered into a joint venture agreement with Pacific Oak to develop real estate in Texas. The JV agreement included an arbitration provision, as well as a provision authorizing the removal of JP-Richardson as a managing member for a "Just Cause Event." JP-Richardson's manager and principal executive was one Mark Jordan.

        The "Just Cause Event" arose because Jordan developed "a personal and financial relationship" with Laura Maczka, the town mayor of Richardson, Texas, where Jordan was seeking permits, entitlements, and zoning changes. A federal indictment basically alleged corrupt conduct by Maczka and Jordan. Jordan apparently was less than transparent with the JV partner Pacific Oak that he was the target of a  federal criminal investigation. When Pacific Oak learned about the investigation in 2017, JP-Richardson was removed as managing member.

        JP-Richardson and Jordan initiated arbitration proceedings, seeking declaratory relief and claiming breach of contract, inviting counterclaims, of course, from  Pacific Oak. The arbitrator ruled against JP-Richardson, after drawing adverse evidentiary inferences because Jordan invoked his Fifth Amendment right against self-incrimination, and did not satisfy discovery demands. The arbitrator noted, "Here, we have a unique case wherein it is the [c]laimant who has asserted his Fifth Amendment privilege against testifying whereas in most of the case law it is the defendant making the claim."

        Jordan's right to remain silent and avoid discovery did not help him, because the arbitration was civil, not criminal, and furthermore, the arbitrator offered an opportunity to provide a privilege log and redact documents -- an opportunity that was not taken. Jordan argued that the arbitrator should never have relied upon his felony conviction, which was vacated after a jury member conversed with a court employee. But the arbitrator also relied on adverse inferences, and testimony presented at the trial, not simply on the conviction that was overturned.

        The arbitrator awarded over $1 million in fees, and $88,000 in costs.

        COMMENT: In an article about Laura Maczka, Wikipedia states that developer Mark Jordan is Maczka's current husband. One can only hope that all the tsuris was worth it for the sake of love.

Arbitration, Jurisdiction, Discovery: Ninth Circuit Determines How Amount Requirement In Diversity Jurisdiction Applies To Subpoenas Issued By Arbitrators

The Majority Looks At The Amount-In-Controversy In The Underlying Dispute, And The Concurring Opinions Looks At The Amount Involved In The Discovery Dispute.

        The panel in Maine Community Health Options v. Albertsons Companies, Inc., No. 20-35931 (9th Cir.  3/31/21) (Hurwitz, Fletcher; Watford concurring) determines how "the amount-in-controversy requirement in 28 U.S.C. § 1332(a) is satisfied in an action under Section 7 of the  Federal Arbitration Act ("FAA"),  9 U.S.C. § 7, seeking enforcement of a third-party subpoena issued by arbitrators." Let's unpack that question.

        Section 7 of the FAA authorizes district courts to enforce third-party arbitration subpoenas. However, merely invoking the FAA to enforce discovery does not create federal jurisdiction -- one still needs an independent basis for federal jurisdiction. One basis for federal jurisdiction is diversity jurisdiction where the parties are citizens of different states and the amount-in-controversy exceeds $75,000. 28 U.S.C. § 1332(a).

        How does one apply these seemingly simple  rules to a third-party subpoena issued by arbitrators to obtain requested documents, when the company requesting documents and  the company producing documents are citizens of different  states? Does one look at the amount at stake in the discovery request, or the amount  at stake in the underlying arbitration that generated the third-party subpoena? And does one focus on the benefit to the  plaintiff or the detriment to the defendant in a  discovery dispute in order to determine amount-in-controversy?

        In Maine Community Health Options, an overbilling dispute concerning Maine Community and Navritus Health Solutions, LLC, a pharmacy benefits manager, over Navritus's billings, the underlying dispute between those two companies involved potentially $17 million, clearly far above the amount-in-controversy requirement for diversity jurisdiction. But that's not how the majority opinion analyzed the issue. Instead, the majority focused on the amount involved in the discovery dispute between Maine Community, and Albertsons, which was the third party subpoenaed to produce the documents. In a way, that makes sense, because Maine Community filed its action in federal court to enforce the  subpoena against Albertsons, invoking § 7, but the underlying dispute was between Maine Community and Navritus, and that dispute was in arbitration. Hence, the parties to the federal action are only Maine Community and the  third party it subpoenaed. And typically, one would look  at a complaint in federal court rather than a claim in arbitration to determine amount-in-controversy.

        Writing for the majority, Judge Hurwitz explains "we agree with the Second Circuit that the amount-in -controversy in a Section 7 enforcement action can be measured by either the benefit to the plaintiff or the detriment to the defendant that  would result from enforcement of the subpoena." In this case, Abertsons claimed the cost to it of production was $1,400, i.e., far below the jurisdictional amount-in-controversy requirement. But in this case, Maine Community provided a good faith allegation that the  value of the subpoenaed information to it exceeded $75,000, and Albertsons failed to show "to a legal certainty" that the claim was less than the jurisdictional amount.

        Concurring, Judge Watford reached the same outcome by a very different route. He would have looked at the amount-in controversy in the underlying arbitration -- $17 million. If the court could have had diversity jurisdiction in the original dispute, then it could have approved third party subpoenas against third parties. So Judge Watford would ask whether the court would have jurisdiction over the underlying dispute. And if it  wouldn't have had jurisdiction, then the subpoena wouldn't  issue. 

        COMMENT: Under the majority opinion, one needs here to  look at the amount-in-controversy in the action filed in federal court  between the parties to the  discovery. Under the concurring opinion, one needs to look at the amount-in-controversy in the underlying arbitration. Is it really easier to do one rather than the  other?

 

 

 

 

 

International Arbitration, Discovery: SCOTUS Grants Review In Servotronics, Inc. v. Rolls-Royce PLC

Can US Federal Courts Allow Discovery For Private International Arbitrations?

        As set forth in SCOTUSBlog, this is the issue before the Supreme Court in Servotronics, Inc. v. Rolls-Royce PLC:  "Whether the discretion granted to district courts in 28 U.S.C. § 1782(a) to render assistance in gathering evidence for use in 'a foreign or international tribunal' encompasses private commercial arbitral tribunals, as the U.S. Courts of Appeals for the 4th and 6th Circuits have held, or excludes such tribunals without expressing an exclusionary intent, as the U.S. Courts of Appeals for the 2nd, 5th and, in the case below, the 7th Circuit, have held." 

        The key issue is whether private international arbitration qualifies as "a foreign or international tribunal", in which case discovery could be permitted in U.S. district courts. 

        John Elwood, posting on March 18, 2021 for SCOTUSBlog, writes: "Servotronics notes that until the provision was revised in 1964, it applied to 'any judicial proceeding pending in any court in a foreign country.' Servotronics contends that the change in wording suggests Congress intended to include quasi-judicial proceedings such as arbitral proceedings. We’ll have a better idea what the Supreme Court thinks on Monday." That was written before the Supreme Court granted cert on March 22, 2021.

        On March 22, 2021, Paul Weiss Rifkind Wharton & Garrison LLP posted about Servotronics on Lexology. The post makes the point that, regardless of how the case is decided, issues are likely to remain regarding the interpretation of 1782: "First, even after the Supreme Court rules in Servotronics, we may not know whether an international arbitration seated in the United States qualifies as a 'foreign or international tribunal' under Section 1782. In addition, regardless of the outcome, courts may continue to find that investor-state arbitrations qualify for Section 1782 discovery."

 

Arbitration, Employment, Unconscionability: First Dist. Div. 3 Agrees Arbitration Agreement Is Unconscionable And Unenforceable

Limited Discovery And Lack Of Mutuality Were Important To Result.

    The Court of Appeal affirmed orders denying motions to compel arbitration in Scott Davis v. Stefan Kozak et al. and Scott Davis v. Red Bull North America, Inc., A156234 & A156238 (1/3  8/19/20) (Fujisaki, Siggins, Jackson), a consolidated appeal arising from an employee's lawsuit against Red Bull executives for age and sex harassment and related tort claims. The Court agreed that the underlying arbitration agreement was adhesive, and that it was substantively unconscionable.

    Substantive unconscionability was the result of overly restrictive discovery, limiting the fifteen-year employee plaintiff to two depositions, and to a "lack of mutuality." We'd guess it was the discussion of mutuality in connection with an exemption for arbitration involving "obligations under the Employee Confidentiality Agreement with Red Bull" that made the opinion publishable.

    The Employee Confidentiality Agreement defined "Confidential Information" as information relating to the Company, and explained it did not apply to inventions of the employee developed entirely on the employee's own time without the Company's help. Therefore, the Court reasoned that the carve-out for "obligations under the Employee Confidentiality Agreement" only applied to the obligation of the employee to protect the Company's Confidential Information, not to inventions created by the employee on the employee's own time. Hence, the lack of mutuality.

    This lack of mutuality was burdensome in two ways: first, theoretical claims of the employee to protect his intellectual property were not exempted from arbitration by the carve-out, second, the arbitration agreement exempted from arbitration the types of claims Red Bull was most likely to bring against an employee.

    Comment: Because the discussion of unconscionability looks at the arbitration agreement at the  time it was entered into, rather than at the  time the employer seeks to enforce it, the discussion is theoretical, considering mutuality with respect to hypothetical claims that an employee might have brought, rather than actual claims that Davis did bring.

Arbitrator, Confidentiality, Disclosures, Discovery, Unconscionability: Former Employee Advanced No Meritorious Reasons For Why An Employment Agreement Was Unconscionable

Also, Arbitrator’s Religious Affiliation Is No Reason For Disqualification, With Jewish Affiliation Not Showing Any Inherent Bias Against Homosexuals.

            Bogue v. Anesthesia Service Medical Group, Inc., Case No. D073518 (4^th Dist., Div. 1 July 17, 2019) (unpublished) (McConnell, P.J.; Benke, J.; and Irion, J.) is a case where a former employee lost an arbitration against a former employer, with the arbitration award being confirmed by a superior court judge.  Plaintiff’s claims primarily consisted of whistleblower retaliation and FEHA claims, mainly focused on the allegations that employer discriminated against employee because he was a homosexual.  The arbitrator summarily adjudicated out the whistleblower retaliation claim and found against plaintiff on the merits in a detailed arbitration award.  On appeal, plaintiff principally claimed that the parties’ arbitration agreement was unconscionable and that the arbitrator, who was Jewish, was prejudiced against homosexuals in general.

            The Fourth District, Division 1, affirmed the confirmation of the arbitration award.

            With respect to the claim that the arbitration agreement was unconscionable, the appellate court found no substantive unconscionability in these respects:  (1) the arbitration agreement contained no limitations on discovery and the ADR provider rules had no similar restrictions; (2) the arbitration agreement did provide for a written award consisting of a concise statement of reasons supporting the award and explaining the basis for a decision on a statutory claim, which more than sufficed; and (3) the arbitration agreement had no confidentiality ban, but the ADR rules did not restrict the litigants from publicly discussing the arbitration, which actually was done through the appeal. 

            The appellate court was not impressed with the religious affiliation disqualification claim against the arbitrator.  Religious affiliation is not a sufficient ground by itself to require disqualification of an arbitrator.  (Code Civ. Proc., § 170.2.)  One cannot reasonably presume, because an arbitrator is Jewish, that the arbitrator has any faith-based animosity toward homosexuality or homosexuals.  “Moreover, many people of faith, including arbitrators and judges, engage in professions requiring them to make decisions based on standards separate from and not necessarily aligned with the tenets of their faith. As long as an arbitrator is able to base his or her decision on the evidence and the applicable law, regardless of the tenets of his or her faith, the arbitrator is not required to disclose his or her faith-based memberships.”  (Slip Op., at p. 13.)  Furthermore, the arbitrator did include a CV showing his Jewish affiliations such that the failure to seek the arbitrator’s disqualification before the arbitration took place forfeited the losing party’s right to disqualify the arbitrator on that basis.

            We note that a similar opinion was published back in 2011, involving a disgruntled party in arbitration and a Jewish arbitrator.  Rebmann v. Rohde, 196 Cal. App. 4th 1283 (2011). The defendant/appellant informed the trial court that if only he had "known about his [the arbitrator's] religious affiliation, his cultural affiliation, and the dedication to keeping the memory of the Holocaust alive, I never would have allowed him to be the arbitrator in my case." The defendant/appellant's father, and his wife's father served in the SS during WWII. Among other things, the Court of Appeal rejected the "tacit assumption" that "a judge who is a member of a minority cannot be fair when a case somehow related to that minority status – no matter how remote or tenuous that relationship might be – comes before that judge." We posted about this on Mike & Marc's California Attorney's Fees blog on July 5, 2011. Efforts to disqualify judges and arbitrators based on religion and race do  not succeed.