California Mediation and Arbitration

Delegation, Gateway Issues: Ninth Circuit Affirms Judgment Of District Court To Compel Arbitration With Tribe Because Of Effective Delegation Clause

The Opinion Sets Forth The Steps For Analyzing A Delegation Issue.

        The Chicksaw Nation opposed arbitrating a dispute with Caremark, the pharmacy benefit manager for health-insurance plans that cover many tribal members. The Nation argued that it could not be compelled to arbitrate because it had not waived tribal immunity and because a provision of the Indian Health Care Improvement Act, referred to as the “Recovery Act, would be violated by compelled arbitration. However, the question before the district court and the Ninth Circuit was not whether the tribe had waived sovereign immunity and whether there was a violation of the Recovery Act, but whether a delegation clause effectively delegated determination of those issues to an arbitrator or to a court. The district court held that the delegation clause was effective, and the Ninth Circuit agreed. Caremark v. Chicksaw Nation, et al, No. 21-16209 (9th Cir.  8/15/22) (Friedland, Wallace, Boggs).

        "[A] delegation clause," explains Judge Friedland, "is essentially a mini-arbitration agreement, nested within a larger one."

        The utility of this opinion is found in Judge Friedland's description of the principles in a delegation clause analysis: "First, a court must resolve any challenge that an agreement to arbitrate was never formed, even in the presence of a delegation clause. Next, a court must also resolve any challenge directed specifically to the enforceability of the delegation clause before compelling arbitration of any remaining gateway issues of arbitrability. Finally, if the parties did form an agreement to arbitrate containing an enforceable delegation clause, all arguments going to the scope or enforceability of the arbitration provision are for the arbitrator to decide in the first instance."

        COMMENT: Note that delegation to the arbitrator means that the arbitrator now gets to decide whether there has been an effective waiver of tribal immunity and whether there is a violation of the Recovery Act.

Arbitration, Enforceability: No Agreement Where Company Was Unable To Establish Automatic Sending Of Electronic Receipt

Existence Of Agreement Was Not An Issue To Delegate To Arbitrator.   

              Fiona Trinity sued Life Insurance Company of North America and individuals (LINA parties) for employment-related claims. The LINA Parties moved unsuccessfully to compel arbitration in the trial court, and the Court of Appeal affirmed. The LINA parties could not establish the existence of an agreement to arbitrate, and even if they could, the agreement would have been unconscionable. Trinity v. Life Insurance Company of America et al., B312302 (2/7  5/23/22) (Perluss, Segal, Feuer).

        The defendant's PMK had testified as to the contract procedure, explaining that  once the employee had  clicked on a link indicating he or she had read an online employee handbook, which included an arbitration agreement, they would receive an email confirming their assent to the terms of the handbook. The problem was that the employer could not produce the automatically generated receipt and did not know how to retrieve it, and the employee did not remember reading or agreeing to the handbook. 

        While issues of arbitrability were delegated to the arbitrator here, whether there is an agreement to arbitrate in the first place is an issue for the judge to decide. The issue of arbitrability cannot be delegated under the terms of a nonexistent agreement.

        COMMENT: In the 21st century, there is still at least one advantage to the use of a paper document with an inked signature. Electronic signing is permissible, but then one must carefully follow procedure and have a good storage and retrieval system for electronic data.

Arbitration, Internet Commerce: Fourth District, Div. 1 Enforces Arbitration Provision In Sign-In Wrap Contract

Sign-In Wrap Contracts Are Hybrids Of Browserwrap (Hard To Enforce) And Clickwrap (Easier To Enforce) Contracts.

        B.D., a minor, and his father sued the videogame company Blizzard, contending that the game Overwatch encouraged gambling. Specifically, they alleged Overwatch used “real money” to make in-game purchases of “Loot Boxes”—items that offer “randomized chances . . . to obtain desirable or helpful ‘loot’ in the game.” The trial court denied Blizzard's motion to compel arbitration. The Court of Appeal reversed, applying the test  in Sellers that the existence of a contract turns “on whether a reasonably prudent offeree would be on inquiry notice of the terms at issue.”  The Court of Appeal also held that whether the contract made public injunctive relief unavailable, such that  the arbitration provision could not be enforced under the McGill rule, was a gateway issue that had been clearly and unmistakably delegated to the arbitrator to decide. B.D. v. Blizzard Entertainment, Inc., D078506 (4/1  3/29/22) (Haller, Huffman, Irion).

        The decision is very fact specific. It seems to this reader that a little confusion was introduced by a screenshot of a pop-up that required clicking on a "CONTINUE" button to proceed. The visible part of the screenshot refers to a Dispute Resolution provision "below". However, because the screenshot in the opinion is static, one does not see the Dispute Resolution provision "below". And presumably B.D. and his father, looking at the pop-up, would not have seen the entire license agreement unless they scrolled through the pop-up. But the pop-up allows scrolling to the end, in which case one can read the entire Blizzard license, which contains a blue hyperlink to the terms of  the dispute resolution provision. The Court of Appeal believed there was a clear and unmistakable incorporation by reference of  the dispute resolution provisions. The Court also observed that Sellers and other decisions take context into account, and are more likely to enforce a sign-in wrap agreement when the commercial transaction involves a "continuing, forward-looking relationship," as was the case here with a minor who continued to play the game during several updates of  the agreement with Blizzard.

        COMMENTS: The plaintiff was a minor, and it is hard to believe that he was capable of giving consent. However, B.D. acknowledged that a parent or guardian had reviewed and agreed to the license agreement. Of course, it is a central principle that arbitration is  contractual, voluntary, and requires agreement. And that principle requires assuming responsibility for  reading a contract, understanding it, following an incorporation by reference, and reading and understanding the terms of the dispute resolution provision. Like the law of contract in general, the law governing enforceability of arbitration provisions relies on legal fictions. Justices of the Court of Appeal, after proper briefing, read the contract, understand it, follow the incorporation by reference, and read and understand the terms of the dispute resolution provision. Are you a gamer and do you do that? Are you a lawyer and a gamer, and do you do that? Are you a judge and a gamer, and do you do that at home, outside the courtroom?

        On April 5, 2022, we posted about the 9th Circuit decision holding a sign-in wrap agreement did not result in binding arbitration, Berman v. Freedom Financial Network. Because these cases concerning wrap contracts are fact-specific, we can expect to see more of them unless and until commerce uses standardized clauses that pass muster with the courts.

Arbitration, Delegation, Choice Of Law: Sixth District Affirms Denial Of Motion To Compel Arbitration Because There Was No Agreement To Arbitrate

Whether An Arbitration Agreement Exists Was A Gateway Issue For The Court To Decide.

        Agreeing with the trial court that there was no agreement express or implied to arbitrate, the Court of Appeal affirms the trial court's order denying employer's motion to compel arbitration in a putative class action wage and hours case brought by a trucker. Mendoza v. Trans Valley Transport et al., H044372 (6th Dist.  3/1/22) (Greenwood, Elia, Grover). This is a 55-page opinion and I will be brief.

        First, the opinion addressed choice of law: did the California Arbitration Act or the Federal Arbitration Act apply? Answer: the CAA applied, because of the carve-out in the FAA for "workers engaged in foreign or interstate commerce," meaning transportation workers. And Mr. Mendoza fell into the carve-out category because he was a trucker. Therefore, the CAA applied.

        Second, the Court of Appeal refused to enforce a delegation clause delegating the issue of contract formation to an arbitrator. It found the issue to have been forfeited because it was only raised in reply papers. Nevertheless, addressing the merits, the Court concluded that not all gateway issues are delegable, and the issue of whether an agreement to arbitrate existed was one for the courts to decide.

        Third, the Court agreed that the parties had not agreed to arbitrate. The problem was that, while the employee acknowledged receipt of a handbook and 14 other items, and acknowledged that any questions he had were answered, nothing in the mass of documents pointed him to an arbitration clause, and there was no signature line for the arbitration policy that could have been found in the handbook.  Nor would the Court conclude that there was an "implied in fact" contract, simply because the employee received the handbook and continued to work for the company, because nothing drew the employee's attention to the arbitration policy. 

        COMMENT: Employers who want to make an arbitration agreement "stick" should include signature lines, and make it clear and unmistakable in writing to the employee that the employee is agreeing to arbitrate. We note that Mendoza was Spanish speaking and did not read or write English. The employer's director of human resources testified that his custom and  practice was to explain the written material to employees and that a Spanish translation was provided, which, however, Mendoza did not recall. For employees who may not be fluent in English, it is preferable to have clear and unmistakable evidence that they have received a written translation.

Arbitration, Existence Of Agreement, Delegation: Ninth Circuit Holds Formation Of Arbitration Agreement Is To Be Decided By Court, Not Arbitrator

Failure To Communicate . . . 

 

Cool Hand Luke. "What we've got here is failure to communicate."

        Reversing the district court's order to compel arbitration, the Ninth Circuit holds that the issue of formation of  the contract to arbitrate should have been decided by the court, despite delegation of issues of validity and arbitrability to an arbitrator in the employment agreement. Ahlstrom v. DHI Mortgage Company, Ltd., L. P., No. 20-15114 (9th Cir.  12/29/21) (Pregerson, Wardlaw, Berzon).

        The procedural history is somewhat complicated and the facts are screwball. Cutting to the chase, what happened is this: Ahlstrom signed an employment agreement with D.R. Horton containing an arbitration clause and a provision delegating certain gateway isssues to an arbitrator. However, the parties ended up agreeing that  Ahlstrom's actual employer was DHI Morgage Company, not  D.R. Horton. So the purported employment agreement described a relationship that did not exist.

        As Judge Pregerson, sitting by designation, explains, "Put simply, the [Mutual Arbitration Agreement], as drafted, describes and governs a relationship between Ahlstrom and D.R. Horton that does not exist, and thus does not constitute a properly formed agreement to arbitrate."

        COMMENT: What is the difference between arbitrability and validity, on the one  hand, and formation, on the other? Arbitrability and validity issues can be delegated, but formation issues cannot be delegated, even though all might be described as "gateway issues." Formation goes to the very existence of the contract. If a contract does not exist, there is no need to delegate issues of validity and arbitrability. 

Arbitration, Gateway Issues, Delegation, Severability, FAA: Court Had Authority To Adjudicate Enforceability Of Arbitration Agreement, Where Party Specifically Challenged The Arbitration Agreement

Opinion Explains How Contract And Arbitration Agreement Are Treated As Separate Agreements.

    Jackpot Harvesting, Inc. v. Applied Underwriters, H044953 (6th Dist.  3/28/19) (Danner, Greenwood, Grover), provides a detailed discussion of whether the court or the arbitrator has authority to enforce an arbitration agreement, and how the concept of "severability" helps the analysis.

    Applied Underwriters offered workers' compensation insurance to Jackpot Harvesting, Inc. and related companies through a number of agreements, one of which was entitled "Request to Bind" and which contained an arbitration agreement. Jackpot sued Applied,  believing Applied mishandled claims and failed to disclose how premiums were calculated. Applied moved to compel arbitration, the trial court denied the motion, and Applied appealed. The important threshold question was whether the trial judge had the authority to decide the gateway issue of arbitrability, or whether that issue was one for the arbitrator to resolve.

    The parties agreed that the Federal Arbitration Act supplied the governing law, and the FAA carries with it a strong policy in favor of enforcing arbitration provisions. Of course, the parties could have included a "delegation clause" specifying who had authority to decide gateway issues. But the arbitration provision did not include a delegation clause.

    In such a situation, SCOTUS applies "the severability principle." The challenge to the validity of an arbitration agreement or delegation clause is treated separately from a challenge to the validity of the entire contract.  In effect, the contract between the parties, and the arbitration provision, are analyzed as two separate contracts. "Unless a party specifically challenges the validity of the agreement to arbitrate, both sides may be required to take all their disputes -- including disputes about the validity of their broader contract -- to arbitration." New Prime Inc. v. Oliveira, 139 S.Ct. 532, 539 (2019). 

    Applied argued that the New Prime approach required an "analytically distinct" attack on the arbitration provision -- in other words, an attack distinct from the attack on the contract as a whole. While conceding that there is "some support" for that position, the Court of Appeal says that it hasn't been shown a SCOTUS case requiring that the "substance of the challenge to the arbitration agreement must differ in all respects from the challenge to the underlying agreement." But this is dictum, because the Court of Appeal then found a distinct challenge to the arbitration provision in the Request to Bind: the Request to Bind was "a collateral agreement" triggering statutory filing and regulatory approval requirements under the Insurance Code and regulations, and "a contract made in violation of a regulatory statute is void."

    So the arbitration provision is specifically challenged. Found to be made in violation of a regulatory statute, the arbitration provision crashes and burns, leaving the trial judge with the authority to adjudicate the enforceability of the arbitration agreement. The denial of the motion to compel arbitration is AFFIRMED.

    

Arbitration, Gateway Issues: SCOTUS Holds That When Parties Agree Arbitrator Will Resolve Arbitrability Question, There Is No "Wholly Groundless" Exception Allowing Question To Be Decided By Court

First SCOTUS Opinion Authored By Justice Kavanaugh Is Unanimous.

    "Under the Federal Arbitration Act, parties to a contract may agree that an arbitrator rather than a court will resolve disputes arising out of the contract." The question presented in Henry Schein, Inc., et al. v. Archer and White Sales, Inc., No. 17-1272 (S. Ct. 1/8/19), is whether courts can decide arbitrability if the basis for arbitration is "wholly groundless", and whether such an exception to delegation of the decision to the arbitrator is consistent with the Federal Arbitration Act. In the first opinion authored by Justice Kavanaugh, the Court unanimously holds that a "wholly groundless" exception is inconsistent with the FAA. 

    COMMENT: The Justices "express no view about whether the contract at issue in this case in fact delegated the arbitrability issue to an arbitrator." So the judgment of the Court of Appeals is vacated and remanded, and the Court of Appeals may address the delegation issue. 

    In some instances, where the gateway decision of arbitrability is delegated to the arbitrator, the basis for delegation is "wholly groundless", and the arbitrator reaches the wrong conclusion, the arbitrator may exceed the arbitrator's powers, leading to "back-end" judicial review, and a waste of time. But SCOTUS is not going to rewrite the FAA.

    

    

Arbitration, Collective Bargaining,Gateway Issues: 9th Circuit Rules That Arbitrator's And District Court's Confusion Over Arbitrability And Merits Determination Requires Reversal Of Court And Vacation Of Award

Majority, Concurring, And Dissenting Opinions.

Siegfried & Roy in their private apartment at the Mirage Hotel on the Vegas Strip, with one of their performing white lions. Photographer: Carol M. Highsmith. Library of Congress.

 

    Judge Bucklo, sitting by designation, describes the appeal of a labor arbitration award as "surprisingly nuanced", an "analytical puzzle" and "inscrutable." Judge Owens, concurring, believes, "most importantly, the extremely convoluted procedural posture of this case is so odd that our holding today likely will be limited to these very idiosyncratic facts." And Judge Friedland, dissenting, isn't having it. Let's try to unpack this case. Local Joint Executive Board of Las Vegas, et al. v. Mirage Casino-Hotel, Inc., No. 16-16754 (9th Cir.  12/13/18).

    The Union submitted a grievance with the Mirage Casino-Hotel to arbitration. The Union had agreed by way of a Collective Bargaining Agreement (CBA), Memorandum of Agreement, and side letter, that Mirage could subcontract its operations, and the Union culinary workers could work under the subcontracting arrangements for the subcontractor, with Mirage maintaining "full control of the terms and conditions of employment." After the subcontractor, BB King's, a restaurant concession, went bankrupt, the Union members filed a grievance to obtain vested vacation pay and other accrued benefits from Mirage. Because the scope of the arbitration provision covered Union grievances, the Union submitted the grievance to arbitration.

    Here's where it gets dicey. A merits issue was whether the Union members were employees, and Mirage, arguing that they were not employees of Mirage, objected that the dispute was not arbitrable, because Mirage was not the proper party for arbitrating the grievance. The arbitrator agreed, apparently concluding that the Union's remedy to recover was against BB King's, and determined that the dispute was not arbitrable, a result that was confirmed by the district court.

    Judge Bucklo explained that the arbitrator, and the district court, confused the merits issue with arbitrability. While everyone seemed to agree that the merits issue was within the scope of the arbitration provision, and to be decided by the arbitrator, the threshold issue of "who should decide who should decide" was not "clearly and unmistakably" submitted to the arbitrator, who had decided that the matter was not arbitrable. Therefore, the court, not the arbitrator, should decide whether the matter was arbitrable, and deciding that the merits were arbitrable, the court should vacate the award and send the parties back to arbitration -- which is what the 9th Circuit has now done.

    Judge Owens joined the majority "because I believe it is more consistent with current controlling law." But he thinks "the dissent reaches the more equitable result and, if the slate were blank, I would join it."

    And Judge Friedland dissents, explaining that, under the facts here, "the 'clear and unmistakable' test for determining whether a party resisting arbitration has nevertheless consented to having the arbitrator decide substantive  arbitrability" should not apply "when determining whether a party that initiates arbitration has so consented." Here, the Union submitted the matter to arbitration, and therefore should be stuck with the result.

    COMMENT: Yes, the Union submitted the grievance to arbitration, but obviously the disagreement among the judges is about whether the Union submitted the threshold question of "who should decide who should decide" arbitrability to the arbitrator by submitting the grievance to arbitration and participating in the arbitration.

    If the matter is now returned to the arbitrator, and the arbitrator focuses on whether the CBA and other agreements impose on Mirage an obligation to provide the benefits that BB King's should have provided, then I suppose the arbitrator might reach a result in favor of the Union. But this could instead end up as an exercise, albeit quite an interesting one, in futility, if the arbitrator, upon concluding earlier that Mirage was not the employer, also believed that BB King's was the employer, and that Mirage was not the guarantor of the employer's obligations.

    

    

    

Arbitration, Gateway Issues, Delegation, Pending Cases, FAA: We Are Watching Three Cases Pending Before SCOTUS

Federal Arbitration Act Cases Pending Before SCOTUS Present Issues of Interpretation Of FAA, And Who Decides Gateway Issues.

    Henry Schein, Inc. v. Archer & White Sales Inc., scheduled to be argued in November, presents as an issue whether judge or arbitrator decides the gateway issue of arbitrability. The general rule is that the judge decides, unless the arbitration provision clearly and unmistakably delegates the decision to the arbitrator. The twist in the Henry Schein case is that the 5th Circuit will not send a case to arbitration if the basis for doing so is "wholly groundless." Will SCOTUS endorse that position, or leave the decision up to the arbitrator, if there is a delegation clause with clear and unmistakable language?

    On October 1, 2018, and February 26, 2018, I blogged about New Prime Inc. v. Oliveira, a case that presents an FAA interpretive issue. Does an exemption clause in Section 1 of the FAA for workers engaged in interstate commerce apply to independent contractors? And who decides?

    And on August 22, 2018, and May 12, 2018, I blogged about Lamps Plus Inc. v. Varela, which presents a question as to whether generalized language in an arbitration agreement forecloses a state law interpretation authorizing class arbitration under the FAA.

    Ronald Mann posted on October 22, 2018, about these cases. As Mann writes, "I don't think the Supreme Court has rejected an FAA claim yet this century." However, he adds, "the argument in New Prime . . . displayed a bench that was not only open to rejecting the claim for arbitration there, but indeed strongly predisposed to reject it." We'll know more when these three cases are decided. And we'll keep you posted.

    

Vacatur: First District, Div. 1, Refuses To Vacate Award For Alleged Lack Of Opportunity To Present Evidence, Ambiguity, Or Lack Of Jurisdiction

A Textbook Example Of How Difficult It Is To Challenge An Arbitration Award.

        Our next case involved a family dispute in the California wine industry, following the death of the family patriarch.  Nickel v. Far Niente Wine Estates, LLC, et al., A150513 (1/1  12/29/17) (unpublished). 

        Affirming the trial court's denial of plaintiffs/appellants' petition to correct or vacate the award, the Court of Appeal gave short shrift to three arguments.

        First, the Court rejected plaintiffs' argument that the arbitration award should be vacated or corrected because plaintiffs were denied an opportunity to respond to late evidence.   The Court explained that the arbitrator did not refuse to consider evidence, and that plaintiffs also failed to make a required a showing of prejudice.

        Second, the Court rejected an argument that the award needed to be vacated or corrected because an included award of injunctive relief was ambiguous.  Changing the award would not have amounted to a minor correction, but rather to a substantive change -- and the Court was not entitled to make such a change in connection with a request to correct the award.  Nor could the award be vacated simply because there was a mistake of law or fact.

        Third, the Court of Appeal deferred to the arbitrator's decision that the arbitrator had jurisdiction to decide certain water rights issues.  For one thing, the parties had agreed to proceed under JAMS rules, and rule 11 provides that the arbitrator will resolve jurisdictional and arbitrability disputes.  Even absent the incorporation of JAMS rules, California case law provides, "courts should generally defer to an arbitrator's finding that determination of a particular question is within the scope of his or her contractual authority."  Advanced Micro Devices, Inc. v. Intel, 9 Cal.4th 362, 372 (1994).

        Once again, we have an example of the considerable obstacles that a disappointed party must overcome to successfully challenge an arbitration award.