California Mediation and Arbitration

Employment: Employee's Release Of Claim After It Accrued Is Not Illegal Or A Violation Of Public Policy

Employee Entered Into Release Of Claims In Her Separation Agreement.

        Elizabeth Castelo entered into a release of claims in her separation agreement from her employer Xceed Financial Credit Union. In arbitration, the employee argued that she had entered into a pre-dispute arbitration agreement that was invalid. The arbitrator ruled in favor of the employer, the court confirmed the award, and the employee appealed. Castelo v. Xceed Financial Credit Union, B311573 (2/7  5/18/23) (Escalante, Perluss, Segal).

        Some pre-dispute releases can be found invalid under some circumstances. Civil Code section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."

        Here, however, the Court of Appeal agreed that Castelo knew about her claims before she entered into the release of claims. There was no violation of public policy.

Public Policy, Vacatur: First District Div. 3 Holds Late Penalty On Loan Default Resulted In Forfeiture Violating Public Policy And Justifying Vacatur Of Arb Award

Violating Public Policy Can Be Ground For Vacating Award.

        Liquidated damages are presumed invalid in a consumer contract and presumed valid in a non-consumer contract. The Honchariws borrowed $5.6M secured by real property in a "non-consumer" contract -- so a liquidated damages provision was presumptively valid when they defaulted on the loan, and an arbitrator so found. They petitioned to vacate the award, the trial court denied their petition to vacate, and the Honchariws appealed. Honchariw v. FJM Private Mortgage Fund, LLC et al, A163756 (1/3  9/29/22) (Petrou, Fujisaki, Rodriguez). 

        One ground for vacating an arbitration award is: "The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted." Cal. Code Civ. Proc. § 1286.2(a)(4). "Arbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." The Court of Appeal found a violation of legislative policy to be the case here.

        Here, the Late Fee imposed by the lender, which included "a 9.99% interest rate assessed against the entire unpaid principal balance of the Loan at any time a single payment is missed," violated the state policy against unreasonable liquidated damages provisions, which is the basis for Cal. Civ. Code,  § 1671. The Court of Appeal was unable to find a single case "in which a liquidated damages provision was upheld when a borrower missed a single installment, and then was penalized pursuant to that provision, even in part, by a late payment fee assessed upon the entire outstanding principal balance, much of it still to be owed."

        REVERSED.

 

 

Arbitration, Public Policy, PAGA: First District, Div. 3 Affirms Order Denying Motion To Compel Arbitration Of PAGA Claim

Once Again, A California Court Of Appeal Affirms That Iskanian Is Still Good Law.

        In Winns et al. v. Postmates Inc., A155717 (1/3  7/20/21) (Petrou, Fujisaki, Jackson), Postmates argued its couriers had waived the right to bring representative PAGA claims, and that the California Supreme Court's Iskanian opinion holding such waivers to be invalid had  been impliedly overruled by SCOTUS cases. 

        Justice Petrou explains California courts must follow the rulings of the California Supreme Court, and SCOTUS has not ruled on the issue presented by Iskanian, namely, whether a waiver of a representative action is enforceable. SCOTUS has ruled that a waiver of a class action is enforceable, but that is a different issue, because PAGA claims are in the nature of  qui tam claims brought on behalf of California. The state is not a party to the arbitration agreement, and has not waived the right to litigate PAGA claims.

        Postmates made another argument, namely, that the plaintiffs had been given the right to opt out of arbitration and had not done so. Therefore, they shouldn't object to arbitrating. The court rejected that argument, explaining that it was against  California public policy to waive the right to litigate PAGA claims.

        COMMENT: Iskanian was decided in 2014. The case was not taken up by SCOTUS. Employers seem to be flogging a dead horse in state court. Though the internal logic of Iskanian may make sense, the decision also presents a political issue, because employers generally want to avoid arbitration, and employees generally want to preserve the ability to litigate. And since 2014, the composition of  SCOTUS has changed. So perhaps it is not a foregone conclusion how SCOTUS would rule if squarely confronted with the  issue of whether the  Federal Arbitration Act preempts the right to litigate representative actions. 

Update: A More Recent Case Reaches The Same Conclusion. 

        The case is Christine Herrera et al. v. Doctors Medical Center of Modesto, Inc., F080963 (5th Dist.   8/5/21) (Franson, Pena, DeSantos).

Arbitration, Public Policy: An Arbitration Provision Purporting To Waive Consumer's Right To Seek Public Injunctive Relief Is Invalid And Unenforceable

McGill Is Still Good Law.

        The action in Joe Maldonado v. Fast Auto Loans, Inc., G058645 (4/3  2/8/21) (O'Leary, Aronson, Thompson) centered on whether McGill v. Citibank, N.A., 2 Cal.5th 945  (2017) is still good California law and whether it has been preempted by the Federal Arbitration Act. McGill, which we posted about on April 6, 2017, held that an arbitration provision was invalid and unenforceable because it required consumers to waive their right to pursue public injunctive relief. See also the September 29, 2020 post on Mejia v. DACM Inc., 54 Cal.App.5th 691 (2020).

        Maldonado and others brought a putative class action alleging Fast Auto Loans, Inc. charged unconscionable interest rates on loans in violation of the  Financial Code. Fast Auto Loans moved to compel arbitration, based on a broad arbitration provision that  would have resulted in a waiver of class actions and the plaintiffs' ability to bring an action for public injunctive relief. The trial court held that the McGill rule made the arbitration provisions unenforceable, and the Court of Appeal affirmed the order denying the motion to compel arbitration.

        The Court of Appeal concluded that  McGill is good law. Fast Auto Loans' argument that FAA preemption applied foundered, because SCOTUS recently denied review of Ninth Circuit cases applying McGill, leaving the Court of Appeal to apply McGill, a case decided by the California Supreme Court.

        COMMENT: What is the reasoning that explains why McGill is not preempted by the  FAA?  "The contract defense at issue here—'a law established for a public reason cannot be contravened by a private agreement' (Civ. Code, § 3513)—is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. . . . It is not a defense that applies only to arbitration or that derives its meaning from the fact that an agreement to arbitrate is at issue." McGill v. Citibank, N.A., 2 Cal. 5th 945, 962 (2017). In short, the defense does not unduly burden an arbitration agreement, because it would also apply to another contract.

 

Arbitration, Policy, Choice of Law, FAA, Severance: McGill v Citibank Lives: Arbitration Provision Eliminating Any Forum For Public Injunctive Relief Is Unenforceable

Case Offers Primer On McGill v. Citibank, N.A.

        Defendant and appellant DACM, Inc. (Del Amo) sold a motorcycle to Joseph Mejia, who paid some cash and financed the remainder of the purchase with a credit card. And, the credit card included an arbitration provision covering Del Amo. So when Mejia sued Del Amo for violation of consumer protection statutes, Del Amo sought to compel arbitration. When Del Amo's motion was denied, it appealed. Joseph Mejia v. DACM, Inc., G058112 (4/3  9/15/20) (Aronson, Moore, Ikola).

        Del Amo lost the  appeal, because the arbitration provision would have prevented Mejia from obtaining public injunctive relief and such a prohibition is unenforceable under McGill v. Citibank, N.A., 2 Cal.5th 945 (2017). We posted about McGill on April 6, 2017.

        The arbitration provision provided for the application of Utah law. So why did California's McGill case apply? California public policy  outweighs the Utah choice-of-law provision, and it is California  policy, as encapsulated in McGill, that courts may invalidate arbitration clauses that waive public injunctive relief in any forum -- something Utah law does not permit.

        So why couldn't the unenforceable waiver provision be severed? The arbitration provision had been drafted to contain a "poison pill" restricting the right of the court to sever, once the prohibition on public injunctive relief was found to be unenforceable.

        So why didn't the Federal Arbitration Act preempt McGill? McGill itself answers that question: "The contract defense at issue here—'a law established for a public reason cannot be contravened by a private agreement' (Civ. Code, § 3513)—is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. . . . It is not a defense that applies only to arbitration or that derives its meaning from the fact that an agreement to arbitrate is at issue." McGill v. Citibank, N.A., 2 Cal. 5th 945, 962 (2017). In short, the defense does not unduly burden an arbitration agreement, because it would also apply to another contract.

Arbitration, Landlord/Tenant, Waiver, Public Policy: Under California Law, Arbitration Clause In Residential Lease Is Void

Case Was Governed By State Law Rather  Than The Federal Arbitration Act.

        The defendant landlord in Keisa Williams et al. v. 3620 W. 102nd Street, Inc., et al., B297824 (2/8  8/24/20) (Wiley, Grimes Stratton), did not discharge the burden of establishing that the residential lease at issue involved interstate commerce, and hence California state law, rather than the FAA, was applied here. And under California law, an arbitration clause in a  residential lease is void. Cal. Civ. Code section 1153(a)(4); Jaramillo v. JH Real Estate Partners, Inc., 111 Cal.App.4th 394 (2003).

        COMMENT: We note that in this age of legal specialization, the plaintiffs' attorneys have found a niche practice. Their business name is MYBEDBUGLAWYER. Their trademarked war cry is, "When bed bugs start biting . . . We start fighting! "Wikipedia has an interesting article on bed bugs, with some photos of nasty looking bed bugs, and the cute 19th century advertisement for cockroach and bed bug exterminators reproduced below.

 

Arbitration, Vacatur, Public Policy: Second Dist., Div. 6 Holds Arbitrator Award Violated Public Policy in HOA/Developer Dispute

And Now There Is A Split Between The 4th District, Div. 3, And The 2nd District, Div. 2.

          In Branches Neighborhood Corp. v. CalAtlantic Group, Inc., 26 Cal.App.5th 743 (2018), a homeowner's association began a construction defects arbitration with a developer without first getting a vote of 51% of its membership, despite association documents requiring such approval. When the developer sought to dismiss the arbitration, the association obtained a ratifying vote. The arbitrator dismissed the arbitration based on the failure to get the required vote before initiating the arbitration, the trial court entered judgment against the association, and the Court of Appeal, 4th District, Div. 3, affirmed.

          Now Aldea Dos Vientos v. CalAtlantic Group, Inc., No. B291731 (2nd Dist., Div. 6  2/6/20) (Gilbert, Yegan, Tangeman) holds otherwise. Note: (1) the facts of the two cases are essentially the same; (2) the developer defendant is the same; (3) the 51% voting requirement is in the governing documents of the HOA in both cases; (4) the arbitrator in both cases dismissed the arbitration; (5) the trial court in both cases affirmed judgment in favor of the developer; (6) the law firm representing the developer is the same in both cases. The differences are the outcome (affirmance in the earlier case, reversal in the later case), the legal arguments, and the courts.

          In the later case, Justice Gilbert explains that the arbitrator exceeded his power, a basis for vacating an award under Cal. Code Civ. Proc., section 1286.2. "Arbitrators exceed their power by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy."

           First, provisions that require a 51% vote before initiating arbitration or litigation "contravene statutory policy by giving the Developer the unilateral power to bar actions for construction defects", contrary to housing policy. The developer here argued that the majority voting requirement of an early vote was for the good of the homeowner. However, Justice Gilbert sees the voting requirement as an issue between the HOA and its members, one that was taken care of by ratification, and not one that the Developer could take advantage of after ratification had occurred. 

          Second, Civ. Code section 5975(a) provides that "unreasonable" equitable servitudes shall not be enforced. Justice Gilbert views as unreasonable a covenant that "gives the Developer veto power over the Association's claims in spite of the members' vote to proceed with the arbitration." The provision, if not interpreted to allow for ratification, "amounts to a trap for the unwary set by the Developer to bar claims against it. The Developer is burdened with no similar hurdle prior to seeking a determination of its rights."

          Third, Senate Bill No. 326, signed by the Governor on August 30, 2019, "bars the use of provisions such as section 7.01B [the 51% member voting requirement to initiate legal action] as a defense for developers against claims of condominum associations."

          The judgment is reversed.

Arbitration, FAA: Ninth Circuit Holds Federal Arbitration Act Does Not Preempt California's McGill Rule

McGill v. Citibank Held Agreement To Waive Right To Seek Public Injunctive Relief Is Unenforceable.

        In McGill v. Citibank, N.A. (2017), the California Supreme Court held that a contract purporting to waive a party's right to seek public injunctive relief in any forum is unenforceable under California law. The key issue in Blair v. Rent-A-Car, No. 17-17221 (9th Cir.  6/28/19) (Fletcher, McKeown, Murguia), is whether the Federal Arbitration Act preempts California's McGill  rule. The Ninth Circuit holds that the FAA does not preempt the McGill rule.

        Blair brought a putative class action against the Rent-A-Center defendants, alleging they overcharged for rent-to-own plans for household items. Such plans provide for installment payments, and if all payments are timely made, the consumer owns the item. Blair's agreement contained an arbitration clause providing that it was "intended to be interpreted as broadly as the FAA allows." The agreement also provided that arbitration was to be on an individual basis and relief could not affect other account holders. There could be no class, collective, mass, private attorney general, or representative action. If the provision was held to be unenforceable, then the claims for relief had to be severed and brought in a judicial forum.

        The district court concluded that this agreement violated the McGill rule because it waived Blair's right to seek public injunctive relief in any forum (1) because all claims had to be heard in arbitration; and (2) because claims for public injunctive relief could not exist in arbitration consistent with the parties' agreement. The Court of Appeals agreed, and severed the claims providing for public injunctive relief, which will now be heard in court.

        The court analyzes federal preemption in two steps. First, it explains the McGill rule is a "generally applicable contract defense." In other words, it applies equally to arbitration and non-arbitration agreements. In contrast, a rule that uniquely burdens arbitration would be preempted by the FAA. Second, even a generally applicable contract defense may not prevent preemption, if the rule interferes with the accomplishment of the FAA's objectives. However, the McGill rule does not deprive the parties of the benefits of arbitration, because according to the Blair court, a public injunctive relief claim could be sought in arbitration or in court. And seeking a public injunction in arbitration does not require all the procedural formality that a class action would require.

        Here, however, the parties' agreement precluded the pursuit of a public injunction in arbitration, and triggered severance of public injunctive relief claims -- so such claims will go to the district court.

        COMMENT: In Blair, the claims for public injunctive relief are severed and go to court only because the agreement does not allow such claims to be heard in arbitration. But an agreement could be drafted that would allow for a hearing of such claims in arbitration. How much protection would that give to the public?

         It would seem that the interests of the public would be better served by hearing public injunctive relief claims in court, because mistakes of law and fact made by an arbitrator would be no basis for vacating the award. While that is exactly what private parties should expect, in the case of public injunctive relief, broader interests are at stake. If one could write on a blank slate, the public's interests would be better protected by a court hearing than by arbitration. But one does not write here on a blank slate.

 

    

 

Arbitration, Powers, Public Policy, Vacatur: Arbitrator Who Found HOA Failed To Follow Pre-Litigation Requirements In CC&Rs Did Not Exceed His Powers

Arbitrator Did Not Exceed Powers By Abridging An Unwaivable Statutory Right Or Policy.

    One of the grounds for a court to vacate an arbitrator's award is that the arbitrator exceeded his or her powers.  See Code of Civ. Proc. section 1286.2(a)(4). And arbitrators may exceed their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy. Richey v. AutoNation, Inc., 60 Cal.4th 909, 916 (2015). 

    In Branches Neighborhood Corporation v. CalAtlantic Group, Inc., G055201 (4/3  8/24/18) (Moore, O'Leary, Fybel), the defendant/respondent developer obtained summary judgment in arbitration, because the HOA filed its arbitration demand without first following a requirement in the HOA's CC&Rs requiring it to obtain the vote or written consent of 51% of its members prior to initiating a construction defect claim. The HOA tried to correct the problem by ratifying its decision to arbitrate after the fact, but the arbitrator wasn't having it.

    You could say this is a case that depends upon the plain language of the CC&Rs. That, by the way, is what the Court of Appeal said. The Court could not find an unwaivable statutory right to ratify after the fact what the CC&Rs required the HOA to do prior to filing its arbitration claim, nor could the Court find any express public policy that prevented enforcement of the CC&Rs. "[A]ccordingly, the plain language of the CC&Rs controls." Affirmed.

Arbitration, Federal Arbitration Act, Public Policy: 9th Circuit Holds That FAA Does Not Apply To Agreements Between Prosecutors And Citizens Resolving Alleged Criminal Violations

And Such An Agreement  To Arbitrate Disputes Invoking The Criminal Law Would Be Contrary To Public Policy.

        The context for our next case is California's Bad Check Diversion Program (Program), created to relieve California courts of the case overload caused by the criminalization of the writing of bad checks with intent to defraud.  The statutory scheme allows district attorneys to contract with private parties to administer the Program, and participants who are diverted from the courts to the Program are given an opportunity to provide restitution, take a class, and pay fees.  Victim Services, Inc. (VSI) is a private administrator under the Program.  Defendants who elect to participate in the Program are subject to an arbitration provision purporting to be enforceable under the FAA, and entered into between the district attorneys and the private administrator.  

        When plaintiffs sued VSI for violations of state and federal consumer-protection laws, VSI filed an anti-SLAPP motion, and also sought to arbitrate with the only plaintiff who had elected to participate in the Program.  The district court denied the anti-SLAPP motion on the grounds that the case was within the so-called "public interest exception" to an anti-SLAPP motion, and also held that the FAA did not apply to an agreement between a criminal suspect and local authorities about how to resolve a potential state-law criminal violation.  VSI unsuccessfully appealed.  Breazeale v. Victim Services, Nos. 15-16549 & 16-16495 (9th Cir.  12/27/17) (Schroeder, Tallman, Whaley). 

        We focus on the arbitration issue only.

        The FAA applies to private commercial agreements.  Judge Schroeder explains, "[a]gainst this historical backdrop, it is apparent that Congress never contemplated that the FAA would apply to agreements between prosecutors and citizens resolving alleged violations of a state's criminal law."  Therefore, the FAA did not apply to the particular agreement here.

        The Court was left to consider whether California state law required that arbitration be compelled.  On this point, the Court agreed with the district court's ruling "that an agreement to arbitrate disputes invoking the criminal law would be contrary to public policy."

            COMMENT:  There are some situations in which the state's involvement in an arbitration agreement, and state interests, provide a reason to avoid FAA preemption and enforcement of arbitration.  Breazeale is an example of a case in which the state's involvement in the criminal system, something altogether different from a normal commercial transaction, provides a reason to avoid compelling arbitration.  The other outstanding example is provided by Iskanian, dealing with efforts by employers to compel arbitration of Private Attorney General Act of 2004 (PAGA) employee representative actions, brought on behalf of the state, against employers.  The state has an interest in enforcing its labor laws by incentivizing private parties through the qui tam PAGA scheme to enforce the labor laws, and the California Supreme Court has  viewed the state involvement and interest as a reason not to enforce an agreement between the employee and employer to arbitrate PAGA claims.