California Mediation and Arbitration

Arbitration/Public Policy/Section 1281.2/Correction: Award Is Corrected Because Arbitrator Incorrectly Ruled That Plaintiff Breached Arbitration Agreement By Choosing To File A Lawsuit

Arbitrator Acted Beyond Powers Because Award Violated Party's Statutory Rights And Clearly Defined Public Policy.

        Instead of initiating arbitration, a party subject to an arbitration agreement chooses to file a lawsuit when a dispute arises.  Has the party breached the arbitration agreement?  And if the arbitrator issues an award by holding that the party has breached, is it reviewable on the merits?  Those are the issues the Court of Appeal confronted in Sargon Enterprises, Inc. v. Browne George Ross LLP, B271718 (2/3  9/26/17) (Edmon, Lavin, Johnson) (published).

        After "long-running litigation" involving a patented dental implant, Sargon sued its attorneys, Browne George Ross LLP (BGR), for legal malpractice, BGR successfully petitioned to compel arbitration, and BGR pressed a claim in arbitration against Sargon for breach of contract.  The arbitrator found Sargon's malpractice claim to be barred by a release, concluded that Sargon breached the arbitration agreement by filing the malpractice action in superior court instead of initiating arbitration, and awarded BGR damages of $200,000.  Sargon appealed the judgment and order granting the petition to confirm the arbitration award.

        Ordinarily, judicial review of the merits of an arbitration award is limited.  However, an exception allowing for review exists when the arbitrator exceeds his powers.  Here, the exception to limited review applied, because an award must be vacated if it violates a party's statutory rights or clearly defined public policy.

        Cutting to the chase, the Court of Appeal concluded that a party subject to an arbitration agreement has a statutory right in California to initiate litigation in court.  Indeed, the California Arbitration Act (CAA) anticipates that a party to an arbitration agreement may file a lawsuit, because it provides that the defendant may respond by filing a petition to compel arbitration instead of filing an answer.  There are public policy reasons for such a procedure, because a plaintiff may believe the arbitration clause is unenforceable, its claims are not within the scope of an arbitration agreement, arbitration has been waived, it prefers to have a jury trial, and the defendant may not assert a right to arbitrate. 

      Because the CAA provides parties with a statutory right to file a lawsuit testing the validity and enforceability of an arbitration agreement, the arbitrator exceeded his powers by awarding damages for breach of the contract to arbitrate after Sargon chose to file a complaint rather than to initiate arbitration.  

        The Court of Appeal corrected the award by striking the portion finding Sargon breached the contract and ordering Sargon to pay damages, while confirming as a judgment the part of the award finding in favor of the law firm on the issue of malpractice.

        COMMENT:  As a published opinion, Sargon Enterprises is important, because it makes it clear, under the CAA, that a party subject to an arbitration agreement does not breach the contract by filing a lawsuit instead.  It is also important, because it applies California's violation of statutory rights/clearly defined public policy exceptions to expand what would otherwise be limited review of an arbitration award.   

 

 

        

 

 

 

    

Arbitration: Employment, Public Policy, Standard Of Review: Court Of Appeal Rejects Contentions That Arbitrator Exceeded Powers By Issuing Award In Violation Of California Public Policy

 

The King vs. Medieval Knights . . . 

    Plaintiff Scott Ehredt, a performer in medieval style games at Medieval Knights, sued claiming that Medieval Knights had misappropriated his likeness in advertising images, notwithstanding a release that he had provided.  The matter was arbitrated, and after receiving an adverse award, Mr. Ehredt appealed. Ehredt v. Medieval Knights, LLC, et al., B275833 (2/8  5/15/17) (Grimes, Rubin, Flier) (unpublished).

        The Court of Appeal rejected Mr. Ehredt's argument that the arbitrator exceeded his powers and acted in violation of public policy by validating the employer's actions requiring him, as a condition of employment, to sign a release.  Nor did the Court of Appeal accept an argument that the parties had contracted to judicial review of the merits of the award by agreeing that the award could be vacated if "the arbitrator acted in manifest disregard of the law or otherwise exceeded the arbitrator's powers . . . "  The "manifest disregard standard" is a federal standard that is narrowly construed.  The general rule, of course, is that the court does not vacate an award for a mistake of law or fact.

    COMMENT:  The arbitrator awarded defendants attorney fees in the amount of $280,000 and costs in the amount of $8,650.26.  Though one of the arguments in favor of arbitration is its economy and efficiency, even a three-day arbitration can prove to be very expensive, given the amount of work leading up to the hearing.  This debacle brought to mind the Black Knight of Monty Python fame.  Hence, the video link above.

Arbitration/Waiver/Public Policy/FAA: California Supreme Court Rules That Arbitration Provision Eliminating Any Forum For Obtaining “Public Injunctive Relief” Is Unenforceable

Nor Is There Federal Arbitration Act Preemption.

    In a long-awaited and important decision, the California Supreme Court addresses the validity of a provision in a predispute arbitration agreement that waives the right to seek "public injunctive relief" as a statutory remedy in any forum. McGill v. Citibank, N.A., No. S224086 (Sup. Ct. 4/6/17). Reversing the Court of Appeal, the Court unanimously holds, in an opinion authored by Justice Chin,"such a provision is contrary to California public policy and is thus unenforceable under California law." The Court further holds "that the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) does not preempt this rule of California law or require enforcement of the waiver provision."

    The plaintiff had brought claims against Citibank under California Unfair Competition Law, under the California Consumer Legal Remedies Act, under false advertising statutory provisions, and under the Insurance Code, in connection with Citibank's alleged violation of a "consumer protection" plan intended to protect credit card holders who missed payments because of certain qualifying events, such as long-term disability, or unemployment. One element of relief sought by the plaintiff was public injunctive relief, namely, injunctive relief that would benefit not only the plaintiff, but the public. A very broad arbitration provision, however, swept just about every conceivable claim under the arbitration rug.

    The parties in McGill agreed that the arbitration provisions, as drafted, prevented the plaintiff from seeking public injunctive relief in arbitration, because the plaintiff would only be able to seek relief as to her own claim, and not obtain any broader injunctive relief that would benefit other persons.

    The Court invokes California Code of Civil Procedure section 3513, providing: "Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement." As interpreted by the Supreme Court, the UCL, the CLRA and the false advertising statutory provisions (Bus. & Prof. Code § 17500) are established for a public purpose, and thus a waiver of the right to obtain public injunctive relief under those statutes is contrary to California public policy.

    So why isn't this result preempted and precluded by the Federal Arbitration Act, which generally requires the enforcement of arbitration clauses? The answer is that the FAA only requires that arbitration provisions be placed on an equal footing with other contracts, and the California Supreme Court explains that such a waiver of the right to obtain public injunctive relief would be equally unenforceable whether the waiver applied to an arbitration proceeding or to a judicial proceeding.

    The Court also relies on a distinction applied by SCOTUS in the Italian Colors Restaurant case (see my June 25, 2013 post) – the distinction between waiver of a statutory remedy that is substantive, and waiver of a procedural path to vindicate a statutory remedy. The Italian Colors majority ruled that waiver of a procedural path to vindicate a statutory right is acceptable, so long as there is no waiver of the substantive right. (Because the substantive right may be ineffective without a procedural path to vindicate it, some may believe that the distinction between waiver of a substantive right and waiver of the procedural path, e.g., class action, to vindicate that right, is a distinction without a practical difference.) In McGill, however, enforcement of the arbitration clause would have required waiver of the substantive right to obtain public injunctive relief: not acceptable.

    The California Supreme Court avoided having to decide whether the so-called Broughton-Cruz rule applied in McGill. As stated by the Court, that rule provides: "Agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California." The Court distinguished McGill on the grounds that it is a case where no public injunctive relief could be obtained in any forum, in contrast to a Broughton-Cruz scenario where the parties have agreed to arbitrate claims for public injunctive relief.

    COMMENT: The practical effect of the ruling in McGill may be diminished if the parties have to arbitrate the arbitrable claims, and the superior court stays judicial determination of the right to public injunctive relief. In the future, arbitration clauses could be drafted allowing for obtaining public injunctive relief through the arbitration process. While that approach would put the Broughton-Cruz rule at issue again, it would seemingly avoid the holding of McGill, in which the holding depends on the unavailability of public injunctive relief in any forum.

    I previously posted about McGill v. Citibank on April 5, 2015 and December 18, 2014.

Arbitration, Public Policy, Record: Slight Record And Failure To Show Violation Of Well-Settled Public Policy Dooms Challenge To Arbitrator’s Award

Absence Of A Record Was A Major Problem For Appellant.

     Law Offices of Mark Waecker, APC v. Pius Kim, B268212 (2/5 12/1/16) (Turner, Kriegler, Kumar) (unpublished) illustrates the proposition that an arbitrator’s decision is generally not reviewable for factual or legal errors.  Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992).  Therefore, the Court of Appeal does not (and did not here) have to determine whether the arbitrator correctly decided the issues.  However, an arbitrator’s decision may be reviewed if the arbitrator exceeds his or her powers or violates a well-settled public policy.  Neither was the case here.  Therefore the Court of Appeal affirmed the judgment confirming an award of $323,320.58, in favor of an attorney in a fee dispute with clients. 

      The individual client, Mr. Kim, made a creative argument that he had been individually included as a client along with his companies just so the attorney could recover fees from him individually, without disclosing any conflicts of interest to Mr. Kim.  It was not necessary, argued Mr. Kim, to include him, as he was not a party to the cases in which the attorney represented the codefendants. 

       The Court of Appeal rejected the argument that there was a conflict, because a conflict, if any, was “outside the subject matter of the litigation.”  The Court further explained that rule 3-300, prohibiting an attorney from entering into a business transaction with a client, did not apply to retainer letters.  

       We note that the appeal made no headway because, among other problems, no arbitration testimony was submitted to the trial court.  Rather, the Court of Appeal had to work with “the arbitrator’s award which states that Mr. Kim was not credible.” 

       NOTE:  Given the rule established by Moncharsh and other cases, one who challenges the arbitrator’s award faces a steep uphill battle.  What’s more, with only a slight record, the outcome is usually foreordained.

Arbitration, Enforceability, Consumers: MarketWatch Reports Trump University Could Be Sued In Court Because It Didn’t Have Arbitration Clause With Students

Obama Administration Has Sought Change In Law To Prevent Educational Institutions Getting Federal Funds From Requiring Students To Sign Pre-Dispute Arbitration Clauses.

     Jillian Berman reports on July 22, 2016 in MarketWatch that students were able to sue Trump University in the courts because the students were not required to sign pre-dispute arbitration clauses. 

     In contrast to Trump University, Berman reports:  “ About 98% of students enrolled in for-profit colleges receiving federal financial aid were subject to an arbitration clause, according to a report published earlier this year by the Century Foundation, a progressive think tank.”

     Meanwhile, the Obama Administration has pushed to finalize rules to prevent colleges that receive federal financial aid from requiring students to sign pre-dispute arbitration clauses as a condition for enrollment.  The rules are scheduled to take effect in 2016.

     QUERY:  How easily can the executive branch undo this change in rules after January 20, 2017?

Collective Bargaining/Public Policy Exception: Ninth Circuit Reverses District Court’s Decision That Vacated Arbitrator’s Award On Erroneous Grounds Arbitrator’s Interpretation Of Agreement Was Not “Plausible” And Was Contra

Opinion Clarifies Limited Role Played By Courts In Reviewing Labor Arbitration Awards.

     In Southwest Regional Council of Carpenters v. Drywall Dynamics, Inc., No. 14-55250 (9th Cir. May 19, 2016) (Berzon, Owens, Marbley), the Ninth Circuit reverses a district court order vacating an arbitration award in a labor case, along the way criticizing use of “plausibility” as a guide to review, and pointing out that the so-called “public policy exception” allowing for review of an arbitrator’s award, is in fact a limited exception requiring violation of an “explicit, well-defined, and dominant public policy.”

     Perhaps the facts troubled the district court judge.  Respondent Drywall Dynamics, Inc., (“Drywall”) entered into a labor agreement with petitioner Southwest Regional Council of Carpenters (“SWRCC” or “Union) by which Drywall assigned to a contractors’ association authority to bargain on its behalf.  Drywall attempted to terminate the agreement, but the Union and association had executed a Memorandum of Understanding (“MOU”) extending the agreement before Drywall could terminate it – something that happened more than once.  The arbitrator found in favor of the Union, in particular finding that the termination was not timely.

     The district court ruled that the arbitration panel’s interpretation of the contracts was not “plausible” – the first problem.  The Ninth Circuit has now clarified that “plausibility” is not the standard of review, to the extent that “plausibility” requires looking at the merits of the decision.  Instead, the question is “whether [the arbitrator] made any interpretation or application of the agreement at all,” adding:  “If so, the court’s inquiry ends.”  Another formulation of this is:  “Did the arbitrator look at and construe the contract, or did he not?”

     The second problem arose when “the district court determined that the arbitrator’s award violated ‘a clear public policy in favor of voluntary relationships among employers and multi-employer bargaining units’.”  The district court had in mind “the voluntary nature of multiemployer bargaining.”  However, the Ninth Circuit found no such clear public policy, but rather competing interests that include the right to withdraw from a multiemployer unit and the stability of multiemployer units.  With competing policies, no clear public policy exists, thus, no violation of a clear public policy, thus, no exception allowing for review of the arbitrator’s award.  Query whether Drywall is in a sort of Catch-22 situation -- stuck with outcomes it does not like, and unable to find a simple way to extricate itself from multiemployer bargaining.

Arbitration/Employment: Arbitration Award Of Fees Against Employee Losing Overtime Claim Properly Vacated Under Public Policy Exception To Arbitral Finality

 

Arbitral Award Was Properly Corrected To Take Into Account That Labor Code Section 1194 Is A One-Way Fee Shifting Award.

    California Attorney’s Fees posts today on  Ling v. P.F. Chang’s China Bistro, Inc., Case No. H039367 (6th Dist. Mar. 25, 2016) (published), an employment law case in which the Court of Appeal agreed (in part) with the trial judge that Labor Code section 1194 works as a one-way fee shifting provision in favor of the employee, such that a substantial arbitral award fee award in favor of the employer required correction.  This is an example of the “public policy” exception to arbitral finality applied in the employment law context.

 

    

Public Policy: Trial Court’s Confirmation Of Arbitrator’s Attorney’s Fees Award Is Reversed Because Law Firm Simultaneously Represented Adverse Parties In Unrelated Matters.

Under California Law, Where Party Challenges An Entire Contract As Illegal Or In Violation Of Public Policy, The Question Of Enforceability Is For The Court To Decide.

     A substantial fee dispute between Sheppard, Mullin, Richter & Hampton, LLP and its client J-M Manufacturing Co., Inc., resulted in an arbitrator’s award to Sheppard, Mullin that the trial court confirmed, that the client appealed, and that the Court of Appeal has now reversed in a published opinion. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., No. B256314 (2/4 Jan. 29, 2016).

     The problem with the arbitrator’s award in favor of Sheppard, Mullin was that Sheppard, Mullin simultaneously represented adverse parties, albeit in unrelated matters.  This nevertheless violated Cal. Rules of Prof. Conduct, Rule 3-310, requiring that attorneys avoid the simultaneous representation of adverse interests. 

     The rule that an arbitrator’s mistakes of law and fact does not provide a basis for refusing to confirm an award is not ironclad, because under California law, the court gets to decide the enforceability of a contract where a party challenges an entire contract as illegal or in violation of public policy.  Here, the Court of Appeal readily found a violation of Rule 3-310 to be a violation of an expression of public policy:

“As discussed in Flatt, SpeeDee Oil, American Airlines v. Sheppard Mullin, and Fiduciary Trust, the attorney’s duty of undivided loyalty that forms the basis of Rule 3- 310 constitutes the very foundation of an attorney-client relationship. The Agreement, which violated Rule 3-310(C), therefore violated an expression of public policy. The trial court erred in holding that the Agreement was valid and enforceable.”  (slip op., p. 26).

     Agreeing with cases holding that “[t]here is no requirement that a contract violate an express mandate of a statute before it may be declared void as contrary to public policy,” the Court of Appeal rejected Sheppard, Mullins’ argument that courts may consider only public policy as expressly declared by the Legislature.

     A January 30, 2016 post in Mike Hensley’s and my blog, “California Attorney’s Fees,” describes the end result here as a “brutal reversal”, because “the reviewing court found that S, M was not entitled to fees during the conflict as a matter of law under Rule 3-310, but remanded for a determination of when the actual conflict arose.”  So a fee award of $1.3M got reversed.

     NOTE:  This is the third published California opinion in recent months that addresses the “public policy” exception to the general rule that arbitration awards can’t be reviewed for a mistake of law or fact, the other two being SingerLewak v. Gantman, 241 Cal.App.4th 610 (2015) (See Oct. 22, 2015 post) and Epic Medical Management v. Paquette, B261541 (2/8 filed Dec. 29, 2015, ord pub. Jan. 28, 2015).

Arbitration/Public Policy Exception: SingerLewak v. Gantman Is Ordered Published

A Circuitous Route To Publication.

     I posted about SingerLewak v. Gantman on July 31, August 31, and September 1, 2015.  This is an interesting case discussing the so-called “public policy exception” that will sometimes justify review of an arbitral award by the superior court – though in the end, not in this case.

    Previously, the Court of Appeal had ordered the case published in the morning, only to revoke the publication order in the afternoon, when it realized that the time to order publication had expired.  The Justices then wrote a letter to the Supreme Court asking for publication.  Yesterday, the Supreme Court ordered publication.

  Ted Bacon, Mike Hensley, and Matt Hansen, my colleagues at AlvaradoSmith, represented SingerLewak, the appellant/plaintiff prevailing on the appeal.  I was pleased to see publication was ordered, as I had written the letter to the Court of Appeal requesting publication.

Department Of Corrections: Say Whaaat? SingerLewak v. Gantman, Certified For Publication Yesterday Morning, No Longer Certified By Yesterday Afternoon

Court of Appeal’s Jurisdiction To Authorize Publication Expired.

     Just yesterday,  in the preceding post, I reported the Court of Appeal, Second District, Division 8, had authorized publication of SingerLewak v. Gantman, a case offering an excellent discussion of the so-called “public policy exception” that, when it is found it exist, allows for judicial review of an arbitral award.

     By the end of the day, however, the following case docket entry appeared:

       Pursuant to California Rules of Court, rule 8.264(b)(1), the court's opinion became final on August 28, 2015. The court's order filed August 31, 2015, granting certification to publish the opinion is hereby vacated as improvidently issued. Forthwith, the court will comply with the provisions of California Rules of Court, rule 8.1120(b) regarding publication of the opinion upon order of the Supreme Court.

     As Arte Johnson would say, “Very interesting . . . but not very funny.”

     Rule 8.1120(b) provides:  “If the rendering court does not or cannot grant the request before the decision is final in that court, it must forward the request to the Supreme Court with a copy of its opinion, its recommendation for disposition, and a brief statement of its reasons. The rendering court must forward these materials within 15 days after the decision is final in that court.”

     I’ll let you know what happens.