California Mediation and Arbitration

Arbitration: Setoff In Arbitration Award That Affected 3d Party Could Not Be Corrected By Trial Court

Can A Merits Award In Arbitration That Affects Rights Of Third Party Who Did Not Participate In Arbitration Be Corrected?

        The majority opinion in E-Commerce Lighting, Inc. v. E-Commerce Trade LLC, E074525 (4/1  12/9/22) (Raphael, Ramirez; dsst. Mentrez), answered the above question with a "no", reversing the trial judge. Judge Menetrez, dissenting, answered "yes," under circumstances where the he believed the award could be corrected without affecting the merits.

        Trade purchased ECL's assets for $11.5, financing the asset sale with several loans.

        After the sale, E-Commerce Lighting, Inc. (ECL) and E-Commerce Trade LLC (Trade) arbitrated competing claims. The arbitrator's award setoff the claims against each other: $2,756.635.66 in favor of ECL and $2,611,463.58, yielding an award in favor of ECL of $145,172.08. 

        Trade then convinced the trial court that the setoff needed to be corrected, because it affected the rights of third party lenders who did not participate in the arbitration. The trial court agreed.

        The Court of Appeal reversed, explaining that while an award on the merits could be corrected if it did not affect the merits, here, correction would affect the merits award.

        Judge Menetrez disagreed, agreeing with the trial court that the arbitrator had exceeded the arbitrator's powers by issuing an award that affected the rights of third party lenders, including their security interest. Also, he argued that the award could be corrected without affecting the merits by simply removing the setoff.

        COMMENT: This is an interesting case, and given the dissent, we will monitor to see whether there is an appeal.

Arbitration Awards: Time To Change "Award" And Add Attorneys Fees Did Not Expire, Because Award Was Not Final Award

This Case Is Must Reading For Determining Whether An Arbitrator's Ruling Is An Award.

        "As this case highlights, whether an arbitrator's ruling constitutes an 'award' is a significant event." Lonky v. Patel, B295314 consolidated with B297632 (2/2  7/2/20) (Hoffstadt, Lui, Chavez). Indeed. The arbitrator can continue to issue interim rulings before there is an award. But once there is a final award, the clock begins to run on the  time the arbitrator has to continue to rule and correct or amend an award. In this case, the Court of Appeal ruled that a Second Interim Ruling did not constitute an Award, and thus the Arbitrator's time to increase compensatory damages and add attorney's fees had not expired.

        Very helpfully, the Court explains upfront how a court determines whether a ruling constitutes an award: "We hold that a court does so (1) by asking whether the ruling (a) determines all issues necessary to resolve the entire controversy and (b) leaves unaddressed only those issues incapable of resolution at that time because those issues are potential, conditional or contingent, and (2) answers those questions by looking to the specific procedures adopted in the arbitration at issue."

        The case is a model of clarity and genuinely useful for practitioners, because it addresses the nettlesome question of when a ruling complete enough to constitute an award. Here, the arbitration was divided into three phases: 1) liability, amount of compensatory damages, and eligibility for punitive damages; 2) amount of punitive damages and entitlement to attorney fees and costs; and 3) amount of attorney fees and costs. The Court of Appeal ruled that the arbitration ruling in phase two did not constitute an award, because it did not determine the amount of attorney fees, i.e., it did not determine all the  issues submitted to arbitration, and the amount was not potential, conditional, or could not otherwise have been determined at the time.

        

       

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: 1286.2 Vacatur, 1286.6 Correction By Court: Party Contending Trial Court Erred By Confirming Award Loses By Relying On Statutory Authority For Correcting An Award

Contention That There Was Error In  Confirming The Award Was Not Before The Court.

     To quote the late Steve “The Crocodile Hunter” Irwin, “Crikey!”.

     On appeal, defendant Porter argued that the arbitrator exceeded his authority, as a result of which confirmation of the arbitration award was error, citing Cal. Code Civ. Proc., section 1286.2(a)(4).  However, in the trial court, his sole theory was that the award should be corrected for miscalculation of figures, section 1286.6(a).  Thus, Porter’s contention that the arbitrator had exceeded his powers was not properly before the Court.  Keith v. Porter, B256524 (2/3 Feb. 20, 2015) (Edmon, Aldrich, Lavin) (unpublished). 

     COMMENT:  The statutory scheme is as follows:  section 1286.2 provides the bases for the trial court to vacate the arbitrator’s award, one of which is: “The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.”  Section 1286.6 (a) provides that unless the court vacates the award pursuant to Section 1286.2, the court shall correct the award and confirm it as corrected if the court determines that there was an evident miscalculation of figures.  Porter relied on correction rather than vacation of the award.  As a result, vacation of the award was not properly teed up for the Court of Appeal.  Covering its bases, the Court of Appeal added that it did not believe there was an evident miscalculation of figures.

Arbitration/Fees/Vacatur: Arbitrator Who Applies Statutory Definition of “Prevailing Party” To Award Fees Rather Than Contractual Definition Does Not Exceed His Powers

Court Does Not Decide Whether Contractual Provision Limiting Arbitrator’s Power To Apply Definition Of “Prevailing Party” Other Than Found In Agreement Would Be Unenforceable As Violative Of Public Policy.

     Does an arbitrator who applies the statutory definition of “prevailing party” found in Civil Code Section 1717(b)(1), rather than than the definition the parties contractually agreed to, violate his powers?  No – at least not when the issue of attorney’s fees is submitted to the arbitrator, and there is no express limitation on the powers of the arbitrator.  Safari Associates v. Superior Court (Alan Tarlov, real party interest), Case No. D065684 (4/1 Dec. 2, 2014) (Aaron, Huffman, Irion).

     Under section 1717, the prevailing party is the one “who recovered a greater relief in the action on the contract.”  However, in the contractual dispute between Safari and Tarlov, the arbitration clause provided that “the term ‘prevailing party’ means the party . . . that obtains substantially the relief sought in the arbitration.”  The different definitions of “prevailing party” proved to be important here, because Safari argued that Tarlov was required to pay, at a minimum, $768,228 to reimburse Safari for Tarlov’s personal expenses that Safari paid, but the arbitrator only awarded $152,611.48 in damages to Safari, plus $211,620 in attorney’s fees and $37,224.05 in costs.

     Thus, the arbitration award set the stage for Safari to move to confirm the award in the trial court, and for Tarlov to argue that the award needed to be modified or corrected as to fees, because he had “substantially” received the relief he sought in the arbitration by beating back much of Safari’s claim.  The trial judge sided with Tarlov, agreeing that the arbitrator had exceeded his powers by failing to apply the contractual definition of “prevailing party.”

      The Court of Appeal, however, disagreed, and granted Safari’s petition for writ of mandate.  The parties had submitted the issue of attorney’s fees and briefed the issue of “prevailing party” to the arbitrator.  Quoting Moore v. First Bank of San Luis Obispo, 22 Cal.4th 782, 787 (2000), but changing the names of the parties, the Court of Appeal explained:  “Having submitted the fees issue to arbitration, [Tarlov] cannot maintain the arbitrator [] exceeded [its] powers, within the meaning of [Code of Civil Procedure] section 1286.6, subdivision (b), by deciding it, even if [the arbitrator] decided it incorrectly.”

     The Court further observed that it was aware of “no authority that would support the conclusion that an arbitrator acts in excess of his powers in refusing to apply a provision in the parties’ agreement that the arbitrator determines is avoid as violative of public policy.” 

      COMMENT:  Could one draft an agreement that would limit the arbitrator’s power to apply a definition of prevailing party other than that found in the arbitration agreement?  One could define “prevailing party”, as did the parties in Safari, and then add that the arbitrator shall apply that definition, and that modifying, changing, or excusing that provision is outside the powers of the arbitrator.  In Safari, however, the parties merely defined “prevailing party”, but did not expressly state that application of a different definition would exceed the powers of the arbitrator.  Similarly, the Safari panel distinguished Gueyffier v. Ann Summers, Ltd., 43 Cal.4th 1179 (2008)  on the narrow ground that the agreement in Gueyffier “explicitly precluded the arbitrator from modifying or changing” a provision.

     If the parties in Safari had intended to “attempt to limit the arbitrator’s power to apply a definition of prevailing party other than the definition contained in the Agreement”, would language evincing such an intent have been enforceable?  The Safari Court declines to decide that question.  (Safari, footnote 5).

     NOTE:  This post also appears on the California Attorney’s Fees blog today.

Arbitration/Deadlines/Correction: Arbitrator Did Not Exceed Powers By Awarding Post-Termination Royalties After License Agreement Ended And Appellant Missed Deadline To Seek Correction Of Award

Post-Termination Of License Royalties Were Part Of $128.3M Arbitration Award.

     In Amkor Technology, Inc. v. Tessera, Inc., A139596 (1/3 Nov. 25, 2014) (Pollak, Siggins, Jenkins) (unpublished), the Court of Appeal affirmed part of a larger arbitration award for $128.3M.

    Procedural hurdle. 

     Appellant Amkor stumbled on a procedural hurdle:  Its petition to correct the award was untimely.  A petition to correct an award must be served and filed not later than 100 days after the date of the service of a signed copy.  Cal. Code Civ. Proc., section 1288.  Amkor’s problem was that it appealed 236 days after “Partial Award No. 3” – the award that it was attacking.  Amkor argued a new 100-day period ran when the arbitration panel issued an addendum to the “partial award.”  Amkor’s petition, however, did not seek to correct the addendum, which addendum was not even attached to the petition.  The critical issue, concerning damages, had been decided in the earlier Partial Award No. 3, and subsequent briefing and the addendum merely confirmed the award. 

     COMMENT:  When in doubt, appeal an original “partial award”, and a later award.  Better safe than sorry.  And “superfluity does not vitiate.”  (Maxim of Equity).

     Substantive hurdle. 

     Amkor argued the arbitration panel exceeded its powers by awarding royalties for the continued use of a patent after Tessera terminated the license agreement with its licensee Amkor.  (There was no question Tessera could recover royalties for the period after Amkor breached and before Tessera terminated the license).  Amkor further argued another lawsuit for patent infringement would be necessary to recover damages after the license agreement terminated, because once Tessera elected to terminate the license agreement upon Amkor’s breach, the obligation to pay future royalties ceased.

     Relying on broad language in the arbitration clause, and the equitable powers of the arbitrator, the Court of Appeal concluded the license agreement contemplated the licensee would not continue to use the patented technology after the license expired and the arbitrator did have the authority to award royalties for the “improper use of patented technology.”  Thus, the remedy was authorized by California law, and if there was an error of law, it was not a basis for holding the arbitration panel exceeded its authority.

     COMMENT:  At the end of the opinion, the Court states:  “The court did not select a remedy not authorized by California law.  Whether the court made an error of law in awarding royalties in this particular case is precisely the type of analysis prohibited under section 1286.6.”  (italics added).  Query whether the Court of Appeal meant to refer to the “arbitrator” rather than to the “court”?  Arbitrators do not exceed their powers, “merely by erroneously deciding a contested issue of law or fact.”  Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362, 366 (1994).

Arbitration/Public Policy/Correction Of Judgment: Policy Against Certain Fee Splitting Arrangements Does Not Justify Judicial Review Of Arbitration Award Enforcing Oral Fee Splitting Arrangement

Arbitrator Did Not Exceed His Powers By Enforcing Oral Fee Splitting Arrangement

      Attorneys Cohen and Sheinkopf had an oral agreement to split client fees:  75% to Cohen, 25% to Sheinkopf.  After the two attorneys went their separate ways, they arbitrated a fee dispute in which the arbitrator enforced their oral fee splitting agreement, resulting in an award that the trial court confirmed as a judgment.  Sheinkopf appealed, arguing that because the arbitrator’s enforcement of an oral fee splitting arrangement violated Rule of Professional Conduct 2-200, and was contrary to public policy, the arbitrator had exceeded his powers.  Cohen v. Sheinkopf, Case No. B252301 (2/3 Oct. 2, 2014) (Edmon, Kitching, Aldrich) (unpublished). 

      Some courts have indeed stated an arbitrator exceeds his or her powers by issuing an award violating “an explicit legislative expression of public policy.” But apparently not all public policies are equal.  Here, the Court of Appeal viewed the dispute among attorneys as more of a private matter, with the public policy served by the prohibition against fee splitting not justifying judicial review of the arbitration award.

     Sheinkopf’s argument that the trial court erred by concluding she waived the right to litigate a statute of limitations issue also made no headway, because she submitted the limitations issue to the arbitrator without objection. 

     However, Sheinkopf was successful in getting a modification of the judgment, because the trial court’s judgment simply failed to include an amount for $6,312 that the arbitrator had awarded to her – and she also received prejudgment interest on that omitted amount.

Arbitration/Correction of Award/1286.6: Arbitrator Did Not Exceed Her Powers In Calculating Damages, Where Appellant Was Ordered To Produce Documentation Of Manufacturing Costs And Failed To Do So

 

Maxim of Equity:  “No one can take advantage of his own wrong.” (Civ. Code, section 3517).

     Defendant/Appellant Donn Zellet appealed from a judgment confirming an arbitration award for $376,418 in damages, contending the arbitrator exceeded her powers in grossly miscalculating damages, and the superior court erred in not correcting the award.  Clark v. Zellet, Case No. B251728 (2/6 Sept. 22, 2014) (Yegan, Gilbert, Perren) (unpublished).

     Zellet argued the superior court should have subtracted plaintiff’s manufacturing cost from plaintiff’s unit cost for items sold.  “The argument fails because Zellet was ordered to produce records of the manufacturing and production costs but refused to do so.”  True, contract damages must be clearly ascertainable.  But:  “The corollary to this rule is that ‘[o]ne whose conduct has rendered difficult the ascertainment of . . . damages cannot escape liability because the damages could not be measured with exactness. [Citations.]”  Zinn v. Ex-Cell-O Corp., 24 Cal.2d 290, 297-298 (1944).

     Affirmed.

Arbitration/Vacatur/Deadlines: Too Late To Correct Arbitrator’s Award In High-Low Arbitration, Appellant Could Still Enforce “High-Low” Limit To The Award With Motion Requiring A Satisfaction Of Judgment

Once Again, Fourth Appellate District Demonstrates That Often There’s More Than One Way To Skin A Cat Where Arbitration Deadlines Are Involved

     Cats.  1927.  Library of Congress.

     On April 4, 2014, we posted about the way a plaintiff found to get around a deadline in arbitration:  after the time ran out to modify an arbitration award, the plaintiff was able to amend a judgment to add another party as a “successor corporation.”  Butler v. Lyons & Wolivar, Inc., Case No. G04766 (4th Dist. Div. 3 March 3, 2014) (Fybel, Rylaarsdam, Aronson) (unpublished).  As our next case also  demonstrates, when it is a matter of an arbitration deadline, often, “there’s more than one way to skin a cat.”    Horath v. Hess, D063124; D063709 (4th Dist. Div. 1 April 10, 2014) (McDonald, Huffman, McIntyre).  

     In Case No. D063124, Horath and Hess submitted to “high-low arbitration.”  In such arbitration, the parties privately agree, without informing the arbitrator, on a “high-low” range to the arbitration award.  In this case, the parties agreed that Plaintiff Horath would accept the award of the arbitrator or $100,000, whichever was less, but in no event less than $44,000.  The arbitrator awarded $329,644.61 in damages, and $36,882.61 in costs – far outside the “high-low” range. 

     Let’s pause for a moment to contemplate the resulting tensions.  On the one hand, an award so far outside the “high-low” range might incline a judge to find a way around the stipulation.  On the other hand, a deal is a deal.  Despite the stipulation, the trial judge confirmed the arbitrator’s award – and the Court of Appeal reversed.

     The problem for defendant Hess in the trial court was that he encountered the 100-day deadline to move to vacate or correct an award (Cal. Code of Civ. Proc., sections 1288 and 1288.2), after filing his motion to limit the judgment amount to $100,000:  Hess filed his motion more than 100 days after the date of the award.  Plaintiff Horath opposed Hess’s motion, arguing that it was a motion to “correct” the award, and as such, was untimely.  Agreeing with plaintiff, the trial judge confirmed the award, and denied as untimely a motion to vacate it or correct it to conform with the “high-low stipulation”.  Defendant Hess’s motion for reconsideration, brought under section 473, was also denied.

     In Case No. D063709, Hess filed a motion for acknowledgment of satisfaction of the judgment, arguing he had paid Horath $100,000 plus costs, and was therefore entitled to a satisfaction pursuant to the terms of the “high-low” stipulation and section 724.050.  The trial court also denied this motion.

      In the consolidated appeal of the two cases, the Court of Appeal concluded that the trial court erroneously denied the section 724.050 motion for acknowledgment of satisfaction of judgment, because the terms of the stipulation and the intent of the parties to submit to “high-low” arbitration was clear.  Furthermore, no term could be implied in the stipulation that the defendant was required to seek enforcement of the “high-low” provision by the arbitrator, who didn’t even know about the stipulation, or that defendant had to move to vacate or correct the award or respond to a petition to confirm the award.

       The motion to obtain acknowledgment of the satisfaction provided a clear route for enforcement of the stipulation that did not require vacation or correction of the award.  Therefore, the Court of Appeal affirmed the judgment, but reversed the post-judgment order denying Hess’s section 724.050 motion for acknowledgment of satisfaction of judgment.

Arbitration/Deadline/Delegation/Vacatur: Fourth District, Div. 1 Affirms Trial Court’s Order Denying Plaintiffs’ Motion To Vacate Award Because Parties Agreed Arbitrators Could Decide Whether The Arbitration Was Timely -- Or Not

Arbitrators Acted Within Their Powers, So It Didn’t Change Results Even If They Erred

     In the underlying dispute, Plaintiffs obtained a substantial award of $150,000 compensatory and $302,784 in punitive damages, blown out when the Court of Appeal ruled that the dispute, related to lease provisions, was subject to arbitration.  Defendants then moved, successfully, to compel arbitration, and the trial court set a date of November 24, 2010 as a deadline to complete arbitration.  After November 24, 2010,  Plaintiffs made a demand to the AAA for arbitration, and Defendants successfully argued to the arbitrators that the demand was untimely.  After the trial court denied Plaintiffs’ motion to correct or vacate the arbitration award, Plaintiffs appealed. P.O.P. v. Onie O. Lively, D063550 (4th Dist. Div. 1 March 8, 2014) (Benke, Haller, McIntyre) (unpublished).

     The issue as to whether the deadline to arbitrate should have been extended arose because Cal. Code of Civ. Proc. section 1283.8 permits a trial court to set a deadline to arbitrate where the agreement to arbitrate does not set a deadline, whereas the AAA rule at the time the arbitration was pending set its own deadline for rendering a decision, typically thirty days from the date of closing the hearing.  If arbitration could be compelled, as it was, then arguably the trial court lacked jurisdiction to set a deadline.

     The Court of Appeal chose the path of least resistance:  because the record showed the parties agreed the arbitrators could decide whether the arbitration was timely, the arbitrators acted within their powers when they decided the issue.  Whether the arbitrators erred was not an issued that even had to be decided, because if the arbitrators acted within their powers, then a mere mistake of law or fact was not reviewable by the trial court.

      The result must have come as a double blow to Plaintiffs/Appellants, who won the underlying dispute, saw the judgment in their favor reversed, and then failed to initiate a timely arbitration.  It happens.