California Mediation and Arbitration

Arbitration, Standard Of Review: The Parties Can Agree That Arbitrator Will Follow The Law

An Exception To The General Rule That Errors Of Fact And Law Are Not A Basis For Reversing An Arbitrator's Award.

        If you need an example of a recent case in which the parties agreed that the arbitrator shall follow the law, see Samuelian v. Life Generations Healthcare, LLC, No. G061911, G062416 & G062426 (4/3   8/20/24) (Moore, Acting P.J.).

        While the general rule is that an arbitrator's mistake of law or fact is not cause for reversal, there is an exception in California. The parties can agree that the arbitrator shall follow the law. Here, the parties agreed in writing: “The Arbitrator shall not have the power to commit errors of law or legal reasoning and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error.” That meant that the arbitrator's award could be reviewed de novo as to matters of law. Here, the arbitrator made a legal error, and as a result the award was not confirmed and was vacated instead.

Waiver: Fourth District Div. 2 Holds Lengthy Delay And Failure To Timely Take Affirmative Steps To Arbitrate Results In Waiver Of Right To Arbitrate

Thirty-Nine Page Slip Opinion Hinges On Issue Of Waiver.

        The Court of Appeal addresses a variety of issues in the context of a complicated procedural history in Desert Regional Medical Center v. Leah Miller and Desert Regional Medical Center v. Lynn Fontana, E076058 and E076069 (4/2  1/6/23) (Codrington, Ramirez, Raphael). 

        The procedural history was complicated by the overlapping pendency of a collective bargaining grievance procedure and the lawsuits brought by individual employees, who were employees at the Desert Regional Medical Center (DRMC). Did the individual actions need to be stayed while the union procedure was exhausted? Did the arbitrability of these cases need to be decided by the court or the arbitrator? Did the Federal Arbitration Act or the California Arbitration Act apply? Did the Labor Commissioner have jurisdiction to hear claims brought by the employees, or did the claims need to be arbitrated? Were the employees estopped from arguing that the employer waived the right to arbitrate? Was prejudice necessary to find a waiver of the right to arbitrate? Interesting questions, but in the end the outcome hinged on whether the employer waived the right to arbitrate.

        In the end, the Court of Appeal affirmed the trial court's order denying a motion to arbitrate, agreeing that the employer waived its right to arbitrate. There was an issue as to how long the employer had delayed bringing a motion to arbitrate. That delay was at least a year, possibly up to four years. The court concluded that even during a one year delay, the employer acted inconsistently with asserting a right to arbitrate by engaging in further litigation procedure.

 

 

 

Jurisdiction, International Arb, FAA, Standard Of Review: Ninth Circuit Reminds Us Of Its Limited Ability To Fix Things In Arbitration When They Go Wrong To

It Is With A Heavy Heart That A Ninth Circuit Panel Tells Us It Can't Fix A Mess.

        "This award shows in stark terms the real risks that parties assume when they trade away their right to adjudicate their claims in court for the potential efficiencies of arbitration. When, as here, things go wrong, our power to fix them is uncomfortably, but plainly, limited under the FAA." HayDay Farms, Inc. et al. v. FeeDx Holdings, Inc., 21-55650 anhd 21-55698 (9th Cir.  12/19/22) (Smith, Nelson, Drain).

        The underlying arbitration involved a contract dispute between HayDay Farms, Inc. and Nippon Kokusai Agricultural Holdings, Inc., on the one hand, and FeeDx Holdings, Inc., on the other. A panel of three arbitrators, after four years of arbitration, issued a final award in excess of $21 million in favor of HayDay Farms, Inc. and Nippon. The trial court judge then confirmed the award in part, but removed $7 million from the award. On appeal to the Ninth Circuit, FeeDx argued that the award put HayDay and Nippon in a better shape than if both sides had fully performed the contract, something that California Civil Code § 3358 does not allow: "Except as expressly provided by statute, no person can recover a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides." That was the justification for the district court's decision to remove the $7 million component of the award.

        Before it could address the merits, the Court of Appeals had to address its jurisdiction. HayDay and Nippon had sought to confirm the award in state court, and FeeDx had removed the proceeding to federal court, purportedly under diversity jurisdiction. The federal district court did not address its jurisdiction. In fact, complete diversity was lacking, because a California, Samoa, and Cayman Island corporation were involved, and diversity jurisdiction does not apply to a foreign entity suing a foreign entity. But the Court of Appeals, analyzing its own jurisdiction, found the trial court's jurisdiction to lie in 9 USC § 203, which provides that an action or proceeding falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards shall be deemed to arise under the laws and treaties of the United States. And if the district court had jurisdiction, then the Court of Appeals had jurisdiction under 9 USC § 16 and 28 USC § 1291.

        Next, the Ninth Circuit had to address a question of first impression in its own circuit: whether the standards for vacatur in the Federal Arbitration Act applied for awards governed by the Convention, when the Convention did not specifically say so. Agreeing with other circuits, the Ninth Circuit held that the FAA standards did apply. And the standard, expressed in different ways, is exceedingly tough.

        A plausible interpretation of the contract cannot be overturned. An award that is manifestly irrational and completely disregards the law can be overturned under FAA standards. The "irrationality standard 'is extremely narrow and is satisfied only where the arbitration decision fails to draw its essence from the agreement.'" Does the decision fail to draw its essence from the agreement? Have we entered the realm of the metaphysical?

        In any case, the Court of Appeal held that the arbitral decision was not irrational, and thus it affirmed the award, while reversing the district court, which had removed $7 million from the award.

        And yet it seems to have done so with some pain. Judge Milan wrote that the losing party, FeeDx, "probably offers the best interpretation of the parties’ agreements . . .", while he assures us that the award "was not some form of vigilante justice . . . " And, he wrote, "We share the district court's concern about a seemingly unfair damages award that likely violate § 3358." 

        Small consolation for the losing party. However, these were sophisticated parties that agreed to arbitrate

Arbitration, Enforceability, Employment: Ninth Circuit Holds Arbitration Agreement Enforceable Against Farm Worker Because No Economic Duress

Just Following The Law, Or Gaslighting?

        Farmworker Martinez-Gonzalez, on behalf of himself and other employees, brought a wage and hour lawsuit against a farm labor contractor and a grower. The district court held that defendants could not enforce an arbitration agreement, because the employee had signed under economic duress or undue influence. A Ninth Circuit panel reversed, holding that economic duress or undue influence did not exist, because the employer did not commit a "wrongful act" and because the employee was not unusually susceptible. Judge Rawlinson dissented, arguing the district court provided detailed factual findings on which its decision was based, and the majority failed to give proper deference to the district court's findings. Martinez-Gonzalez v. Elkhorn Packing Co., LLC, et al, No. 19-17311 (9th Cir.  11/3/21) (Bumatay, Siler; Rawlinson (dissent)).

        The majority and dissenting opinions make for interesting reading. Judge Bumatay, author of the majority opinion, wrote: "The dissent disagrees largely based on Martinez-Gonzalez’s socioeconomic background." He also insisted it was the court's duty to follow the law, not its sympathies. Judge Rawlinson retorted, "The majority’s suggestion that 'facts don’t matter' to me or to the district court . . . is nothing short of gaslighting." And she includes a definition of gaslighting taken from Wikipedia: "The term “[g]aslighting is . . . used informally to describe someone who persistently puts forth [a] false narrative” in an effort to cause “another person to doubt [her] own perceptions. . . .”

        The district court did make detailed factual findings, noting that the employee was transported in a twelve-hour bus trip from Mexico, that he signed the arbitration agreement in a parking lot of the hotel where the employer was putting him up, that no explanation was provided to him, and that he had a reasonable belief that if he did not sign, he would not be able to find another  job. The majority points out that the facts do not amount to a crime or a tort, and fall short of other cases in which contracts have been rescinded because of economic duress or undue influence. The dissent points out that a tort or a crime is not required to find undue influence or economic duress, that the district court judge made detailed findings, and that the court should have deferred to the findings and to reasonable inferences from the findings.

        COMMENT: The case is interesting because the facts occupy a liminal space: they do not amount to a tort or a crime, and yet as the majority artfully puts it, the circumstances for signing the arbitration agreement were "not ideal." So the question presented is: what facts, falling short of crime or tort, will constitute a wrongful act?

        The case is another example of a decision involving a pre-dispute arbitration provision in which the judges' respective views line up with the party of the President who appointed them: Bumatay (Trump), Siler (George H. W. Bush), Rawlinson (Clinton).

        The case also provides an example of that much repeated proposition that arbitration is voluntary and consistent with freedom of contract -- a proposition necessary to uphold the enforceability of arbitration agreements, while at the same  time serving as a legal fiction.

        Finally, it is worth noting that the enforceability of the arbitration provision in this case depends on whether there is undue influence or economic duress. See Cal. Civ. Code § 1689(b)(1). This is different from unconscionability, the more common defense to contract enforceability. In California, unconscionability has two prongs: procedural unconscionability and substantive unconscionability. But rescinding a contract based on economic duress or undue influence does not require substantive unconscionability. 

"Visalia (vicinity), Tulare County, California. The Farm Security Administration. Miners's cooperative farm. Ten families have been established on the old ranch of 500 acres, which they operate as a farm unit, raising cotton alfalfa and dairy products for cash crops." Dorothea Lange, photographer. November 1938. Library of Congress.

Arbitration, Authentication, Standard Of Review, Employment: First District Div. 5 Agrees That Employer Failed To Authenticate Electronic Signature On Arbitration Agreement

Authentication Of Electronic Signatures Continues To Trip Up Employers.

        The trial court denied the employer's motion to compel arbitration, because the employee Bannister "presented evidence that she never saw the [arbitration] agreement during the  onboarding process and did not affix her  electronic signature to it," and the  Court of Appeal affirmed. Maureen Bannister v. Marinidence Opco, LLC, et al., A159815 (1/5  5/21/21) (Burns, Simons, Rodriguez).

        When an appeal from a denial of a  motion to arbitrate turns on undisputed facts, the Court of Appeal reviews the trial court's ruling for  substantial evidence. If the facts are undisputed, then the  review  of the  trial court's finding can be a  question of  law. Here, the court  agreed that  the outcome is  the same regardless of  the  standard applied. The trial court concluded that, given conflicting evidence, the employer failed to  prove by "a preponderance of the evidence" the existence of an arbitration agreement. And the Court of  Appeal defers to the trial court's determination of the credibility of witnesses and weight of the evidence.

        COMMENT: Civil Code section 1633.9, subdivision (a), governs the authentication of electronic signatures. It provides: "(a) An electronic record or electronic signature is attributable to a person if it was the act of the person.  The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable."

Arbitration, Vacatur: Arbitrator's Inappropriate Ex Parte Communications Result In Vacation Of Arbitration Award

Plaintiff/Appellant Did Not Need To Prove That Arbitrator's Ex Parte Communications Led To Adverse Award.

        A rather unusual case, this. Joanna G. Grabowski, an in pro per plaintiff/appellant successfully vacated an adverse arbitration award in a malpractice arbitration she brought against Kaiser. Joanna G. Grabowski v. Kaiser Foundation Health Plan, Inc., et al, No. D076968 (4/1  5/10/21) (Guerrero, Benke, Do).

        The Court of Appeal agreed that the arbitrator's ex parte communications with Kaiser's attorney were not ethical, and that the nature of the communications was such that a reasonable person could have concluded that the arbitrator was incapable of being impartial. Speaking with Kaiser's attorney ex parte, the arbitrator commiserated that this was a difficult case, and that Grabowski, who represented herself in pro per, couldn't effectively represent herself. "The arbitrator volunteered these comments to Kaiser’s counsel, ex parte, and they shared a hearty laugh about Grabowski’s perceived shortcomings as an advocate." Additionally the arbitrator failed to disclose two Kaiser matters in which the arbitrator was selected to arbitrate. 

        The disclosure standard is not whether disclosure would have changed the outcome, but whether a person could have reasonably concluded that the arbitrator could not be impartial, based on the ex parte communication and the failure to disclose prior involvement with Kaiser.

        COMMENT: One might well ask how Grabowski knew about the ex parte communications, since she wasn't present when Kaiser's attorney spoke to the arbitrator. "Grabowski’s mother was recording the proceedings on her cell phone and had inadvertently left it going while she and Grabowski left the room." If the arbitrator had imagined that everything he said might be recorded, he might have been more careful.

 

Arbitration, Standard Of Review: 1st District Div. 5 Independently Reviews Arbitrator's Questions Of Law Under Cable Connection, Inc.

An Arbitrator's Decision Is Not Ordinarily Reviewable For Error . . . Unless The Parties Agree That It Is In California State Courts.

        In Oakland-Alameda County Coliseum Authority v. Golden State Warriors, LLC, A157688 (1/5  8/18/20) (Jones, Simons, Needham), high stakes depended on whether a contract between the Oakland-Alameda County Coliseum Authority and Golden State Warriors terminated by nonrenewal or terminated by expiration. The arbitrator ruled that the contract could terminate by nonrenewal. The Golden State Warriors failed to renew the contract, the arbitrator ruled it terminated, and the dire consequence was that Golden State Warriors had to continue servicing debt incurred to renovate the arena till 2027.

        Given the rule that an arbitrator's mistake of law or fact is ordinarily no basis to review or overturn it, my first question was why the Court of  Appeal was reviewing whether the arbitration award had properly been confirmed by the Superior Court. The simple answer is that the  parties had agreed that "either party may file an application to correct or vacate the arbitration award or an application for de novo review on all questions of law based on the arbitrator's finding[s] of fact (which are deemed for such purpose to be stipulated by the parties) . . ." The parties can "agree that legal errors are an excess of arbitral authority that is reviewable by the courts."  Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334, 1347, 1361 (2008).

        And so the Court of Appeal independently reviewed questions of law decided by the arbitrator. However, the review did not change the outcome, as the judgment was affirmed.

Arbitration, Nonsignatories: 2nd District Div. 8 Holds Nonsignatory Is Able To Compel Another Nonsignatory To Arbitrate Based On "Stipulation"

A Critical Letter Provided The Evidentiary Linchpin.

        The Court of Appeal in Gamma Eta Chapter of PI Kappa Alpha, B25667 (2/8   2/6/20) (Wiley, Bigelow, Grimes), reversed the trial court's order denying a motion to compel arbitration and remanded so that the trial court could grant the motion and stay the case pending arbitration. The somewhat unusual circumstance here is that the defendants who moved to compel arbitration against the fraternity chapter were not signatories to the arbitration agreement -- and neither was the chapter.

        The arbitration agreement in question was between the national fraternity (Fraternity) and the local chapter (Chapter). It required that the Chapter mediate disputes, and if mediation did not resolve disputes, then arbitrate disputes with entities or persons "affiliated" with the Fraternity.

        A dispute erupted between the Chapter and a housing corporation (Housing Corporation) created "to serve as a non-profit facilitator to ensure that the [Fraternity] at USC would consistently have a fraternity house to house and host its members." The Chapter sued the Housing Corporation and its director for constructive fraud, breach of fiduciary duty, unjust enrichment, negligent misrepresentation, and other claims.

        In a critical letter the Fraternity sent to its Chapter and the Housing Corporation, it asserted the Housing Corporation was affiliated with the Chapter, the Chapter lacked standing to sue, the Chapter must mediate, and if mediation did not resolve the dispute, then it must arbitrate. The Housing Corporation and its director then moved to compel arbitration, which the trial court, without explanation, denied.

          The Court of Appeal reasoned, based on the record it had, that the Fraternity "is an overarching and governing international organization, and the local chapter . . . is merely a subordinate fraternal component of the international fraternity. ¶ The international fraternity wanted arbitration, and so did the defendant housing corporation. This was in effect a stipulation for arbitration."

COMMENTS:

        Several things helped the Court of Appeal reach this result. First, the record on appeal was scant. There was no transcript. The trial judge had not explained his reasoning in a minute order, nor was there a statement of decision. And there were no disputes of fact. Therefore, the standard of review was de novo.

        Second, the critical letter in which the Fraternity aggressively asserted its control over the Chapter, was not objected to, and was "in evidence for the truth of the matter it asserts."

        Third, the effectiveness of the arbitration agreement depended on the interpretation of the word "affiliated." At first blush, it is not clear that the Housing Corporation is "affiliated" to the Chapter in the way the word is sometimes used, to mean one entity owning a majority of another entity's stock. However, once the Court of Appeal concluded that the Chapter was a subordinate unit of the Fraternity, then because the Fraternity staked the position that the Housing Agency and the Chapter were "affiliated", "the letter established that affiliate relationship from the perspective that counts: the perspective of the governing international fraternity."

        Presumably there is some "perspective that counts" from which the Court of Appeal could have rejected a completely off-the-wall interpretation of the meaning of "affiliated". However, since the Housing Corporation was set up for the purpose of securing housing for the Chapter, and because it acted as an agent for the Chapter, the Fraternity's interpretation of "affiliated" was  colorable.

Arbitration, Waiver, Standard Of Review: Delay, Substantial Invocation Of Litigation Machinery, And Prejudice Result In Waiver Of Right To Arbitrate

Was Delay In Requesting Arbitration Simply A "Strategic Convenience" For Defendants?

    Spracher v. Paul M. Zagaris, Inc. [Zagaris], and Higashi v. Disclosure Source, A1952941, A152962 (1/3   9/17/19) (Petrou, Siggins, Fujisaki), is a consolidated appeal brought by defendants in a class action in which plaintiffs alleged that defendants schemed to defraud plaintiffs. Plaintiffs were home sellers or buyers alleging defendant Zagaris schemed with Disclosure Source to buy natural hazard disclosure reports as part of a real estate transaction, double the price, and charge clients the higher price without a disclosure regarding the markup.

    Defendants moved to compel arbitration. Relying on the six-part test in St. Agnes Medical Center v. PacifiCare of California, 31 Cal.4th 1187 (2003), the appellate court affirmed the trial court's determination that defendants waived arbitration as supported by substantial evidence. Defendants waited nearly two years to bring their motion, "substantially invoked" the litigation machinery by engaging in extensive discovery, 12 case management conference hearings, two rounds of demurrers, and filed a summary judgment motion. Ample evidence supported a showing of prejudice, including that plaintiff Higashi incurred over $315,000 in attorney's fees.

    COMMENT. Given that the law of waiver (see St. Agnes) is  well established, we don't know what prompted the Court to certify the original unpublished opinion for publication. But we're going to hazard some guesses. First, the Court may have wanted to send a message that it was not pleased with substantial delay in moving to arbitrate, while defendants waited to see how matters turned out in litigation, which the trial court viewed as "strategically convenient for defendants".

     Second, there was one factual wrinkle to the case: there were originally five representative plaintiffs, and defendants argued they could not have moved earlier to arbitrate, because the arbitration agreements differed. The Court explains: "Presumably, if numerous plaintiffs had proceeded to arbitration there would have been appropriate efforts to coordinate the matters and motions regarding the representative plaintiffs; we have been provided with zero evidence to the contrary." This statement elides the point that consolidation may not be possible unless the agreement, the rules of the arbitral forum, or a subsequent agreement provides for consolidation. The Court's statement seems to put the burden of proof on the defendant to provide evidence that appropriate efforts to coordinate matters and motions would have been agreed to. Without explanation, the Court states that "[b]ecause this is not a case where 'only one inference may reasonably be drawn' from the underlying facts, we review the trial court's decision under a substantial evidence standard." So presumably the standard of review helped plaintiffs carry the day. 

Arbitration, Internet Commerce: 9th Circuit Tests Limits Of "Reasonably Conspicuous" Provision In Internet Commerce Adhesion Contract

Plaintiff Had To Jump Through Hoops To Get To Arbitration Clause.

        For our next case, we add a new sidebar category: "Arbitration: Internet Commerce." "This case tests the outer limits of what constitutes a 'reasonably conspicuous' provision as part of the terms of usage so prevalent in the adhesion contracts of modern internet commerce," writes Senior Circuit Judge Michael Daly Hawkins in In re Randall Holl, No. 18-70568 (9th Cir.  5/30/19) (Hawkins, Smith, Lynn).

        Plaintiff Holl sued UPS alleging it systematically overcharges retail customers shipping packages through third-party facilities by applying Delivery Surcharge Rates higher than the rates it advertises. UPS successfully moved to arbitrate, and Holl sought a writ of mandamus.

        The issue here is the convoluted path Holl had to take to get to the arbitration clause. It takes the panel six pages just to describe how Holl gets to the arbitration clause. He must be able to proceed through the UPS Technology Agreement, which is lengthy; incorporation of rules, regulations, and documents by reference; and inclusion of a jurisdictional provision. And without agreement, there is no agreement to arbitrate.

        However, the Court concludes that mandamus is not justified because Holl assented to the service terms with a click, and the terms clearly incorporated the document containing the arbitration clause in question. Never mind that you, I, and even a learned judge sending a UPS package would likely never get to the arbitration clause, unless we were looking for it. After all, this is about mandamus relief. And the Court concludes: "Faced with the heavy burden of showing a 'clear and indisputable' right to the extraordinary remedy he seeks, Holl fails to establish the type of 'judicial usurpation of power' or 'clear abuse of discretion' that might justify issuance of the writ."