California Mediation and Arbitration

Arbitration, Employment, Standard Of Review: Employee Who Explicitly Rejects Arbitration Agreement Is Bound By It By Continuing To Work

Justice Segal Dissents.

    An employee can impliedly accept an arbitration agreement by continuing to work for his or her employer. But what happens when the employee explicitly rejects the arbitration agreement yet continues to work, after the employer has said that continuing to work will bind the employee to arbitration? The trial court said that there was no meeting of the minds in Diaz v. Sohnen Enterprises (Los Angeles County Super. Ct. No. BC644622). The Court of Appeal reversed, saying the facts were undisputed, and the employee had impliedly agreed to arbitrate by continuing to work. Diaz v. Sohnen Enterprises, No. B283077 (2/7  4/10/19) (Zelon, author, Feuer, conc., Segal, dsst.).

    Justice Segal, dissenting, took issue with the de novo standard of review applied by the majority. As Justice Segal explained, the trial court found the employer had failed to meet its burden of proving the existence of an implied arbitration contract: "In this situation, we do not review the record to determine whether substantial evidence supports the trial court's finding, but whether the evidence compels the opposite finding as a matter of law." This standard applies when the appeals turns on a failure of proof.

    And Justice Segal did not believe the evidence compelled a finding the parties agreed to arbitrate. The employee explicitly rejected an agreement to arbitrate and stated an intention to continue to work. While the employee's continued employment may be viewed as an implied agreement to arbitrate from the perspective of the employer, the trial judge, and Justice Segal, did not see a clear meeting of the minds. And there was some ambiguous evidence in the record. The arbitration agreement stated it had to be accepted in writing, but the employer's Chief Operating Officer stated she told employees they could accept the agreement even if they did not sign it.

    It will be interesting to see whether, in light of the split opinion, this appeal has a further life.

    

Arbitration, FAA, Standard of Review: 9th Circuit Agrees With District Court That Arbitrator's Award Was "Irrational"

"We have become an arbitration nation," says the Court.

    The 9th Circuit affirmed the district court's order vacating an arbitration award under the Federal Arbitration Act, concluding that the arbitrator acted beyond his powers, rendering an award that was "irrational", failing to "draw the essence of the award" from subcontracts. Aspic Engineering and Construction Company v. ECC Centcom Constructors LLC, et al., No. 17-16510 (9th Cir.  1/28/19) (Smith, Nguyen, Restani).

    Aspic, a local Afghan construction company, acted as a subcontractor for the prime contractor, ECC, in support of EEC's contracts with the U.S. Army Corps of Engineers. The subcontracts incorporated obligations that ECC owed to the U.S. government, and Federal Acquisition Regulations governing termination for convenience. (Termination for convenience refers to termination at any time without liability for damages that the other side might suffer). When the U.S. Army Corps of Engineers terminated for convenience its contracts with ECC, ECC did the same with Aspic.

    Aspic sued for damages, and received an award from the arbitrator, who believed "ECC could not expect that ASPIC would be capable of modifying their local business practices to completely and strictly conform to the US governmental contracting practices that were normal to ECC. There was not a true meeting of minds . . . " Apparently, the arbitrator believed it would be unfair to inflict the Federal Acquisition Regulations upon Aspic, and based the award on the damages Aspic had suffered.

    The arbitrator's award was confirmed and modified by a state court, ECC removed to the federal district court, the district court vacated the award, and the 9th Circuit affirmed the district court.

    "We have become an arbitration nation," wrote Judge Smith. "An increasing number of private disputes are resolved not by courts, but by arbitrators. Although courts play a limited role in reviewing arbitral awards, our duty remains an important one. When an arbitrator disregards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene." The court concluded that the arbitrator's award exceeded his authority, failed to draw the essence of the award from the subcontracts, "disregarded specific provision of the plain text" in an effort to prevent an unfair result, and was "irrational."

    COMMENT: Exceeding the powers of the arbitrator is a basis for vacatur in California and federal courts. However, "failing to draw the essence of the award" from the contract is language originating in federal cases in the context of collective bargaining. "[A]n arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award." United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960). We would not expect to find this language in a California state case involving vacatur of an arbitration award.

 

    

Collective Bargaining, Standard Of Review: 9th Circuit Concludes Arbitrator Acted Within His Authority When Reforming Labor Agreement To Cure Mutual Mistake

And Judge Ikuta Dissents.

    The Ninth Circuit affirmed the district court's order confirming an arbitration award in favor of a union seeking relief concerning a bonus provision in the parties' collective bargaining power. The employer had argued that the arbitration award was invalid because the arbitrator reformed the Basic Labor Agreement (BLA) between the Union and the employer, despite a "no-add" provision in that agreement. The district affirmed the award, and the employer appealed. ASARCO v. United Steel, et al., No. 16-16363 (9th Cir. 12/4/18) (Gettleman, McNamee; Ikuta, dsst).

    The arbitrator found that the BLA was based on a mutual mistake, because the Union was unaware of a link between a change in the pension plan and the opportunity of employees to obtain annual bonuses. The arbitrator reformed the BLA to remedy the mutual mistake. It was undisputed that the parties did not discuss the bonus when negotiating, and neither party indicated that the bonus would be impacted by modifying eligibility for the pension.

    The panel concluded "that the arbitrator was acting within his authority when he crafted a remedy to cure the parties' mutual mistake."

    In a characteristically vigorous dissent, Judge Ikuta wrote, "[t]he 'no-add' language in the collective bargaining agreement . . . is unmistakably clear. . . . . Because the arbitrator ignored the no-add provision, his award fails to draw its essence from the BLA and is invalid." She concluded, "the BLA deprives the arbitrator of the authority to rewrite the agreement, and also deprives the arbitrator of the authority to reconsider and reject this limitation on his authority."

    COMMENT: The majority usefully summarizes the standard of review: the district court's decision confirming an arbitration award is de novo, whereas the review of labor arbitration awards is extremely deferential because the courts do not hear claims of factual or legal error by an arbitrator. However, there are three exceptions to the general rule of deference to an arbitrator's decision: "(1) when the arbitrator's award does not draw its essence from the collective bargaining agreement and the arbitrator is dispensing his brand of industrial justice; (2) when the arbitrator exceeds the boundaries of the issues submitted to him; and (3) when the award is contrary to public policy."

Arbitration: Choice of Law; Standard of Review: Arbitrator’s Award Of $183,000 In Allocated Fees To One Successful Defendant In Joint Defense Arrangement And Trial Court’s $21,000 In Post-Arbitration Fees To All Defendants Were Proper

Losing Plaintiff Claimed Arbitration Award Was “Manifest Disregard Of Law,” But This Was A Federal Standard Rather Than The More Limited State Standard Applicable To Review Of Arbitration Awards.

            HUB International Ins. Services v. Morales, Case No. E067095 (4th Dist., Div. 2 June 14, 2018) (unpublished) was an imbroglio involving non-interference, non-solicitation, confidential disclosure, and non-recruit provisions in certain documents between employees and an insurance company, triggered once certain employees departed and went to work for a rival insurance company. The pertinent agreements had arbitration clauses under California law, with the signatories waiving appeal rights. The real dispute was between the insurance companies, but all parties stipulated to arbitration even though some parties had agreed to contractually arbitrate previously.

            The arbitrator found against plaintiff and in favor of defendants. The thrust of the arbitrator’s decision was that a liquidated damages clause for breach of the pertinent agreements was unenforceable given that plaintiff would not introduce lost profits evidence so to allow the arbitrator to gauge whether the liquidated damages were reasonable in relation to actual damages. The arbitrator then ordered that defendant Morales recover prevailing party fees of $183,000, with the trial judge affirming the arbitration award and then further ordering that all defendants obtain post-arbitration fees of $21,000.

            Plaintiff challenged the arbitration award on the merits and on the $183,000 fee award, but none of those challenges resonated with the 4/2 DCA.

            Although the arbitrator actually did allocate out the fees attributable to arbitration efforts for the rival insurance company, plaintiff’s challenge that the arbitrator made a “manifest disregard of law” was incorrect. This was a federal criterion challenge under the FAA, not a state challenge which does not generally allow challenges to the merits of an award—especially given that the signatories to the arbitration agreement and arbitration stipulation agreed California law would apply. (Siegel v. Prudential Ins. Co., 67 Cal.App.4^th 1270, 1280, 1290 (1998).) Also, the parties did waive the right to appeal, but the appellate court construed this as waiving appellate rights except on the limited grounds applicable under the California appellate restrictions relating to arbitration awards. (Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4^th 1334, 1358 (2000).)

Arbitration/FAA/Class Action/Standard Of Review: Court Of Appeal Rejects Enforcing Class Action Waiver Under Federal Arbitration Act, Because FAA Does Not Apply To Workers Engaged In Transporting Goods

Gentry v. Superior Court:  It's Alive, It's Alive!

 

        Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) held that class action waiver provisions in a contract are unenforceable, and a motion to compel arbitration may be denied, where the so-called "Gentry factors" are satisfied, and it is determined that a class action is a more effective practical means of vindicating rights of affected employees than individual litigation or arbitration.   In AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), SCOTUS effectively invalidated Gentry in circumstances where the Federal Arbitration Act preempts state law -- typically, circumstances where interstate commerce is involved.

        In Muro v. Cornerstone Staffing Solution, Inc., D070206 (4/1  2/23/18) (Dato, Benke, Aaron) (published), interstate commerce was clearly involved.  The plaintiff, a trucker, sued his employer Cornerstone, a "full service employee staffing firm providing assistance to a variety of employers" in California and other states, for employment-related violations.  Furthermore, the plaintiff had routes in California and across state lines.  The trial court, however, determined that the FAA did not apply, that Gentry did apply, and that the class action waiver was unenforceable.

        Why?  Section 1 of the FAA expressly exempts from its coverage all "'contracts of employment . . . of workers engaged in foreign or interstate commerce.'"  Rejecting the employer's argument that the employers' business must be devoted to the transportation industry, the Court of Appeal held that the plaintiff was a worker was engaged in interstate commerce.  Because the FAA did not apply, the Court applied state law, i.e., Gentry, to affirm the trial court's order denying a motion to compel arbitration.

        COMMENT:  Regarding the application of the Gentry factors, an abuse of discretion standard of review applies.  As a refresher, the four Gentry factors are:  (1) the modest size of potential individual recovery; (2) potential for retaliation against members of the class; (3) the fact absent members of the class may be ill informed of their rights; and (4) other real world obstacles to the vindication of class members' rights through individual arbitration.

         While the result in this particular case may seem dramatic, the circumstances are a bit unusual, because it will not be the usual case that, when interstate commerce is involved, the FAA does not apply.

Appealability/Standard Of Review: Appellant Waived Judicial And Appellate Review Of Fee Award By Failing To Raise Objections In Arbitration And In Superior Court

Plus The Court Of Appeal could Not Review Merits Of The Dispute, Which Included Legal And Factual Bases Of The Arbitrator's Award.

        After William Schwartz arbitrated with Joel Schwartz, the arbitrator declared William the prevailing party and awarded William $264,559.89 in fees and costs.  The Superior Court confirmed the award, and Joel timely appealed.  Schwartz v. Schwartz, D071445 (4/1  9/15/17) (Irion, Huffman, Haller) (unpublished).  

        Joel raised some interesting substantive issues on appeal, namely, that the fee award was largely based on work done by Oregon attorneys who had not been admitted pro haec vice, and that William had failed to beat Joel's 998 settlement offer.  But Joel's substantive points were never considered by the Court of Appeal.

        First, Joel waived the "out-of state-attorney" argument, by failing to raise it with the arbitrator or with the Superior Court judge.  Second, because a mistake of law or fact is not a basis for reviewing the merits of an arbitration award, the Court did not need to address the merits of Joel's argument that William had not prevailed on Joel's 998 settlement offer after he turned down Joel's 998 settlement offer.  Third, Joel apparently did not provide record references to support some of his arguments.

        COMMENT:  Arbitration proceedings may seem informal, but it is certainly important to raise objections in arbitration, to have a record, and to preserve the objections and the record in the Superior Court -- at least, where a substantial fee and cost award may be challenged later.  And if one wants appellate review to include review of the merits, then the arbitration agreement needs to provide that the arbitrator who makes mistakes of law or of fact exceeds his powers.

Arbitration, Standard Of Review, Delegation, Vacatur: Second District, Div. 1 Rules Trial Court Erred By Failing To Apply Correct Legal Standard To Review Of Arbitrator's Award

Agreement Between The Parties That Award Could Be Reviewed For Legal Error Made The Difference.

        In Harshad & Nasir Corporation v. Global Sign Systems, Inc., and related appeals, B269427, B275942, B275947 (2/2  8/15/17) (Rothschild, Chaney, Lui), the Court of Appeal considered three related appeals of parties fighting over allegedly unpaid invoices amounting to $114,823.72, arising from plans to put up signs at Carl's Jr. restaurants.  The Court of Appeal, in a published opinion penned by Justice Rothschild, concluded "that the trial court prejudicially erred when it failed to apply the correct standard in reviewing the arbitrator's award."

        This is a case in which the parties' agreement that the award could be reviewed for legal error made all the difference.  Unlike the typical situation in which errors of fact or law will not provide a basis for vacating an award, here, the parties took advantage of the California rule set forth in Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal.4th 1334 (2008), allowing the  parties to agree to limit the arbitrators' authority by providing for review of the merits.

        The results of review on the merits were severe.  The Court of Appeal held substantial evidence did not support the award for damages, and an alleged contract to be performed over a three-year period violated the statute of frauds.  Also, the arbitrator exceeded his authority by deciding a claim for lost profits the parties had not agreed to arbitrate.  As a result of this reversal of fortune, the formerly prevailing party did not prevail, and a fee and cost award in the amount of $1,142,596.20 was reversed.

        COMMENT:   A successful arbitration can be efficient and cost effective.  This arbitration is a stunning counter-example.  It took five years to get an arbitration award.  The arbitration and subsequent trial court rulings resulted in three related appeals.  Significant damage and attorney fees/cost awards, each in excess of $1 million, were reversed.   And this all started with an effort to recover $114,823.72!

        An interesting aspect of the opinion is the interaction of delegation of authority to the arbitrator with the standard of review.  Global argued that under JAMS rules, the decision about the scope of authority is delegated to the arbitrator, and the arbitrator had decided that the substantial lost profits claim was within his authority to decide.  Because, however, the parties agreed that the standard of review allowed for review of legal error, the Court of Appeal did not need to rule whether the decision about scope had been delegated to the arbitrator.  Whether or not JAMS rules allowed for a delegation of decision-making authority, the arbitrator had ruled incorrectly as a matter of law.

        NOTE:  California Attorney's Fees, the website Mike Hensley and I contribute to, has a post on the attorney's fees aspect of this case.

        

 

 

 

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/Disclosure/Standard of Review: Court Of Appeal Agrees There Is No Basis To Disqualify Arbitrator For Failing To Disclose.

   

Bon Ton Burlesquers.  c1898.  Library of Congress.

            The Court of Appeal applies a de novo standard of review to arbitrator disclosure issues (unless the trial court’s decision is based upon disputed facts, in which case a substantial evidence standard or review applies).  In Mitchell Anthony Productions LLC v. Jennifer Hamilton, B269969 (2/5  4/12/17) (Turner, Kriegler, Baker) (unpublished), the Court of Appeal rejected plaintiff/appellant’s request to vacate an award based on a claim that the arbitrator had failed to make necessary disclosures.

            Plaintiff’s owner, who wanted to produce a burlesque show, claimed defendant, a choreographer, had defamed him.  He sought to force the arbitrator to recuse himself after learning that the arbitrator had represented “talent.”  However, the arbitrator had indicated that he did not have a relationship with any party or party’s counsel, something that was not challenged.  Bottom line:  “[R]epresentation of talent agencies is not evidence in this case of an arbitrator’s bias in favor of a dancer.”

            COMMENT:  One might imagine circumstances in which an arbitrator’s history of one-sided representation could be relevant.  Here, however, the record was thin.  There was no evidence of the nature of the arbitrator’s alleged representation of talent and talent agents, no evidence as to when it occurred, no evidence as to who was represented, and no evidence of any similar information.

Arbitration, PAGA, Standard Of Review, FAA: Fourth District Division One Agrees Predispute Arbitration Clause Cannot Be Enforced With A PAGA Claim

The Employee Brought A Single Cause Of Action For PAGA Violations.

    At first blush, Betancourt v. Prudential Overall Supply, E064326 (4/2 March 3, 2017) (Miller, Ramirez, McKinster), another opinion holding that PAGA claims cannot be arbitrated (more about the holding), is unremarkable. However, there are interesting points in the case that help explain why it was worthy for publication.

    First, plaintiff/respondent Betancourt sued for a single cause of action: labor violations of the Private Attorneys General Act (PAGA). Betancourt's single shot approach is testimony to the recognition of plaintiffs' attorneys in employment cases that a carefully pleaded PAGA complaint is likely, for now, to avoid arbitration.

    Second, Betancourt, in his single PAGA- cause complaint, sought remedies that did not fall within a PAGA cause of action. Therefore, the employer argued that the PAGA cause of action was an effort to end-run a standard wage and hour case around the arbitration requirement. This argument did not succeed, with the trial court and the Court of Appeal explaining that the proper procedural step was a motion to strike, not a motion to compel arbitration. Query: if the employer had filed a demurrer or a motion to strike to clarify the complaint, would the employee then have argued that the employer had delayed and waived the right to move to compel arbitration? Yet in proper circumstances, a motion to clarify the complaint would seem proper, and should not necessarily result in a waiver of the right to seek arbitration.

    Third, the trial court did not issue a statement of decision. However, it did say that it was relying upon Iskanian when giving its tentative reasons for denying the motion. The Court of Appeal took this as an indication that the trial court based its ruling on a decision of law, and that therefore the de novo standard of review applied.

    Fourth, the Court agreed that PAGA claims lie outside the Federal Arbitration Act's coverage, because the claim, like a qui tam claim, is essentially between the employer and the state, not between the employer and the employee.

    Fifth, the Court of Appeal considered different interpretations of Iskanian. On the one hand, the employer argued that PAGA does not hold that PAGA claims are exempt from arbitration, only that predispute waivers of the right to bring a representative action are unenforceable, and presumably a representative PAGA action could be brought in arbitration or in court. But the Court interpreted Iskanian broadly to mean that a predispute waiver of the right to bring a representative action is unenforceable because the state cannot be bound by the predispute agreement.

    Sixth, the Court held that FAA preemption did not apply, because it was not ruling that Iskanian required a blanket prohibition against arbitration in PAGA cases, only that "a defendant's reliance on a predispute arbitration agreement to compel arbitration when an employee becomes a type of qui tam plaintiff in a PAGA action" is prohibited. This part of the ruling seems a bit murky to me, because under Supreme Court cases such as Concepcion, it is not clear that a blanket prohibition of arbitration of all PAGA cases would need to occur for FAA preemption to apply – i.e., if a Court believed that arbitration was unduly burdened, that might satisfy one formulation of what FAA preemption requires.

    However, the bottom line is that California state courts are strongly endorsing the view that PAGA claims are, like qui tam actions, really between the state and the employer, and that therefore, predispute arbitration clauses cannot bind the state and compel arbitration of PAGA claims.

    NOTE: Efforts to compel arbitration are sometimes styled as "petitions" and sometimes as "motions." As the Court explains in footnote 2, "petition" is the proper terminology for a document commencing an independent action, whereas "motion" is the proper label for a document filed in an existing action.