California Mediation and Arbitration

Stay: US Supreme Court Holds That Stay Means Stay

Overruling A Ninth Circuit Decision (62 F.4th 1201 (2023).

        Though the plain language of the Federal Arbitration Act appeared to require a district court to stay a lawsuit pending arbitration rather than dismiss it, the Ninth Circuit ruled that case law allowed district courts to dismiss the lawsuit when all claims are subject to arbitration. The Supreme Court reversed in Smith v. Spizzirri, no. 22-1218 (5/16/2024). Justice Sonia Sotomayor penned the Court's unanimous opinion, writing: "Just as 'shall' means 'shall,' 'stay' means 'stay.'"

Stay, Burden Of Proof: First District Div. 5 Holds Defendant Is Entitled To Stay Litigation With Plaintiff Pending Pending Plaintiff's Arbitration With Another Party

Mattson Obtained The Stay Of Litigation Against Applied Material's Lawsuit Despite Not Having Arbitration Agreement With Applied Material.

        Preliminarily, our next case, Mattson Technology, Inc. v. Applied Material, Inc., A165378 (1/5  11/1/23) (Burns, Jackson, Simons), is somewhat confusing to read. Mattson is designated as plaintiff and appellant in the case heading, though Applied, which is designated as defendant and respondent, sued Mattson and Mattson's former employee Lai. We'll refer to Applied as plaintiff. Applied sued its former employee Lai and his new employer Mattson for misappropriating trade secrets, and also sued Lai for breach of his employment contract with Applied. 

     Mattson and Applied Material are head-on competitors. Applied accused Lai of downloading confidential information, wiping his phone, and lying about whether he had Applied confidential information when he left Applied's employment. 

       Lai successfully moved to compel arbitration with Applied based on his arbitration agreement with Applied. The trial court denied Mattson's efforts to arbitrate against Applied, because Mattson was not a party to the arbitration agreement. (In this respect, the case is factually similar to Waymo LLC v. Uber Techs, Inc., 252 F.Supp.3d 954 (2017)). Also, the trial court denied Mattson's request to stay litigation against Applied pending the arbitration with Lai, on the ground that the litigation against Applied was severable from Applied's arbitration and contract with Lai.

        The Court of Appeal reversed the denial of the request for a stay pending arbitration with Lai. "The party seeking severance under Code of Civil Procedure section 1281.4 has the burden of proving its claim is independent from the arbitrable matter." Applied did not meet its burden. Applied's claims against Mattson and Lai were not independent, because the claims depended on proof of misappropriation of trade secrets.

        COMMENT: The case shows that under some circumstances, Cal. Code of Civ. Proc. 1281.4, which is the basis for a mandatory stay pending arbitration, makes it possible for a party to obtain a stay pending an arbitration, though it is not a party to that arbitration. 

 

Legislation, Stays: Stays Of Appeals Of Orders Denying Motions To Compel Arbitration Are Now Discretionary

Governor Newsom Signed SB 365 On October 10, So Now There Are No Automatic Stays Pending Appeal When Trial Court Denies Motion To Compel Arbitration.

        Ordinarily, "the perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon the matters embraced therein or affected thereby . . ." Therefore, California courts have stayed proceedings in trial courts when the order appealed from is an order denying a motion to compel arbitration. The stay protects the jurisdiction of the arbitrator if the court of appeal ultimately decides that the case should be arbitrated.

        Prior to the United States Supreme Court Coinbase case, which we blogged about on 7/3/23, federal and California law were out of synch. Federal law provided that litigation continued in the district court pending an interlocutory appeal, but a party could try to convince the district court (and if necessary, the circuit court) to exercise discretion and stay proceedings pending appeal. Coinbase changed the law, making a stay automatic when a party sought review of the order denying its petition to compel arbitration. So for a fleeting moment, California law and federal law aligned. Now the stay pending appeal of an order denying arbitration was automatic in both state and federal court. 

        Along came the California Legislature, which enacted SB 365. The Legislative Counsel's Digest explains: "Existing law authorizes a party to appeal, among other things, an order dismissing or denying a petition to compel arbitration. Existing law generally stays proceedings in the trial court on the judgment or order appealed from when the appeal is perfected, subject to specified exceptions. This bill would provide that, notwithstanding the general rule described above, trial court proceedings would not be automatically stayed during the pendency of an appeal of an order dismissing or denying a petition to compel arbitration." (italics added). Once again, California law and federal law are out of joint. The stay pending appellate review of the order denying a petition to compel arbitration is automatic in federal court, but discretionary in state court, much as a stay in federal court pending appeal of an interlocutory order had once been discretionary.

        Consider the political perspective. The conservative United States Supreme Court is very friendly to mandatory arbitration. In disputes brought by employees or consumers, it will usually be the defendant company that seeks to arbitrate. If defendant's motion to compel arbitration is denied, the employer will want to avoid unnecessarily litigating in district court and the court of appeals, and will want to preserve the jurisdiction of the arbitrator. It makes sense, therefore, that the SCOTUS majority would stray from the general rule that stays pending appeal are discretionary and instead make them automatic in the arbitration example. We note that Justice Katanji Brown Jackson filed a dissent in Coinbase, in which Justices Sotomayor and Kagan joined in full, supporting our Legal Realist view that there is a political slant to the issues. (Justice Thomas, sometimes an outlier in arbitration cases, partially joined the dissenters).

        In our Blue state, the California courts, Democratic legislature, and labor unions are less supportive of mandatory arbitration than is SCOTUS, or at least, than is the conservative SCOTUS majority. It is therefore unsurprising that Governor Newsom signed SB 365.

        Does the new California rule making the stay discretionary really help employees and consumers? That remains to be seen. Because the stay is now discretionary, it may not make much difference -- superior courts can still grant a stay pending an appeal. However, if the courts take advantage of the new rule to deny a stay, it could add a layer of complexity, expense, and delay to a case. This could turn out to be an example of "be careful what you ask for." The optics, however, certainly favor employees and consumers. At least on paper, they are no longer subject to an automatic stay when a corporation pursues arbitration in a court of appeal.

        For an objective and elegant discussion of the "do-si-do re stays" see appellate specialist Ben Shatz's post in the Southern California Appellate News. Ben even included a cute sketch of "the dance".

        Finally, I asked arbitrator and mediator Paul Dubow, his opinion as to whether SB 365 will raise preemption issues. As always, Paul provided a thoughtful in-depth response. With his permission, I repeat it in full:

        "The enactment of SB 365 does not change the conflict between Section 16 of the FAA and CCP Section 1294. It just flips the situation.

 

        Prior to the enactment of SB 365 and issuance of the Coinbase decision, there was a conflict between California and federal law with respect to appeals from the denial of a motion to compel arbitration. The trial was not stayed under Section 16 and was stayed under Section 1294. Now the situation is reversed, albeit only with respect to appeals where the underlying arbitration agreement is a condition of employment.

 

        The FAA does not preempt state procedural rules. See Swissmex Rapid S.A. de CV v. SP Systems LLC, 212 Cal. App. 4th 539 (2012). In that case, Swissmex sought to confirm an arbitration award in state court. The underlying transactions were clearly in interstate commerce (although, as far as I can discern, the arbitration agreement did not clearly state whether the FAA applied) and so SP opposed the motion on the ground that Section 9 of the FAA, which did not permit the judicial confirmation of an award without the written agreement of the parties, applied. There was no such limitation under California law. The trial court granted the motion and the Court of Appeal affirmed, holding that federal procedural rules do not preempt state procedural rules.

 

        However, take a look at Judge v. Niijar Realty, Inc., 232 Cal.App. 4th 619, which happens to involve the conflict between Section 16 and Section 1294. In that case, the appeal would not have been permissible under Section 16 and the appellee sought to dismiss it. The Court of Appeal denied the request but did state that if the parties incorporated federal procedural rules into their agreement, the outcome would have been different.

 

        Employers may take a different tack than the Section 16 conflict to argue that SB 365 is preempted. They might argue that preemption exists because the new law singles out arbitration. However, in Gallo v. Wood Ranch, Inc. USA, 81 Cal. App. 5th 621 (2022), the Court of Appeal, in ruling that new CCP Sections 1281.97 and 1281.98 (which allow claimants to nullify arbitration agreements if the respondent does not timely pay arbitration fees) were not preempted, stated that the fact that a law is arbitration specific does not by itself warrant preemption. The law must "commit the additional sin of outright prohibiting arbitration or more subtly discouraging arbitration". And so I think this argument will fail. But who knows?"

 

Hat Tips to Paul Dubow and Ben Shatz. 

 

 

 

 

 

Stays: Supreme Court Overrules 9th Circuit And Orders Trial Court Proceedings Must Be Stayed Pending Appeal Over Arbitrability

The Supreme Court Created A New Rule For Staying Cases Pending Interlocutory Appeal Of Order Denying Motion To Compel Arbitration.

        Prof. Ronald Mann provides an excellent review in ScotusBlog of the Supreme Court's decision in Coinbase v. Bielski, No. 22-105 (S.Ct. 6/23/23). The majority opinion, authored by Justice Brett Kavanaugh, holds that a district court must stay its proceedings while an interlocutory appeal on the question of arbitrability is ongoing.

        In federal court, the general rule is that an interlocutory review of a trial court order leaves the rest of the case intact in the trial court. However, a party that wants to stay the case pending the review can seek a particularized determination from the trial court as to whether its proceedings should be stayed. As the dissent summarizes in Coinbase, the determination will hinge on consideration of "likelihood of success on the merits, irreparable harm, favorable balance of equities, and alignment with the public interest."

        However, in Coinbase, the Supreme Court considered whether there should be a blanket stay rule, rather than a particularized determination, in the context of 9 USC § 16(a). This section of the Federal Arbitration Act allows a party to immediately appeal from an order denying a petition to order arbitration. 

        Justice Kavanaugh acknowledged that § 16 does not state whether proceedings should be stayed pending appeal. However, he believed a stay would prevent a detrimental result if the matter could be entirely litigated without a stay, only to find out that it should have been arbitrated.

        COMMENTS. Justice Ketanji Brown Jackson dissented, joined by Justices Elena Kagan and Sonia Sotomayor and mostly by Justice Clarence Thomas. Aside from the legal arguments, it is pretty easy to understand why the liberal justices dissented. The majority created a bespoke rule for defendants who oppose arbitration -- in this case, for a cryptocurrency company seeking to avoid class action litigation. This ability to stay is not symmetrical, because under § 16(b), an interlocutory appeal may not be taken from an order requiring arbitration. Therefore, employees and consumers bringing class action litigation will not be able to appeal from orders requiring them to arbitrate, and thus will not be able to stay arbitration. Why Justice Thomas joined with his liberal brethren is less easy to explain. Perhaps he agreed with their reasoning?

        Ronald Mann notes that this case concerning arbitration may have much broader impact, if its ruling is extended to other federal cases where interlocutory appeals are available. If there is an across-the-board rule that in such cases, there should be a stay to prevent further proceedings below, then the rule requiring particularized examination of the justification for a stay will no longer apply.

        We note that the result in Coinbase v. Bielski is likely the same result that would have occurred if the case had been brought in California state court (we only say "likely", because California state courts are more likely to push back against mandatory arbitration). In California, an order denying a motion to compel arbitration is appealable, and the appeal will stay proceedings below. But an order granting a motion to compel arbitration is not appealable. In some circumstances, it may be challenged by writ. Zembesch v. Superior Court, 146 Cal.App.4th 153 (2006).

 

Stay: Despite Plain Language Of The FAA, Ninth Circuit Holds That Judge Has Discretion To Dismiss Case Rather Than Stay It, Once All Claims Are Subject To Arbitration

Holding Is Consistent With Ninth Circuit Precedent But Not The Language Of The Federal Arbitration Act.

        "The sole question before us is whether the Federal Arbitration Act (“FAA”) requires a district court to stay a lawsuit pending arbitration, or whether a district court has discretion to dismiss when all claims are subject to arbitration. Although the plain text of the FAA appears to mandate a stay pending arbitration upon application of a party, binding precedent establishes that district courts may dismiss suits when, as here, all claims are subject to arbitration. Thus, we affirm." William F. Forrest, et al v. Keith Spirrizzi et al, No. 22-16051 (9th Cir.  3/21/23) (Bennett, Graber, Desai).

        Judges Graber and Desai, fully concurring in the majority opinion, nevertheless urged that the Ninth Circuit consider the matter en banc to issue an opinion consistent with the language of the FAA, and that the Supreme Court take up the issue. As Judge Graber points out, "When a party requests a stay pending arbitration of “any issue referable to arbitration under an agreement in writing,” the court “shall . . . stay the trial of the action” until the arbitration concludes or unless the requesting party is “in default in proceeding with such arbitration.” 9 U.S.C. § 3 (emphases added)." Squaring the language of the FAA with not staying the trial of the action when any issue is referred to arbitration is a bit like squaring the circle.

COMMENT: “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master – – that’s all.” -- Alice's Adventures in Wonderland.

Jurisdiction, Delegation, Stay: NY Court Is Court Of Competent Jurisdiction To Rule On Motion To Compel Arbitration Involving California Lawyer

At Play: Applicability Of Labor Code § 925 And California Code Of Civ. Proc. § 1981.4.

        The scenario in Jinshu "John" Zhang, Petitioner v. Superior Court of Los Angeles, Respondent; Dentons US LLP et al, real parties in interest, B314386 (2/8  11/9/22) (Grimes, Stratton, Wiley), while not exactly common, is also to be expected. It involves a jurisdictional turf war arising from the circumstance that California employees generally prefer to litigate claims in court on their home turf, to wit, California, whereas employers prefer to arbitrate, and if the employee can be compelled to arbitrate out of state on the employer's home turf, so much the better. But was lawyer Zhang an "employee" of Dentons US, and who decides that question? -- there's the rub!

        The spat between Zhang and Dentons arose over a multi-million dollar contingency fee for a client Zhang brought to the law firm. The lawyer and the law firm had an agreement to arbitrate disputes in Chicago or New York. The arbitration agreement also included a delegation clause providing all issues of arbitrability are to be decided by the arbitrator. Dentons moved in NY to compel arbitration in NY, alleging claims for breach of fiduciary duty, and Zhang sued in LA Superior Court for wrongful termination and other causes of action. Petitioner Zhang moved to enjoin the NY proceedings, and Respondent Dentons moved to stay the LA proceedings pending arbitration in NY.

        Two statutory provisions are particularly relevant to the outcome. First, Labor Code § 925 provides that an employer cannot require, as a condition of employment, that an employee who primarily resides and work in California, agree to adjudicate a claim arising in California outside California. In other words, if Zhang is an employee, then he gets to adjudicate California claims on his home turf. 

        Here, Code of Civ. Proc. 1281.4 comes into play, for it allowed Dentons to argue in the LA court that it should stay its proceedings pending the arbitration in NY. Section 1281.4 provides in part: "If a court of competent jurisdiction, whether in this State or not [i.e., in NY],  has ordered arbitration of a controversy [in NY] which is an issue involved in an action or proceeding pending before a court of this State [California], the court in which such action or proceeding is pending [LA Superior Court] shall, upon motion of a party [Dentons] to such action or proceeding, stay the action or proceeding [in LA] until an arbitration is had [in NY] in accordance with the order to arbitrate or until such earlier time as the court specifies."

        Much of the argument centered on whether the NY court ordering arbitration was a "court of competent jurisdiction," with Zhang arguing that it could not possibly be competent to adjudicate the motion to compel arbitration if he was an employee, because Labor Code § 925 did not allow him as an employee to be forced to adjudicate a California employment claim outside of California. The obstacle that Zhang could not overcome was that the trial court in California, and our Court of Appeal, agreed that the arbitration clause "clearly and unmistakably" delegated issues of arbitrability, including a determination as to whether Zhang was an employee, to the arbitrator. And the court in NY was competent to decide that the issue was delegated to the NY arbitrator.

        COMMENT: If the NY arbitrator decides Zhang was an employee, then jurisdiction will belong in California. But if the arbitrator decides Zhang was not an employee, then the NY arbitrator will decide the merits of the dispute.

 

 

Stay: CCP Section 1281.4 Does Not Authorize Staying Litigation On Basis Of Pending Arbitration To Which Plaintiff Is Not A Party

Under Proper Circumstances, A Stay Of The Action, Or An Arbitrable, Severable Issue, Would Have Been Mandatory.

        Ann Leenay brought a PAGA action for various Labor Code violations against her former employer, Lowe's Home Centers, LLC. The trial court consolidated her action with five other actions. Lowe's moved to stay the six consolidated actions based on 50 pending arbitrations with overlapping issues. The trial court stayed the litigation, and Leenay sought a writ of mandate to undo that court's stay order.  Ann Leenay, petitioner, v. Superior Ct. of San Bernardino Cty., Lowe's Home Centers, respondent and real party in interest, E077292 (4/2  7/22/22) (Menetrez, Ramirez, Slough).

        The key fact, which led to the granting of the writ of mandate petition, was that neither Ann Leenay, nor the other five plaintiffs, were parties to the 50 pending arbitrations.  The statutory provision authorizing a stay of litigation based on pending arbitration is Cal. Code of Civ. Proc., § 1281.3. Justice Menetrez explained: "Section 1281.4 does not authorize the court to stay a plaintiff’s action on the basis of a pending arbitration to which the plaintiff is not a party. 

Arbitration, Scope, Stay: Fifth District Agrees Equitable Issues Were Outside Scope Of Arbitration Agreement, And Arbitrable Claims Could Be Stayed

The Arbitration Provision Was Not Ambiguous.

        The arbitration provision in Eminence Healthcare, Inc. v. Centuri Health Ventures, LLC, et  al., F079993 (5th Dist.  2/2/22) (Franson, Hill, Pena), carved out equitable causes of action from arbitration. Because the Court of Appeal agreed the clause was unambiguous, the Court affirmed the trial court's decision that six equitable claims should be heard by the trial court. In an unpublished part of the opinion, the Court of Appeal agreed that the arbitration of the remaining arbitrable claims was  properly stayed because the resolution of the litigated claims might dispose of the need to arbitrate.

Arbitration, Conflicts, Stay & Celebrities: Second District, Div. 7 Rules That Disqualification Motion Was Premature While Motion To Compel Arbitration And To Stay Were Pending

The Code Of Civil Procedure 1281.4 Stay Is Mandatory.

    Top Kick Productions, Inc., Chuck Norris's production company, sued CBS Broadcasting Inc. over allegations of what might be characterized as Hollywood Accounting. CBS moved to compel arbitration, and to stay the litigation pursuant to CCP 1281.4, while Top Kick had a pending motion to disqualify CBS's attorneys based on conflict of interest. In true kick-ass Walker, Texas Ranger style, Top Kick convinced the trial court to hear the disqualification motion first, and to deny the stay request. Next, CBS obtained a temporary stay in the Court of Appeal, and the Court issued an OSC to determine whether the trial court had abused its discretion by denying the stay. CBS Broadcasting Inc., et al., Petitioners,  v. Superior Court of Los Angeles County, Respondent; Top Kick Productions, Inc., et al., Real Parties in Interest, No. B292277 (2/7  2/21/19) (Zelon, Segal, Feuer) (not for publication).

    The Court held that the trial court erred, because the 1281.4 stay is mandatory, once a petition to compel arbitration is brought. So now the stay will go into effect, the motion to compel arbitration will be heard, and if the motion is granted, then the arbitrator would get to rule on the disqualification motion. 

    The Court acknowledged that there are  New York state law cases and federal law Second Circuit cases providing disqualification is not a matter for arbitrators to determine, but explains those cases are contrary to California law where disqualification motions have been decided by arbitrators. Furthermore, the Court acknowledges a situation might arise where the issue of disqualification is intertwined with the issue of arbitrability "so that the potentially disqualified lawyer should not be permitted to argue the motion to compel". However, because Top Kick conceded the disqualification motion had nothing to do with arbitrability, the Court did not need to address the issue.

    The opening theme to Walker, Texas Ranger, is available on YouTube:

 

 

Arbitration: Existence Of Agreement/1281.2/Stay: Incorporation By Reference Works This Time, But It's Not The End Of The Story

Settlement Agreement Incorporated Arbitration Clause In Licensing Agreement -- But Only Claims Arising Out Of Or In Connection With Any Provision In The Licensing Agreement Could Be Arbitrated.

        On February 9, 2018, we posted about Cirile v. Petersen-Dean, an unpublished case, in which incorporation by reference was too amorphous and vague to incorporate an arbitration provision in a separate agreement.  In Advanced Charging Technologies, Inc. v. Flexible Manufacturing, LLC, G054671 (4/3  2/21/18) (Thompson, O'Leary, Ikola) (unpublished), incorporation by reference did work -- sort of.

        In Advanced Charging Technologies, a Settlement Agreement entered into one day after a Licensing Agreement, and including an integration clause, incorporated the terms and conditions of the Licensing Agreement.  And the Licensing Agreement included an arbitration provision applying to a dispute or claim arising out of or in connection with any provision of the Licensing Agreement.  The trial court denied a motion to compel arbitration, believing that the integration clause wiped out the Licensing Agreement, an argument rejected by the Court of Appeal, because the successful incorporation by reference preserved the terms of the Licensing Agreement.  The trial court also believed that the arbitration clause, which only applied to the disputes arising out of the Licensing Agreement, was too narrow to cover disputes arising out of the Settlement Agreement, a position that did have some traction in the Court of Appeal.

        The upshot is that Court of Appeal reversed and remanded, with directions to grant the motion to compel arbitration, and set up a three-step process.  First, the trial court had to decide whether the claims arose out of or  in connection with the License Agreement that was incorporated by reference.  Second, the trial court had to determine whether the resolution of "any nonarbitrable issues may make the arbitration unnecessary, as set forth in Code of Civil Procedure section 1281.2."  And finally, the trial court was directed to order any appropriate stay order.