California Mediation and Arbitration

Mediation, Condition Precedent: Mediation Is Not A Condition Precedent To A Fee Award Where Parties Merely "Pledge" To Resolve Disputes Amicably Without Litigation

The Court Distinguishes Mandatory Mediation Language Of Frei v. Davey.

       We sometimes supplement our diet of published cases with unpublished cases -- especially for mediation decisions, which are few in supply compared to arbitration decisions. Ocean Tomo, LLC v. PatentRatings, LLC v. Patent Ratings, LLC, G055429 (consol. with G056063, G056829) (4/3  6/13/19) (Fybel, Aronson, Thompson) (unpublished) addresses a discrete mediation issue involving attorney's fees. Hence, we post about it.

        Ocean Tomo was a member and 25% owner of PatentRatings, LLC, and Jonathan Barney was the manager and 63.83 % owner of PatentRatings. A business dispute erupted when Ocean Tomo failed to meet a capital call and Barney deposited money in PatentRatings' bank account as a loan to cover Ocean Tomo's portion of the capital call. Ocean Tomo sued Barney and PatentRatings after the parties could not resolve their disputes through mediation, and Barney cross-complained against Ocean Tomo. Following a bench trial, the court found in favor of Barney and PatentRatings and against Ocean Tomo on all claims and cross-claims. The trial court also granted motions for contractual attorneys fees in favor of Barney and Ocean Tomo.

        Ocean Tomo argued Barney was not entitled to attorney's fees because he did not mediate before he filed his cross-claims. However, Justice Fybel distinguished the Operating Agreement language in the case from the mandatory mediation language of Frei v. Davey, 124 Cal.App.4th 1506 (2004). In Ocean Tomo, the parties "pledge[d] to attempt to resolve any dispute amicably without the necessity of litigation." In Frei v. Davey, if a party commenced an action without first attempting to mediate, or after refusing to mediate, "then that party shall not be entitled to recover attorney's fees, even if they would otherwise be available to that party in any such action." That's not the same as in Frei v. Davey, and Justice Fybel, who penned that opinion, as well as Ocean Tomo, is the authority on the subject.

        Furthermore, Barney did participate in mediation before Ocean Tomo filed its lawsuit, and the Court of Appeal held "[t]he trial court did not err in finding that Barney was not required to attempt additional alternative dispute resolution before filing his cross-claims."

        BONUS: Wikipedia describes Ocean Tomo as, "an intellectual property merchant bank that provides financial products and services, including expert testimony, valuation, research, ratings, investments, risk management, and transactions." Ocean Tomo invested in PatentRatings, a company created to commercialize a product created by Barney: "Barney created a software product to statistically analyze, rate, and value patents. . . " Jonathan Barney's spouse, Colleen Barney, worked as an attorney with me at a previous law firm. Congratulations, Jonathan.

Mediation: Condition Precedent; Arbitration: Unconscionability: 4/3 DCA Reverses Denial Of Motion To Compel Arbitration Based On Employee’s Failure To Follow Dispute Resolution Hierarchy And Rejects Unconscionability Challenges

Employee Was Required To Have Informal Meeting With Employer First, Formal Mediation Next, And Then Arbitration, With Employer Paying Costs Of ADR Remedies.

            Justice Bedsworth, in his distinctively colorful writing style, reversed a denial of a motion to compel arbitration in line with an ADR agreement between employee and employer in Barati v. Ottno, Inc., Case No. G054960 (4^th Dist., Div. 3 June 25, 2018) (unpublished; Bedsworth, J., author, concurred in by O’Leary, P.J. and Thompson, J.). In the process, he discussed a tailored ADR agreement and four unconscionability challenges advanced by employee on appeal.

            The operative background was that employee and employer entered into a mediation and arbitration agreement which was pretty much a standalone and signed by employee—it was not just a handbook with an arbitration clause hidden in small print or at the back of the handbook. This agreement called for a three-tiered ADR process: first, all employment claims (including civil rights violations) had to be subject to an informal negotiation through a first meeting between employee and employer concerning a dispute; second, the case had to be referred to the nearest office of JAMS for a nonbinding conference before a retired judge or justice; and third, if those efforts were unsuccessful, an arbitration then could be requested by either party. The problem here was that employee balked at doing the first informal negotiation meeting and filed his own formal demand for arbitration with JAMS (complete with the filing fee, although griping that the employer should have paid it). Employer insisted on employee honoring the ADR scheme in the agreement, filing a motion to compel ADR compliance under the agreement. The trial judge denied the motion without explanation, triggering an appeal by employer resulting in a reversal.

            The 4/3 DCA panel deciding the appeal decided there was no waiver of arbitration by employer not paying the JAMS mediation fees (“the elephant-in-the-room issue in the case”) because employee failed to follow the ADR process set forth in the agreement, more specifically, failure to engage in the initial informal negotiation session with employer.

            The appellate court then discussed and rejected four unconscionability arguments.

            First, the “take it or leave it” nature of the agreement was not unconscionable simply because the signing of it was a condition of employment. (Serafin v. Balco Properties Ltd., LLC, 235 Cal.App.4^th 165, 179 (2015).)

            Second, although it was true that the JAMS arbitration rules were not attached to the agreement and is a minor factor indicating procedural unconscionability, the failure to attach the rules—by itself—is not dispositive given employee failed to show that there was anything unfair about the JAMS rules. (Peng v. First Republic Bank, 219 Cal.App.4^th 1462, 1472 (2013).)

            Third, employee argued that the first informal negotiation session allowed employer an unfair “free peek” at his case. However, the 4/3 DCA panel found this unpersuasive because there was nothing in the ADR process requiring employee to reveal anything about his case and, in fact, employer was likely going to have to explain why employee was terminated—a reverse “free peek” favoring employee. The ADR structure under the agreement was unlike Nyulassy v. Lockheed Martin Corp., 120 Cal.App.4^th 1267, 1282-1283 (2004), which required successive negotiations with higher-up supervisors (not the case here) and was unilateral (also not the case, because it was bilateral in nature). (See also Nguyen v. Applied Medical Resources Corp., 4 Cal.App.5^th 232, 254-255 (2016).)

            Fourth, employee argued that he had to pay for at least part of the mediation fees such that he was denied the benefit of filing with court and not bearing such expenses. Not so, said the appellate panel, because the agreement was silent on which side paid, meaning that the employer would bear the cost of both the mediation and arbitration. (Little v. Auto Stiegler, Inc., 29 Cal.4^th 1064, 1082 (2003).)

            So, this one got reversed with directions that the motion to compel be granted and ADR resolution proceed as described per the agreement between the parties. With respect to awarding appellate costs to any side just yet, the panel decided that the issue should be left to the discretion of the arbitrator depending on the eventual outcome of the arbitration (assuming that the first meeting or subsequent mediation did not resolve things).

Mediation/Condition Precedent: Fourth District, Division Three, Limits Mediation As A Condition Precedent In A CAR Contract For Fee Recovery

The General Rule In A California Association Of Realtors Purchase And Sale Agreement Requires Participation In Mediation As A Condition For A Prevailing Party To Recover Fees.

        The general rule under the standard CAR purchase and sale agreement requires participating in mediation as a condition precedent for fee recovery.  The rule was explained by Justice Fybel in Frei v. Davey, back in 2004.   Now Justice Fybel has explained a limitation to that rule in Toranji v. Kim, G054111 (4/3  12/15/17) (unpublished).  Shared representation alone does not necessarily mean one who shares representation with others who have rejected mediation has also refused to mediate.  See today's post in California Attorney's Fees.

Arbitration, Fees, MFAA/Mediation, Condition Precedent: Defendant Who Did Not Agree To Binding Arbitration Was Nevertheless Bound By Mandatory Fee Arbitration Act Award

A Mistake By The Trial Court Did Not Affect The Outcome.

        Client Nussbaum and attorney Liberty had a fee dispute that they arbitrated pursuant to the Mandatory Fee Arbitration Act (MFAA).  The arbitration panel awarded Liberty $75K in fees and $30K in interest.  After the notice of the award was mailed and more than 30 days had passed, the attorney moved to confirm the fee award.  And after the fee award has been confirmed, the client appealed the order confirming the award.  Liberty v. Nussbaum, A149830 (1/1  11/9/17) (Dondero, Margulies, Banke) (unpublished).

        It appeared to the Court of Appeal that "the trial judge here mistakenly concluded that the parties had elected to have binding arbitration at the time of the arbitration hearing . . . "  No matter.  The MFAA creates a statutory scheme, and if the award is not challenged within 30 days after service by requesting a trial de novo or by moving to vacate, it becomes final.  Such was the case here.

        The arbitration provision also required that the  parties mediate as a condition to arbitrating.  Here, however, the client did not assert a right to mediate before the arbitration.  The Court of Appeal analogized this failure to a waiver by delay of the right to arbitrate.

        The order confirming the arbitration award was affirmed.  

        COMMENT:  The Court of Appeal described the respondent plaintiff - attorney's failure to file an appellate brief as "plaintiff's dereliction of duty" -- especially so, because the respondent was an attorney.  Lucky for respondent, the Court of Appeal sua sponte undertook the tasks of reviewing the record on the basis of defendants' brief, and the trial court's order and judgment for prejudicial error!

Condition Precedent: Non-Signatory To Contract Must Mediate To Recovery Attorney’s Fees, If Mediation Is A Condition Precedent To Fee Recovery In The Contract

The

The Wrinkle Here Is That The Prevailing Party Claimed She Did Not Need To Satisfy The Condition Precedent Because She Never Signed The Contract.

    Standard real estate purchase and sale agreements in California, e.g., California Association of Realtors forms, include a provision requiring mediation as a condition precedent that must be satisfied before a prevailing party can recover attorney fees. That requirement has been litigated often enough in California to become one of our sidebar categories: "Mediation: Condition Precedent". Yet it still trips up parties, as it did in our next case, Hsiao v. Lin, B271296 c/w B272366 (2/8 4/4/17) (Rubin, Flier, Grimes) (unpublished).

    Hsiao (buyer) sued Lin (seller) for breach of contract when the seller refused to proceed with the sale of a house. The seller Lin prevailed, because she never signed the contract – instead, her adult son did. Because Lin prevailed, she sought attorney's fees, which the superior court granted in a postjudgment order

    The problem for Lin was that the contract required mediation first in order to recover attorney's fees. The buyer requested mediation, and Lin refused the request. The Court held that the case is governed by Leamon v. Krajkiewcz, 107 Cal.App.4^th 424 (2003), requiring a prevailing seller who sued to quiet title to request mediation first in order to recover attorney's fees.

    The seller valiantly tried to distinguish Leamon on the grounds she did not sign the contract in the first place. But the Court found this to be "a distinction without a difference," because she was relying on the contract to recover attorney's fees. She could hardly rely on the benefit – recovering attorney's fees – without accepting the burden of mediating.

    Judgment affirmed; postjudgment order awarding attorney's fees to Lin, reversed.

Mediation/Condition Precedent: International Lawyers Also Worry About Consequence Of Skipping Mandatory Pre-Arbitral Step

It’s Not Exactly The Same As Skipping Mediation In A Home Sale Purchase In California . . . .

     California courts have established that the consequence of not requesting mediation before suing for breach of a California Association of Realtor’s residential purchase agreement is that the plaintiff will not recover attorney’s fees even if the plaintiff prevails.  That result is the logical consequence of the contractual language in the C.A.R. purchase agreement.  See generally our sidebar category:  Mediation:  Condition Precedent.  Interestingly, practitioners of international construction law must also grapple with the consequences of skipping an ADR step.

     Matthias Scherer and Samuel Moss, attorneys with the international law firm Lalive, have authored a November 28, 2016 article entitled, “The consequence of skipping a mandatory pre-arbitral step.”  The article focuses on a recent ruling by the Swiss Federal Supreme Court considering the consequences of failing to comply with a mandatory pre-arbitral condition – in this case, a conciliation step.  The authors list potential consequences:  (1) dismiss the case for lack of jurisdiction or inadmissibility; (2) suspend the proceedings; or, (3) award damages for breach and proceed with the arbitration.

     Here, the court characterized the issue as one of lack of jurisdiction, resulting in suspension of the proceeding by the arbitral tribunal until the parties complied with the pre-arbitral condition.

Mediation/Condition Precedent: Court Refuses To Strictly Enforce Mediation Requirement As A Condition Precedent To Collecting Attorney’s Fees Because Of Unique Procedural Posture Of Case

True, Mediation Conditions Precedent To Collecting Attorney’s Fees Are Strictly Interpreted – But Not Here, Where Commonsense Dictated Otherwise.

      Check out the September 13, 2016 post in California Attorney’s Fees, the blawg my colleague Mike Hensley and I contribute to, about  Lamar Central Outdoor, LLC v. Hwang, Case No. B266070 (2d Dist., Div. 5 Sept. 9, 2016) (unpublished).  The unique procedural posture of this case leads to an unusual result:  notwithstanding a contractual requirement to mediate before initiating an action, the Court recognizes that requiring mediation as a precondition would run counter to the purpose of promoting judicial efficiency, based on the unusual procedural posture of this case. 

      In Lamar Central Outdoor, LLC, the requirement that a party mediate first before commencing legal action, if that party prevails and  is to ever collect legal fees, existed in the contract between co-defendants.  So when the plaintiff sued the co-defendants, and co-defendant Milan cross-complained against defendant Hwang, the Court recognized that the counter-claim was a permissive counterclaim, and that delaying the permissive counter-claim between the two co-defendants, while the co-defendants mediated, would only have undermined, rather than promoted, judicial efficiency.  In this unusual case, the Court did not strictly require the cross-complainant to mediate before cross-complaining as a condition precedent to obtaining attorney’s fees from its co-defendant.

Mediation, Attorney’s Fees: Ex-Husband’s Efforts To Thwart Ex-Wife’s Efforts To Mediate Provide Substantial Justification For Award Of Section 271 Attorney’s Fees In Family Law Matter

The Parties Had Agreed To Mediate.

     Efforts to avoid mediation can be costly.  For example, in real estate disputes, the standard California Association of Realtors purchase and sale agreement requires mediation before litigation – and participation in mediation becomes a precondition to collecting attorneys fees for a prevailing party.  In our next case, a family law case, the parties agreed to mediate their disputes concerning a martial settlement agreement, and the efforts of the ex-husband to thwart mediation resulted in a sanctions award of $10,000 under Family Code section 271.  Dyer v. Dyer, H038921 (6th Dist. Feb. 20, 2015) (Mihara, Bamattre-Manoukian, Grover) (unpublished).

     Most of the fee award ($50,000) was awarded under section 2030, not 271.  To reach its result, the Court of Appeal first had to conclude that a fee provision in a marital settlement agreement was not so broad and exclusive as to preclude fee recovery under section 2030.  See today’s post in California Attorney’s Fees.

     However, there was also substantial evidence that Wayne Dyer sought to avoid mediation, and that Wayne’s claims about a lack of evidence on this point were not entirely candid:  “The record is replete with evidence,” said the Court, “that Wayne repeatedly attempted to avoid mediation even after the court had ordered that it occur.”  That litigation conduct resulted in $10,000 in attorney’s fees as a sanction award to Carrie Dyer.

     COMMENT:  The Court of Appeal notes:  “Carrie’s attorney explained that ‘we finally had our mediation, and it was unsuccessful.’  Carrie had decided to dismiss her motion due to her medical condition and lack of financial resources.”  Notwithstanding the fees awarded under sections 2030 and 271, will hardball litigation tactics ultimately succeed in their objective?

Mediation/Condition Precedent: Fifth District Holds Homeowners Must Comply With Contractual Prelitigation Procedures With Homebuilder, Which Procedures Included Nonbinding Mediation

Failure Of Contractual Dispute Resolution Procedures In Contract To Track Protections In The Right To Repair Act Did Not Make The Provisions Unconscionable

     The Right To Repair Act, Civ. Code sections 895 et seq., (Act) require a homeowner to provide a builder with notice of defects and an opportunity to investigate and repair them.  However, the builder has the option of contracting for its own alternative nonadversarial prelitigation procedures when the home is sold.  The Act applies to new residential units where the seller signed the purchase agreement on or after January 1, 2003.

     Are homeowners who have purchased before January 1, 2003, or who have purchased after January 1, 2003, or who have purchased from those purchasers, bound by contractual prelitigation procedures, if those procedures do not track the procedures in the Act?  That’s the problem presented in The McCaffrey Group, Inc. v. Superior Court, F066080 (5th Dist. March 24, 2014) (Gomes, Cornell, Franson). 

     And the answer?  Yes, they are bound here, because the Court of Appeal found that the contractual procedures were not unconscionable, merely because they did not track the procedures in the Act.  Furthermore, since unconscionability is determined as of the time of entering into the contract, the Act could not even be used as a yardstick for measuring unconscionability of those contracts entered into by purchasers who signed before the effective date of the Act.

     When the homebuilder elected a contractual procedure, the homebuilder opted out of the nonadversarial prelitigation procedures prescribed by Chapter 4 of the Act, and the parties were bound by the contractual procedure.  Here, the contractual procedure, while not providing all the same time deadlines as the Act, did provide times for accomplishing steps in prelitigation procedure.  Also, the covenant of good faith and fair dealing placed an obligation on the homebuilder to act reasonably. 

     Here, the Court found a lack of substantive unconscionability, notwithstanding that the homeowners were contractually bound to pay half the mediation fees, while under the Act, the homeowner only splits fees if the homeowner agrees to do so.  The Court signaled that there was a failure of proof, because the homeowners “made no attempt to show that the mediation fees they are likely to pay would be exorbitant or place an unreasonable burden on them . . . “

      On one issue, however the Court punted:  “Since we are ordering compliance with the contractual procedures, we do not decide whether the judicial reference clause is enforceable . . as some or all of the parties may resolve their complaints . . . “

      Petition of The McCaffrey Group, Inc. granted.

     Congratulations to attorney for petitioner Eddie Galloway (a former colleague of mine) and to his team at Jackson, DeMarco, Tidus & Peckenpaugh.

Mediation/Condition Precedent: Following Its Own Precedent, 4th Dist. Div. 3 Reminds Us To Mediate First If Mediation Is A Condition Precedent For Receiving Attorney’s Fees

Here, The Prevailing Party Fails To Mediate, And Fails To Recover Attorney’s Fees

     In our next case, plaintiffs’ claims arose from mismanagement of their property.  They sued, and obtained a substantial recovery – but no attorney’s fees.  Why?  Because mediation was a precondition in their contract for the prevailing party to receive attorney’s fees, and they failed to mediate.  Following its own precedent, the Fourth District, Division Three, upheld the denial of attorney’s fees.  Brown v. Modaffari, Case No. G047443 (4th Dist. Div. 3, November 26, 2013) (unpublished); see Frei v. Davey, 124 Cal.App.4th 1506, 1508 (2004) (enforcing condition precedent in contractual attorney fee provision denying prevailing party right to recover fees if party does not attempt to mediate before suing).