California Mediation and Arbitration

Arbitration/Employment/Enforcement/ Construction: Signed Acknowledgment of Employee Guidebook Failed to Establish Employee Was Bound By Arbitration Provision in Guidebook

 

Guidebook Disclaimers Were Self-Destructing

     In the next case, the Court of Appeal would not let the employer “have its cake and eat it too.”  On the one hand, the employee Guidebook provided for arbitration.   On the other hand, the employee Guidebook contained disclaimers that relieved the employer of contractual obligations.  The employer could not have it both ways.

      In an employment lawsuit between Plaintiff Tamayo and her employer, a golf club, the golf club moved to compel arbitration, based on the employee’s signed acknowledgment that she received the employer Guidebook with an arbitration provision.  The trial court denied the employer’s motion to compel arbitration, and the employer appealed.  Tamayo v. Cordevalle Golf Club, LLC, H037983 (6th Dist. April 26, 2013) (Bamattre-Manoukian, J., author 3:0) (unpublished). 

     One key disclaimer in the Guidebook provided that it “does not constitute a contract of employment.”  The Court of Appeal concluded, “the parties did not enter into a binding agreement to arbitrate because no document contained in the record can be reasonably construed to manifest the mutual assent of the parties to an agreement to arbitrate.”

     Query whether the result would have been different if, instead of the self-destructing language that there was no contract of employment, the Guidebook had only said that the employer could unilaterally modify, revoke, suspend, terminate, or change the policies and procedures in the Guidebook.  Under those circumstances, might the Court of Appeal have reached into its toolkit, and pulled out the implied covenant of good faith and fair dealing to conclude that the contract was not unilateral and illusory, because it had to be interpreted reasonably so as not to frustrate its purpose?  See my April 28, 2013 post on Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published) (applying covenant of good faith and fair dealing to save arbitration clause from “illusory” interpretation).

Arbitration/Employment/Unconscionability: Second District, Div. 7, Reverses Trial Court, and Finds Employment Agreement Arbitration Requirement Is Not Unconscionable

Court Uses Full Bag Of Tools To Save Arbitration Provision

     Life boat drill.  Between ca. 1910 and ca. 1915.  Library of Congress.

     The Courts of Appeal have many tools for interpreting arbitration provisions, including sliding scales for weighing unconscionability, incorporation by reference, application of the implied covenant of good faith and fair dealing, severability, and “reasonable” interpretation of an undefined term.  All those tools were applied to save an arbitration provision from unenforceability in the following employment case, Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published).

     Plaintiff Serpa sued her employer CSI alleging FEHA claims for sexual harassment, gender discrimination, retaliation, and other employment related claims.  The trial court denied the employer’s motion to compel arbitration on the ground that the arbitration provision was unconscionable and therefore unenforceable.  The employer appealed.

     First, applying the sliding scale of unconscionability, the Court of Appeal found that the contract was indeed one of adhesion, and therefore at least somewhat procedurally unconscionable.  However, with a low degree of procedural unconscionability, the degree of substantive unconscionability would have to be high to make the arbitration provision unconscionable. 

     Second, there was a question as to whether the arbitration provision was written broadly enough so as to result in a mutual obligation to arbitrate.  Here, incorporation by reference helped the employer, because the arbitration provision incorporated an employee handbook that evidenced an intent to arbitrate “any dispute” arising out of the employment.

     Third, the arbitration provision, which allowed the employer to alter the terms of any policy contained in the handbook at its sole discretion and without notice appeared to be illusory.  Not so, said the Court of Appeal, relying on the covenant of good faith and fair dealing implied in every contract.  The party with the authority to alter the contract may not change it in such a manner as to frustrate its purpose.

     Fourth, the contract explicitly provided that each party would bear its own attorney’s fees.  That, said the Court of Appeal, was unconscionable, because it deprived Serpa of an unwaivable statutory remedy to recover fees if she prevailed on her FEHA claims in arbitration.  Not to worry – the unconscionable provision could be severed. 

     Fifth, the Court applied a reasonable interpretation to a seemingly vague provision in the agreement.  The agreement required the employee to submit her dispute informally to the company before seeking arbitration.  Serpa argued that this unfairly gave her employer a “a free peek” at her case.  But the Court interpreted “informal internal efforts”, which were not defined, to mean nothing more “than some informal notice of a grievance before proceeding to arbitration.” 

    Thus, the Court of Appeal rescued the arbitration provision, finding that it was not unconscionable, and reversing the trial court’s denial of the employer’s motion to arbitrate.

Arbitration/CCP 1281.2: Allegations Defendants Are Agents of One Another Are Not Necessarily Judicial Admissions that Defendants Can Use to Compel Arbitration

Only Factual Allegations Admitted By The Opposing Party Count As Judicial Admissions

     Section II of our next case is certified for publication.  It addresses the issue of when an allegation in a complaint that defendants are agents of one another is binding on plaintiff.  The issue is relevant to arbitration, because an argument often made in moving to compel arbitration is that there are no “third parties” whose involvement will create the possibility of inconsistent rulings resulting from litigation with those third parties.

     Plaintiff sued her former boyfriend, law firm, ex-boyfriend'’s brother-in-law and his LLC, as a result of a 1031 tax exchange that did not have a happy ending, alleging that her law firm secretly represented her former boyfriend’s brother-in law and his LLC in the exchange.  She also alleged that the defendants were agents of one another.  Based on an arbitration provision, the law firm moved to compel.  Plaintiff successfully defeated the motion, arguing that third parties created the possibility of inconsistent rulings, a basis for denying a request to arbitrate under Cal. Code Civ. Proc. section 1281.2.  The defendant law firm appealed, arguing that plaintiff was bound by her pleading that all defendants were agents of one another, and thus there were no “third parties”.  Barsegian v. Kessler & Kessler, Case No. B237044 (2nd Dist. Div. 1 April 15, 2013) (Rothschild, J., author 3:0) (partially certified for publication).

     The Court points out:  “Prominent treatises, while recognizing that the Supreme Court has described such allegations as ‘egregious examples of generic boilerplate’ . . . . still advise that ‘such allegations may be necessary,’ especially ‘at the outset of a lawsuit, before discovery.’”  A “judicial admission is ordinarily a factual allegation by one party that is admitted by the opposing party.”  (italics in the opinion).  However, here, at oral argument, the defendant seeking to compel arbitration based on plaintiff’s allegation of agency, also made it clear they were reserving their right to argue they were not bound by the allegation of agency.  Absent the agreement of the opposing party, plaintiff’s allegation of agency was not a judicial admission.

      Thus, the Court of Appeal affirmed the trial court’s order denying defendants’ motion to compel arbitration.

      Tip:  Whether you want to arbitrate or whether you want to oppose arbitration, consider the legal implications of alleging agency in a complaint, whenever an arbitration agreement may be an issue.

       

Arbitration/Consumers/FAA/Unconscionability: 9th Circuit Holds Arbitration Clause In Consumer Credit Contract Lacking “Holder Rule” Language Is Not Unconscionable, And Doesn’t Fall Under “Public Injunction” Exception to Arb

Dissenting Judge Pregerson Attaches “Dense, Small Print, And Blurry Nine-Page Contract” As Appendix

     We posted on December 16, 2012 about the Kilgore v. Keybank oral argument to the Ninth Circuit, sitting en banc.  The case involves a putative class action by former students of a failed helicopter flight-training school seeking injunctive relief against the bank that originated their student loans and the loan servicer.  The complaint alleged defendants violated the California Unfair Competition Law (UCL), because the Note and contracts with students failed to include language required by the Federal Trade Commission’s “Holder Rule.”  This rule requires consumer credit contracts to include language that a holder of the consumer credit contract is subject to claims and defenses which the debtor could assert against the seller of goods or services.  In the case of the flight school, students took out loans that the lender quickly resold on the secondary market, and the students of the failed school were left “holding the bag.”  The district court found the contractual arbitration clause to be unconscionable.  The Court of Appeals, sitting en banc, has now reversed, holding that the arbitration requirement, which includes a class waiver, is not unconscionable, and does not fit into the narrow “public injunction” exception to the arbitration requirement.  Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013) (Hurwitz, J., author) (for publication).

     The en banc majority rejected the argument that the Note’s ban on class arbitration is substantively unconscionable under California law; that issue was foreclosed by AT&T Moblility v. Concepcion, 131 S.Ct. 1740 (2011).  The risk that students will be saddled with prohibitive arbitration costs was rejected as “too speculative”.  The procedural unconscionability argument was also rejected, primarily because the arbitration clause allowed “students to reject arbitration within sixty days of signing the Note.” 

      A carve-out from the arbitration requirement has been judicially created in Broughton v. Cigna Healthplans of Cal., 988 P.2d 67 (Cal. 1999).  Where plaintiffs function as a private attorney general, enjoining future deceptive practices on behalf of the general public, injunction claims are not arbitrable.  The hot issue is whether Broughton has also been preempted by the Federal Arbitration Act and Concepcion.  However, the Court avoided deciding this important issue by determining that the students were acting to further their own interests, and the action complained about was past rather than prospective action.  

     Judge Pregerson, dissenting, attaches an an Appendix “the dense, small print, and blurry nine-page contract that Silver State thrust on the students at career fairs and open houses.” 

       Among the points made by Judge Pregerson are that this is a “take it or leave it” consumer contract introducing at least some procedural unconscionability under the circumstances.  Of course, there is the 60 day provision allowing for an opt-out – tough to get around, and never mind that students don’t read the provisions.  As to “substantive unconscionability”, a confidentiality provision requires the parties to maintain confidentiality of any claim they arbitrate.  This works against plaintiffs who can’t share information, and in favor of the defendant that gets to arbitrate separately with each plaintiff.  Filing a civil action costs less than $500; filing the same claim in arbitration runs more than $4000.  Finally – and this is interesting – one of the two arbitrators named in the contract ruled in favor of banks and credit card companies, and against consumers 94 % of the time.  Judge Pregerson is alone in his dissent.

Arbitration/Employment/Choice of Law/Preemption: Massachusetts Choice of Law Enables Court of Appeal to Uphold Denial of Petition to Arbitrate Employment Discrimination Claims

Waiver of Right to Trial of Employment Claims Was Not Clear and Unequivocal

     One of the hottest areas of contention concerning arbitration is the waiver of statutory rights through arbitration, and whether such a waiver is preempted under AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).  In Harris v. Bingham McCutchen, B240522 (2nd Dist. Div. 5 March 29, 2013) (O’Neill, J., author 3:0) (published), the Court held that Massachusetts choice of law, required by the employment contract, provided that waiver of the right to try an employment discrimination claim needed to be “clear and unequivocal.”  That’s the law in Massachusetts, and the contractual language did not meet that heightened standard.

     So why wasn’t this resulted preempted by the Federal Arbitration Act and Concepcion? After all, Concepcion invalidated a class action waiver that peculiarly burdened an arbitration provision in California.

     The answer is that the heightened waiver standard under Massachusetts law does not discriminate against arbitration, because it applies as well to any contractual provision that limits statutory rights in an employment discrimination case. “[The] rule states only that as a matter of the Commonwealth’s general law of contract, a private agreement that purports to waive or limit—whether in an arbitration clause or in some other contract provision—the employee’s otherwise available right to seek redress for employment discrimination through the remedial paths set out in [Massachusetts General Law chapter] 151B, must reflect that intent in unambiguous terms.” Warfield v. Beth Israel Deaconess Medical Center, Inc., 454 Mass. 390, 399-400 (Mass. 2009) (italics added by me for emphasis).

     TIP for California legislators:  A statute that provides a heightened standard for waiver of statutory rights might survive Concepcion if it applies to all contracts, not just to arbitration provisions.

    

    

Arbitration/Automobiles/Unconscionability: Arbitration Provision In Automobile Purchase Held Procedurally But Not Substantively Unconscionable

“Sliding Scale” Unconscionability Analysis Saves Arbitration Provision

      In a published decision, the Court of Appeal reverses the trial court’s denial of a petition to compel arbitration based on an automobile purchase contract.  Vasquez v. Greene Motors, Inc., Case No. A134289 (1st Dist. Div. 1 March 27, 2013) (Margulies, Acting P.J., author 3:0) (published).

      These contracts will be found procedurally unconscionable to some degree, because they are “take it or leave it” contracts of adhesion.  “In light of the minimal level of procedural unconscionability and the absence of significant substantive unconscionability, however, we reverse the trial court’s denial of the petition to compel.” 

      So what was the “minimal level” of substantive unconscionability here? 

      First, the first $2,500 in costs fell upon the seller, after which the buyer was responsible, subject to cost shifting by the arbitrator at the end of the proceeding.  Unconscionable?  Outside the area of employment, said the Court, it is not unconscionable for the plaintiff to pay costs.

      Second, an appeal to three arbitrators was possible if the award was zero, or over $100,000.  Unconscionable?  No, said the Court.  The buyer was most likely to appeal awards of zero, and the seller was most likely to appeal awards over $100,000.  So there were advantages and disadvantages to each.

      Third, self-help and small claims were exempted from arbitration.  Unconscionable?  No, said the Court, because the self-help exemption benefited sellers, and the small claim exemption benefited buyers.

      Fourth, the contract required class action waivers and arbitration of statutory claims.  Unconscionable?  No, said the Court, AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011) (Concepcion) permits waiver of class action claims in arbitration.  I note that Concepcion does not expressly address arbitration of statutory claims.   (While the Court of Appeal says that the same rationale applies to permitting waiver of class action claims and to “preemption of the statutory ban on class action waivers,” what is not clear to me is whether arbitration here required arbitrating other statutory claims.)

      Bottom line:  the order denying the petition to compel arbitration is reversed.

Arbitration/Construction of Agreement: Agreement Providing Alternative of Arbitration Did Not Require Binding Mediation

Sometimes “May” Means “Shall” and Sometimes “May” Means “May”

     When does an ADR provision that provides for arbitration require arbitration?

     Truplug, the inventor of a product used as an emergency plug for boat leaks, sued Forespar, which had exclusive rights to market the product, for misrepresentation and negligence in marketing the Truplug product.  After the trial court denied Forespar’s motion to compel arbitration, Forespar appealed.  Truplug v. Forespar Products Corp., Case No. G046983 (4th Dist. Div. 3 April 2, 2013) (O’Leary, P.J., author  3:0) (unpublished).

      The problem presented by the ADR provisions was that they were a mish-mash.  Thus, one sentence read, “the parties shall try in good faith to settle the dispute by mediation . . . before resorting to arbitration, litigation, or some other dispute resolution procedure.”  Another sentence read:  “In the event . . . mediation does not resolve the dispute, either party may deliver a copy thereof to the American Arbitration Association . . . “   Yet another sentence read, “Whenever a party desires to institute litigation proceedings against the other party concerning this Agreement, it shall provide written notice . . . “  And another sentence provided that actions shall be brought in the County of Orange.

     Appellant Forespar argued that the use of the word “may” meant that a party had the option to arbitrate, and that arbitration was triggered by a party’s choice to arbitrate.  In fact there are cases holding that mandatory arbitration will be triggered when a party “may” arbitrate and opts to arbitrate.

      However, looking “at the arbitration language in the context of the entire Agreement,” the Court of Appeal concluded that there was no “clear agreement to arbitrate any and all controversies between the parties,” sinking Forestar’s argument.

      The Merrimac sinks the Cumberland.  1862.  Library of Congress.

      The order of the trial court was affirmed.

     TIP:  If you are arguing in favor of arbitration, emphasize “contractual arbitration being a favored method of resolving disputes, every intendment will be indulged to give effect to such proceedings.”  Titan Group, Inc. v. Sonoma Valley County Sanitation Dist., 164 cal.App.3d 1122, 1127 (1985).  If you are opposing arbitration, argue that there is no clear and unequivocal agreement to waive the right to a court trial of controversies between the parties.   Wolschlager v. Fidelity National Title Ins. Co., 111 Cal. App.4th 784, 789 (2003).

Arbitration/Scope/Costs: Arbitrator’s Failure To Declare Prevailing Party And Denial Of Statutory Costs To Winner No Ground For Reversal

Arbitration, Law, and Equity

     Our next case reminds me of a hoary legal story.  Clarence Darrow handles a legal matter for William Randolph Hearst, and telegrams him:  “Justice has prevailed.”  Hearst’s reply:  “Appeal immediately!” 

     Appealing an arbitration result is often a long shot, because arbitration is more geared to equity and finality than to legal exactitude.

     The point is brought home in Plummer v. Day/Eisenberg, Case No. G046567 (4^th Dist., Div. 3 Mar. 22, 2013) (Ikola, J., author; 3-0) (unpublished).  The arbitrator’s failure to declare a prevailing party and denial of statutory costs to the winner did not permit a different result.  “An arbitrator does not exceed his or her powers by deciding an issue submitted for arbitration under the arbitration agreement. (Pierotti v. Torian (2000) 81 Cal.App.4th 17, 25 (Pierotti); see also Corona v. Amherst Partners (2003) 107 Cal.App.4th 701, 705 (Corona) [scope of arbitration and powers of arbitrator defined in accordance with agreement].)”  Here, the submission to the arbitrator was broad enough to include the question of costs.  And an error of fact or law is ordinarily not reason enough to reverse a judgment confirming an arbitrator’s award.

     Judgment affirmed. 

     

 

     

Arbitration/Employment/Unconscionability: Second District, Division 8 Tanks Employment Arbitration Provision On Basis of Unconscionability

Main Problem is One-Sidedness of Arbitration Provision

     Compton v. Superior Court, Case No. BC448343 (2nd Dist. Div. 8 March 19, 2013) (published) starkly presents the conflicting views of judges confronted with deciding whether an employment arbitration provision is unconscionable.

      Leasa Compton appealed the order granting her former employer, American Management Services’s (AMS’s) petition compelling her to arbitrate her class action complaint for violations of Labor Code provisions governing payment of wages.  Appellant Compton raised two issues:  (1) the employer had waived arbitration by litigating extensively; (2) the arbitration provision was unconscionable. 

      Justice Rubin, with Justice Flier concurring, authored the opinion reversing the trial court’s order.  The first issue – waiver of the right to arbitrate through delay – was not addressed, perhaps because the employer sought arbitration, after extensive litigation, but immediately after Concepcion was decided by the United States Supreme Court, opening up the argument for employer that it would have been futile for it to seek arbitration before Concepcion was decided, holding class action waivers in arbitration are not per se unenforceable.  In any case, the issue of delay and waiver did not need to be addressed, because Justice Rubin disposed of the enforceability of the arbitration provision issue on the grounds of procedural and substantive unconscionability.

      The trial court’s decision was reviewed on a de novo standard, as there appeared to be no facts in dispute.  The provision was procedurally unconscionable, presented on a “take it or leave it” basis, as a condition for unemployment, unaccompanied by the applicable arbitration rules.  Substantive unconscionability resulted because the provision required employees to arbitrate claims they were most likely to bring, while allowing the employer to go the judicial route for certain claims it was more likely to bring; statutory rights to attorney’s fees might not be applied in arbitration; and the statute of limitations provisions seemed to favor the employer.

      Justice Bigelow, dissenting, believes that Concepcion has changed the landscape, and that the Majority failed to pay it proper homage.    She concludes that the arbitration provision is not "so ‘tainted with illegality’ as to render it wholly unenforceable”, that an injunctive relief carve-out for litigating trade secret and unfair competition cases “could be easily severed”, and that she is not “offended by the procedural path to litigation here.”

      Plenty to chew on here for advocates on both sides.

Mediation/Condition Precedent/Arbitration/Construction of Agreement: Fifth District Refuses To Compel Mediation And Agrees Arbitration Clause Is Unenforceable

Arbitration Clause Did Create Unilateral Right To Compel Arbitration, And There Was No Precedent To Compel Mediation

     Members of an LLC ended up in a business dispute leading to a lawsuit followed by defendants’ motion to compel mediation and arbitration.  The trial court construed an arbitration agreement as insufficient to allow one party to unilaterally compel arbitration, and further found that it was without jurisdiction to enforce a mediation provision.  After defendants lost their motion to compel mediation and arbitration of their disputes, they appealed.  Angelakis v. Hennigan, Case No. F064956 (5th Dist. March 12, 2013) (Levy, Acting P.J., author 3:0) (unpublished).

     The Court of Appeal acknowledged that there is support, under some circumstances, for construing an arbitration clause as creating a unilateral right to compel arbitration.  But not here.  The problem for defendants/appellants was that here, the arbitration clause also provided the dispute could be resolved by arbitration “if all parties to the dispute agree to arbitration.”  Here, however, all parties did not agree to arbitration, leaving defendants/appellants stuck with the Court’s construction of the plain language of the arbitration clause.

     The parties’ operating agreement also provided, “if the members cannot resolve the dispute to their mutual satisfaction, the matter shall be submitted to mediation.”  Also, there is a strong policy in favor of promoting mediation.  So why wouldn’t the Court require mediation? 

     The Court agreed that encouraging mediation meant that courts will uphold a sanction, such as denying attorney’s fees, where mediation is a precondition to obtaining attorney’s fees.  But the Court refused to force the parties to mediate because mediation is voluntary.  Jen-Weld, Inc. v. Superior Court, 146 Cal.App.4th 536, 543 (2007) (an order compelling mediation is antithetical to the entire concept of mediation).

     The order denying the defendants’ motion to compel mediation and arbitration was affirmed.