California Mediation and Arbitration

Arbitration/3rd Party Beneficiaries/Equitable Estoppel: 9th Circuit Holds District Court Correctly Concluded Defendant Could Not Invoke Arbitration Clause As 3rd Party Beneficiary or Through Equitable Estoppel

Defendant Admitted It Did Not Enter Into Contract With Student To Provide Him With Debt Relief Services

     Student loan debt is an area of our economy ripe to generate cases on arbitration and class action.  See for example my April 12, 2013 post about Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013), a case in which students of a failed helicopter flight-training school, in which the 9th Circuit, sitting en banc, found that the class action waiver was not unconscionable. 

     Rajagopalan v. NoteWorld, LLC, No. 12-35205 (9th Cir. May 20, 2013) (per curiam) (for publication), is yet another student loan debt case. 

     After losing his job, Plaintiff Rajagopalan, an electrical engineer who accumulated $15,000 in student debt, sought a professional loan work out solution by contacting a company on the Internet.  He signed a contract that contained an arbitration clause.  After some months passed, Plaintiff cancelled his subscription, only to find out that the company responsible for the payment processing had had withdrawn $8,290.15 from his account, and he had received no debt relief.

      NoteWorld, which was responsible for payment processing, was not a signatory to the contract.  Its in-house counsel explained that NoteWorld was an “independent third-party and does not act as an agent for the [debt relief service provider], nor does it take on any of the contractual obligations of the DRSP.”

     Plaintiff filed a lawsuit against NoteWorld, and NoteWorld sought to take advantage of the arbitration provision in the contract between Plaintiff and the debt relief company.  The district court denied NoteWorld’s motion to compel arbitration.

     Under Washington state law, “both contracting parties must intend that a third party beneficiary contract be created.”  Here, evidence was lacking that Plaintiff intended to designate NoteWorld as a third-party beneficiary, or that NoteWorld assumed any duties or obligations under the contract.

      In order to successfully invoke equitable estoppel, it was essential “that the subject matter of the dispute was intertwined with the contract providing for arbitration.”  Such was not the case here, because Plaintiff’s claims against NoteWorld were statutory claims separate from the contract itself.

      Affirmed.

  

Arbitration/Costs/CCP 1286.6: Sixth District Reverses Costs Award for Arbitration, But Remands to Allow Trial Court to Determine Costs Incurred To Judicially Confirm Arbitration Award

Both Sides Wanted To Correct Cost Award That Couldn't Be Corrected

     As with our immediately preceding post of May 19, 2013 on De Sena v. Richert, the issue here is whether cost issues should be presented to the trial judge or to the arbitrator.

     At arbitration, Plaintiffs were awarded $1,092,797, plus "costs in accordance with the California Code of Civil Procedure." Plaintiffs, however, never briefed the cost issue to the arbitrator, and did not submit evidence of costs or of a CCP 998 settlement offer. The trial court confirmed the arbitrator's award, but "corrected" the costs award by removing it. Plaintiffs appealed in order to recover their costs. Watson v. Knorr, H036430 (6^th Dist. May 13, 2013) (Rushing, P.J., author 3:0) (unpublished).

     The unpublished opinion is 40 pages long – evidence that costs issues in arbitration can be very confusing. Both Plaintiffs and Defendant had wanted to correct the ruling on costs – Plaintiffs, by filling in a dollar amount, Defendant, by deleting the reference to entitlement to costs. The bottom line, however, was that it was within the power of the arbitrator to rule on costs, and that even if the ruling was erroneous in arbitration, that was no basis for "correcting". it. If the Plaintiffs wanted the arbitrator to award costs, they would have done well to brief the issue, and submit evidence to the arbitrator.

     Costs incurred by Plaintiffs in the trial court were a different matter. "The case is remanded to the trial court for the sole purpose of determining Plaintiffs' entitlement to costs related to the proceedings in the trial court and the amount of such costs."

     Practice Tip: The Court of Appeal helpfully suggests a two-step approach in arbitration where a 998 settlement offer is made, and costs cannot be assessed before a prevailing party is determined. The parties should advise the arbitrator that a 998 offer has been made, and ask the arbitrator to conduct a bifurcated hearing, reserving jurisdiction to address costs after the liability and damages phase is completed.

 

Arbitration/Fees/Construction of Agreement/Mediation/Settlement Agreement: Limiting Language in Settlement Agreement Required Arbitrator, Not Court, To Determine Fees

"Customary Provision Allowing for the Award of Legal Fees in Any Action on a Contract" Was Missing Here 

     This case presents a common issue: whether a prevailing party must seek fees from the arbitrator or from the trial court. Here, the issue was resolved by express, non-standard language in a settlement agreement. DeSena v. Richert, C070461 (3d Dist. May 13, 2013) (Butz, J., author 3:0).

     Plaintiff settled a neighbor dispute during mediation. The settlement agreement provided that the mediator could resolve future disputes acting as an arbitrator. Sure enough, disputes arose, the mediator cum arbitrator resolved the disputes in favor of Plaintiff, and Plaintiff was thus the prevailing party. As the prevailing party, Plaintiff expected to recover fees based on a contractual fee provision in the settlement agreement. Consequently, Plaintiff appealed after the superior court judge denied her motion for legal fees incurred to confirm the ruling of the mediator acting as an arbitrator.

     Plaintiff ended up cornered by the language of the settlement agreement. "The intent reflected in the terms of the . . . settlement . . . was for the parties to bear their own costs and legal fees except in matters relating to the enforceability and interpretation of the settlement agreement (undoubtedly as a way to avert any subsequent truculence about settling the dispute). This exception, however, is limited to issues of enforceability and interpretation submitted to the mediator for binding arbitration, as to which the mediator possesses sole discretion to award costs or legal fees." Here, because the Plaintiff did not submit the fee issue to the arbitrator, Plaintiff was unable to recover fees. Focusing on the language of the settlement agreement, the Court of Appeal pointed out," this is not the equivalent of the customary provision allowing for the award of legal fees in any action on a contract . . . . "

     Judgment affirmed.

Arbitration/Unconscionability: Fourth District, Division 3, Finds That Contract of Adhesion Is Not Procedurally Unconscionable

Justice Aronson Dissents, Believing Majority Misapplied Legal "Sliding Scale" Test To Contract of Adhesion

      Plaintiff Nibler sued Monex, a precious metals trading company in which he invested, and lost, his inheritance. The trial court denied Monex's motion to compel arbitration, finding the arbitration provisions unconscionable. In fact Monex had been involved in another case, Paradise v. Superior Court, 176 Cal.App.4^th 1554 (2009) in which the arbitration clause was found unconscionable. Monex appealed the denial of its motion.

      The Court of Appeal reversed, finding a lack of procedural unconscionability. Nibler v. Monex Deposit Company, G046511 (4^th Dist. Div. 3 May 13, 2013) (Moore, Acting P.J., author 2:1, with Justice Fybel concurring) (unpublished). The key to the reversal was that changes had been made to the arbitration provisions, including the ability to opt out completely, precluding a finding of procedural unconscionability. Because both procedural and substantive unconscionability must be present to make an arbitration provision unconscionable, the Court of Appeal didn't even need to address substantive unconscionability. So it didn't.

      Nevertheless, the Court of Appeal did agree that the contract was adhesive – basically a take it or leave it contract that the customer could not change.

      Justice Aronson, dissenting, believed that once the Majority agreed that the contract was adhesive, it had acknowledged that there was at least some procedural unconscionability, requiring it to apply the sliding scale test, and to consider whether the procedural and substantive unconscionability, considered together, were sufficient to make the arbitration provision unconscionable.

      Interesting issue; too bad the case is unpublished.

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.