Public Policy: Arbitrator’s Determination That An Agreement Imposing Cost On Departing Partner Servicing Firm Clients, And Lacking A Specific Geographic Limitation, Is Enforceable, Does Not Violate Public Policy
SingerLewak LLP v. Gantman Contains Excellent Discussion Of The “Public Policy Exception” That Sometimes Permits Judicial Review Of An Arbitrator’s Decision – But Not Here.
It is well-established that arbitrators do not exceed their powers just because they assign an erroneous reason for their decision. Therefore, the vast majority of arbitrator’s awards are immune to judicial review and easily get confirmed as judgments. Sometimes, however, an arbitrator’s award clearly violates public policy, resulting in judicial review and vacatur. Our next case, SingerLewak, LLP v. Gantman, B259722 (2/8 July 29, 2015) (Bigelow, Flier, Grimes) (unpublished) has an excellent discussion of the public interest exception.
SingerLewak, an accounting firm, and its employee, Gantman, were parties to a partnership agreement containing an arbitration provision. The partnership agreement included a provision that if a partner left the firm and competed, then a cost was imposed on the departing partner who serviced partners of the firm. The arbitrator concluded that Gantman was a partner, that the provision was not a true covenant not to compete, and that the restriction was not void for lack of an express geographical limitation, because there was an implied limitation – locations accessible to the firm’s client’s locations. In other words, the arbitrator “blue-penciled” a geographic limitation. Ordinarily, that would be the end of the matter, because whether the arbitrator was right or wrong could not be second-guessed by the courts.
The trial court, however, concluded judicial review of the arbitration award was required because it violated California non-compete policy, and vacated the award, leading to SingerLewak’s appeal.
Though unpublished, the case addresses an issue of first impression. Because California Bus. & Prof. Code section 16602 allows for an agreement that a departing partner “not carry on a similar business within a specified geographic area where the partnership business has been transacted . . . “, does an arbitrator who implies a geographic limitation run afoul of an important public policy, exposing the arbitral award to judicial review?
No, says the Court of Appeal. Unlike Bus. & Prof. Code section 16600, the general non-compete provision that draws a bright line in California, section 16602, applying to partnerships, applies a “rule of reason.” That rule of reason, which is not a bright line, allows the arbitrator to imply a geographic limit. Therefore, by implying a geographic limit, the arbitrator does not fall within the “public policy exception” that would open up the award to judicial review.
This case discusses in detail the public interest exception, carefully distinguishing many other cases that address the public interest exception. For example, on one side of the spectrum is Ahdout v. Hekmatjah, 213 Cal.App.4th 21 (2013), in which the Court concluded judicial review of an arbitration award was required because the award implicated “the explicit legislative expression of public policy embodied in section 7031 regarding unlicensed contractors.” On the other side of the spectrum is the SingerLewak case, involving no explicit legislative expression of public policy prohibiting an arbitrator (or the courts, for the matter), from implying a geographic limitation on business activities under section 16602.
One important takeaway is that the public policy exception will not be lightly applied. Absent a clear expression of illegality or public policy, the strong presumption in favor of arbitration means that the award will generally be immune from judicial scrutiny.
Congratulations to my colleagues at AlvaradoSmith, Ted Bacon, Mike Hensley, and Matt Hansen, who successfully briefed this matter in the Court of Appeal and obtained the reversal. Mike Hensley, my co-contributor to the California Attorney’s Fees blawg, argued the case for Appellant SingerLewak.
Collateral Estoppel: First District, Div. 4 Gives Collateral Estoppel Effect To Unconfirmed Arbitration Award
Rule For Arbitration Awards Is Different From Rule For Judgments
In North Beach Partners, LLC v. Sollner, A139893 (1/4 July 27, 2015) (Rivera, Ruvolo, Reardon) (unpublished), a hotly contested real estate dispute, the superior court granted a motion to amend a judgment and add additional judgment debtors as alter egos of North Beach Partners (NBP). NBP appealed, contending “the court erred in relying on the arbitrator’s findings because the arbitrator’s award was not yet final and had no collateral estoppel effect.”
While collateral estoppel does apply to arbitration awards, here the appellants argued that the award was not conclusive because an appeal of the order confirming the $476,066.40 award was pending. However, the Court of Appeal explained that unconfirmed arbitration awards are to be viewed as “the equivalent of a final judgment” for purposes of res judicata and collateral estoppel. “The reason for this rule is the limited judicial review applicable to the arbitration awards,” explained the Court, relying on Thibodeau v. Crum, 4 Cal.App.4th 749 (1992).
True, Thibodeau was a res judicata, not a collateral estoppel case, but that difference did not impress the Court. For good measure, the Court added: “Given that the arbitration award has since been confirmed, we cannot conclude that appellants were prejudiced by the court’s application of collateral estoppel to the arbitrator’s finding on the alter ego issue.”
Affirmed.
Choice of Law; Delegation: Delegation Clause And Agreement Arbitration Disabling Application Of California Law In Employment Dispute Are Found To Be Substantively Unconscionable
“Exotic” Choice Of Law Clause Is The Key To This Case.
Stained glass in Neiman Marcus store, San Francisco. Carol M. Highsmith, photographer. 2012. Library of Congress.
Neiman Marcus drafted an ingenious choice of law clause that the First District, Division Four, describes as “exotic” – perhaps a euphemism for “too clever by half”, because it ultimately led the Court of Appeal to find the arbitration agreement unconscionable in an employee-employer putative class action/wage-hour dispute. Pinela v. Neiman Marcus Group, Inc., A137520 (1/4 June 29, 2015) (Streeter, Reardon, Rivera).
The choice of law clause provided Texas law applied, “except that for claims or defenses arising under federal law, the arbitrator shall follow the substantive law as set forth by the United States Supreme Court and the United States Court of Appeals for the Fifth Circuit. The arbitrator does not have the authority to enlarge, add to, subtract from, disregard, or . . . otherwise alter the parties’ rights under such laws, except to the extent set forth herein.” The agreement also included a broad delegation provision allowing the arbitrator to decide pretty much any disputed issue.
Ordinarily an agreement can specify choice of law and delegate decisions to the arbitrator. Indeed, typically such provisions are enforced, but such was not their fate here. The Court performed an unconscionability analysis, and found the arbitration provisions both procedurally and substantively unconscionable.
The Court did not like the fact that the agreement disabled the arbitrator from applying California law to a labor dispute involving California workers, and therefore it refused to enforce the Texas choice of law provision, explaining that California has an important interest “in ensuring that its statutory protections for California-based workers are not selectively disabled by out-of-state companies wishing to do business in this state . . .” (My ball, my rules.) The Texas choice of law disadvantaged California workers both as to substantive claims that they might have in California, but not in Texas, and as to defenses to the enforceability of an arbitration agreement, e.g., California law concerning unconscionability.
“[B]ecause the ability of the arbitrator to call upon California law in deciding the enforceability questions entrusted to him is a ‘consideration [] inextricably bound up in the question of the validity of the choice of law provision, ‘”, once the choice of law provision was jettisoned, the delegation of the enforceability decision to the arbitrator was too.
Having concluded that the delegation clause was uneforceable, the Court then analyzed the arbitration agreement as a whole and found several instances of substantive unconscionability.
The Court’s bottom line: “We conclude that the delegation clause and the agreement are both unconscionable and therefore unenforceable under California law.”
COMMENT: The Court notes, “In Peleg [v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012)], Division One of the Second District Court of Appeal held an arbitration agreement identical in form to the agreement at issue in this case was illusory under Texas law (which the appellate court applied pursuant to a choice of law provision) and therefore unenforceable).” I have previously posted about Peleg on November 7, 2012:
The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466. This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.
See also my post of April 18, 2012. Note that Peleg and Pinela reach the same result – invalidation of the arbitration agreement – but by different routes. Peleg finds the arbitration agreement illusory under Texas law. Pinela refuses to apply Texas or Fifth Circuit law, and finds the agreement unconscionable under California law.
Settlement Agreements: Trial Court Holds Broad Release Unambiguously Released Defendants, But Court Of Appeal Holds The Release Is Ambiguous
Contract Must Be Construed As A Whole So As To Give Effect To Every Part, If Reasonably Practicable
Rodriguez v. Oto, 212 Cal.App.4th 1020 (2013) held language unambiguously releasing “all persons” from liability extended to third parties, entitling a stranger to summary judgment that the stranger had been released, in the absence of countervailing evidence. In Epic Communications, Inc., v. Richwave Technology, Inc., H037884 (6th Dist. June 23, 2015) (Rushing, Elia, Walsh) (published), the trial judge agreed with defendants Richwave and Wong that a broadly worded release in a settlement agreement between Epic and ALi was unambiguous and released Richwave and Wong from further liability.
The release language released ALi’s “past, present, and future . . . assignees, . . . shareholders, . . . [and] employees.” Wong and Richwave argued Wong was a past employee of ALi, and Richwave was “an assignee and shareholder of ALi”, such that both were covered by the release and free from liability.
Epic did well by appealing.
The Court of Appeal found that the release, when viewed in light of the entire agreement, was not unambiguous on its face. For example, the recitals suggested that the release was limited to matters arbitrated between Epic and ALi, and thus did not include claims against Richwave and Wong that were not arbitrated. The agreement provided for confidentiality, raising an issue as to how third parties could be intended to take advantage of a confidential agreement.
The Court found “something of a smoking gun” in agreement language providing, “No other person or entity other than the Parties hereto shall be entitled to claim any right or benefit under this” – at which point the paragraph ended without punctuation.
Once the language was found by the Court to be ambiguous, the barn door opened wide to let in extraneous evidence inconsistent with an intent to release Richwave and Wong. For example, ALi never objected to Epic’s further legal action against Richwave and Wong, and refused to release confidential documents at the request of Richwave and Wong, unless the court issued an order.
DRAFTING TIPS: The Court observes that “whether the parties intended to confer enforceable rights on the party now asserting them,” is a pivotal question in cases such as this one. Parties should therefore give this question attention when drafting releases – though sometimes parties are reluctant to flag an issue when ambiguity may work in their favor.
The Court suggests that, had the parties intended to extinguish Epic’s pending claims against Wong and Richwave, “they might have been expected to express the purpose of the settlement agreement more broadly, e.g., as extinguishing all existing and potential claims arising from the events giving rise to the suit and the award.” Recitals can be a useful tool to expand or contract the scope of an agreement.
The Court also notes that the use of the term “successor” in the release was “at best . . . ambiguous”. “Successor” could refer to someone who claims to succeed to certain rights previously owned by another party, or refer to a successor to all the rights under the settlement agreement. The same problem can exist with the word “assignee” – an assignee of a specific asset, versus an assignee of all the rights under the agreement. Beware when using the boilerplate phrase “successors and assigns.”
References, Confidentiality: Law Firm May Be Disqualified If It Substitutes Into Case In Which One Of Its Attorneys Participated As A Court Appointed Settlement Officer
The Disqualification Outcome Hinges On Whether The Attorney-Settlement Officer Received Confidential Information
![[Bird's-eye view of the Great Wall of China along mountain ridges, disappearing into the haze in the distance]](http://cdn.loc.gov/service/pnp/ppss/00500/00507r.jpg)
Bird’s-eye view of the Great Wall of China. Jean E. Norwood, photographer. 1979. Library of Congress.
Attorney Banuelos participated as a settlement officer on a “CRASH” panel mediating an employee-employer dispute in Los Angeles Superior Court. “CRASH” stands for “Civil Referee Assisted Settlement Hearing,” and the CRASH panel consisted of two attorneys and one judge. A little less than six months after the mandatory settlement conference, Banuelos’ law firm substituted in to represent the employer in the dispute, and the employee moved to disqualify Banuelos’ law firm.
The trial court denied the disqualification motion, holding that even if Banuelos received confidential information – an issue the court did not decide – adequate screening measures could be established to ensure Banuelos did not discuss the case with anyone at the firm. The employee filed a writ. Castaneda v. Superior Court (Perrin Bernard Supowitz, Inc., Real Party in Interest), No. B259950 (2/8 June 24, 2015) (Rubin, Flier Grimes) (published).
The employee’s petition was granted, with directions. The trial court must now consider whether Banuelos participated in ex parte communications with the employee’s representatives. If ex parte communications occurred, then it will be presumed that confidential information was exchanged, and the law firm will be vicariously disqualified. No ethical wall will prevent vicarious disqualification if the attorney received confidential information.
COMMENT: I have participated as a “mediator” in a settlement conference program in LASC. The status of attorneys who participated in the program was not clearly defined. Participants were informed that the formal mediation privilege did not apply, because these were settlement conferences ordered under rule 3.1380. However, as the Court of Appeal points out in Castaneda, its concern is not with the laws of mediation confidentiality, but rather with “the law of attorney disqualification based on confidential communications, wherever they may occur.”
PAGA: Second District, Div. 4 Holds PAGA Cause Of Action Cannot Be Split Into An Arbitrable Individual Claim And A Nonarbitrable Representative Claim
The Waiver Of A Right To Assert PAGA Claim In Any Forum Is Unenforceable And The Claim Cannot Be Split.
Iskanian v. CLS Transportation Los Angeles, LLC is still binding precedent, and an employee cannot be required to waive a representative PAGA claim in any forum. But can an employee, who asserts a representative PAGA claim be required to submit the “underlying controversy” to arbitration for a determination whether he is an “aggrieved employee” with standing, before pursuing the representative PAGA claim? No, says the Court of Appeal in Williams v. Superior Court (Pinkerton Governmental Services, Inc., Real Party In Interest), B261007 (2/4 June 9, 2015) (Manella, Willhite, Collins) (published). The PAGA claim cannot be split.
And so it goes, as employers continue to search for imaginative ways to arbitrate PAGA claims, and employees and California courts continue to push back.