Arbitration, Nonsignatories: Arbitration Agreement Between Purchasers And Seller Did Not Compel Purchasers And Nonsignatory Assignees Of Purchasers To Arbitrate Their Own Dispute
Judgment Confirming Arbitration Award And Postjudgment Order Awarding Attorney Fees Are Reversed.
One of this blog’s sidebar categories is “Nonsignatories,” because many cases address whether nonsignatories to arbitration agreements can nevertheless be compelled to arbitrate either because they are third-party beneficiaries of the agreement, or because they have a special relationship with a party to the agreement – e.g., agency. The issue in Ahern et al. v. Asset Management Consultants Inc., B253974 and B257684 (2/7 August 11, 2015) (Perluss, Zelon, Segal) (unpublished) was whether the Ahern plaintiffs could be compelled to arbitrate by the defendants, despite the fact that the Ahern plaintiffs were not signatories to the arbitration agreement.
The arbitration agreement applied to the Seller (iStar CTL I, L.P.) and to the Purchasers of real property (Hopper parties). The Purchasers assigned and sold their interests in the property to the Ahern plaintiffs and others. The Ahern parties sued the Purchasers for fraudulent inducement and other causes of action, and the Purchasers successfully moved to compel arbitration, obtained favorable results in arbitration, and confirmed the arbitration award as a judgment.
The Court of Appeal explained that iStart CTL, the Seller, “would most likely have been entitled to require the Ahern parties to arbitrate disputes regarding their respective rights and obligations regarding the sale [to the Ahern parties].” The problem, however, was that the real dispute was not between the Purchasers and the Seller, but rather between the Purchaser and the Ahern parties who “were fully aligned with the purchaser side of the transaction only. . ..” Thus, the arbitration agreement between the Purchasers and the Seller did not apply to disputes between the Purchasers and the Purchaser’s buyers and assignees.
Because the judgment confirming the arbitration award was reversed, the attorney’s fee award was also reversed.
Greetings to my former colleague at Jackson, DeMarco, Tidus & Peckenpaugh, M. Alim Malik, lead counsel for defendants and respondents.
Class Actions, Unconscionability, Automobiles: California Supreme Court Reverses Court of Appeal, Enforces Class Action Waiver, Holds Automobile Sales Contract Is Not Unconscionable
Application of Concepcion Is Decisive.
At last, the California Supreme Court has decided Sanchez v. Valencia Holding Company, LLC, S199119 (Cal. Sup. Ct. Aug. 3, 2015) (Liu, J., author). The case has been pending since Defendant and Appellant Valencia filed its petition for review on January 4, 2012. The majority opinion, authored by Justice Liu, holds: “Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provision of the arbitration agreement. Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable.”
Sanchez’ lawsuit alleged Valencia violated the Consumer Legal Remedies Act by making false representations about the condition of the automobile he purchased.
The automobile sales contract at issue contained four arbitration provisions that some Courts of Appeal have found to be unfairly one-sided: (1) an award could be appealed to a panel of three arbitrators if the award was $0 or over $100,000; (2) an award of injunctive relief could be appealed; (3) the appealing party had to pay in advance the filing fee and other arbitration, through the arbitrators could later apportion costs; (4) repossession is exempted from arbitration. Because the California Supreme Court finds that none of those provisions is unconscionable, and because those provisions are common in automobile sales contracts, automobile dealers will breathe a collective sigh of relief.
Justice Chin, concurring and dissenting in part, agrees that the class arbitration waiver is enforceable and that Sanchez fails to carry his burden of establishing that the contract is unconscionable. However, Justice Chin disagrees with some of the majority’s analysis. He questions whether an adhesive contract is necessarily procedurally unconscionable, and states that the majority does not need to reach the issue of procedural unconscionability, because it holds that the arbitration provisions are not substantively unconscionable. He also argues in favor of a single substantive unconscionablility “shocks the conscience” test, rather than a smorgasbord of legal formulations.
COMMENT: The opinion also contains an interesting discussion of Cal. Code Civ. Proc. section 1284.3, concerning responsibility for fees in consumer arbitrations. While the Court agrees that a requirement that a consumer front appellate filing fees or other arbitration costs “has the potential to deter the consumer from using the appeal process”, the Court applies a case-by-case “affordability of arbitration” analysis to determine whether fees and costs would make arbitration unaffordable. Here, the dispute involved “a high-end luxury item” – a “preowned” Mercedes-Benz S500V. Sanchez simply failed to claim or show that appellate arbitration filing fees were unaffordable to him.
Unconscionability and the “affordability of arbitration” will have to be left for another day.
My Article In California Litigation: Can Private Attorney General Actions Be Forced Into Arbitration?
An Uncertain Future In California: The Arbitrability Of Statutory Representative Actions Brought For The Benefit Of The Public.
Thanks to the generous permission of California Litigation, The Journal of The Litigation Section, State Bar of California, my article “Can Private Attorney General Actions Be Forced Into Arbitration?” is now available on my website by clicking here. The article appeared in the latest issue of California Litigation, Vol. 28, No. 2, 2015.
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.