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.
Waiver: Court Erred In Finding Waiver, “Because Plaintiff Demonstrated No Prejudice From Defendants’ Delay In Moving To Compel Arbitration”
14-Month Period From Filing Of Original Complaint To Filing Of Motion To Compel Is Insufficient To Support Waiver, Absent Showing Of Prejudice
Khalatian v. Prime Time Shuttle, Inc., Case No. B255945 (2/8 June 9, 2015) (Grimes, author; Bigelow concurring, Flier concurring and dissenting) (published) nicely bookends our penultimate post on Oregel v. PacPizza, about waiver of the right to arbitrate. In Khalatian, a 14-month delay, absent a showing of prejudice, was insufficient to establish waiver of the right to arbitrate, leading to reversal of the trial court’s order denying defendants’ motion to compel arbitration. In contrast, a 17-month delay in Oregel, together with a high level of litigation activity unlikely to be found in arbitration, led to affirmance of an order denying a motion to compel arbitration based on waiver of the right to arbitrate.
Why did the Court in Khalatian believe that the Plaintiff/Respondent failed to establish prejudice, despite the 14 months that elapsed between the filing of the original complaint and the motion to compel arbitration?
First, discovery was limited. (Compare the 25 depositions taken by the party moving to compel arbitration in Oregel). Second, the defendant moved to compel arbitration more than a year before the trial date. Third, the fact that the party petitioning for arbitration has participated in litigation, short of a determination on the merits, does not by itself constitute a waiver. Fourth, the party seeking to establish waiver “bears a heavy burden of proof.” Fifth, there was “no evidence that defendants stretched out the litigation process, gained information about plaintiff’s case they could not have learned in an arbitration, or waited until the eave of trial to move to compel arbitration.”
Though plaintiff filed a first amended complaint, defendant filed a demurrer and a motion to strike, plaintiff filed a second amended complaint, and defendants answered the second amended complaint, there was no merits based determination, because the demurrer was taken off calendar when the parties agreed plaintiffs could file a second amended complaint. While the Court of Appeal notes that a demurrer “may lead to a determination on the merits,” we note that a demurrer also may not lead to a determination on the merits, e.g., when it is granted without prejudice, when it is denied, and when it is simply taken off calendar, as was the case in Khalatian.
Justice Flier concurred in the holding that no waiver occurred in Khalatian. She dissented on other grounds, believing that the scope of the arbitration provision did not completely encompass the whole dispute.
Waiver: First District Affirms Order Denying Petition To Compel Arbitration – Appellant, Who Took 25 Depositions, Waived Right To Arbitrate
“Less-Than-Candid ‘Chronology of Pertinent Events Underlying Appeal’” Chafes Court.
In Oregel v. PacPizza (1/2 June 1, 2015) (Richman, Kline, Stewart) (published), the Court of Appeal had no trouble affirming the superior court’s order denying Appellant PacPizza’s petition to compel arbitration. More than enough evidence of a high level of litigation activity inconsistent with arbitration supported the finding of waiver of the right to arbitrate: filing two answers without mentioning arbitration, paying jury fees and asking for a jury trial, attending two CMCs without mentioning arbitration, and considerable discovery – including taking 25 depositions.
Appellant’s omission of extensive discovery from its chronology of pertinent events particularly vexed the Court. Justice Richman remarked the omission “is nothing short of brazen given the trial court’s finding that Oregel was prejudiced by the discovery the parties conducted . . . . “ The lesson here is to strive for candor in describing the record to the Court of Appeal. We’re stuck with the facts.
Public Policy And Florida Choice Of Law Result In Affirmance Of Order Partially Denying Defendant’s Motion To Compel Arbitration
Arbitration of Unlawful Group Boycott Claim Under California Cartwright Act Was The Juicy Florida Choice Of Law Law Issue.
HCF Insurance Agency v. Patriot Underwriters, Inc., Case No. B257715 (2/5 May 27, 2015) (unpublished) involved a dispute between plaintiff insurance broker, and defendant program administrator/underwriter, partially governed by an arbitration clause. The Court of Appeal affirmed the trial judge’s order that causes of action for contract breach and breach of the covenant of good faith and coverage were within the scope of the arbitration agreement, but that causes of action for fraud and intentional interference with economic advantage were not within the scope.
However, the cause of action for unlawful group boycott, in violation of California’s Cartwright Act, raised an interesting issue of public policy and choice of law. The dispute, which was within the scope of the arbitration clause, was governed by a Florida choice-of-law provision. Florida law did not provide a remedy for losses resulting from antitrust violations outside Florida, and plaintiff’s alleged damages were sustained in California. Florida law also provides an arbitration agreement is unenforceable if it violates public policy, and such a violation occurs when an arbitration agreement diminishes available remedies. Thus, the Court of Appeal reasoned that the arbitration clause must be invalid under Florida law, because arbitration under Florida law would diminish the remedies of plaintiff for injury in California under the Cartwright Act, violating Florida public policy.
COMMENT: Under the Federal Arbitration Act, claims that an arbitration provision violates state public policy don’t get much traction these days. However, even under the FAA, the parties can agree to choice of law, and here, the parties agreed to apply Florida law to their dispute.