Arbitration, Nonsignatories, Employment: In A Case Of First Impression, Court Of Appeal Holds That Successor Company Can Enforce Arbitration Agreement
By Suing DirectTV For Unpaid Wages, Employee Acknowledged Existence Of An Employment Relationship With Entity That Survived Merger.
May a nonsignatory defendant enforce an arbitration agreement between a signatory plaintiff and a corporation that was acquired by the nonsignatory defendant, which assumed all rights and obligations of the acquired corporation? “We have found no California cases on this point,” says the Court of Appeal, which then answers the question presented with a YES. Marenco v. DirectTV LLC, No. B238421 (2/4 Feb. 5, 2015) (Epstein, Willhite, Manella).
COMMENT: The Court of Appeal said that whether or not the corporation that originally signed the agreement had ceased to exist did not matter to the outcome. The employee’s continued employment “provided implied consent to maintaining the existing terms of employment,” explained the Court, also invoking “the established principle that ‘[a] voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.’”
If you are interested in reading a strong arbitration provision in an employment agreement, check out footnote 1 of the opinion.
Reading: Thirteen Days In September–Carter, Begin And Sadat At Camp David
The Pros And Cons Of Creative Ambiguity.
Lawrence Wright has written a fascinating book about the thirteen days of intense negotiations at Camp David in 1979 leading to a peace agreement between Egypt and Israel. Earlier, Wright earned a Pulitzer Prize for his book The Looming Tower about events leading up to 9/11.
Thirteen Days in September can be read as a background briefing about the political, historical, and religious obstacles to peace in the Mideast, as a collection of vignettes of the leaders and their entourages, as a meditation on war and peace, and as a detailed account of the procedural and psychological dynamics of immensely complicated negotiations.
The negotiations are an example of opposite sides dealing with seemingly intractable problems and “getting to yes”. In fact, President Carter and Secretary of State Cyrus Vance borrowed a concept from Harvard Law’s Roger Fisher, co-author of Getting to YES, by taking control of the negotiating document, and using it to narrow issues. The process did not start out that way, as Carter naively thought that bringing together Begin and Sadat would lead to an exchange of goodwill, and a mutual recognition of the shared interest in peace, but in fact, quite the opposite occurred, and it became necessary to separate Sadat and Begin.
Carter developed a rapport with Sadat, but not with Begin, whom Carter found to be legalistic and obstructionist. For Begin, the security of Israel was an existential problem, and he balked at exchanging the security buffer of the Sinai for the promise of peace.
On the brink of humiliating failure, Carter changed his role as facilitator and became more directive. The negotiation process evolved painfully, and at times dramatically, while the US draft progressed through 23 revisions. At several points, one side or the other threatened to walk out, and Carter played his trump card: you will destroy your relationship with the US, and you will be blamed for the failure of the peace talks.
Sadat and Begin each achieved important goals: a formal peace agreement between Egypt and Israel, and a continuing relationship for Egypt and Israel with the United States. Egypt regained control of the Sinai Desert. Since 1979, the peace Carter brokered between Israel and Egypt has lasted – between Israel and Egypt.
Carter hoped to successfully link the agreement between Israel and Egypt with an agreement to address UN Resolution 242 and the rights of the Palestinian people in Gaza and the West Bank. However, the Palestinians were not “present at the table”, and their issues were of secondary concern to Begin and Sadat. The agreement between Egypt and Israel was achieved by drafting “creative ambiguities” that imprecisely addressed the rights of Palestinians, without solving profound problems that were simply “papered over.” Thirty-five years later, the agreement between Israel and Egypt is still in place, and the issues presented by UN Resolution 242, Gaza, and the West Bank remain as open sores.
Arbitration, Enforceability: Arbitration Agreement Created Unilaterally And Applied Retroactively To Pending Claim Is Illusory
Sometimes Unilateral Changes To Agreement Are Protected By Covenant of Good Faith And Fair Dealing – But Not Here.
I have posted about employment cases in which the covenant of good faith and fair dealing allowed an employer to unilaterally change an arbitration provision without the contract being illusory, because the covenant reins in the ability of the employer to make unreasonable changes. However, the lesson in Cobb v. Ironwood Country Club, G050446 (4/3 Jan. 28, 2015) (Rylaarsdam, O’Leary, Bedsworth) (published) is that the covenant won’t save a unilateral change that creates an arbitration provision that applies retroactively to accrued or known claims.
Plaintiffs, two present members and two former members of defendant, a country club, sued the country club in August 2012, alleging the country club reneged on a plan to repay members who loaned money to the club and then sold their membership interest before the club repaid their loan. In December, 2012, the club adopted a bylaw mandating arbitration of claims against it, and in January, the club filed a motion to compel arbitration of plaintiffs’ claims.
The Court of Appeal concluded that there was no authority allowing for enforcement of a unilaterally imposed retroactive arbitration agreement on a party who has not expressly consented to that retroactive application, once the plaintiff has already filed a lawsuit. A further problem with the bylaw was that it also mandated waiver of “all claims, rights and demands for punitive and consequential damages.”
The order denying Ironwood’s motion to compel arbitration was affirmed.
COMMENT: The discretionary power to unilaterally change a contract may make a contract illusory. The constraints imposed by the covenant of good faith and fair dealing can save the contract from being illusory, but the discretionary power must be exercised in good faith.
Arbitration, Nonsignatories, Equitable Estoppel: Nonsignatory Defendant Is Able To Compel Nonsignatory Plaintiff Because All The Claims Are “Inextricably Intertwined”
Plaintiffs’ Pleading Allegations Didn’t Help Their Argument.
The somewhat anomalous circumstances in this case allowed a nonsignatory defendant to arbitrate its claims with a nonsignatory plaintiff. O’Donnell Strategic Industrial REIT v. Super. Ct., G049498 (4/3 Jan. 28, 2015) (Thompson, Bedsworth, Moore) (unpublished).
In a dispute concerning the setting up and operation of a real estate investment trust, plaintiffs sued defendants for breach of contract, fraud, breach of fiduciary duty, and declaratory relief. Defendants/respondents successfully sought to compel arbitration of the dispute under a broad clause in an Advisor Operating Agreement providing for arbitration of, “[a]ny dispute, controversy, or claim arising out of or in connection with this Agreement . . . “ Furthermore, the Advisor Operating Agreement, together with a related Dealer Management Agreement, had to be read as a single unified contract. As a result of the broadly construed arbitration provision and the unified contract, the trial court and Court of Appeal found all claims were covered by the arbitration clause.
The greater problem was that not all the parties were signatories to the arbitration agreement, and in fact, not all the parties existed at the time the arbitration agreement was signed. The Court dealt with this problem by noting – based on plaintiffs’ pleadings — “Plaintiffs also acknowledge the causes of action against each of the defendants are substantially intertwined with those against the others.” Also, all the parties were related to and affiliated with each other. The Court reasoned, “nonsigning parties could be compelled to arbitrate if the claims were sufficiently dependent on each other.” Petition denied.
If all the parties, except for one, could be compelled to arbitrate, proceedings could have gotten messy, so perhaps pragmatic considerations also played a part.
Miscellaneous: Reference Rot — Plague and Partial Solutions
Damn Those Hyperlinks That Rot In Cyberspace !
Jill Lepore, Professor of American History at Harvard, has written a fascinating article in the January 26, 2015 edition of the The New Yorker. Her subject, which interests and plagues every blogger, is archiving the Internet before the information vanishes into cyberspace.
If you have been reading this blog, or the other blog to which I contribute with my colleague Mike Hensley, California Attorney’s Fees, or any other blog, you are familiar with the problem. All the hyperlinks degrade over time and become useless. You click on a hyperlink, and you get an annoying message: “Page Not Found” (“link rot”). Or the page has been overwritten. Or the page has moved, and something else appears in its place (“content shift”). These are examples of “reference rot.”
This problem should be of particular concern to attorneys, because an astounding number of legal footnotes relying on web addresses now rely on invalid addresses, a problem that includes footnote references in SCOTUS opinions.
The sheer petabyte volume of Internet information makes the archiving problem a Sisyphean task. There are, however, some constructive efforts to ameliorate the problem.
There is, of course, the famous internet archive “Wayback Machine,” a valuable Internet resource for people searching for old information on the Internet. “Wayback Machine” alludes to Mr. Peabody and Sherman’s fictional “WABAC Machine”, allowing time travel through Peabody’s Improbable History, a feature of the Rocky and Bullwinkle show.
There is also a nifty patch, currently in Beta development phase, for the legal footnote problem. Perma.cc has been developed by the Harvard Library Innovation Lab as a way to create a permanent link (“permalink”) for legal footnotes. Perma.cc is powered by various libraries, and now used by the Michigan Supreme Court, as well as the Harvard Law Review. A Perma.cc account allows you to “create links to archived versions of web pages cited in your work.” Cool!
Even Perma.cc won’t guarantee that the permalink it creates to reference a source will last as long as a diamond. However, Perma.cc does claim that a permalink will last for two years, with the possibility of renewal, and that it may last longer for a person, such as a legal librarian, who is given “vesting rights.”
I note that most of the links on my blog are to newly filed California appellate opinions. Those links become stale after a few months. However, if the case is of lasting interest, you should be able to find it on LexisNexis, on Westlaw, or on Google Scholar with the case information provided in my post.
HAT TIP to Deborah Tint, librarian, artist, and Wonder Woman fan, who pointed me to Jill Lepore’s article. Professor Lepore is also the author of the wonderful new book, The Secret History of Wonder Woman.
QUERY: How long will the links on this page last?
Arbitration, Employment, Public Policy, Standard Of Review: Cal Supreme Court Rules Arbitrator May Have Erred About Employee’s Unwaivable Statutory Rights, But Valid Alternative Ground Existed For Dismissing Employee
California Supreme Court Leaves Employer’s “Honest Belief Defense” Unsettled.
This case fits under the rubric “no harm, no foul.”
Plaintiff Richey sued his employer AutoNation, Inc., for terminating his employment after he went out on sick leave, thereby violating his right to reinstatement under the California Family Rights Act (CFRA). While on sick leave, Mr. Richey worked to start up a restaurant, in violation of his employer’s policy that employees must not seek outside employment.
The arbitrator rejected Richey’s claims, concluding the employer could terminate Mr. Richey if it had an “an ‘honest’ belief that he is abusing his medical leave and/or is not telling the company the truth about his outside employment.” The trial court confirmed the award. The Court of Appeal reversed, concluding the arbitrator violated plaintiff’s right to reinstatement by applying an “honest belief” defense of the employer to the employee’s claim, thereby eliminating the employee’s unwaivable statutory right to reinstatement. The employer appealed. Richey v. AutoNation, Inc., S207536 (Cal. S. Ct. Jan. 29, 2015) (Chin, J., author).
In fact, “[a]rbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy.” And the interesting question in this case is whether the arbitrator exceeded his powers by adopting the employer’s “honest belief” defense that it can terminate an employee based on a reasonable belief the employee is violating company policy while on sick leave under the California Family Rights Act or its federal counterpart.
The Court acknowledges this is “an unsettled question of law.” Unsettled it remains, for the Court concluded that the question need not be resolved here, because the “arbitrator found plaintiff’s firing was based on a clear violation of company policy – a legally sound basis for upholding the arbitrator’s award . . . “As for the employee’s argument that the company policy “forbidding outside employment in this context is an illegal restraint on his CFRA leave”, that had been forfeited by a failure to raise it in the trial court.
An interesting case for the narrow issue it resolves, as well as for the important issues it leaves unresolved.