Arbitration, Attorney’s Fees: Voluntary Dismissal Of Court Action Comes Too Late To Avoid Attorney’s Fee Exposure Once Evidence Has Already Been Presented In Dual-Track Arbitration
When Does Trial Commence In “Dual Track” Arbitration/Litigation?
The Danger Signal. Currier & Ives. 1884. Library of Congress.
Parties routinely avoid exposure to attorneys fees under Cal. Civ. Code section 1717 by voluntarily dismissing their action before “the actual commencement of trial”. The meaning of “the actual commencement of trial” presented a novel question where “dual track” arbitration/litigation occurred — the facts presented in Mesa Shopping Center-East, LLC v. O Hill, Case No. G049205 (4/3 Dec. 23, 2014) (Ikola, O’Leary, Aronson) (published).
Parties are permitted to follow a “two-forum approach to litigation (i.e., court for provisional remedies, arbitration for the merits) . . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.” And that’s exactly what occurred here, where two sets of real estate investors disputed spending and management issues. Plaintiffs filed a court action seeking – unsuccessfully – to obtain preliminary injunctive relief – and plaintiffs and defendants agreed to arbitrate the merits. After an unfavorable interim award analyzing the merits was issued by the Arbitrator, plaintiffs “voluntarily” dismissed their court action, hoping to avoid attorney’s fee exposure. The trial judge agreed the voluntary dismissal of the court action, prior to commencement of trial, meant attorney’s fees could not be awarded against plaintiffs in the court action (as contrasted to the arbitration, in which plaintiffs clearly lost).
Closely scrutinizing the meaning of “commencement of trial,” the Court of Appeal disagreed with the trial court, and reversed. Essentially, the Court of Appeal refused to view the court action and the arbitration as two entirely separate proceedings: “it is self-evident from the record that this action and the arbitration were interdependent, featuring the same parties fighting over the same causes of action.” The Court concluded, “The parties commenced arbitration on the merits . . . when they presented evidence and argument before the arbitrator. This qualified as the ‘commencement of trial’ referenced in section 581, subdivisions (b)(1) and (c), thereby cutting of the Mesa Investors’ unilateral right to dismiss this action without prejudice."
COMMENT: The dual forum scenario deserves a caution sign.
Proceed with caution, because if the litigation train is running out of steam, you cannot depend on a “voluntary” dismissal of the court action prior to a court trial to avoid exposure to attorney’s fees once a dual-track arbitration hearing has commenced. Trial may have actually commenced – in arbitration!
Mesa Shopping Center-East, LLC v. O Hill is also the subject of a December 28, 2014 post in Mike and Marc’s California Attorney’s Fees blog.
Mediation, Confidentiality: Court of Appeal Holds Mediation Privilege Does Not Protect Confidentiality Of Financial Disclosure Statements Mandated By Family Code
Court Refuses To Carve Out Judicial Exception To Mediation Privilege While Explaining Why Privilege Simply Didn’t Apply Here.
Few are the cases in which courts have pierced the mediation confidentiality privilege, because the courts have said the privilege is almost absolute, refusing to craft judicial exceptions to the statutory privilege, Evid. Code sections 1115 et seq. Thus, the law is relatively well-defined in this area. Gilda Lappe v. Superior Court (Murray Lappe Real Party In Interest), Case No. B255704 (2/3 Dec. 19, 2014) (Kitching, Klein, Edmon) offers a rare counter-example of a case in which the mediation privilege is not enforced.
In a divorce proceeding, Gilda Lappe relinquished for $10M her community property interest in shares owned by her husband Murray Lappe, a successful physician/businessman. Some five months after judgment was entered in the family law case, Dr. Lappe sold his interest for $75M pre-tax dollars. Ms. Lappe sought to reopen the judgment and obtain through discovery a financial disclosure statement her husband had produced during mediation. Dr. Lappe’s attorneys took the position that the disclosure statement was subject to the mediation privilege; indeed, a marital settlement provided the Declarations of Disclosure were subject to the privilege and were confidential.
The superior court judge assigned the discovery dispute to a referee who concluded the Declaration of Disclosure was not subject to mediation confidentiality because the document had “independent legal significance” and the “public policy” declared under the Family Code favoring disclosure to ensure fair and equal property divisions trumped mediation confidentiality. However, the superior court judge rejected the referee’s recommendation, instead concluding the public policy argument provided insufficient reason to carve out a judicial exception to mediation confidentiality.
The threshold question, said the Court of Appeal, is: “[D]o the mediation confidentiality statutes apply in the first instance to statutorily mandated disclosures that must be made regardless of whether the parties participate in mediation? We conclude the answer to this question is ‘no.’” (Fam. Code, section 2103 mandates the exchange of of preliminary and final disclosure statements, except under limited circumstances prescribed by statute (Fam. Code, sections 2105 and 2110)).
The Court hurried to explain that it was not agreeing with the referee’s conclusion that a declaration of disclosure was not subject to mediation confidentiality because of “public policy” and the Family Code favoring disclosure. Rather, the Court explained that it was simply recognizing “that the confidentiality statutes do not apply in the first instance, because these statutorily mandated declarations do not fall into any category delimited by Evidence Code section 1119.” In other words, mandated financial disclosures must be made whether or not mediation occurs, and making the disclosures in mediation will not immunize them from discovery.
Having concluded that the disclosures were not immunized by mediation confidentiality, the Court still needed to explain why the settlement agreement, by which the parties agreed that the documents were confidential and subject to section 1119 confidentiality, failed to be an effective contractual waiver of the mandatory Family Code disclosure requirement. Here, the Court relied on Civil Code, section 3513: “Any one may waive the advantage of a law
intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” By way of explanation, the Court simply said, “So it is here,” adding that waiver was only permitted under section Family Code, section 2105.
COMMENT: Saying that the Family Code statutory requirement is for the public benefit, rather than for private benefit, begs the question. Why is it for a public benefit that cannot be waived, rather than for a private benefit that could be waived? The fact that the Family Law Code expressly limits waiver supports the “public benefit” argument. However, I suspect that the same reasons waiver is limited under the Family Code may be the same public policy reasons the referee gave for “overriding” mediation confidentiality – namely, that the Family Code favors disclosure to ensure fair and equal property divisions. So even though the Court of Appeal expressly abjured reliance on “public policy”, perhaps public policy slipped in under the radar via reliance on Fam. Code, section 2105.
Arbitration, Public Policy: Fourth District, Division 3 Holds AT&T Mobility v. Concepcion Preemption Sweeps Away Broughton-Cruz Rule That Prohibited Arbitration Of UCL, FAL, And CLRA Injunctive Relief Claims Brought For The Public’s Benefit
But Iskanian’s Analysis Of PAGA Representative Action Waivers Remains Intact Under This Court’s Analysis.
The California Supreme Court developed the “Broughton-Cruz” rule, under which arbitration provisions are unenforceable as against public policy if they require arbitration of Unfair Competition Law, False Advertising Law, or Consumer Legal Remedies Act injunctive relief claims brought for the public’s benefit. Our local Court of Appeal in Santa Ana has now ruled: “The Broughton-Cruz rule falls prey to AT&T Mobility’s sweeping directive because it is a state-law rule that prohibits arbitration of UCL, FAL, and CLRA injunctive relief claims brought for the public’s benefit.” McGill v. Citibank, N.A., Case No. G049838 (4/3 Dec. 18, 2014) (Aronson, Rylaarsdam, Thompson) (published).
Going at the problem with a fine scalpel, the Court explains that the rule in Iskanian, which rejects a predispute waiver of representative PAGA action claims, is consistent with its holding in McGill v. Citibank, N.A. – and thus Iskanian remains intact, at least in the Fourth District, Division 3 (We note that some federal district courts have disagreed with Iskanian).
The Court explains the PAGA action “is fundamentally different than the injunctive relief action under the other statutes [UCL, FAL, or CLRA].” In the PAGA action, the plaintiff truly represents the interests of the state. The PAGA action is more like a qui tam action, with 75% of the civil penalties going to the Labor and Workforce Development Agency, and the remainder paid to the aggrieved employees. Because the role of the state is primary, with notice to the state being a condition for filing a PAGA action, the PAGA plaintiff acts as a “proxy or agent of the state’s labor law enforcement agencies.” The state is not a party to the arbitration agreement. “Iskanian concludes a PAGA action poses no obstacle to FAA purposes because the FAA only applies to private agreements between parties to arbitrate their dispute.”
For previous posts on the Broughton-Cruz rule, is our posts of March 7, 2012, December 16, 2012, April 12, 2013. We posted on the California Supreme Court’s ruling in Iskanian on June 23, 2014.
Arbitration, Appealability, Jurisdiction: Two-Fer: Courts Of Appeal Find Orders Unappealable In Disputes Raising Arbitration Issues
Wells Fargo Bank, N.A. v. The Best Service Co., Inc., Case No. B253861 (2/5 Dec. 17, 2014) (Turner, Mosk, Kriegler) (published).
In Wells Fargo Bank, N.A. v. The Best Service Co., Inc., the Court of Appeal dismissed defendant’s appeal of an order denying its motion to stay the action pending arbitration, because the stay motion was not accompanied by any motion or petition to compel arbitration or a pending arbitration. The order denying the bare stay motion was not an appealable order.
Judge v. Nijjar Realty, Inc., Case No. B248533 (2/7 Dec. 17, 2014) (Segal, Perluss, Zelon) (published).
Judge sued her employer in one lawsuit for employment-related and Labor Code causes of action (“individual/PAGA action”), and in another related lawsuit for similar causes of action on behalf of herself an other employees (“class action”).
The trial court granted defendants’ petitions to compel arbitration of plaintiff’s individual claims only, and stayed the two cases. The arbitrator then issued a “clause construction award”, concluding that the arbitration agreement permitted arbitration of class and representative claims. She labeled the award as “a partial final award on the construction of the arbitration clause.” Next, the court ruled that the arbitrator exceeded her powers by deciding the issue of whether the parties agreed to arbitrate class or representative claims, because the issue had been submitted to the court earlier for determination. (Confusion had arisen because in ruling earlier, the trial court seemed to be saying that these issues could be brought to the attention of the arbitrator).
The trial court’s order vacating the “clause construction award” was not a final arbitration award appealable under section 1294(c). The appeal from the order vacating the clause construction award in the individual/PAGA action was therefore dismissed.
COMMENT: Why wasn’t the trial court’s order vacating the “clause construction award” appealable under the “death knell doctrine”? The “death knell doctrine only applies ‘when it is unlikely the case will proceed as an individual action.’” Szetela v. Discover Bank, 97 Cal.App.4th 1094, 1098 (2002). In Judge, however, the Court of Appeal reasoned that the death knell doctrine did not apply, because “[u]nlike an order dismissing class claims . . . the clause construction award allows class claims to proceed.” We surmise that this is a case in which there was no class action waiver in the employee’s contract.
Arbitration, Employment, Unconscionability Severability: Substantively Unconscionable Arbitration Provision Is Saved By Severability Clause
Court of Appeal Only Found Fee-Shifting Provision To Be Substantively Unconscionable.
The trial judge, the Hon. Mary Ann Murphy, found the employer-employee arbitration Agreements to be unconscionable and unenforceable because JAMS rules were not referenced, a fee-shifting provision permitted an award of fees to the prevailing defendant on employee’s FEHA claims without factual findings required under FEHA, and the discovery provisions in the JAMS arbitration rules provided inadequate discovery. The court declined to reform the agreements, finding they were permeated by unconscionability. Employer appealed. Sandoval v. Medway Plastics Corporation, B252412 (2/4 Dec. 17, 2014) (Manella, Willhite, Collins) (unpublished).
Reversed. The only provision the Court of Appeal found to be substantively unconscionable was the fee-shifting provision. “After severing that provision,” wrote Justice Manella, “we conclude the Agreements are enforceable.”
COMMENTS: Regarding procedural unconscionability, which the Court of Appeal found to be “more than minimal” due to “the high disparity in bargaining power”, the employer did a smart thing: both respondents had signed a Spanish version of the Agreement, and both respondents were Spanish speaking. If the Spanish speaking employees had only been presented with English language arbitration clauses, the procedural unconscionability would have been higher, perhaps tipping the balance. Drip, drip, drip. Just how much unconscionability must there be to permeate an agreement?
The severability provision, which saved the Agreements from substantively unconscionable fee-shifting, provided: “If any court of competent jurisdiction finds any part of this Arbitration Agreement is illegal, invalid or unenforceable, such a finding will not affect the legality, validity or enforceability of the remaining parts of the Agreement, and the illegal, invalid or unenforceable part will be stricken from the agreement.” A very useful provision here!
Arbitration/CCP 1281.2/Enforceability: Opponent’s Filing Of Lawsuit Constitutes Refusal To Arbitrate
Fourth District, Division 3 Publishes To Distinguish Mansouri v. Superior Court.
California Code of Civil Procedure, section 1281.2 requires that a party seeking to compel arbitration allege, “the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy.” The question in Hyundai Amco America, Inc. v. S3H, Inc., Case No. G049204 (4/3 Dec. 17, 2014) (Fybel, O’Leary, Ikola) (published) was whether contractor S3H was required to formally demand arbitration from Hyundai Amco once Hyundai Amco filed a complaint. The answer: No. Filing the complaint “invoked the protections and procedures of the court system, and thus was an effective denial of arbitration.”
The Court published to distinguish Mansouri v. Superior Court, 181 Cal.App.4th 633 (2010). In Mansouri, the arbitration demand did not match the terms of the parties’ arbitration agreement, whereas Hyundai Amco’s lawsuit “clearly related to the parties’ performance under the agreement, thus suffic[ing] to show Hyundai Amco’s refusal to arbitrate the controversy.”
LITIGATION TIP: In run-of-the-mill cases, formally request an opponent to arbitrate before moving to compel arbitration.