Sixth District Affirms Trial Court’s Order Denying Cisco’s Motion To Compel Arbitration, Based On Independent Review That Backflip’s Claims Are Not Covered By Arbitration Clause
Strong Policy In Favor Of Arbitration Yields To Court’s Independent Review Of What Parties Intended By Their Contractual Language.
In Backflip Software, Inc. v. Cisco Systems, Inc., No. H040382 (6th Dist. Dec. 3, 2014) (Bamattre-Manoukian, Elia, Mihara) (unpublished), the Court concludes, based on its independent review of contractual language, the trial court did not err in denying Cisco’s petition to compel arbitration and stay proceedings.
Backflip and Cisco entered into a software license and escrow agreement, whereby Backflip’s software was to be released to Cisco upon the occurrence of certain events, one of which was Backflip’s discontinuing its software maintenance/support. If the release event occurred, Cisco could send a notice to escrow, Backflip could send a counter-notice if it disagreed, and the parties could arbitrate the dispute.
After giving notice Backflip would stop responding to maintenance requests from Cisco, a former Backflip CEO “authorized” release of the software from escrow to Cisco. Escrow closed, and the software was released to Cisco. Backflip, however, contended Cisco should have known action by Backflip’s former CEO was not authorized, resulting in Cisco’s misappropriation of the software.
The Court of Appeal agreed with the trial court and with Backflip that the scope of the parties’ arbitration agreement, as set forth in the license and escrow agreements, only “encompassed a dispute regarding the release of Backflip’s escrow materials while those materials remained in the possession of the escrow agent.” The parties contemplated arbitration would occur before the software was released from escrow. Thus, the arbitration clause became irrelevant here, once the software was released.
The Court distinguishes cases in which the arbitration requirement continues, as cases where the arbitration clause was broader than here or explicitly survives termination of an agreement.
Arbitration/Fees/Vacatur: Arbitrator Who Applies Statutory Definition of “Prevailing Party” To Award Fees Rather Than Contractual Definition Does Not Exceed His Powers
Court Does Not Decide Whether Contractual Provision Limiting Arbitrator’s Power To Apply Definition Of “Prevailing Party” Other Than Found In Agreement Would Be Unenforceable As Violative Of Public Policy.
Does an arbitrator who applies the statutory definition of “prevailing party” found in Civil Code Section 1717(b)(1), rather than than the definition the parties contractually agreed to, violate his powers? No – at least not when the issue of attorney’s fees is submitted to the arbitrator, and there is no express limitation on the powers of the arbitrator. Safari Associates v. Superior Court (Alan Tarlov, real party interest), Case No. D065684 (4/1 Dec. 2, 2014) (Aaron, Huffman, Irion).
Under section 1717, the prevailing party is the one “who recovered a greater relief in the action on the contract.” However, in the contractual dispute between Safari and Tarlov, the arbitration clause provided that “the term ‘prevailing party’ means the party . . . that obtains substantially the relief sought in the arbitration.” The different definitions of “prevailing party” proved to be important here, because Safari argued that Tarlov was required to pay, at a minimum, $768,228 to reimburse Safari for Tarlov’s personal expenses that Safari paid, but the arbitrator only awarded $152,611.48 in damages to Safari, plus $211,620 in attorney’s fees and $37,224.05 in costs.
Thus, the arbitration award set the stage for Safari to move to confirm the award in the trial court, and for Tarlov to argue that the award needed to be modified or corrected as to fees, because he had “substantially” received the relief he sought in the arbitration by beating back much of Safari’s claim. The trial judge sided with Tarlov, agreeing that the arbitrator had exceeded his powers by failing to apply the contractual definition of “prevailing party.”
The Court of Appeal, however, disagreed, and granted Safari’s petition for writ of mandate. The parties had submitted the issue of attorney’s fees and briefed the issue of “prevailing party” to the arbitrator. Quoting Moore v. First Bank of San Luis Obispo, 22 Cal.4th 782, 787 (2000), but changing the names of the parties, the Court of Appeal explained: “Having submitted the fees issue to arbitration, [Tarlov] cannot maintain the arbitrator [] exceeded [its] powers, within the meaning of [Code of Civil Procedure] section 1286.6, subdivision (b), by deciding it, even if [the arbitrator] decided it incorrectly.”
The Court further observed that it was aware of “no authority that would support the conclusion that an arbitrator acts in excess of his powers in refusing to apply a provision in the parties’ agreement that the arbitrator determines is avoid as violative of public policy.”
COMMENT: Could one draft an agreement that would limit the arbitrator’s power to apply a definition of prevailing party other than that found in the arbitration agreement? One could define “prevailing party”, as did the parties in Safari, and then add that the arbitrator shall apply that definition, and that modifying, changing, or excusing that provision is outside the powers of the arbitrator. In Safari, however, the parties merely defined “prevailing party”, but did not expressly state that application of a different definition would exceed the powers of the arbitrator. Similarly, the Safari panel distinguished Gueyffier v. Ann Summers, Ltd., 43 Cal.4th 1179 (2008) on the narrow ground that the agreement in Gueyffier “explicitly precluded the arbitrator from modifying or changing” a provision.
If the parties in Safari had intended to “attempt to limit the arbitrator’s power to apply a definition of prevailing party other than the definition contained in the Agreement”, would language evincing such an intent have been enforceable? The Safari Court declines to decide that question. (Safari, footnote 5).
NOTE: This post also appears on the California Attorney’s Fees blog today.
California Supreme Court Holds That Arbitrator May Rule On Pitchess Discovery Motion For Officer Personnel Records
Justice Werdegar Concurs and Dissents.
The California Supreme Court held today, “that when hearing an administrative appeal from discipline imposed on a correctional officer, an arbitrator may rule upon a discovery motion for officer personnel records, commonly referred to as a Pitchess motion.” Riverside County Sheriff’s Department v. Stiglitz, S206350 (Dec. 1, 2014) (Cordigan writing for the majority).
The context in which the issue arose was a disciplinary proceeding involving a Riverside Sheriff’s Deputy Kristy Drinkwater, fired for allegedly falsifying her payroll forms. Deputy Drinkwater urged a disparate treatment defense, seeking discovery of other personnel investigations. The arbitrator denied the Pitchess motion without prejudice, but after further briefing did order production of 11 officers’ personnel records for in camera review.
The Sheriff’s Department sought a writ of administrative mandamus, successfully arguing to the superior court that only judicial officers could grant Pitchess motions. However, Drinkwater and intervener Sheriffs’ Association sought review, and the Court of Appeal reversed. The Supreme Court has now affirmed the Court of Appeal, thereby allowing the arbitrator to do an in camera review and rule on the Pitchess motion.
Justice Werdegar agreed with the majority that Pitchess discovery can be sought in administrative proceedings. She disagreed, however, that every nonjudicial presiding officer may review privileged and confidential materials in the context of a Pitchess motion, arguing only judicial officers should be permitted in camera review of such materials.
Arbitration/Deadlines/Correction: Arbitrator Did Not Exceed Powers By Awarding Post-Termination Royalties After License Agreement Ended And Appellant Missed Deadline To Seek Correction Of Award
Post-Termination Of License Royalties Were Part Of $128.3M Arbitration Award.
In Amkor Technology, Inc. v. Tessera, Inc., A139596 (1/3 Nov. 25, 2014) (Pollak, Siggins, Jenkins) (unpublished), the Court of Appeal affirmed part of a larger arbitration award for $128.3M.
Procedural hurdle.
Appellant Amkor stumbled on a procedural hurdle: Its petition to correct the award was untimely. A petition to correct an award must be served and filed not later than 100 days after the date of the service of a signed copy. Cal. Code Civ. Proc., section 1288. Amkor’s problem was that it appealed 236 days after “Partial Award No. 3” – the award that it was attacking. Amkor argued a new 100-day period ran when the arbitration panel issued an addendum to the “partial award.” Amkor’s petition, however, did not seek to correct the addendum, which addendum was not even attached to the petition. The critical issue, concerning damages, had been decided in the earlier Partial Award No. 3, and subsequent briefing and the addendum merely confirmed the award.
COMMENT: When in doubt, appeal an original “partial award”, and a later award. Better safe than sorry. And “superfluity does not vitiate.” (Maxim of Equity).
Substantive hurdle.
Amkor argued the arbitration panel exceeded its powers by awarding royalties for the continued use of a patent after Tessera terminated the license agreement with its licensee Amkor. (There was no question Tessera could recover royalties for the period after Amkor breached and before Tessera terminated the license). Amkor further argued another lawsuit for patent infringement would be necessary to recover damages after the license agreement terminated, because once Tessera elected to terminate the license agreement upon Amkor’s breach, the obligation to pay future royalties ceased.
Relying on broad language in the arbitration clause, and the equitable powers of the arbitrator, the Court of Appeal concluded the license agreement contemplated the licensee would not continue to use the patented technology after the license expired and the arbitrator did have the authority to award royalties for the “improper use of patented technology.” Thus, the remedy was authorized by California law, and if there was an error of law, it was not a basis for holding the arbitration panel exceeded its authority.
COMMENT: At the end of the opinion, the Court states: “The court did not select a remedy not authorized by California law. Whether the court made an error of law in awarding royalties in this particular case is precisely the type of analysis prohibited under section 1286.6.” (italics added). Query whether the Court of Appeal meant to refer to the “arbitrator” rather than to the “court”? Arbitrators do not exceed their powers, “merely by erroneously deciding a contested issue of law or fact.” Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362, 366 (1994).
Scope Of Arbitration: Dispute Was Outside Scope Of Arbitration Provision Relating To Conflicts Of Interest, As Court Of Appeal Refuses To “Handcuff” Parties To Position Taken In Discovery
Plaintiffs Manage To Distance Themselves From Discovery Response, Allowing Them To Avoid Having To Arbitrate Their Malpractice Claims.
By a deft interrogatory, Defendant tried to corner Plaintiffs into having to arbitrate their malpractice claims in LADT, LLC v. Greenberg Traurig, LLP, B246649 (2/1 Nov. 25, 2014) (Miller, Rothschild, Johnson) (unpublished).
The gravamen of Plaintiffs’ claim was that Greenberg Traurig drafted real estate documents “in a sloppy, ambiguous, inconsistent, incomprehensible manner that led to costly litigation and multimillion-dollar judgments against some of the plaintiffs.”
Greenberg, Traurig zinged Plaintiffs with an interrogatory, asking if they contended the law firm “had an unwaived conflict of interest in its representation”. Plaintiffs swallowed the bait and answered, “Yes.” Plaintiffs’ answer set them up for Greenberg Traurig’s motion to compel arbitration, because Plaintiffs had signed a Conflict Waiver and Arbitration Letter including an arbitration clause. The trial court, however, denied the motion to compel, and the law firm appealed.
Affirmed.
Why? The arbitration provision only applied to claims arising from or relating to the Conflict Disclosure and Waiver Agreement. Even though Plaintiffs answered the interrogatory by contending that there was an unwaivable conflict, Plaintiffs were able to nimbly distance themselves from their discovery response, “saying in essence that, even though such a conflict existed, they were not pursuing any claim based on any conflict of interest.”
Put another way, the gravamen of Plaintiffs’ claim – malpractice – was simply outside the scope of the narrow arbitration agreement once Plaintiffs clarified that they were not pursuing a claim based on conflict of interest.