Arbitration/Nonsignatories/Equitable Estoppel: Ninth Circuit Puts Brakes On Toyota’s Attempt To Compel Prius Plaintiffs To Arbitrate Their Claims
District Court Could Decide Whether Nonsignatory Could Compel Arbitration
Toyota has been enmeshed in arbitration concerning the ABS braking system of its 2010 Prius. In Kramer v. Toyota Motor Corporation, et al., Case No. 12-55050 (9th Cir. January 1, 2013) (Quist, D. J., author 3-0) (published), owners of 2010 Priuses, parties to arbitration agreements with Toyota dealerships, were able to fend off a motion to compel arbitration by Toyota Motor Corporation and Toyota Motor Sales, U.S.A., Inc. (Toyota), nonsignatories to the arbitration agreement.
The first issue addressed in Kramer was whether the district court or the arbitrator had authority to decide if Toyota, a nonsignatory, could compel arbitration. This is typically a “threshold issue” determined by the courts, unless the arbitration clause explicitly and clearly delegates the authority to the arbitrator. Here, the arbitration clause provided that it “applies to any claim or dispute about whether a claim or dispute should be determined by arbitration.” Okay, that may work to delegate the authority to decide the issue of arbitrability as to signatories. But as to nonsignatories, “[g]iven the absence of clear and unmistakable evidence that Plaintiffs agreed to arbitrate arbitrability with nonsignatories, the district court had the authority to decide whether the instant dispute is arbitrable.”
Second, Kramer includes a detailed analysis of whether Plaintiffs were “equitably estopped from avoiding arbitration.” To determine whether Toyota, a nonsignatory, could invoke equitable estoppel and require arbitration under the Federal Arbitration Act, the Court looked to California state contract law. In particular, the Court drew on the test in Goldman v. KPMG LLP, 173 Cal.App.4th 209 (2009), whether the claims that the nonsignatory sought to arbitrate were “intimately founded in and intertwined with the underlying contract obligations.” Id. at 221. Without getting deep in the weeds, let’s just say that the Court did not find the Prius owners’ claims against Toyota sufficiently intertwined with the underlying contract obligations between the Prius owners and the dealerships to require arbitration of the claims against the nonsignatories.
The panel affirmed the district court’s order denying Toyota’s motion to compel arbitration.
Blawg Bonus: Theodore J. Boutrous Jr., one of Toyota’s attorneys, was the lead attorney for Wal-Mart in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), the case resulting in the decertification of a huge class of Wal-Mart female employees.
Arbitration/Consumers/Fees: Sorry, Wrong Number – Court of Appeal Rejects Cingular Wireless Customer’s Claim That Fees Incurred Successfully Opposing Arbitration Before Concepcion Was Decided Amounted To Damages
Concepcion Looms Large, As Court Summons “Large Animal” and “Tanker of Ink”Images For The Case — And Its Wake
The issue in Selby v. Cingular Wireless LLC, Case No. G045769 (4th Dist. Div. 3 January 29, 2013) (Bedsworth, J., author 3-0) (unpublished), was whether the customer of a cell phone carrier could state damage under the California Legal Remedies Act (CLRA) because she had incurred legal fees successfully opposing Cingular’s motion to compel arbitration back in 2005. Unless the plaintiff suffers some “damage” from enforcement of a contract provision alleged to violate the CRLA, the plaintiff lacks standing to sue under the CRLA. Meyer v. Sprint Spectrum L.P., 45 Cal.4th 634 (2009).
Unfortunately for the plaintiff, none of the contractual provisions she claimed violated the CLRA had ever been enforced against her (with one exception), and therefore under Meyer, she could not state a claim for damages as to those claims. The one exception was that back in 2005, she had successfully opposed Cingular’s motion to compel arbitration, thereby incurring fees — arguably “transaction costs” constituting damages.
As to the motion to compel arbitration, however, AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) has changed the legal landscape. In the colorful language of Justice Bedsworth, Concepcion is “so significant a tanker of ink has been spilled about it in less than two years after it was handed down . . . . Concepcion is the large animal in this room.”
Tanker of oil. Public domain work of sailor or employee of U.S. Navy. Wikimedia Commons.
Concepcion – a case involving the very same defendant, Cingular (called AT&T in the opinion) – held that the Federal Arbitration Act made arbitration agreements valid and enforceable, save “upon such grounds as exist in law or in equity for the revocation of a contract.” The most common exception under the “savings clause” is unconscionability of the contract. In Selby, however, the Court believed that it would be “a perversion of state law unconscionability doctrine” to apply the doctrine to a situation in which the consumer “picked the fight in the first place,” making no claims of “any damage” arising from the non-arbitration she attacked. Her costs, Justice Bedsworth wrote, “are the legal equivalent of a self-inflicted wound, and cannot be regarded as recoverable transaction costs.” Selby’s claims based on Cingular’s enforcement of its arbitration right, covered by Concepcion and the FAA, lacked merit.
Judgment affirmed.
Margate Elephant, Margate City, Atlantic County, N.J. U.S. Government photo. Library of Congress.
Arbitration/Public Policy/Standard of Review: Licensing Requirement for Contractors Constitutes Explicit Legislative Expression of Public Policy, That If Not Enforced By Arbitrator, Constitutes Grounds for Judicial Review
Trial Court Must Conduct De Novo Review To Determine Whether Licensing Statute Requires Disgorgement of Compensation By Unlicensed Contractor
Our next case addresses an important exception to the general rule that an arbitrator’s award cannot be vacated because of an error of fact or law: the “public policy exception.”
The setting is a condominium project that suffered numerous construction setbacks, took six years to complete, and received a Certificate of Occupancy on January 29, 2008 – bad timing. That left Plaintiff Ahdout and Defendant Hekmatjah, the members of a company formed to develop the project, arbitrating their dispute over the accounting for distributions. Ahdout was unhappy with the arbitrator’s award. He appealed from a judgment entered following the superior court’s denial of his petition to vacate the arbitration award and from the court’s order confirming the award. Ahdout v. Hekmatjah, Case No. B236764 (2nd Dist. Div. 4 January 25, 2013) (Willhite, J., author) (published).
The fly in the ointment was Bus. & Prof. Code section 7031(b), permitting an action for disgorgement of compensation from an unlicensed contractor. Both the person who provides construction services himself and one who does so through others qualifies as a contractor. Ahdout claimed that Hekmatjah had provided construction services through an unlicensed general contractor. Ahdout’s and Hekmatjah’s agreement for distribution of profits provided that Hekmatjah’s capital account would be credited more than Ahdout’s account for construction costs. However, Ahdout opposed such a credit, based on Hekmatjah’s involvement in the alleged use of an unlicensed contractor.
Hekmatjah’s argument was simple: even if the arbitrator’s decision contained errors of fact or law, the trial court properly deferred to the trial court. Though Hekmatjah correctly stated the general rule, there is an important “public policy exception,” and that was the hook upon which the Court of Appeal hung its opinion:
“We find that Ahdout’s claims under section 7031 fall within the ‘public policy’ exception to the general prohibition of judicial review of arbitration awards, because 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor. Thus, the trial court erred in deferring to the arbitrator’s finding that section 7031 does not apply. We remand the matter to the trial court to conduct a de novo review.”
The Court rejected Ahdout’s other argument that the arbitrator exceeded his powers by enforcing an illegal contract, because the illegality in the instant case did not infect the entire contract.
Blog Bonus: The arbitral forum in this case was a “Bais Din” or “Beth Din” (“house of judgment”), a Jewish rabbinical court.
Arbitration/Construction of Agreements: Fourth District, Division 2 Concludes Subcontract Arbitration Clause Does Not Permit Contractor to Compel Arbitration of Payment Dispute
Result Here Depends Entirely On Contract Construction Of Prime And Subcontracts
Our next case is entitled American Water Jetting, Inc., Plaintiff and Respondent, v. Highland Construction, Inc. et al., Defendants and Appellants, Case No. E054004 (Fourth Dist. Div. 2 January 25, 2013) (McKinster, J.) (unpublished). I don’t usually restate the full caption of a case. Here, however, I did so, because I find it curious that the Court of Appeal states: “The trial court denied the motion to compel arbitration, and AWJ filed a timely notice of appeal.” Why would the respondent, AWJ, file a timely notice of appeal, after successfully defeating Highland’s motion to compel arbitration in the trial court? Whatever. Let’s move on.
This case is filled with red herrings.
Red herrings. Creative Commons Attribution 2.0 Generic license. misocrazy, author.
AWJ, a subcontractor retained by Highland, performed some of the work under a contract between Highland and Caltrans. Evidently, Caltrans paid Highland for AWJ’s work, but AWJ did not get fully paid by Highland under the subcontract. So AWJ sued. Highland moved to compel arbitration, and AWJ successfully opposed the motion, contending that its subcontract with Highland gave it an option to arbitrate or litigate, and alternatively, that Highland had waived arbitration. Let’s just say an appeal followed.
AWJ relied on a provision in the subcontract allowing it to sue or pursue arbitration in the event that Caltrans rejected AWJ’s claims for additional payment. But the Court of Appeal rejected that argument. Here, the dispute was between AWJ and Highland, not between AWJ and Caltrans, and the provision relied upon by AWJ “does not answer the question raised in this case, i.e., whether Highland can compel arbitration of AWJ’s claim that Highland breached the contract.”
Next, the Court of Appeal turned to Highland’s argument that the subcontract incorporated in its entirety the prime contract between Highland and Caltrans, and the prime contract required arbitration. But the Court of Appeal rejected the wholesale incorporation argument, because the incorporation language was expressly limited to “work to be performed by the Subcontractor,” and did not reference provisions of the prime contract pertaining to payment or to arbitration of disputes – the issues involved here.
In the end, the resulting contractual confusion did not help respondent Highland, because an agreement to arbitrate must be “clear and unmistakable.” Badie v. Bank of America, 67 Cal.App.4th 779, 894 (1998).
Because the conclusion that the subcontract did not permit Highland to compel arbitration of a payment dispute hinged on contract interpretation, the Court did not have to address respondent AWJ’s waiver argument. I know, I know, the Court says AWJ appealed. In any case, because the order below was affirmed, AWJ, the respondent, won its timely appeal. Got that?
Arbitration/Homeowners: California Supreme Court’s Pinnacle Museum Tower Association Case Disposes Of Enforceability of Arbitration Provision In CC&Rs In Verano Condominium Homeowners Association Case
Based On Holding of Pinnacle, Fourth District, Division 1 Reverses Order Of The Superior Court That Had Denied Developer’s Request To Arbitrate
I posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, a 4th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in recorded covenants, conditions and restrictions (CC&Rs) was not enforceable between the homeowners association and the developer, or between the developer and a class of owners on whose behalf the HOA sued. On August 16, 2012, I posted about Pinnacle Museum Tower Assn. v. Pinnacle Market Development (UASA), LLC, 55 Cal.4th 223 (2012), in which the California Supreme Court held arbitration clauses in CC&Rs are enforceable against an HOA, notwithstanding the fact that the HOA did not come into existence until after the CC&ARs were recorded, and the HOA’s consent to arbitrate occurred by operation of law. I asked: “Will today’s Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?”
The answer to my rhetorical questions is: Yes. On January 25, 2013,the Court of Appeal held in Verano that the arbitration provisions in Verano “constitute a valid agreement to arbitrate within the scope of the FAA [Federal Arbitration Act],” thereby reversing the trial court’s order. Verano Condominium Homeowners Association v. La Cima Development, LLC, Case No. D058217 (4th Dist. Div. 1 January 25, 2013) (unpublished) (Benke, Acting P.J., author).
Arbitration/Disclosures: California Arbitration Act And Ethics Standards Require Arbitrator To Disclose A Lawyer In the Arbitration Is A Member Of The Dispute Provider Resolution Organization
California Code of Civ. Proc. Section 1281.9 Enumerates Specific Instances Where Disclosure Is Always Compelled
Plaintiff appealed an adverse judgment affirming a medical malpractice decision in favor of defendant doctor, arguing arbitrator failed to make a necessary disclosure. The neutral arbitrator and defendant’s counsel failed to disclose that defendant’s counsel had, subsequent to the commencement of arbitration, become affiliated with the firm providing the arbitrator. Gray v. Chiu, Case No. B238404 (2nd Dist. Div. 6 January 22, 2012) (Perren, J., author) (for publication).
The Court of Appeal reversed the judgment confirming the award, and directed the trial court to vacate the arbitration award. The Court held that the California Arbitration Act, and the California Ethics Standards for Neutral Arbitrators in Contractual Arbitrations, require:
“(1) a neutral arbitrator to disclose that a lawyer in the arbitration is a member of the administering ‘dispute provider resolution organization’ (DRPO); and (2) section 1286.2, subdivision (a)(6) compels a trial court to vacate the arbitration award if the arbitrator fails to disclose that information.”
It will not do to argue, as did defendant/respondent, that the arbitrator had no duty to disclose the relationship, “because there was no evidence of any ‘significant . . . financial or professional relationship or affiliation’ between the neutral arbitrator and a lawyer in the arbitration.” The reason is that Code of Civ. Proc. section 1281.9 “enumerates specific instances where disclosure is always compelled.” (emphasis added). Thus, for the specific instances enumerated by section 1281.9, there is a bright-line test.
One of those specific instances enumerated, 1281.9(a)(2), requires disclosures of “[a]ny matters required to be disclosed by the ethics standards for neutral arbitrators adopted by the Judicial Council pursuant to this chapter” – a provision encompassing the lawyer’s membership in the DRPO, under Ethics Standard 8(b)(1)(A).
Disclosure: Daikoku, one of the Seven Gods of Fortune, descends from picture on a wall to peek. Suzuki Harunobo, 1767-1768. Library of Congress.