Happy Holidays !
And best wishes to my readers for 2013
Ernst Haeckel. Ascidiae. Kunstformen der Natur (1904).
Review in The Wall Street Journal: Boilerplate
End of the Rule of Law, or Useful Legal Fiction?
Arbitration, like boilerplate, creates a private legal system that displaces the public one. Whereas the common law depends on the rule of law, and creates a system of precedent that is available to the public, an arbitration award is typically a private affair, and even a mistake of law or fact needn’t lead to the reversal of an arbitration award. The connection between boilerplate and arbitration is closer still, because often the agreement to arbitrate is an adhesive contract created by boilerplate-like provisions. Because arbitration is a subject of this blawg, a review of a new book on the unlovable subject of boilerplate in The Law Wall Street Journal resonated for me.
In the December 21, 2012 edition of The Wall Street Journal, Robert E. Nagel, professor of constitutional law at the University of Colorado, reviews Boilerplate (Princeton 2012), a new book by Prof. Margaret Jane Radin of the University of Michigan Law School. Prof. Nagel describes Boilerplate as “a sophisticated and thought-provoking treatment of the boilerplate contracts that everyone signs yet few read or understand.”
“Because the terms aren’t bargained over,” writes Prof. Nagel, summarizing arguments in Boilerplate, “it follows that they aren’t consented to in any traditional sense; there is no meeting of the minds between the parties.” The “moral basis” for using state power to enforce contracts is lacking in the case of boilerplate, because mutual agreement of the parties is the justification for using “the power of the state to enforce the transfer of one person’s property to another . . . “ But in the case of boilerplate, mutual agreement must be a legal fiction. Furthermore: “The party that constructs the boilerplate makes a kind of private legal system that displaces the public one.”
Prof. Nagel, however, suggests that the contractual treatment of boilerplate may be a useful legal fiction, and that “our bewilderingly complex political system exhibits many contradictions more alarming than the tension between boilerplate and the rule of law.” He asks rhetorically: “Can it be that real, bargained-for contracts remain an important practice and ideal because boilerplate removes so many transactions from the realm of law?”
As a first-year law student, I took Peggy Radin’s real property class at UCLA, and have fond memories of spending the first six weeks reading bewildering cases about foxes, hunters, possession, ownership, and opaque forms of action. All the best, Prof. Radin, and congratulations on the publication of Boilerplate.
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Arbitration/Employment/Enforceability/FAA/CCP 1281.8: Second District, Div. 1 Reverses Order Denying Motion To Compel Arbitration – Mutuality Of Employer/Employee Provisions Is Key
“In particular, we do not find unconscionable a provision in the arbitration agreement allowing either party to seek provisional remedies . . . “
For the practitioner, Baltazar v. Forever 21, Inc., Case No. B237173 (2nd Dist. Div. 1 Dec. 20, 2012) (Mallano, J.) (published), is worth reading because it provides employers and employees with an example of a “final and binding” arbitration provision that survives various challenges and passes muster with the Court of Appeal.
Maribel Baltazar sued her former employer, Forever 21, Inc., for racial and sexual harassment and other employment-related wrongs. Employer and two employees filed a motion to compel arbitration, which motion the employee opposed, arguing the arbitration agreement was unconscionable. The trial court denied defendants’ motion, and defendants appealed.
Agreeing that the “take it or leave it” employment contract was one of adhesion, the Court of Appeal nevertheless held that it was not substantively unconscionable.
Preliminarily, the Court of Appeal concluded that the agreement was governed by the California Arbitration Act, not the Federal Arbitration Act, because no evidence was offered that the employment or any pertinent transaction involved interstate commerce. This preliminary conclusion supported the Court’s analysis that carving out provisional equitable relief from the arbitration agreement was entirely permissible.
Because California Arbitration Act applied, Cal. Code of Civ. Proc. section 1281.8 necessarily applied to the agreement. And section 1281.8 allows either party to the arbitration provision to apply to the court for a provisional remedy in connection with an arbitrable controversy. (We note in passing that sometimes other contractual arbitration provisions include carve-outs for provisional relief. Seeking provisional relief from an arbitrator may be unwieldy, because it must be enforced quickly and through a court. For example, the standard California Association of Realtors contracts for the purchase and sale of real estate typically have ADR provisions requiring mediation and arbitration with a carve-out for provisional remedies, allowing recourse to the court).
The Court also rejected the employee’s argument that the carve-out for provisional remedies did not result in a lack of mutuality. Here, the carve-out did not exempt claims more likely to be brought only by the employer. For example, of the employee’s nine claims, virtually all could be a source of injunctive relief. Thus, while ‘[a]n arbitration agreement is substantively unconscionable if employees are required to submit their disputes to arbitration while the employer remains free to pursue its claims in any forum,” such was not the case here.
The employee also argued that a provision allowing for all necessary steps to be taken to protect trade secrets and proprietary and confidential information from public disclosure was unduly harsh and one-sided. One-sided, perhaps, but not unreasonable. After all, the provision was limited to protecting trade secret or similar provision, “consistent with the duties imposed by the Uniform Trade Secrets Act (Civ. Code, sections 3426-3426.11)”. Besides, “courts have upheld confidentiality and nondisclosure agreements of general application,” allowing the Court to invoke the maxim that “the greater contains the less.”
Concluding that the agreement to arbitrate was not unconscionable, the Court of appeal reversed the order denying arbitration, ordering the trial court on remand to enter a new order granting the motion to compel arbitration.
Mediation: Homeowners Get To Recover Fees Spent On Pre-Litigation Mediation from Homeowner Association
Interpretation of Civil Code section 1354(c) Leads to Result
In Grossman v. Park Fort Washington Association, Case No. F063125 (5th Dist. Dec. 19, 2012) (Franson, J.) (unpublished), the Court of Appeal held that the trial court correctly awarded fees for pre-litigation mediation to homeowners involved in a tussle with their homeowners association over construction of a backyard cabana and fireplace. How did the court get to that result?
Outdoor fireplace built by U.S. Forest Service. Russell Lee, photographer. 1942. Library of Congress.
Civil Code sections 1354(c) reads: “In an action to enforce the governing documents, the prevailing party shall be awarded the reasonable attorney’s fees and costs.” The homeowner’s association, which resisted paying attorney’s fees, argued that fees incurred in pre-litigation mediation are not incurred “in the action”, and hence, should not have to be paid.
Nope, said the Court of Appeal. “This text does not explicitly limit the recovery of attorney fees and costs to those items incurred in the lawsuit itself.” (italics in the original). Three things are important: (1) the existence of an action to enforce the governing documents; (2) a prevailing party; and (3) reasonable fees and costs. The Grossmans, who were plaintiffs and respondents, easily satisfied the first two conditions. As to the question of reasonableness, because the Legislature has required ADR, “a party acts reasonably when it spends money on attorney fees and costs during pre-litigation ADR.” Thus, the third condition was also satisfied by the Grossmans.
The pre-litigation attorneys fees related to 38.1 hours of work at $350/hour (i.e., $13,335) and pre-litigation costs were an additional $875 – a fraction of the total requested ($116,165), and a fraction of the total awarded ($112,665).
FAA’s National Policy Favoring Arbitration Requires Arbitrator In First Instance To Determine If Noncompetition Agreements Are Null And Void
SCOTUS Smackdown of Supreme Court of Oklahoma
On November 26, 2012, in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. _______ (2012) (per curiam), the Supreme Court of the United States found it necessary to remind the Supreme Court of Oklahoma that “[i]t is a matter of great importance . . . that state supreme courts adhere to a correct interpretation” of the Federal Arbitration Act (FAA). “Here, the Oklahoma Supreme Court failed to do so. By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law.” The Oklahoma decision was therefore vacated.
Consider for a moment how this would play out in California, a state with a strong public policy that protects employees from unlawful restraints of trade and promotes competition. Cal. Bus. & Prof. Code section 16600. As in Nitro-Lift Technologies, the issue would have to be decided by the arbitrator, assuming the arbitration provision is enforceable. If the arbitrator incorrectly applied the law, that would ordinarily be no ground for judicially reversing the arbitrator’s award, notwithstanding the failure to carry out California’s strong public policy that protects employees and promotes competition.
On March 27, 2012, we posted about Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012) (per curiam). The Supreme Court of West Virginia had refused enforcement of an arbitration clause because it violated the state’s public policy against arbitrating personal injury or wrongful death claims against nursing homes. The per curiam Nitro-Lift Technologies opinion quotes the per curiam Marmet opinion: “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Hence, state law cannot prohibit outright the arbitration of a noncompete claim – the arbitrator decides the issue “in the first instance.”
We would simply add that in the case of binding arbitration, “in the first instance” usually means “in the last instance” too!
Pending Case: Ninth Circuit Holds En Banc Hearing In Kilgore v. KeyBank
Federal Preemption Of California’s Broughton-Cruz Rule Exempting Claims For Public Injunctive Relief Is At Issue
On March 7, 2012, we posted about Kilgore v. KeyBank, 673 F.3d 947 (9th Cir. March 7, 2012) (authored by Judge Trott). Kilgore held that California’s Broughton-Cruz rule, which provides claims for public injunctive relief cannot be arbitrated, is preempted by the Federal Arbitration Act (FAA). The case was heard en banc on December 11, 2012, and the video of the hearing is available online.
Kilgore involved students of a private helicopter vocational school alleging the school had a preferred lender who knew the school was “a slowly unfolding disaster”, yet continued to make loans to the hapless students. The students sought to have the loans declared unenforceable and to prevent the lender from reporting defaults to credit reporting agencies. Because the students had to first get over the hurdle of an arbitration provision, the case presented the issue of whether the Broughton-Cruz rule provides a carve-out exception to arbitration on the facts here, and whether the rule is now preempted by the FAA. In the opinion authored by Judge Trott earlier this year, the court found preemption.
The estimable Kimberly A. Kralowec has posted two reports of last week’s hearing on The UCL Practitioner, the first by Eric Kingsley of Kingsley & Kingsley in Encino, the second by Edie Mermelstein of the Offices of F. Edie Mermelstein in Huntington Beach.