News/FINRA: Morgan Stanley and Facebook Investor Are Not Friends
Lead Underwriter in Facebook IPO Seeks to Avoid FINRA Arbitration With Facebook Investor
On November 6, 2012, Suzanne Barlyn reported for Reuters that Morgan Stanley, a lead underwriter for the Facebook IPO, has filed a complaint in federal court in Manhattan seeking an order to stop FINRA arbitration initiated by a Facebook investor who alleges she took a financial drubbing in the recent Facebook IPO. Morgan Stanley asserts that the investor, who ordered shares through Vanguard Financial Group Inc., was not Morgan Stanley’s customer.
The investor, a widow and retired schoolteacher (but of course!), alleges that Morgan Stanley “informed their own privileged clients” it was downgrading its outlook for the stock, while issuing more shares at the same time.
Arbitration/Employment/Unconscionability: Implied Restriction On Employer’s Express Right To Unilaterally Change Arbitration Agreement Saves Arbitration Agreement From Unconscionability Attack
Arbitration Requirement In Employment Contract of Casino Security Director Survives Unconscionability Attack
Plaintiff Gatewood sued his former employee Hustler Casino and its owner El Dorado Enterprises, Inc., for various employment-related claims. The employer moved successfully to compel arbitration. Apparently unsatisfied with the arbitration award, Mr. Gatewood appealed the award and the order compelling arbitration on grounds of substantive and procedural unconscionability. Gatewood v. El Dorado Enterprises, Inc., et al., B237435 (2nd Dist. Div. 4 November 6, 2012) (Manella, J.) (unpublished).
The Court of Appeal first analyzed enforceability of the arbitration agreement under the four “minimum requirements for the arbitration of nonwaivable statutory claims” set forth in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83 (2000). Three of the four requirements were “indisputably” satisfied: no limit on statutorily imposed remedies such as punitive damages and attorney’s fees; a written arbitration decision allowing for review; the employer bears any type of expense the employee would not be required to bear in a court action. While there was a disagreement about a fourth factor, adequate discovery, the Court believed this issue had been forfeited, or else satisfied by a provision stating “[e]ach party shall have the right to conduct reasonable discovery, as determined by the arbitrator as provided in [the] California Code of Civil Procedure.”
The Court found “minimum elements of procedural unconscionability” to be present, because signing the agreement was required to obtain the job. But the agreement was not so one-sided as to create the substantive unconscionability also necessary to find an agreement unconscionable.
The most interesting one-sidedness issue arose because the language permitted Hustler Casino to “change in [its] sole discretion” all the policies, procedures and conditions of employment. But the employer’s discretionary power to modify the terms of the employment agreement “indisputably carries with it the duty to exercise that right fairly and in good faith.” 24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199, 1214 (1998).
The Court distinguished another “unilateral modification” case that we have posted about on April 18, 2012: Peleg v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012). In Peleg, Texas law governed. The “unilateral modification arbitration agreement” was invalid, because Texas law requires an express carve-out of claims from the employer’s ability to unilaterally modify, whereas, “[u]nder California law, a court may imply such a restriction if an arbitration agreement is silent on the issue.” Peleg at p. 1466. This is an instance in which Texas law is “more demanding than California law.” Id. at pp. 1466-1467.
The judgment was affirmed.
Arbitration/Unconscionability/Severability/Standard of Review: Law Firm Partnership Agreement That Is Functionally An Employment Agreement Is Subject To Armendariz Unconscionability Analysis
Court of Appeal Rejects Employer’s Contention that AT&T Mobility v. Concepcion Overruled Armendariz Unconscionability Analysis
Plaintiff Erika Brenner, an attorney, sued her “employer” Glenn Johnson Law, LLP and its principal, attorney Glenn Johnson, for wrongful discharge and other employment-related claims. Defendants moved to compel arbitration under a contractual arbitration provision. Brenner opposed, arguing that the arbitration provision was unconscionable under the analysis set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). Defendants argued Armendariz had no application, because Brenner was a partner, not an employee. Agreeing with Brenner that the agreement was unconscionable, the trial court denied Defendants’ motion to compel arbitration. Defendants appealed. Brenner v. Glenn Johnson Law, LLP et al., Case No. G046532 (4th Dist. Div. 3 November 5, 2012) (Rylaarsdam, Acting P.J.) (unpublished).
The Court of Appeal agreed that the trial court’s finding that the partnership agreement was “the functional equivalent of an employment agreement” was supported by substantial evidence; thus, there was no reason to disturb the trial court’s finding. Brenner had a 5% interest, and Johnson had a 95% interest, Johnson dictated the terms, and the agreement set forth the terms of the employment relationship.
“Unconscionability” analysis requires an examination of two prongs: substantive and procedural unconscionability. The source of substantive unconscionability here was that the agreement, which purported to cover FEHA claims, did not require the employer to bear costs unique to arbitration, nor did it contain a limitation that the employee, if she her suit, could not be burdened with fees and costs unless the employee’s suit was brought frivolously or in bad faith. While Plaintiff and Defendants disagreed as to whether the agreement was “take it or leave it”, there was substantial evidence that Brenner did not have a meaningful opportunity to negotiate the terms – enough to support a finding of procedural unconscionability, the second prong.
Finally, there was an issue as to whether the provision for shifting of costs and fees to the prevailing party, if unconscionable, could be severed in order to save the arbitration provision. Because there were two problems with the unlawful fees provision, the Court concluded it was not required to reform an agreement that was “permeated” by unconscionability. Besides, Defendants failed to ask the superior court to exercise its discretion to sever.
Affirmed.
Arbitration/Enforceability: District Court of Nevada Finds “Browsewrap Agreement” To Arbitrate Unenforceable
“Browsewrap Agreement” Did Not Evidence That Plaintiffs Consented To Arbitrate, Plus It Was An Illusory Agreement That Could Be Changed At Any Time
Generally, we focus on California law, but the next case, arising from the United States District Court for the District of Nevada, is an important one for e-commerce. In Re Zappos.Com, Inc., Customer Data Security Breach Litigation, 3:cv-00325-RCJ-VPC MDL No. 2357 (filed 9/27/12).
This lawsuit arose from “a security breach of servers” belonging to Amazon.com, Inc., doing business as Zappos.com, and Zappos.com, Inc. (Zappos). Since Zappos is the largest online shoe store, we assume that quite a few people may have been affected.
Zappos moved to compel arbitration based on an arbitration provision in what the court characterized as a “browsewrap agreement.” A browsewrap agreement is one whereby a website owner seeks to bind users to terms and conditions “by posting the terms somewhere on the website, usually accessible through a hyperlink located somewhere on the website.” In contrast, “a ‘clickwrap’ agreement requires users to expressly manifest assent to the terms by, for example, clicking an ‘I accept’ button.”
The court concluded that, “[w]ithout direct evidence that Plaintiffs click on the Terms of Use, we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use.” (If only Zappos had used a “clickwrap” contract . . . )
There was a second problem with the arbitration agreement: the Terms of Use, including the Arbitration Clause, could be changed at any time, without notice to the customer. “We join those other federal courts,” wrote Chief Judge Robert C. Jones, “that find such arbitration agreements illusory and therefore unenforceable.” This reenforces another theme of ours: companies that want enforceable arbitration provisions should strive to make them fair (or at least, not illusory or unconscionable).
Blog Bonus: “Zappos.com is an online shoe and apparel shop currently based in Henderson, Nevada. In July 2009, the company announced it would be acquired by Amazon.com in an all-stock deal worth about $1.2 billion. Since its founding in 1999, Zappos has grown to be the largest online shoe store.” Wikipedia (footnotes omitted).
Arbitration/Scope/Fees: Court of Appeal Affirms Arbitration Award Leaving Out Attorney Who Refused Arbitration
Standing On One’s Right May Not Always Be The Best Way To Protect One’s Rights
The stake in the next case was a share of a $380,000 attorney’s fees award in a class action lawsuit. The parties included the class, whose representative was McCall, and two law firms that had represented the class: Morris Polich & Purdy (Morris) and The Quisenberry Law Firm (Mr. Quisenberry). McCall, Plaintiff and Respondent, v. Morris Polich & Purdy et al., Defendants and Respondents; The Quisenberry Law Firm, Objector and Appellant, Case No. B239142 (2nd Dist. Div. 5 October 30, 2012) (Turner, J.) (not for publication).
Morris represented the clients first, substituting out in favor of Mr. Quisenberry, the attorney who actually negotiated the settlement on behalf of the class. Morris, which had an arbitration provision in its fee agreement, arbitrated with the class, and based on quantum meruit, was awarded 65% of the award – $270,000. The arbitrator also held that Mr. Quisenberry was entitled to 35% of the award, though Mr. Quisenberry was not a party to the arbitration provision, and had in fact successfully resisted efforts of Morris to compel Mr. Quisenberry to arbitrate. The superior court confirmed the award in favor of Morris, but corrected the arbitrator’s award by deleting the 35% allocation in favor of Mr. Quisenberry, because the issue of Mr. Quisenberry’s rights to fees was not part of the “controversy submitted” to the arbitrator. Mr. Quisenberry appealed from the judgment correcting and confirming the arbitration award.
Affirmed.
Standing on his rights, Mr. Quisenberry asserted the arbitrator did not have the power to allocate the fee, as Mr. Quisenberry was not a party to the arbitration, and the Court of Appeal agreed: the allocation to Mr. Quisenberrry was in excess of the arbitrator’s powers. However, the Court of Appeal found no basis for overturning the quantum meruit award in favor of Morris.
Mr. Quisenberry also argued that “the award as corrected interferes with and constitutes an involuntary forfeiture of his property rights.” But the Court of Appeal was entirely unsympathetic to that claim. The superior court judge had earlier ruled: “If [Mr. Quisenberry] refuses to participate in the arbitration, [he] will have little practical opportunity to provide input to the arbitrator.” The judge called that one correctly. The Court of Appeal pointed out that Mr. Quisenberry could have protected his rights by participating in the arbitration, or filing suit to adjudicate his rights to the attorney’s fees fund, instituting litigation to bring in all interested parties (Cal. Code Civ. Proc. section 1281(c), and seeking to stay the arbitration to resolve the dispute in a judicial forum.
But by standing on his right not to arbitrate, “Mr. Quisenberry’s [sic] declined to opt for any of these courses of action to protect his rights.”
Arbitration/Enforceability: First District, Division 1 Affirms Order Denying Sprint’s Motion To Compel Arbitration, Based On Trial Court’s Limited Jurisdiction Following Remittitur
Dispositional Language Of Prior Appellate Opinion Deprived Trial Judge Of Jurisdiction To Rule On Motion To Compel Arbitration
On September 26, 2012, we posted about Phillips v. Sprint, a case in which a 2006 denial of a motion to compel mediation was reversed in 2011 only after the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, __ U.S. __, 131 S.Ct. 1740 (2011), making it easier to compel arbitration. The Court of Appeal, First District, Division 3, affirmed the trial judge’s reversal of the earlier denial of the motion to compel arbitration. In Phillips v. Sprint, the Court of Appeal explained that an earlier effort by Sprint to compel arbitration would have been futile before Concepcion was decided.
In Ayyad v. Sprint Spectrum, L.P., Case No. A133824 (1st Dist. Div. 5 October 29, 2012) (Needham, J.) (certified for publication), the Court of Appeal, in one of the so-called “Cellphone Termination Fee Cases”, rejected Sprint’s argument that it should be allowed to compel arbitration because an earlier effort to compel arbitration before Concepcion was decided would have been futile.
The different outcomes in Ayyad v. Sprint Spectrum, L.P. and in Phillips v. Sprint hinge on a procedural/jurisdictional issue: In Cellphone Termination Fee Cases, 193 Cal.App.4th 298 (2011), the Court of Appeal “affirmed the trial court’s order granting Plaintiffs a partial new trial on the issue of Sprint’s actual damages and the calculation of a setoff to which Sprint might be entitled. In our disposition, we remanded for further proceedings limited to those issues.” (italics added for emphasis). Ayyad was a plaintiff in the Cellphone Termination Fee Cases, and thus the trial court was jurisdictionally limited by the directional language in the remittitur to consider the remaining issues, which issues did not include the right to arbitrate. (In the appellate context, the remittitur is the order by which the Court of Appeal hands back jurisdiction to the trial court to retry the case, or to enter orders in conformance with the appellate court’s directions. See Cal.Rules of Court, Rule 8.272).
Does the outcome mean that Sprint was completely deprived of any opportunity to ask the the appellate courts to address the question of arbitrability? Not entirely. The Court of Appeal noted a window of opportunity in footnote 6: “While its petition for review was pending, Sprint could certainly have requested that the California Supreme court examine the effect, if any, of Concepcion on this case.” But once the remittitur issued, the window of opportunity had closed. Sprint failed to sprint.
Evidently the Court of Appeal felt rather strongly about Sprint’s argument. Saying that it was “extremely troubled by Sprint’s argument” that “rests on a refusal to acknowledge the very obvious limitations our prior opinion imposed on the remand proceedings in this case,” the Court of Appeal called Sprint’s arguments “spurious.” Ayyad v. Sprint Spectrum, L.P., at footnote 5. Ouch.