Arbitration: Parties Not “Aggrieved” May Not Appeal From An Order Denying Their Cross-Petition to Compel Arbitration
An Order Denying Defendants’ Cross-Petition To Compel An Arbitration They Already Initiated Does Not Adversely Affect Them – And Therefore They Can’t Appeal It
O’Malley v. Avenatti, Case No. G045806 (4th Dist. Div. 3 June 13, 2012) (Ikola, J., author) (not for publication) is the kind of lawsuit only lawyers can love – a lawsuit among former law partners fueled by high-octane gamesmanship. The opinion also provided Justice Ikola, trained in electrical engineering at the University of Michigan, with an opportunity to display his mathematical skill and astringent wit.
O’Malley sued defendants in Orange County, then moved to compel arbitration in Orange County. Defendants opposed – sort of – stating “there is no disagreement that this dispute should proceed to arbitration,” while disputing the scope of the arbitration, who was to make the determination of scope, and where the arbitration was to proceed. Alternatively, defendants cross-petitioned to compel arbitration in San Francisco.
The superior court granted O’Malley’s petition to arbitrate in Orange County. Defendants appealed, but an order granting a petition to arbitrate is not appealable. The Court of Appeal solved this problem by pointing out that defendants’ notice of appeal identified the order as the “order denying [their cross-] Petition to Compel Arbitration . . . “ – an appealable order. But defendants had a further and higher hurdle to surmount.
Because defendants had already initiated an arbitration in San Francisco, and O’Malley had apparently appeared in that arbitration, the denial of defendants’ motion to compel arbitration in San Francisco meant that they were not “aggrieved.” Only a party aggrieved may appeal. Code Civ. Proc., section 902.
The kludgy result is two overlapping arbitrations in two different JAMS offices. And this is the part that triggered Justice Ikola’s merciless display of mathematical reasoning:
“Having two overlapping arbitrations in two different JAMS offices is hardly ideal, but it is the entirely foreseeable consequence of defendants’ tactics. Defendants responded to O’Malley’s petition to compel arbitration by initiating their own arbitration the very next day. Faced with the prospect of one arbitration being compelled by a nonappealable order, defendants chose to initiate another one. One plus one equals two.” (our italics).
Song of Two
Arbitration/FAA/Waiver/Employment: Fourth District, Div. 2, Affirms Denial of Petition to Arbitrate in Area of the Law It Describes as “Fluid and Volatile”
Split of Opinion Continues About Arbitrability of State Statutory Labor Claims
“Once more unto the breach, dear friends, once more.” (Henry V, Act 3, Scene 1).
Hoover v. American Income Life Insurance Company, Case No. E052864 (4th Dist. Div. 2 May 16, 2012) (Codrington, J., author) (certified for publication) underscores a split in the law, concerning the arbitrability of state statutory labor claims, that we reported on just last week.
On June 5, 2012, we posted on Iskanian v. CLS Transportation Los Angeles, LLC, Case No. B235138 (2nd Dist. Div. 2 June 4, 2012) (Boren, P.J., author) (certified for publication), a labor code violations case, in which the Court of Appeal interpreted AT&T Mobility v. Concepcion broadly to hold that the Federal Arbitration Act “conclusively invalidates the Gentry test” for finding that a statutory right is unwaivable and cannot be arbitrated. Also, the court in Iskanian disagreed with the majority’s opinion in Brown v. Ralphs Grocery Co., 197 Cal.App.4th 489 (2011), that the Concepcion holding does not apply to representative claims under the Private Attorney General Act of 2004 – instead, the Federal Arbitration Act (FAA) can trump employee statutory rights, according to Iskanian.
Hoover is the latest California wage and hour case involving arbitrability of employee state statutory labor claims. But in Hoover, at footnote 2, the 4th District, Division 2, explicitly and positively relies upon Brown, infra: “AT&T does not provide that a public right . . . can be waived if such a waiver is contrary to state law.” Hoover, 197 Cal.App.4th 489, 500, 502-503.
In addition, the court in Hoover concluded that the employer had the burden to establish FAA coverage/preemption, and the employer had failed to establish that the relationship between the plaintiff employee and the defendant employer “had a specific effect or ‘bear[ing] on interstate commerce in a substantial way.” Therefore, because the Commerce Clause in the US Constitution did not reach the relationship, FAA preemption didn’t even kick in.
The court in Hoover also rejected the employer’s argument to compel arbitration on the more mundane ground of waiver. Here, the employer waited almost 15 months after Hoover’s complaint was filed to move to compel arbitration. Before moving to compel, the employer filed an answer to the complaint with 22 affirmative defenses, none of which alleged the existence of an arbitration provision, propounded interrogatories and document requests, noticed Hoover’s deposition, and tried unsuccessfully to remove to federal court.
Despite all the evidence of the employer’s waiver of arbitration, the court still wanted to make its firm statement about the arbitrability of state statutory labor claims: “Even if . . . defendant had not waived its right to assert arbitration, we would decide [defendant] could not compel arbitration in the present case.”
Last week, we ended our post on Iskanian by observing:
“This is an active area of the law. Kinecta, Brown, and Iskanian create a sharp split in authority. As fellow-blogger Kimberly Kralowec says about Iskanian in her post . . . in the UCL Practitioner, ‘We should all watch this case to see if the California Supreme Court takes it up.’”
Ditto for Hoover. No wonder the court closes its opinion in Hoover by observing this is a “fluid and volatile area of the law.”
In the News: Stockton and Mediation – Near the End of the Rope?
Stockton Positions Itself to Be Able to End Mediation and File for Chapter 9 Protection From Its Creditors
We blogged on May 30, April 8, and March 11, 2012, about the efforts of California cities in financial distress to comply with AB 506 by mediating as a precondition to filing for bankruptcy.
Stockton is Exhibit 1. The city has been battered by an alignment of unfortunate events: the mortgage foreclosure crisis, the loss of tax revenues, and ambitious projects leaving it financially overextended. The city has the second-highest foreclosure rate in the nation. If Stockton does declare bankruptcy, it will become the most populous city in the country to have done so.
On June 6, 2012, the City Council authorized the City Manager to file for Ch. 9 protection from creditors. The vote immediately triggered a debt downgrade by Fitch Ratings.
A flurry of articles appeared on June 6, 2012, signaling the mediation process is approaching an end: (1) Diana Marcum’s article in the Los Angeles Times, “Stockton moves another step closer to bankruptcy”; (2) Reuters, “Fitch downgrades $252 mln of Stockton, Calif., Debt”, (3) Associated Press, “Stockton officials ready bankruptcy plan,” and (4) Scott Smith, Stockton Record, “Council gives Deis Chap. 9 authority.”
Mediation continues to June 25, 2012, with the city manager authorized to file for Ch. 9 protection the next day.
Blawg Bonus: photograph taken by Dorothea Lange in Stockton in December 1938 during the Depression:
Farm woman, Stockton, California. Tenant Purchase applicant.
Mediation/Fees: Rejecting Request to Mediate Results in Reversal of Fees Award
Plaintiff’s Filing Of Lawsuit Without Requesting Mediation Did Not Negate Duty of Defendant to Participate In Mediation After Plaintiff Did Request Mediation
The Cullens bought a vacation home in 2002, and sued the sellers, the Corwins, in 2009, for failing to disclose the defective condition of the roof. The Cullens lost their case based on the Corwins’ statute of limitations defense, and also got hit with a $16,500 attorney’s fees award in favor of the Corwins. The Cullens appealed. Cullen v. Corwin, Case No. C067861 (3rd Dist. June 7, 2012) (Butz, J., author) (certified for partial publication).
The result was bad news – and good news – for the Cullens. The bad news – not certified for publication — was that the Cullens’ complaint was indeed barred by the statute of limitations.
The good news for the Cullens – certified for publication – was that the fee award was reversed, based on the fee/mediation provision in the standard form purchase agreement:
“If . . . any party commences an action without first attempting to resolve the matter through mediation, OR refuses to mediate after [the making of] a request . . . , then that party shall not be entitled to recover attorney [ ] fees . . . . “ (Uppercase type & italics added in the opinion.”.
The Cullens apparently filed suit without first requesting mediation. That would have precluded them from recovering attorney’s fees—had they prevailed. But the facts here were that the Cullens lost, and that it was therefore the Corwins who requested attorney’s fees. Unfortunately, as it turned out for the Corwins, the Cullens did request mediation in 2010, after commencing suit, but the Corwins refused to mediate.
Because the plain language of the standard form purchase agreement also provides that if any party “refuses to mediate after [the making of] a request,” then that party doesn’t recover fees, the fee award in favor of the winning defendants was reversed by the Court of Appeal.
The Court of Appeal noted that the clause in the form purchase agreement was first considered in Frei v. Davey, 124 Cal.App.4th 1506 (2004) (Fybel, J., author). Though the facts of Frei are somewhat distinguishable from those in Cullen v. Corwin, the following point in Frei continues to be pertinent and should be heeded: “The new provision barring recovery of [legal] fees by a prevailing party who refuses a request for mediation means what it says and will be enforced.”
Arbitration: Third Party Cannot Rely On Res Judicata Effect Of Arbitration Unless That Is Intent Of Parties To The Arbitration
Court of Appeal Borrows Reasoning From Collateral Estoppel Effect Of Arbitration On Third Party
The Wus (Sellers) sold an apartment building to the Sobel Family Trust (Buyer). Buyer sued Seller for failure to disclose material defects in the 75 year old building, and obtained an award in arbitration that Sellers paid. Sellers followed up by suing the Sellers’ broker (Lee) and the Buyer’s broker (Sherman). The trial court sustained demurrers in favor of all defendants, and granted summary judgment on remaining causes of action for fraud and breach of contract. Sellers appealed. Wu v. Lee, Case No. B227087 (2nd Dist. Div. 8 June 4, 2012) (Grimes, J., author) (unpublished).
The Court of Appeal explained that the trial court had erroneously relied on the res judicata effect of the arbitration between Sellers and Buyer when it sustained demurrers in favor of the brokers. Relying on Vandenberg v. Superior Court, 21 Cal.4th 815, 833-834 (1999), which holds that a private arbitration award, even if judicially confirmed, can have no collateral estoppel effect in favor of third persons unless the arbitral parties agreed that such a consequence should apply, the Court of Appeal applied the same principle to res judicata (without distinguishing between res judicata and collateral estoppel).
The trial court error was harmless in the case of the Sherman defendants, because in their case, the Court of Appeal affirmed the summary judgment in their favor. But the trial court’s error in sustaining the demurrer was corrected in the case of the Lee defendants. There, the error made a difference to the outcome, because material disputes as to the Lee defendants precluded summary judgment.
Arbitration/Federal Preemption/Class Actions/Employment: Second District, Division 2 Broadly Applies Federal Preemption in Labor Code Violation Case to Uphold Arbitration
Vindication of Statutory Rights Loophole to Arbitration Is Closed
In an April 25, 2012 post, we suggested, based on Kinecta Alternative Financial Solutions, Inc. v. Superior Court of Los Angeles County, (2012) (partially published) (District 2, Div. 3), that “the rule in Gentry [42 Cal.4th 443 (2007)] allowing for invalidation of class arbitration waiver where nonwaivable statutory rights are at issue manages to maintain [a] toehold.” No longer, according to Division Two of the Second District. In Iskanian v. CLS Transportation Los Angeles, LLC, Case No. B235138 (2nd Dist. Div. 2 June 4, 2012) (Boren, P.J., author) (certified for publication) a labor code violations case, the Court of Appeal interprets AT&T Mobility v. Concepcion broadly to hold that the Federal Arbitration Act “conclusively invalidates the Gentry test” for finding that a statutory right is unwaivable and cannot be arbitrated.
The Court of Appeal agrees that “Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them.” It rejects the “public policy rationale” and the vindication of statutory rights rationale of Gentry as “irrelevant in the wake of Concepcion.”
The Court also declines to follow D.R. Horton, 357 NLRB No. 184 (2012), a case that held that a mandatory, employer-imposed agreement requiring all employment-related disputes to be resolved by arbitration, violated the National Labor Relations Act. Because the FAA is not a statute the NLRB is charged with interpreting, the Court of Appeal concluded that it was under no obligation to defer to the NLRB’s analysis.
The Court of Appeal also disagreed with the majority opinion in Brown v. Ralphs Grocery Co., 197 Cal.App.4th 489 (2011). Brown held that the Concepcion holding does not apply to representative claims under the Private Attorney General Act of 2004 (“PAGA”), allowing a private citizen to pursue civil penalties on behalf of the State of California Labor and Workforce Development Agency.
“We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA,” said the Court of Appeal, adding: “But we believe that the United States Supreme Court has spoken on the issue, and we are required to follow its binding authority. . . . Following Concepcion, the public policy reasons underpinning the PAGA do not allow a court to disregard a binding arbitration agreement.”
This is an active area of the law. Kinecta, Brown, and Iskanian create a sharp split in authority. As fellow-blogger Kimberly Kralowec says about Iskanian in her post today in the UCL Practitioner, “We should all watch this case to see if the California Supreme Court takes it up.”