Arbitration/Class Action Waiver: Party Cannot Be Compelled To Arbitrate Class Arbitration Where Arbitration Provision Neither Authorizes Nor Prohibits Class Action
But Rule in Gentry Allowing For Invalidation of Class Arbitration Waiver Where Nonwaivable Statutory Rights Are At Issue Manages to Maintain Toehold
Once again, the Court of Appeal ventures into the thicket of class action arbitration waivers, threading its way around ATT&T Mobility LLC v. Concepcion, __ U.S. __ , 131 S.Ct. 1740 (2011), Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) (overruled by Concepcion), and Gentry v. Superior Court, 42 Cal.4th 443 (2007)(Gentry). Kinecta Alternative Financial Solutions, Inc. v. Superior Court of Los Angeles County, B235491 and B236084 (2nd Dist. Div. 3 April 25, 2012) (certified for partial publication) (authored by Kitching, J.)
Malone filed a class action for violation of California wage and hour laws against Kinecta. But Malone had signed an agreement containing an arbitration provision providing: "I further agree and acknowledge that [Kinecta] and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context." Based on the arbitration provision that neither authorized nor prohibited class actions, the employer, Kinecta, moved to dismiss class allegations from Malone’s complaint. The trial court ordered arbitration, but refused to dismiss the class allegations. Kinecta then petitioned the Court of Appeal to issue a writ of mandate directing the trial court to vacate its order denying Kinecta’s motion to dismiss class allegations from the complaint.
First, the Court reviewed the status of Discover Bank. In that case, the California Supreme Court stated that when consumer contracts of adhesion contain a class action waiver, when the disputes involve small amounts of damages, when the party with unequal bargaining power schemes to cheat large numbers of consumers out of small sums of money, the class action waivers are unconscionable and should not be enforced. However, Discover Bank has been expressly overruled by Concepcion – the Federal Arbitration Act does not allow arbitration agreements to be enforced differently than other agreements.
Second, the Court reviewed the rule in Gentry. Gentry requires analysis of four factors to determine whether a class action arbitration waiver is unconscionable in circumstances where an employee seeks damages for the employer’s alleged violations of wage and hour statutes: (1) the modest size of potential individual recovery; (2) potential retaliation against class members; (3) absent class members may not be informed about their rights; and, (4) existence of other obstacles to vindication of class member’s rights through individual arbitration. Based upon an analysis of those factors, a trial court may invalidate the class arbitration waiver in California.
Third, the Court points out that Discover Bank and Gentry established different tests of whether to enforce a class arbitration waiver. Briefly, Discover Bank looked at a consumer situation, and a very carefully drafted arbitration provision, whereas Gentry concerned a situation in which nonwaivable employee statutory rights were involved – and the tests for invalidating a class action waiver were different in the two cases. Discover Bank has been overruled by Concepcion. However, at least for now, because Gentry, "has not been expressly abrogated or overruled, Gentry appears to remain the binding law in California." The Court added in dictum: "A question exists about whether Gentry survived the overruling of Discover Bank in Concepcion, but it is not one we need to decide."
Fourth, Malone failed to provide evidence as to any of the four Gentry factors, there was no "factual basis that would require a declaration that the arbitration agreement was unenforceable."
Fifth, because the arbitration agreement was not unenforceable under Gentry, and because the parties’ arbitration agreement did not authorize class actions, the employer could not be compelled to arbitrate. Stolt-Nielsen v. Animalfeeds International Corp., 559 U.S. __, 130 S.Ct. 1758 (2010). (holding that under FAA, party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that party agreed to do so.).
The Court granted a writ of mandate directing the Superior Court to vacate its order denying the employer’s motion to dismiss class action allegations, and also granted a writ directing the Superior Court to vacate its order granting the employee’s discovery motion relating to class action discovery.
Arbitration/Fees/Appealability: Order Denying Petition to Compel Arbitration Is Not (Necessarily) An Appealable Order
Some Orders Denying Petitions to Compel Arbitration Are More Equal than Others
Defendant and Appellant Zani Mansouri spent over $200,000 in a patio improvements dispute with her HOA, Plaintiff and Respondent Fleur Du Lac Estates Association. Naturally, she hoped to recover her fees and costs after the trial court earlier granted the HOA’s motion to compel arbitration, and the Court of Appeal, in a prior writ proceeding, reversed, agreeing with Mansouri that the HOA had failed to establish that it had requested arbitration and that she had refused.
Mansouri sought fees and costs on the theory that she was the prevailing party in a proceeding to compel arbitration. But the trial court concluded her fee motion and costs memoranda were untimely. She moved for reconsideration, or relief due to excusable neglect. The trial court denied that motion too in a May 2011 order. All that law and commotion led to a writ petition, denied on the ground that Mansouri had a remedy by appeal, followed by her present appeal from the May 2011 order. Fleur du Lac Estates Association v. Mansouri, C0968693 (3d Dist. April 23, 2012) (certified for publication) (authored by Justice Robie).
In the opinion now certified for publication, the Court of Appeal holds that the May 11 order appealed from was non-appealable. Why?
First, an order denying reconsideration is typically non-appealable – to hold otherwise would permit, in effect, two appeals from every appealable decision.
Second, the appealability of an order under the California Arbitration Act is governed by Cal. Code of Civ. Proc. section 1294 – and Mansouri was unable to successfully shoehorn her appeal into an appealable situation under section 1294. Mansouri argued that under Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796 (2008), an order denying a petition to compel arbitration is a “judgment” in a petition to compel proceeding, and that a subsequent order denying fees is an appealable post-judgment order, expressly appealable under section 1294 (e).
The Court of Appeal drew a distinction between an order in an arbitration proceeding resolving the only issue before the court in that proceeding – essentially a judgment and therefore appealable – and an order in an arbitration proceeding that did not foreclose the HOA here from “making a proper demand for arbitration under the CC&R’s on remand . . . .” And that is what the HOA did here: after its motion to compel arbitration was nixed by the Court of Appeal earlier because the HOA failed to demand arbitration and failed to establish a refusal to arbitrate, the HOA simply retraced its steps, and made the demand required by section 1281.2 as a predicate for bringing a petition to compel. The second time around, Mansouri didn’t oppose arbitration – the HOA had dotted its i’s and crossed its t’s.
There are several lessons to be drawn from this case. First, before seeking to compel arbitration under section 1281.2, establish that you asked for arbitration, and that the opposing party refused. Second, appealing from denial of a motion to reconsider may be futile – you may be appealing from a non-appealable order. Third, not all orders denying a petition to compel arbitration are created equal: some resolve all issues in a case, some do not. Fourth, an order denying a motion to compel arbitration that resolves all issues in a case may be a final and appealable order. Fifth, a special order after final judgment is appealable in a proceeding under the California Arbitration Act – but only if you first have a final judgment.
Is the door shut to Mansouri’s recovery of fees? No: “because it appears that Mansouri still has an adequate remedy by appeal from the final judgment in this matter by which to seek review of the trial court’s denial of her motion for attorney fees and the granting of the Association’s motion to strike her costs memoranda. . . “ In fact, that was the basis for denying her alternative request to treat her premature appeal as a writ petition. It ain’t over. . . .
Above: Kirsten Flagstad
Arbitration: Parties Are Entitled To Prejudgment Interest During Time The Trial Court Vacated Arbitration Award In Their Favor And Reinstatement Of The Award
Issue of First Impression in California
Tenzera, Inc. v. Osterman, B228189 (2nd Dist. Div. 3 April 19, 2012) presents “what appears to be an issue of first impression in California.” That issue is whether prevailing parties in an arbitration “are entitled to prejudgment interest between the time the trial court vacated the arbitration award in their favor and our reinstatement of the award in the previous appeal in this case.”
Before an earlier appeal (Tenzera I), the trial court had vacated the arbitration award in favor of the Ostermans as to all parties, even though the company, Tenzera, Inc., did not seek to vacate the award. In Tenzera I, the Court of Appeal held the trial court should have modified the award to reflect that only the company was liable. On remand, the trial court did not award interest that would have accrued during the pendency of the appeal in Tenzera I, reasoning that during this appeal, the company was “prevented by law” from paying the arbitration award.
Not so said the Court of Appeal this time around. A prevailing party in arbitration is entitled to prejudgment interest as of the date of the final award to entry of judgment. Thoughout the appeal in Tenzera I, “damages were certain and there was no dispute between the parties concerning the basis of computing those damages.” Nor was the company “prevented by law” from paying – that exception is very narrowly construed, and did not apply under the facts here.
The opinion was authored by Justice Aldrich. It is certified for partial publication – the unpublished part pertains to attorney’s fees, and the published party pertains to the prejudgment interest “issue of first impression”.
Arbitration/Enforceability/FAA/Construction: Arbitration Clause That The Employer Can Change Turns Out To Be Illusory
Problem Here: Modification Provision Was Not Sufficiently Restricted So As To Exempt All Employee Claims, Accrued Or Known, From A Contract Change
Magician, Illusionist, Entertainer. 1913. Library of Congress.
The next case takes us back to law school days: is a contract illusory? The case required the Court of Appeal to determine (1) who was responsible for deciding whether the arbitration provision was illusory; (2) what law applied; (3) what Texas law would hold on the issue; (4) whether Texas law is contrary to California public policy; and (5) whether the arbitration provision was illusory. Peleg v. Neiman Marcus Group, Inc., B231634 (2nd Dist. Div. 2 April 17, 2012) (certified for publication).
The plaintiff, who worked in the fragrance department of Neiman Marcus, sued his employer for violations of the FEHA, breach of an implied-in-fact contract requiring good cause for termination, wrongful termination, and defamation. The employer, Texas-based Neiman Marcus, was successful in compelling arbitration of the dispute. The employee appealed after an adverse result.
The contract contained a modification provision stating that the employer may amend, modify, or revoke the arbitration contract on 30 days’ written notice; at the end of the 30-day period, a contract change applies to any claim that has not been filed with the AAA. The employee argued that the employer’s ability to change the arbitration contract on 30 days’ notice made the contract illusory. The employer pointed to a saving provision in the contract: "[A]ny amendment, modification, or revocation will have no effect on any Claim that was filed for arbitration prior to the effective date of such amendment, modification, or revocation." Illusory or not?
In a lengthy analysis of the issues, the Court of Appeal determined:
First, that the issue was for a judge, not an arbitrator to decide. The issue is "comparable" to determining arbitrability or unconscionability – issues determined by the court "unless the parties clearly and unmistakably delegate them to the arbitrator." And, "[t}hat did not happen here."
Second, the Court of Appeal upheld the choice of law provision requiring the application of Texas law and the FAA, because "Neiman Marcus has a substantial relationship to Texas and engages in interstate commerce."
Third, the Court held that under Texas law, the arbitration provision was illusory, because it made it possible for the employer to change the contract after giving a "trivial" 30 days notice, so long as no claim was filed before the expiration of the 30 day period. Under Texas law, the provision would need to be more protective, and exempt claims accrued, or known, from a contract change, in order not to be illusory.
Fourth, the Court held that Texas law was not contrary to California fundamental public policy – it simply required an express provision (absent here) that in California would be implied by the covenant of good faith and fair dealing.
Thus, the Court majority, in an opinion authored by Justice Mallano, with Justice Johnson, concurring, held that the change provision created an illusory contract.
Justice Rothschild dissented, arguing essentially that Texas cases had found such agreements were not illusory, and that the majority had teased out distinctions that do not yet exist under Texas case law.
Arbitration/Nonsignatories/Third Party Beneficiaries: Financial Advisor of Corporation Can’t Compel Arbitration With Corporation’s Creditors on Third-Party Beneficiary Theory
Corporate Creditors Would Have Benefited Alright If Advisor Had Successfully Obtained Financing for Corporation — But Benefit Alone Does Not a Third-Party Beneficiary Make
One exception to the rule that a nonsignatory cannot be compelled to arbitrate a dispute is when the nonsignatory is a third-party beneficiary of the contract containing the arbitration agreement. Crowley Maritime Corp. v. Boston Old Colony Ins. Co., 158 Cal.App.4th 1061, 1069 (2008). A financial advisor tried to avail himself of that exception to compel arbitration with secured creditors of a corporation who sued him for allegedly fraudulent misrepresentations made to induce the creditors to forbear from foreclosing on their security. The refinancing efforts did not succeed, and the corporation became bankrupt. Defendant Kann, the financial advisor, argued the nonsignatory creditors were third-party beneficiaries of the contract between him and the corporation who could be compelled to arbitrate. The trial court disagreed, and denied the financial advisor’s motion. The financial advisor appealed. Epitech, Inc. v. Kann, B230197 (2nd Dist. Div. 3 April 16, 2012) (for publication) (Croskey, J.).
The Court of Appeal also disagreed with Kann’s third-party beneficiary argument. For the creditors to qualify as creditor beneficiaries, Kann’s performance of the contract to obtain refinancing would have had to satisfy the corporation’s preexisting obligation to the creditors. But Kann did not contract to pay the creditors any money, or even to obtain financing; he only agreed to perform certain acts “geared toward possibly obtaining financing.” The corporation’s “only obligation to the secured creditors was to repay them, which Kann simply did not contract do do.” The mere fact that the corporate creditors might benefit by a successful refinancing was not enough to make them intended beneficiaries of the financial advisor’s contract with the corporation. Therefore, the order denying arbitration was affirmed.
Third-party beneficiary analysis can be tricky. This case resulted in an opinion certified for publication.
One Hundred Years Ago: 1912 Nobel Peace Prize Goes To Elihu Root For Work In International Arbitration and Cooperation
Elihu Root Negotiated Some 40 International Arbitration Treaties
Elihu Root (1845-1937) was awarded the 1912 Nobel Peace Prize for his work in negotiating some 40 reciprocal international arbitration treaties and in promoting international cooperation. Root was a prototype for the twentieth-century “wise man” – enormously successful as a private attorney, he also accepted appointments from Presidents McKinley, Roosevelt, and Wilson. He is little remembered, though he had considerable influence in his own time. In addition to serving as US Attorney for the Southern District of New York, Secretary of State, Secretary of War, Senator from New York, and delegate to the Washington Naval Conference, he was also the first president of the Carnegie Endowment for International Peace.
