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.
Arbitration/Nonsignatories: Second District, Division 5 Refuses to Enforce Arbitration Agreement Against Nonsignatory Broker
Opinion Not For Publication Rejects Dictum In Published Opinion
Nonsignatories to arbitration agreements may find themselves bound to arbitrate if they are agents of a signatory party to the transaction. But that didn’t happen to the real estate brokers here. 3118, LLC v. CBD Investment, Inc., B234706 (2nd Dist. Div. 5 April 10, 2012) (not for publication).
Plaintiff, 3118, LLC, the purchaser of a building, successfully obtained an arbitration order against defendant brokers in a separate action. The Plaintiff appealed from an order denying its motion to compel arbitration and to stay litigation of claims against defendants, including defendant brokers, in the instant action. The real estate purchase agreement included a common mediation/arbitration provision, and a NOTICE provision, requiring initialing. The defendant brokers did not initial the NOTICE provision.
The published case of Nguyen v. Tran, 157 Cal.App.4th 1032 (2007) (4th District, Div. 3) needed to be addressed. In Nguyen v. Tran the purchasers signed the purchase agreement. The Court of Appeal stated in that case: “As such, [purchasers’] brokers could have been compelled to arbitrate the claims against them although they did not sign the agreement and were not parties to it.” Id., at p. 1037. That statement would seem to be dispositive and require the brokers to arbitrate in 3118, LLC. However, the statement is dictum in Nguyen v. Tran that the 2nd District, Division 5 refused to follow.
The express language of the real estate form in 3118, LLC provides: “Buyer and Seller agree to . . . arbitrate disputes or claims involving either or both Brokers, . . . . provided either or both Brokers shall have agreed to such . . . arbitration prior to, or within a reasonable time after, the dispute or claim is presented to Brokers.” The capitalized NOTICE provision states in part, “BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’”. The brokers did not initial that NOTICE provision.
The Court of Appeal simply gave effect to the provision, concluding that the brokers, who did not sign the arbitration agreement, could not be compelled to arbitrate claims by plaintiff, the buyer, in light of the explicit language of the agreement. Refusing to apply equitable principles to override the contract, the Court of Appeal also noted that this was not a case where a nonsignatory wanted to be bound by an arbitration agreement.
However, the court reversed the order refusing to stay the judicial action against the brokers pending arbitration, because of the existence of overlapping issues and the risk of inconsistent results.
The opinion is unpublished and therefore cannot be cited as precedent. Nevertheless, if you are a real estate broker or litigator, this is a case you might want to keep in mind.
Arbitration/Pending Cases: Consumer Car Arbitration Riding on New Treads As Ninth Circuit "Recalls" Opinion in Kolev v. Euromotors West/The Auto Gallery
Axle of Evil: Opinion Withdrawn in Kolev v. Euromotors West/The Auto Gallery Was Critical of Pre-Dispute Binding Arbitration Where Automobile Problems and Magnuson-Moss Warranty Act Are Concerned
On April 11, 2012, the Ninth Circuit withdrew the Opinion in Kolev v. Euromotors West/The Auto Gallery, 586 F.3d 1024 (9th Cir. 2011), explaining that it cannot be cited as precedent. This "recall" of an automobile arbitration decision offers the strategic advantage of mooting a petition for rehearing en banc. The parties may still file a petition for rehearing and rehearing en banc – but first the California Supreme Court needs to decide Sanchez v. Valencia Holding Co. LLC, No. S199119 (previously heard by the 2nd Dist., Div. 1, and published at 201 Cal.App.4th 74 (2011)). What’s all that about?
Ms. Kolev bought a pre-owned (i.e., used) Porsche that turned out to have serious mechanical problems during the warranty period. Having purchased a car that she believed was a lemon, she may now believe that her court case is a lemming headed off a cliff.
In the now withdrawn Kolev opinion, Judge Reinhardt, writing for a majority of two, concluded: "We hold that written warranty provisions that mandate pre-dispute binding arbitration are invalid under the [Magnuson-Moss Warranty Act ("MMWA")] and that the district court therefore erred in enforcing Porsche’s warranty clause by compelling mandatory arbitration of Kolev’s claims." Judge Reinhardt’s opinion deferred to FTC regulatory interpretation of the MMWA that IDSMs ("informal dispute settlement procedures" or "Mechanisms" under the MMWA) were not intended to be binding on consumers. The majority opinion also concluded that binding arbitration fails to protect consumers from being forced into involuntary agreements they can’t negotiate.
Judge Reinhardt’s majority opinion drew a dissent from Judge Smith, who argued that the majority conflated Mechanisms – a narrow class of warranty dispute resolution procedures – with any ADR remedy adopted in a private contract. Judge Smith also believed the majority view to be "incompatible with the clear federal policy favoring arbitration under the Arbitration Act."
The state case awaiting Supreme Court review, Sanchez v. Valencia Holding Company, supra, also involves a consumer, an automobile, and arbitration. The opinion of the Second District, Div. 2, was written by Justice Mallano. That opinion concluded that an arbitration provision in the sales contract was unconscionable – regardless of the fact that it also contained a class action waiver:
"the provision is adhesive – involving oppression and surprise – and contains harsh one-sided terms that favor the car dealer to the detriment of the buyer. Because the provision contains multiple invalid clauses, it is permeated by unconscionability and is unenforceable."
We’ll be interested to see whether the fact-driven unconscionability defense in Sanchez survives further legal review, and also whether the holding in Kolev that pre-dispute binding arbitration is invalid under the MMWA is able to avoid a crack-up.
Arbitration/Standard of Review: Fourth District, Division Two Holds Arbitrator Did Not Exceed Authority In Ruling County Employee Was Terminated Without Just Cause
Court of Appeal Also Rejects Public Policy Argument Put Forward By County for Vacating Arbitrator’s Award
The County of Riverside terminated the Respondent, Ms. Matheson, a network administrator, for allegedly accessing email of the District Attorney’s Office without authorization. Pursuant to the procedure agreed to between the County and Ms. Matheson’s labor union, Ms. Matheson appealed the decision to a neutral arbitrator, presumably Mr. Tamoush, the Defendant. The arbitrator began his discussion by noting that “[m]anagement responded with a solidly emotion reaction to the fact that it never knew, nor chose to understand, why Ms. Matheson would access other Managers’ e[-]mails strictly for procedural reasons.” The arbitrator ordered the County to reinstate Ms. Matheson, and the County appealed, arguing the arbitrator improperly substituted his own judgment for that of the district attorney. County of Riverside v. Tamoush [Defendant] and Matheson [Real Party in Interest], No. E053005 (Fourth Dist. Div. 2 April 10, 2012) (not to be published).
This is essentially a “standard of review” case. The Court of Appeal points out that it reviews the trial court’s order de novo; thus, it is in essence reviewing the arbitrator’s decision directly and on “extremely narrow” grounds. Arbitrators, “unless specifically required to act in conformity with rules of law, may base their decision upon broad principles of justice and equity . . . . “ “[J]udicial deference to the arbitrator extends to the arbitrator’s choice of remedies.” “In close cases the arbitrator’s decision must stand.” Generally, “it is within the ‘powers’ of the arbitrator to resolve the entire ‘merits’ of the ‘controversy submitted’ by the parties.” Moncharsh v. Heily & Blase, 3 Cal.4th 1, 28 (1992).
Here, the Court of Appeal concluded that the arbitrator did not exceed his authority. However, like most cases that make it to the Court of Appeal, this one had its wrinkles. The arbitrator here was constrained by a Memorandum of Understanding providing he would not substitute his “discretion or judgment for that of management for sustained charges unless the neutral finds that discrimination, unfairness, capriciousness, or arbitrary action by the County is proven.” But the arbitrator did explicitly find that management action was “capricious and arbitrary”, and according to the Court of Appeal, nothing about the arbitrator’s use of the phrase “appears superficial, fleeting, or ambiguous.”
The other wrinkle is that the County made a public policy argument for overturning the arbitrator’s award. An arbitrator’s award can be vacated on public policy grounds “in those rare cases where ‘according finality to the arbitrator’s decision would be incompatible with the protection of a statutory right’ or where the award contravenes ‘an explicit legislative expression of public policy’”. City of Palo Alto v. Service Employees Internat. Union, 77 Cal.App.4th 327, 334 (1999). The County argued that reinstating Ms. Matheson threatened the district attorney’s duty to enforce the law and protect confidential and privileged communications. But the Court of Appeal wasn’t buying it. The record failed to show “that reinstatement of Matheson would endanger the district attorney’s ability to comply with the cited rule.”
Disposition: Judgment affirmed. The 3-0 opinion was authored by Justice King.