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Opinion Not For Publication Rejects Dictum In Published Opinion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 Div. 5 April 10, 2012) (not for publication).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.
Arbitration: Third District Rules That FAA Does Not Preempt California Arbitration Statute Allowing for Denial of Arbitration Where There Is Possibility of Conflicting Rulings
Elder Abuse of Parent and Emotional Distress of Daughter Set Up Possibility of Conflicting Rulings
The trial court denied motions of operators of skilled care nursing facilities to compel arbitration of parent’s Elder Abuse claim that was subject to arbitration. Why? Because the daughter’s claim of emotional distress caused by her mother’s alleged abuse created the possibility of conflicting rulings. Cal. Code Civ. Proc. section 1281.2. Defendants appealed. Bush v. Horizon West, C067277 (3rd Dist. April 9, 2012) (not to be published).
![[Nurse caring for elderly patient]](http://lcweb2.loc.gov/service/pnp/cph/3b10000/3b11000/3b11600/3b11612r.jpg)
Above: Nurse caring for elderly patient. c1906. Library of Congress.
Defendants’ chief argument was that the California statutory provision allowing for denial of the motions to compel arbitration was preempted by the Federal Arbitration Act. However, in an earlier case involving Stanford University, the Supreme Court held that “where the parties have agreed that their arbitration agreement will be governed by the law of California,” (which was also the case in Bush v. Horizon West), “application of [section 1281.2(c)] is not preempted by the [FAA].” Volt Info. Sciences v. Stanford Univ., 489 U.S. 468, 470 (1989).
Okay, so section 1281.2(c) is not preempted where the parties have agreed that the contract will incorporate California law. But section 1281.2(c) also provides that “[t]his subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” Section 1295 requires particular language be included in an agreement to arbitrate as to the professional negligence of a health care provider, and that language was employed in the agreement here. That gave Defendants a fall-back argument: the exemption for arbitration of medical malpractice claims meant that section 1281.2(c), by its terms, did not apply. The Court of Appeals brushed off that argument of Defendants, pointing out that here, neither the mother nor her daughter had sued for medical malpractice. Instead, the mother had sued for Elder Abuse, and the daughter sued for infliction of emotional distress.
That was not the end of it, however. Defendants argued that the daughter was not a third party to the arbitration agreement, because of the closeness of the parties, and that therefore, the daughter could also be bound by the arbitration provision. In fact, the California Supreme Court recently held that, “when a person seeking medical care contracts with a health care provider to resolve all medical malpractice claims through arbitration,” the agreement applies “to the resolution of wrongful death claims, when the claimants are not themselves signatory to the arbitration agreement.” Ruiz v. Podolsky, 50 Cal.4th 838, 841 (2010). At first blush, Ruiz seems close to the situation here, but courts are in the business of drawing distinctions. Here, neither the mother’s nor the daughter’s claims were for wrongful death, and the daughter’s claim for emotional distress – to her – was distinct from the mother’s claim for Elder Abuse. Therefore, Ruiz was not controlling.
Separately, Defendants argued “equitable estoppel.” A nonsignatory who sues on a contract can sometimes be equitably estopped from disclaiming the binding effect of an arbitration provision in the contract sued upon. You take the benefits, you accept the burdens. The problem for Defendants here is that the daughter’s claim for negligent infliction emotional distress is not a contract claim.
Finally, Defendants made a policy argument, reminding one of a variant of that old adage: if the facts are against you, argue the law, if the law is against you, argue the facts, and if both are against you, argue policy [or: bang the table]. Concluding that section 1281.2(c) is not preempted, and that the trial court did not abuse its discretion in exercising its power under the statute, the Court of Appeal said, “we can do no more.”
Result: The orders denying the motions to compel arbitration were affirmed in a 3-0 decision authored by Justice Robie.
Mediation: Solution to Mammoth Problem Facing Mammoth Lakes?
First Stockton, Now Mammoth Lakes
On March 11, 2012, we blogged about Stockton’s fiscal plight and effort to take advantage of a new California law, AB 506, to mediate with its creditors. The law positions bankruptcy as a last resort, after the municipality has exhausted other means for working out it financial problems.
As reported online on April 6, 2012 by the Associated Press on SFGate, Mammoth Lakes may be next to mediate with its creditors. Unlike Stockton, battered by the housing crisis, general economic problems, and a growing budgetary shortfall, Mammoth Lakes got whacked by a $42M judgment (including interest and legal fees),resulting from an unsuccessful lawsuit with a developer. On top of that disaster, there has been a poor snow season. Though the causes of Mammoth Lakes’ economic plight are different than those of Stockton’s, both cities are on the verge of bankruptcy.
Above: Legal avalanche.
Mediation: Does Mediation Confidentiality in California Require a Legislative Fix?
California Assembly Bill 2025 Would Allow Introduction of Mediation Communications Between Attorneys and Their Clients in Actions For Malpractice or Breach of Fiduciary Duty
California Assembly Member Don Wagner introduced Assembly Bill 2025 to amend California Evidence Code section 1120 to allow:
“The admissibility in an action for legal malpractice, an action for breach of fiduciary duty, or both, or in a State Bar disciplinary action, of communications directly between the client and his or her attorney during mediation if professional negligence or misconduct forms the basis of the client's allegations against the attorney.”
The proposed amendment of the Evidence Code is a response to the California Supreme Court’s decision, Cassel v. Superior Court, 51 Cal.4th 113 (2011). In Cassel, the Supreme Court held (1) an attorney's mediation-related discussions with his client were confidential and neither discoverable nor admissible for purposes of proving a legal malpractice claim, and (2) applying the mediation confidentiality statutes to legal malpractice actions does not implicate fundamental due process concerns that might merit a constitutional exception.
In Cassel, the client sought to pierce through the confidentiality protections in mediation, claiming that he was coerced by the mediator and his own attorney into accepting a settlement, though he was tired, hungry, and ill. The client further claimed that his attorneys threatened to abandon him at an imminently pending trial, misrepresented settlement terms, falsely assured him they would negotiate a settlement agreement, and falsely promised to discount his attorney’s fees, even pursuing him to the bathroom to “hammer” him to settle.
Justice Baxter, author of the opinion, insisted that “we understand the policy concerns advanced”, but that based on the “plain language” of the statute, confidentiality needed to be protected. Ostensibly relying on the “plain language” of the Evidence Code, the opinion nevertheless discusses in some detail the policy advanced by confidentiality: promoting a candid and informal exchange that can be “achieved only if the participants know that what is said in the mediation will not be used to their detriment through later court proceedings and other adjudicatory processes.” Unlike the attorney-client privilege, the mediation confidentiality statutes do not create a privilege in favor of any one particular person. Instead, confidentiality cloaks the entire mediation for the benefit of all participants. The confidentiality statutes “serve the public policy of encouraging the resolution of disputes by means short of litigation.”
Nor does a violation of due process arise just because a client can’t introduce evidence of malpractice in a civil action. Interestingly, the one case creating a judicial exception to mediation confidentiality is Rinaker v. Superior Court, 62 Cal.App.4th 155 (1998) – a criminal case. In Rinaker, a minor needed access to information elicited in mediation to impeach a witness. The minor’s constitutional right to impeach a witness took precedence over mediation confidentiality. Thus, Rinaker involved weighty due process considerations.
“I concur in the result,” wrote Justice Chin in Cassel, “but reluctantly.” Justice Chin observed that the majority noted, “the Legislature remains free to reconsider this question.” Justice Chin invited the Legislature “may well wish to do so.”
More recently, mediation confidentiality has been upheld in Provost v. Regents of the University of California, 201 Cal.App.4th 1289 (2011). Plaintiff Provost claimed, among other things, that the mediator told him that Provost’s employer would have criminal charges filed against him if he did not sign a stipulated judgment immediately. The Court of Appeal, however, held that mediation confidentiality precluded Provost from presenting evidence of alleged coercion and duress in mediation to oppose a motion brought to enforce a settlement stipulation.
No solution here can be altogether edifying, because the problem involves important goals that can sometimes conflict – promoting frank exchanges in mediation among all participants, encouraging mediation as an alternative to a court trial, and holding attorneys responsible for malpractice or breach of fiduciary duty occurring in mediation. One thing is certain after Cassel: the State Supreme Court is not prepared to express a “view about whether the statutory language . . . ideally balances the competing concerns or represents the soundest public policy.” Any significant adjustments will need to be done by the Legislature or not at all.