Ninth Circuit Alphabet Soup Of Acronyms Yields Tidbits Regarding Arbitration In Regulatory Context
Watch Deadlines And Exhaustion Requirements And Hope That It Works Out . . .
The next case would be even more impenetrable without the helpful glossary of 15 acronyms at the end. Some of our favorites: CMRS (Commercial Mobile Radio Service), DTMF (Dual Tone Multi-Frequency signaling), LEC (Local Exchange Carrier), ILEC (Incumbent Local Exchange Carrier), PUC (Oregon Public Utility Commission),Wink-start MF (Wink-start Multi Frequency signaling). Yes, Dear Reader, we are in the land of telecommunications regulation. Western Radio Services Co. v. Qwest Corporation, et al., No. 10-35820 (9th Cir. March 15, 2012) (Opinion byJudge Ebel) (for publication).
Plaintiff-Appellant Western is a CMRS (hey, we just told you what that means). Defendant-Appellee Qwest is an LEC. The case arose between two telecommunications carriers over their ICA.
The Ninth Circuit affirmed the district court’s dismissal of Western’s claim for Qwest’s alleged failure to negotiate an ICA in good faith. Regarding a challenge to the district court’s decision affirming an order of the PUC, which order adopted results of arbitration leading to the ICA and the approval of the ICA, the Ninth Circuit affirmed in part and denied in part.
What are the tidbits concerning arbitration?
First, the regulatory scheme results in a complex process in which arbitration plays an important part. The carriers are required to negotiate in good faith, if they cannot agree (“Mommy, Jimmy won’t share”) they arbitrate, the arbitrator files a decision with the PUC, if the PUC adopts the arbitrator’s decision, the carrier submits an ICA to the PUC in compliance with the decision, objections can be made, and at some point, when all the steps of the administrative process are exhausted, there can be judicial review of the PUC’s decision. This is actually an incomplete summary of the complete process of review and remand that occurred here.
The factual findings of the PUC’s decision adopting the arbitrator’s decision will be reviewed under an “arbitrary and capricious standard.”
Administrative procedures present fiendish issues of exhaustion of remedies and narrow deadlines. The words bramble bush, maze, quicksand, and land mine spring to mind. Alas for Western, the Telecommunications Act provides “a strict window of time for the submission of a petition for arbitration: ‘the 135th to the 160th day (inclusive) after the date on which [a carrier] receives a request for negotiation under this section. . . .’” This deadline tripped up Western on one of its issues – Qwest’s alleged failure to negotiate in good faith.
Western submitted two petitions for arbitration. The first submission failed to properly identify Qwest’s failure to negotiate in good faith as an “open issue.” After the ICA had already been approved by the PUC, Western submitted a second petition.
But Western could not rely on the second petition for arbitration. Why?
Mediation/Condition Precedent/Fees: Homeowner Hit With Fee Recovery For Failing To Satisfy Mediation Condition Precedent In Settlement Agreement With HOA
Steep Price for Noncompliance With Mediation Condition Precedent.
The object lesson of this next case is that attention really must be paid to those mediation clauses that serve as a condition precedent before a party can initiate litigation or arbitration.
In a 2004 case, the Fourth District, Division Three, put teeth into a mediation provision contained in a California Association of Realtor (CAR) sale/purchase form contract that required parties to mediate before resorting to arbitration or litigation. Frei v. Davey, 124 Cal.App.4th 1506 (2004). Frei barred the prevailing parties from recovering attorney’s fees because they refused to mediate. We have posted earlier on the Frei case.
Here, the “bite” of the mediation provision came up outside the context of a CAR Form, and in the context of enforcement of a settlement agreement. Adams v. Newport Crest Homeowners Assn., Case No. G044230 (4th Dist., Div. 3 Mar. 13, 2012) (unpublished). Homeowner Adams was involved in litigation with her HOA resulting in a settlement agreement that she wanted to enforce – sort of. The settlement agreement included a mediation agreement, but she did not wish to mediate. She filed further court proceedings without availing herself of mediation first, and the HOA successfully moved to enforce the mediation provision requiring her to mediate (apparently mediation did not take place). That was a costly exercise, resulting in a trial court ruling that she owed the HOA $58,212 in attorney’s fees.
In the appeal, Adams argued she had not violated the settlement agreement, such that the HOA would be a prevailing party; she had simply not mediated. The Court viewed the matter otherwise. A provision in the settlement agreement “dictates the result in this case. . . [I]t provides that the prevailing party ‘in any dispute’ concerning an obligation under the settlement agreement shall be entitled to attorney fees. The dispute resolved in Case No. 05CC05516 was whether the settlement agreement obligated Adams to mediate. It did. She lost that one dispute.”
Justice Moore wrote the decision for a 3-0 panel of our local Santa Ana appellate court resulting in the affirmance. For more about the fee aspect of the case, see the post on California Attorney’s Fees, along with a vintage photograph of the game of “leapfrog.”
In the News: Arbitration and Regulation
Mandatory Arbitration Provisions: Will They Undermine the Benefits of Securities Law Regulation?
In the March 12, 2012 National Law Journal, Gonzaga University professor and former law school dean Daniel Morrissey uses the example of The Carlyle Group L.P., involved in a showdown with the SEC, as a springboard to launch his argument that mandatory arbitration provisions, if they are allowed to proliferate, will be fatal to shareholder litigation.
The Carlyle Group’s prospectus for an offering provided that purchasers of securities would agree to forego class actions involving their claims. The SEC refused to accelerate the effective date of Carlyle’s registration statement, and Carlyle blinked, withdrawing its mandatory arbitration provision.
Prof. Morrissey argues that the history of securities legislation, from the Securities Act of 1933 and the Securities Exchange Act of 1934 to the Private Securities Litigation Act, evinces “the implicit congressional finding that shareholder suits are better brought as class actions in court, not individual arbitrations.”
Of course, an explicit congressional intent to exempt securities litigation from mandatory arbitration would allow plaintiffs in securities class actions to escape the grip of the Federal Arbitration Act and mandatory arbitration provisions. Congress can create an escape hatch from the preemptive effects of the FAA. Because Prof. Morrissey points to an “implicit” congressional finding, we wonder just how much litigants can count on an implicit escape hatch if they are parties to an arbitration provision.
“Arbitration will result in more investment fraud,” Prof. Morrissey concludes. “And it probably won’t be long before another company, emboldened by the unfriendly attitude of some judges there toward SEC regulation, tries a like maneuver [to Carlyle’s] and pushes it all the way to the Supreme Court.”
Goldman Sachs Fights $20.6 Million Arbitration Award
FINRA – the Financial Industry Regulatory Authority – is a private company that is the largest regulator of securities firms doing business in the United States.
On March 12, 2012, Fox Business News reports that Goldman is seeking to overturn a $20.6 million arbitration award resulting from FINRA arbitration, and confirmed by Federal Judge Jed S. Rakoff in November 2010. The matter has been appealed to the 2nd Circuit.
Goldman disputes the claims of creditors of Bayou Group LLC, a failed hedge fund, that Goldman ignored suspicious signs that Bayou Group LLC made improper transfers of funds to its account at Goldman.
On the one hand, the award is being attacked as “unreasoned and patently indefensible.” On the other hand, it is argued that upholding the award could help raise standards for banks that clear trades for hedge funds. Samuel Israel III, the former hedge fund manager for Bayou Group LLC, surrendered to federal authorities on June 9, 2008. Mr. Israel has been sentenced to a total of 22 years (including two years for faking his own suicide).
Construction of Arbitration Clause: Clear Enough to Require Reversal of Order Denying Arbitration
First District, Division 3, Takes Practical Approach to Interpreting Arbitration Clause Between Two Merchants.
The next case is a fount of curious factoids – such as (1) there is an American Spice Trade Association (ASTA) with its own set of arbitration rules; and (2) in 2009 a multi-state outbreak of Salmonella Rissen was traced back to Union products that contained white pepper. The outbreak of Salmonella Rissen led to Union suing its supplier Harris Freeman & Co., Inc., and to Harris Freeman moving, unsuccessfully, in the trial court, to compel arbitration in New York under the rules of the ASTA. Union International Food Company v. Harris Freeman & Co., Inc., Case No. A132384 (1st Dist. Div. 3 March 8, 2012) (authored by Siggins, J.) (not for publication).
The trial court had denied the motion to compel arbitration on two grounds: “(1) Harris Freeman did not sufficiently advise Union of the specific terms and rules governing the proposed arbitration; and (2) the existence of a related third-party action raised the possibility of conflicting rulings and duplication of resources.”
The Court of Appeal, however, found overwhelming evidence of a course of dealing whereby Union for several years accepted ASTA contracts containing arbitration clauses – even though Union didn’t always sign the contracts. The clauses were never questioned, and they “clearly and unequivocally” incorporated ASTA arbitration rules.
Under Cal. Code of Civ. Proc. section 1281.2(c), a court may deny a request to arbitrate if “[a] party to the arbitration is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” While there may have been legitimate concern that other litigation involving product liability could generate conflicting results here, that concern had ceased to be an issue, because the related litigation had been settled and dismissed.
The Court of Appeal has taken a pragmatic approach here to enforcing an arbitration clause between two merchants and holding them to it. Some of the considerations that are prominent in cases involving an employer and employee seem not to have troubled the Court, given that the contractual relationship was between two companies. Perhaps the Court would have been more troubled in an employee/employer context by the fact that some of the contracts were not signed, rules were not attached, there was an incorporation by reference, and the arbitration was to take place in New York. Indeed, the Court made short shrift of an unconscionability issue – the trial court “made no determination on whether Union met its burden of proof on the issue”, and besides, “Union’s evidence is far from overwhelming.”
In the News: Can Mediation Save Stockton From Fiscal Ruin?
AB 506: A Life Saver in a Fiscal Storm for Sinking City?
In the March 10, 2012 Los Angeles Times, Diana Marcum poignantly reports about the fiscal plight of the port city of Stockton, and its human cost. Stockton has descended from boom to the brink of bankruptcy. Thriving back in 2004, Stockton has been hit hard by the real estate crisis, the loss of municipal revenue, and extensive commitments, such as employee retirement benefits, that it struggles to meet.
There is an interesting mediation angle to the story.
The City of Stockton is taking advantage of a new state law, AB 506, to mediate with creditors. “Taking advantage” may overstate the case, because the new law actually requires municipalities to mediate or declare a fiscal emergency before they can go the bankruptcy route.
Above: “Farm Security clients during applications for aid under Tenant Purchase Act. Stockton, California. December, 1938.” Dorothea Lange, photographer. Library of Congress.
A city can file a petition for bankruptcy under Ch. 9 of the Bankruptcy Code. AB 506 adds another step by barring local government agencies from filing for bankruptcy until they undergo mediation or hold a public hearing and declare a fiscal emergency. Whereas in the past, California imposed no pre-conditions to filing bankruptcy, now filing bankruptcy is to be treated as a last resort. AB 506 passed the Assembly in September 2011 on a party-line vote, 50-24, with only one Republican voting for it.
Stockton will have to mediate with its creditors and municipal employees before it can play a bankruptcy card. Good luck to Stockton and its people.
Click here for text of AB 506.
Above: “Near Stockton, California. November 17, 1938. One of six successful applicants out of seventy-five. Purchasing farm under Bankhead Jones Act. "When a feller is in for himself, if he makes it, it’s his. If he don’t make it, it’s his fault alone." (Tenant Purchase).” Dorothea Lange, photographer. Library of Congress.
Arbitration: 2nd Dist. Div. 2 Holds That Arbitrator’s Award Regarding Attorney Fees Is Not Res Judicata In Subsequent Attorney/Client Dispute Over Fees
Attorney, Who Was Not an “Arbitral Party”, Could Not Take Advantage of Arbitrator’s Findings
Shumake v. Mirisola, Case No. B227383 (2nd Dist. Div. 2 March 5, 2012) (Boren, P.J.) (not certified for publication), is a good reminder of an elementary, but useful point, concerning arbitration. If you want to take advantage of the res judicata effect of an arbitrator’s award, it certainly helps if you are a party to the arbitration. Here, the attorney arguing for res judicata was not a party to the arbitration, nor was there evidence that the actual arbitral parties intended a res judicata effect to the arbitration in any subsequent lawsuit.
The case really is about a fee dispute between the attorney, Shumake, and his client, Mirisola. Mirisola was represented by attorney Treadwell in a contractor’s dispute. Some of the issues were resolved, and Mirisola terminated Treadwell, who moved on with attorney Shumake.
In an arbitration, where he was represented by Shumake, Mirisola obtained a favorable result against the contractor – including attorney’s fees in the amount of $40,125.
But in a subsequent lawsuit between Shumake and his client Mirisola in which the attorney sought to recover fees from Mirisola, the client claimed that he had never seen the cost memorandum that was the basis for the $40,125 award when it was submitted, and besides, it was all wrong. A jury awarded Shumake $29,625 in fees in his action against Mirisola – $10,500 less than he had obtained for Mirisola in the latter’s arbitration with his contractor.
In his appeal, Shumake argued for arbitral finality and the res judicata effect of the arbitrator’s award. No go – because Shumake was not himself a party to the arbitration, and there was no evidence that the parties to the arbitration intended the results to be binding in a subsequent judicial action involving Shumake and Mirisola.
Result: In all respects, the judgment was affirmed, except for a remand to determine litigation costs.