Arbitration: Interpretation of Arbitration Provision By Sixth District Leads to Vacating Trial Court’s Order Compelling Employee to Arbitrate
Drafting Mistake by Employer Means Employer Must Accept the Consequences
When the employer drafts an arbitration provision, and the Court of Appeal opines, “[i]t appears that there was a huge drafting mistake,” as it did in the next case, you know that the employer is going to have a bad day in court. Derr v. The Superior Court of Monterey County [Nepenthe/Phoenix Corp., Real Party in Interest], Case No. H037117 (Sixth Dist. Feb. 8, 2012) (not to be published in official reports).
Petitioner Susan Derr had worked as a server for Nepenthe for 40 years, when she was diagnosed with cancer. The employer sent her a notice by mail indicating that she had voluntarily “quit.” She sued for disability discrimination and wrongful termination in violation of public policy.
But Ms. Derr was a party to an arbitration provision, and the employer successfully moved to compel arbitration. She then sought a writ of mandate directing the trial court to vacate its order compelling her to arbitrate. (Note: Orders compelling arbitration are considered interlocutory and not directly appealable, but can be attacked with writ review: “(1) if the matters ordered arbitrated fall clearly outside the scope of the arbitration agreement or (2) if the arbitration would appear to be unduly time consuming or expensive.” Zembsch v. Superior Court, 146 Cal.App.4th 153, 160 (2006).)
The drafting mistake? “[T]here was an agreement to arbitrate disputes ‘arising from or relating to’ the arbitration agreement itself; the arbitration agreement does not describe the types of disputes that could arise from or relate to the agreement — as nonsensical as that is.” In essence, the court is distinguishing between the arbitration agreement, on the one hand, and the employment agreement on the other hand, and saying that, for whatever reason, this arbitration agreement only provided for arbitrating disputes concerning the arbitration agreement itself, not for arbitrating disputes concerning the employment agreement and the employment relationship.
Justice Elia authored the 3-0 decision.
Blawg Bonus: “Nepenthe” is the drug for forgetfulness in ancient Greek literature. From Wikipedia, three cultural references to Nepenthe:
- H.P. Lovecraft’s "The Outsider", "But in the cosmos there is balm as well as bitterness, and that balm is nepenthe."
- Edgar Allan Poe‘s poem "The Raven": "Quaff, oh quaff this kind nepenthe and forget this lost Lenore!"
- Nathaniel Hawthorne‘s "The Scarlet Letter": "I know not Lethe nor Nepenthe…" (Roger Chillingworth to Hester Prynne)
Arbitration/Costs/Deadlines/Scope/Section 998: Second District, Div. 2, Affirms Trial Court’s Denial of Costs
Look to the Scope of the Arbitration Provision to Determine Whether Costs Need to Be Addressed by the Arbitrator or the Court
The plaintiff, a patient alleging malpractice, suing through his guardian ad litem, lost a first arbitration against a doctor. Unfortunately for the doctor, his party arbitrator had an ex parte contact with the neutral arbitrator while the award was pending — leading the court to vacate the eventual award that would have helped the doctor. In a second arbitration, the patient won a significant monetary award, and then sought costs (based on an earlier cost shifting CCP section 998 offer). Costs were denied by the trial court on the grounds that costs should have been determined by the arbitrator. Maaso v. Signer, Case No. B228314 (2nd Dist., Div. 2 Feb. 7, 2012) (certified for publication).
The patient appealed the denial of costs, and the doctor appealed the vacation of the first arbitration.
Arbitration/Unconscionability/Employment/FAA: Employment Arbitration Provision Invalidated By 4th District, Div. 3, On Grounds of Unconscionability
Arbitration Provision Drafted By Employer in Contract of Adhesion Was Too One-Sided
The next case, though unpublished, nicely lays out principles relevant to an arbitration clause in the employment context, including procedural and substantive unconscionability, Federal Arbitration Act (FAA) preemption, and severability. Mayers v. Volt Managemnt Corp.,Case No. G045036 (4th Dist. Div. 3 February 2, 2012). This is a useful opinion to read when drafting an arbitration clause in an employment agreement. If only Volt had had the opportunity to read the opinion in advance, it might have avoided a shock. (A reason to keep “current” with our blog.).
Justice Fybel, the author, summarizes the holding, affirming the trial court’s finding of unenforceability, and refusal to sever unenforceable provisions:
“The arbitration provisions contained in the employment application, employment agreement, and employee handbook each required that plaintiff submit employment-related claims to arbitration pursuant to the ‘applicable rules of the American Arbitration Association in the state’ where plaintiff was employed or was last employed by defendant. Plaintiff was not provided with a copy of the controlling American Arbitration Association (AAA) rules or advised as to how he could find or review them. The provisions also failed to identify which set of rules promulgated by the AAA would apply. They further stated that the ‘arbitrator shall be entitled to award reasonable attorney’s fees and costs to the prevailing party.’ For the reasons discussed post, such a prevailing party attorney fees term exposed plaintiff to a greater risk of being liable to defendant for attorney fees than he would have been had he pursued his FEHA claims in court.”
A prevailing FEHA defendant, usually the employer, only recoups fees if the employee’s claims were frivolous, unreasonable, without foundation, or in bad faith. Here, the arbitration provision changed the ground rules, enabling the employer, as a mere prevailing party, to recover fees. That factor pointed to substantive unconscionability.
The FAA preempts state law that places an arbitration agreement on an unequal footing and makes it more difficult to enforce than other contracts. But that was not the case here, since unconscionability is a defense to enforcement of contracts in general, not to a specific type of contract.
Finally, the trial judge did not err by refusing to sever arbitration provisions, where unconscionability permeated the contract.
Moral: Though it may at first blush seem self-defeating for the employer to draft a fair arbitration provision, that is the route to enforceability.
Arbitration: Unavailability of Arbitrator Means Petitioner Couldn’t Be Compelled to Arbitrate
Missing You: Availability of Arbitrator Was a Material Factor or Consideration Relating to Petitioner’s Agreement to Submit to Arbitration
Here, the petitioner agreed to arbitrate with a particular arbitrator who turned out to be unavailable. Nevertheless, the Superior Court of San Bernardino County compelled arbitration. The petitioner sought a writ to vacate the order of the Superior Court. Curtis v. Superior Court of San Bernardino [Coachmen Recreational Vehicle Company, et al., Real Parties in Interest], Case No. E054779 (4th Dist. Div. 2 January 23, 2012) (not to be published in official reports) (Codrington, Acting P.J.).
The Court of Appeal issued a peremptory writ directing the Superior Court to vacate its order compelling arbitration, and to enter a new order denying the motion to compel. It reasoned: “[I]f the use of a particular arbitration forum and its rules is considered ‘material,’ a fortiori, the use of a specific arbitrator known to the parties.”
TIP: If you really do want to arbitrate, consider agreeing to a Plan B up front, in case the arbitrator, or particular forum, turns out to be unavailable.
Arbitration/Arbitrator’s Fees/Appealability: Second District, Division One, Affirms Order Denying Petition to Confirm Arbitration Award Following Upon Failure of a Party to Pay Fees in Arbitration
Failure of Party to Pay Fees Here Resulted in Termination of Arbitration, and Case Bouncing Back to the Trial Court
The next case grabbed Marc’s attention, because it involved a situation he has had to confront in arbitration: what to do when a party refuses to pay its share of arbitration fees. The resulting opinion, certified for publication, scrutinizes the problem — apparently not so rare, given the comment of long-time Superior Court Judge Malcolm Mackey: “This happens all the time. People don’t want to pay fees.” Cinel v. Christopher, Case No. B231679 (2nd Dist., Div. 1 Jan. 20, 2012; pub. order Feb. 16, 2012) (Johnson, J.).
Cinel purchased stock, commenced an action for securities fraud and related claims against defendants, and ended up in AAA arbitration. The AAA can pull the plug on an arbitration when parties don’t pay fees. That’s what happened here: the panel terminated the arbitration due to the nonpayment of fee deposits.
Defendant Christopher then filed a motion in the Superior Court to confirm the purported fee-related “award”. We say “award” advisedly, because that was Defendant Christopher’s way of characterizing the outcome. The trial court denied the motion to confirm.
The threshold question for the Court of Appeal was whether the order “denying” the petition to confirm the arbitrator’s ruling was appealable. The statutory scheme contemplates an arbitration award may be confirmed, vacated, or corrected in the trial court; in response, a party may request the court to dismiss the petition. The statutory scheme prescribes the options: an aggrieved party may appeal from an order dismissing a petition to confirm, correct, or vacate an award. Cinel argued that an order “denying” a petition to confirm is not appealable, because it is not a “dismissal.” However, under the circumstances, the Court of appeal construed the order “denying” the petition to confirm an award as a “dismissal”, making it immediately appealable by Christopher.
Christopher then argued that the arbitrator’s termination of the proceedings for lack of payment of fees constituted an award that had to be confirmed. The argument relies on an assumption that there was an “award”, and that the trial court’s “denial” of the motion to confirm the award was an unauthorized vacation of the award, because the trial court can only confirm, vacate, or correct the award, or else “dismiss” a petition to confirm; and, furthermore, because the trial court did not “dismiss” the petition, vacate the award, or correct it, it had to confirm the award.
The problem with this mind-bending technical argument is that the termination of the proceedings for failure to make a payment did not constitute an “award” within the mean of section 1283.4. The arbitrator’s order did not address any of the issues in controversy.
Along the way to its conclusions, the Court of Appeal makes some nice distinctions between whether denial of a petition to vacate an award is an appealable order (no, in Mid-Wilshire Associates v. O’Leary, 7 Cal.App.4th 1450 (1992), because the order was appealable after confirmation), and whether denial of a petition to confirm is an appealable order (yes, here, where denial was tantamount to dismissal). The court also distinguished between a termination of proceedings that resulted in an award (Young v. Ross-Loos Medical Group, Inc., 135 Cal.App.3d 669 (1982), where the termination occurred because of a failure to prosecute with due diligence), and a termination of proceedings that did not result in an award (here, where proceedings were terminated for failure to pay, and not issues were reached on the merits). And the court distinguished between a petition to compel arbitration (Lifescan Inc. v. Premier Diabetic Servs., 363 F.3d 1010 (9th Cir. 2004) (petition to compel/continue arbitration should have been denied where fees were not paid, and arbitration was terminated, but parties’ agreement provided apportionment of fees would be left to arbitrators), and a petition to confirm an award (here).
Nor did the trial court err in lifting a stay to set the matter for trial. Once a stay is granted, the court’s “vestigial powers” include the power to rule on a petition to confirm, correct, or vacate an award. Here, where the court dismissed the petition to confirm the award, the stay terminated, and the trial court properly set the matter for trial.
Congratulations to Benjamin Shatz, an appeals specialist at Manatt, representing Plaintiff and Respondent Washington Umberto Cinel. Kudos too to Bob Platt, spearheading this litigation at Manatt, and to associate Emil Petrossian, who argued the case as his first appeal and obtained the favorable published decision.
Enforcement of Settlement Agreement: Second District, Division 8 Holds Settlement Enforceable Against Employer Under CCP section 664.6 in Wage and Hours Case.
Court Rejects Employer’s Arguments That Agreement Lacked Material Terms and Was Obtained Through Fraud.
Mejia v. Jhan, Inc., No. B230818 (2nd Dist. Div. 8 January 10, 2012) (unpublished), involved an overtime dispute between the employee, Mejia, and the employer, Jhan, Inc. The parties entered into a settlement agreement calling for the employer to make a lump sum payment of $25,000, without admission of liability, and for the parties to execute a further long form agreement, a common term in short form agreements.
You guessed it: the employer did not pay $25,000, claimed that the agreement was unenforceable for lack of material terms, argued that it had been obtained through fraud and argued that the employee had breached a confidentiality agreement.
From the employee’s point of view, it turned out that the settlement was adequately drafted:
“The Stipulation satisfies the statutory prerequisites of section 664.6. It is a written agreement duly executed by all parties. Moreover, paragraph 6 of the Stipulation expressly provides that “[t]his mediation settlement agreement is intended to be binding and enforceable and is effective this 13th day of Oct., 2010, and reflects the final agreement between the parties to this dispute, and each of them, pursuant to Evidence Code Section 1123. This stipulation for settlement is admissible and subject to disclosure, despite the otherwise enforceable requirements of confidentiality, solely for the purpose of establishing in court that an agreement has been reached by the parties for purposes of enforcing and interpreting that agreement.”
Evidence of fraudulent inducement was lacking, and even if the employee had breached a confidentiality term, that did not render the agreement unenforceable.
Result: Affirmed on appeal. Justice Grimes authored the opinion, in which Justices Rubin and Flier concurred.