Waiver: Substantial Evidence of Waiver of Right to Arbitrate Results in Affirmance of Trial Court’s Order Denying Petition to Compel Arbitration
Our next case involves a business and a relationship gone sour. Slagter v. Maiao, No. D057368 (4th Dist. Div. 1 January 5, 2012) (unpublished). However, as the Court notes that the parties are well aware of the facts, and the facts are not relevant to the present legal issue, neither we nor the Court needs to recite those facts.
The case involves defendant/cross-complainant Maiao’s attempt to invoke an arbitration provision in a property sharing agreement in order to compel arbitration, after a lawsuit had already been filed. The case is somewhat unusual in that the trial court found a waiver of the right to arbitrate, even though the pleadings had not progressed to the point where Maiao had answered, and Maiao waited only four months to invoke the right to arbitrate. In many cases, courts have found no waiver where the defendant had only demurred, or in circumstances where even more time passed before a party petitioned to compel arbitration.
But waiver is a question of fact that is evaluated under a multi-factor test. Saint Agnes Medical Center v. PacifiCare of California , 31 Cal.4th 1187, 1196 (2003). Significantly – to the Court of Appeal – Maiao filed a cross-complaint without seeking a stay, used a demurrer to address the merits, and attacked a lis pendens. Additionally, compelling arbitration would have resulted in continuance of a trial date.
The Court was not sympathetic to Maiao’s argument that he was dragged into the litigation by the “hyper-aggressive litigation tactics” of Slagter. That problem could have been addressed by seeking a stay concurrently with petitioning to arbitrate.
COMMENT: There may be good tactical reasons for delaying a request to arbitrate. For example, a demurrer that removes causes of action can sometimes result in a case becoming more suited for arbitration. Here, however, Maiao’s counsel told the trial judge that a demurrer might remove the need to arbitrate, and that was cited by the Court of Appeal as evidence that Maiao sought to use the judicial process to litigate the case on the merits. Would it have made a difference if counsel had said that the demurrer could narrow the case and make it more amenable for arbitration? Bottom line: the deeper one gets into judicial proceedings, the riskier it becomes that a waiver of the right to arbitrate will be found.
Enforceability/Unconscionability: Third District Affirms Order That Employment Application Requiring Arbitration Is Unconscionable
Plenty of Hurdles to Enforcement in This Particular Case
In Wisdom v. AccentCare, Inc., No. C065744 (3rd Dist. January 3, 2012) (certified for publication), the Court of Appeal held:
“that a clause in an application for employment with AccentCare, Inc. (AccentCare), requiring only the applicant agree that, if hired, all disputes that cannot be resolved informally will be submitted to binding arbitration is both procedurally and substantively unenforceable as unconscionable.”
The leading case of Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) proved to be legally dispositive for finding procedural and substantive unconscionability.
First, the Court of Appeal relied on Armendariz, supra, at 115, to affirm the finding of procedural unconscionability, i.e., that the provision was oppressive due to the unequal bargaining power of the parties: “[F]ew employees are in a position to refuse a job because of an arbitration requirement.”
Second, the Court relied on Armendariz, supra, at 118, to affirm the finding of substantive unconscionability, because the provision only required the employee to arbitrate: “[I]n the context of an arbitration agreement imposed by the employer on the employee, such a one-sided term is unconscionable.”
The Court took issue with another decision that did not find procedural or substantive unconscionability in “a nearly identical arbitration agreement.” Roman v. Superior Court, 172 Cal.App.4th 1462 (2009), pretty much guaranteeing that such arbitration agreements will remain ripe for controversy.
Query: Can a pre-employment arbitration agreement in a job application be drafted so as to avoid unconscionability? The following may help: A provision that is conspicuously placed, preferably in bold, larger type, initialed, and expressly pointed out to the prospective employee – much like a disclaimer in a consumer purchase. The prospective employee would acknowledge reading and understanding the provision – in Wisdom, the employees claimed not to know the meaning of “binding arbitration”. The provision would not be “take it or leave it.” And the mutuality would be express: e.g., both employer and employee would need to agree to arbitration, and both employer and both would have to agree and acknowledge that they are giving up their right to a trial by jury. If an arbitration forum (such as JAMS, AAA, ADR Services, JudicateWest) is referenced, the forum’s rules would also be attached. Some employers might even be willing to pay the arbitrator’s fees, removing another potential issue. Overkill?
Illegality/Enforceability: Arbitration Agreement with Unlicensed Contractor May Still Be Enforceable
Fifth District Finds That The Contract Containing the Arbitration Clause Is Not Automatically Unenforceable
With limited exceptions, an unlicensed contractor will find it impossible to collect payment, and may also have to disgorge payments already made. Can an award in favor of the client of an unlicensed contractor be set aside on the grounds of illegality? Our next case, Templo Calvario Spanish Assembly of God v. Gardner, 198 Cal.App.4th 509, 129 Cal.Rptr.3d 574 (2011), answers “no,” at least not when it is the unlicensed contractor trying to avoid the arbitration award.
In Templo Calvario, the dispute between the church and the unlicensed contractor who had agreed to construct the church was subject to an arbitration clause. The arbitrator’s award required the unlicensed contractor to disgorge its fees. The trial court sided with the view that the contract with the unlicensed contractor could not be enforced, because void and illegal, and granted the contractor’s petition to vacate the award.
The church appealed, and the Court of Appeal reversed the order that had vacated the award. Relying on MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal.4th 412, 30 Cal.Rptr.3d 755 (2005) (MW Erectors), the court held that the contract containing the arbitration provision was not automatically illegal and void just because the contractor was unlicensed. MW Erectors had held that a contract entered into by an unlicensed contractor was not void under circumstances where the contractor became licensed during the course of its work.
The Court of Appeal was not persuaded by the California Supreme Court holding in an older case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949) (Loving & Evans). In Loving & Evans, the Supreme Court held that an arbitration clause could not be relied upon by the unlicensed contractor to compel arbitration. Loving & Evans is distinguishable, because in that case, it was the unlicensed contractor seeking to take advantage of the illegality of the provision to compel arbitration, and the Supreme Court refused to allow that. But the Court of Appeal noted that the Supreme Court, in MW Erectors, described Loving & Evans as not a “modern case,” implicitly overruling the holding that a contract containing the arbitration provision was void ab initio, just because the contractor was unlicensed.
Incorporation of Rules/CCP section 1281.2: Arbitration Agreement is Self-Executing Where Arbitration Clause Incorporates Existing Rules of AAA
“Self-executing” Means Party Does Not Have to File Petition Pursuant to CCP 1281.2 to Compel Arbitration
In Tutti Mangia Italian Grill, Inc. v. American Textile Maintenance Co., 197 Cal.App.4th 733, 128 Cal.Rpr.3d 551 (2011) a dispute arose between ATM, a supplier of restaurant lines, and TMIG, a restaurant. ATM commenced an arbitration pursuant to an arbitration agreement. TMIG refused to participate, taking the position that an arbitration clause incorporating rules of the AAA is unenforceable, and citing Gilbert Street Developers, LLC v. La Quinta Homes, LLC, 174 Cal.App.4th 1185, 94 Cal.Rptr.3d 918 (2009) (Gilbert Street.)
Above: Chef in North Beach Italian Restaurant. 1941. John Collier, photographer. Library of Congress.
The arbitrator disagreed, and rendered an award, entered as a judgment, and affirmed by the Court of Appeal. Gilbert Street was distinguishable, for in that case, the arbitration provision incorporated by reference future rules of the AAA, rendering that agreement unenforceable.
The Court of Appeal also addressed whether the arbitration provision was self-executing, or whether a petition had to be filed with the Court under CCP section 1281.2 to get the arbitration ball rolling. Section 1281.2 was “designed to afford a remedy where the parties have not provided for the contingency that has arisen or where the contractual scheme has failed.” Brink v. Allegro Builders, Inc.,58 Cal.2d 577, 25 Cal.Rptr. 556 (1962). Section 1281.2 is not the exclusive means for starting an arbitration. Where the arbitration provision was sufficiently specific, as was the case here, no petition needed to be filed. The provision was indeed self-executing.
Unconscionability/Enforceability: Incorporation by Reference of Arbitration Policy in Employee Handbook Was Procedurally Unconscionable.
Employer Failed to Attach the Rules . . .
Petitioner Zullo sued her employer Inland Valley Publishing Co. (Inland), for wrongful termination. The superior court granted Inland’s petition to compel arbitration and stayed the civil proceedings. Petitioner challenged the ruling by way of writ of mandate. Zullo v. Sup. Ct., 197 Cal.App.4th 477, 127 Cal.Rptr.3d 461 (2011).
The Court of Appeal granted the writ of mandate, finding the arbitration provision to be unenforceable:
“Inland’s arbitration policy is a contract of adhesion, fails to give adequate notice of the arbitration rules that will apply, and allows Inland the full range of remedies and forums for resolution of whatever claims it might have against petitioner while limiting petitioner to binding arbitration of her claims against Inland. It also imposes strict time limits within which petitioner must respond to any arbitration-related communication without imposing similar requirements on Inland. Accordingly, the arbitration agreement is unconscionable and cannot be enforced as written.” Id. at 487.
Tip: A contract of adhesion 
need not be unconscionable. But to have the possibility of satisfying this court, the arbitration provision would need to attach the correct set of arbitration rules referred to, be symmetrical as to remedies and forums for employer and employee, and be fair and symmetrical regarding time limits for responding to arbitration-related communication.
Nonsignatories/Burden of Proof/Equitable Estoppel/Third-Party Beneficiaries: Third Party Non-Signatories Cannot Successfully Move to Compel Arbitration Agreement Where They Are Neither Sufficiently Tied to The Parties to the Agreement Nor Third Party Bene
Nonsignatory Has Burden of Proof to Establish It is Party to the Arbitration Agreement and Entitled to Enforce It.
In Jones v. Jacobson, 195 Cal.App.4th 1 (2011), Societe Generale and a related entity (SG appellants) were sued along with Jacobson by the Joneses in connection with a failed investment, and sought to arbitrate. The trial court denied the motion to compel, prompting the appeal.
The problem for the appellants was that the arbitration agreement was between the Joneses and an entity named SG Americas Securities LLC (SGAS) an entity different from the SG appellants.
The appeal was unsuccessful. The nonsignatory SG appellants and Jacobson had the burden to prove that they “are a party to, and thus are entitled to enforce, the arbitration provision in the account agreement.” It was not enough for nonsignatories to establish the existence of a valid and broadly worded arbitration provision.
Here, the third parties were unable to sustain their burden, for they could not establish either a close enough relationship to SGAS to justify being able to compel arbitration, nor a third-party beneficiary relationship. The SG appellants were unable to argue that they were agents or employees of SGAS.
The doctrine of equitable estoppel can sometimes be used by a nonsignatory to argue that it would be inequitable for the party to base its claims on a contract containing an arbitration provision, but then avoid arbitration under an arbitration clause in the contract. Here, however, the account agreement containing the arbitration provision was not the basis of the claims against the SG appellants.
Finally, the Jacobson appellants relied on the additional argument that he was a “broker-dealer” and entitled to arbitrate as a “third party beneficiary.” However, that argument was also rejected on the grounds that there was an insufficient nexus between the account agreement containing the arbitration provision and the claims against the Jacobson appellants.
The opinion was authored by Justice Benke in San Diego.