Delegation, Gateway Issues: Ninth Circuit Affirms Judgment Of District Court To Compel Arbitration With Tribe Because Of Effective Delegation Clause
The Opinion Sets Forth The Steps For Analyzing A Delegation Issue.
The Chicksaw Nation opposed arbitrating a dispute with Caremark, the pharmacy benefit manager for health-insurance plans that cover many tribal members. The Nation argued that it could not be compelled to arbitrate because it had not waived tribal immunity and because a provision of the Indian Health Care Improvement Act, referred to as the “Recovery Act, would be violated by compelled arbitration. However, the question before the district court and the Ninth Circuit was not whether the tribe had waived sovereign immunity and whether there was a violation of the Recovery Act, but whether a delegation clause effectively delegated determination of those issues to an arbitrator or to a court. The district court held that the delegation clause was effective, and the Ninth Circuit agreed. Caremark v. Chicksaw Nation, et al, No. 21-16209 (9th Cir. 8/15/22) (Friedland, Wallace, Boggs).
"[A] delegation clause," explains Judge Friedland, "is essentially a mini-arbitration agreement, nested within a larger one."
The utility of this opinion is found in Judge Friedland's description of the principles in a delegation clause analysis: "First, a court must resolve any challenge that an agreement to arbitrate was never formed, even in the presence of a delegation clause. Next, a court must also resolve any challenge directed specifically to the enforceability of the delegation clause before compelling arbitration of any remaining gateway issues of arbitrability. Finally, if the parties did form an agreement to arbitrate containing an enforceable delegation clause, all arguments going to the scope or enforceability of the arbitration provision are for the arbitrator to decide in the first instance."
COMMENT: Note that delegation to the arbitrator means that the arbitrator now gets to decide whether there has been an effective waiver of tribal immunity and whether there is a violation of the Recovery Act.
Arbitration, Severability, Public Policy: Second Dist. Div. 8 Holds Arbitration Provision In Attorney Fee Dispute Was Enforceable, Though Attorney Unlicensed In California Had Done Some Work For Client
Just Because Some Work Was Done By An Attorney Not Licensed In California Doesn't Necessarily Mean The Arbitration Agreement Or The Fee Agreement Is Unenforceable.
Plaintiff Mark Brawerman sued Loeb & Loeb, arguing the law firm failed to protect his interests in negotiating with the venture capital firm Wasserstein & Co., resulting in the eventual loss of control of his successful business TMI marketing healthy frozen food desserts. As a result of the arbitration agreement in his retention agreement with Loeb & Loeb, the parties arbitrated. Brawerman was unhappy with the result. Learning that a substantial amount of Loeb & Loeb's services (382 of 928 hours) had been performed by an attorney unlicensed to practice law in California (but licensed in other states), Brawerman argued his agreement with Loeb & Loeb was against public policy, the arbitrator had exceeded the scope of his powers by proceeding under an invalid arbitration agreement, and the arbitration award should therefore be vacated rather than confirmed. The arbitration award was confirmed, and Brawerman's appeal followed. Mark Brawerman et al. v. Loeb & Loeb LLP et al, B305802 (2/8 8/3/22) (Harutunian, Grimes, Wiley).
The Court of Appeal affirmed, based on its analysis of two key cases: Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 6 Cal.5th 59 (2018) and Birbrower, Montalbano, Condon & Frank v. Superior Court, 17 Cal.4th 119 (1998).
Sheppard held that the retention of the law firm, which happened to result in a severe conflict of interest, could be invalid as against public policy, resulting in a loss of attorney fees. In Brawerman, the court limited Sheppard by explaining Sheppard applied to a situation where a breach of professional ethics infected the entire agreement from its inception. Birbrower, like Brawerman, involved a situation in which an attorney unlicensed in California performed work for a California client. While the California Supreme Court held that the Birbrower firm could not collect under the contract for work illegally performed in California by New York attorneys, it did not void the entire retention agreement, because it was possible that some of the work had been properly done by New York attorneys in New York, and that work might be severable from the work illegally performed.
Unlike in Sheppard, in Brawerman there was no conflict of interest, nor was there a basis for finding that the retention agreement was improper from the beginning. In fact, but for the fact that an attorney unlicensed in California had performed some of the work in Brawerman, there would have been no basis for attacking the fees. Loeb & Loeb has plenty of California attorneys who could have been enlisted to do work for a California client under the retention agreement. Similar to Birbrower, the work improperly done by the attorney unlicensed in California, which involved filing an arbitration demand, might be separated from the work done by licensed California attorneys. The agreement in Brawerman need not be entirely invalid if work that was done properly can be severed from work that was done improperly.
The Court of Appeal affirmed the confirmation of the arbitration award in Brawerman.
COMMENT: Interestingly, the award in Brawerman resulted in disgorgement of fees to plaintiffs in the amount $138,075 for work done by the unlicensed attorney, and fees incurred in the arbitration of $94,833. So the retention agreement and arbitration agreement were legal, but the work done by the attorney unlicensed in California was not compensable. But this was surely small potatoes for Brawerman, who believed his attorneys had not protected him properly, resulting in loss of control over a multi-million dollar company, and who therefore wanted to undo the arbitration award in its entirety.
Out-of-state attorneys are, of course, happy to know that California fixed the problem after Birbrower regarding out-of-state participation in arbitrations. California now has what is essentially a "pro hac vice" approach to out-of-state attorneys wishing to participate in California arbitrations. Cal. Code Civ. Proc., § 1282.4.
Ninth Circuit Holds Jurisdiction Exists To Enforce Arbitral Document Subpoena In California For International Arbitration Pending In DC
Fighting About Obtaining Discovery In International Arbitration Pending In US . . .
A problem occasionally encountered in arbitration is getting a court to enforce a document subpoena issued by the arbitrator. That was the problem in Jones Day v. Orrick, Herrington & Sutcliffe, LLP, Michael D. Torpey, Mitchell Zuklie, 21-16642 (9th Cir. 8/1/22) (Wardlaw, Ikuta, Bade).
The situation here was that Jones Day sought discovery from Orrick in an arbitration involving a partnership dispute and an attorney who was a German national, the arbitration was in Washington DC, and Orrick is headquartered in San Francisco. The problem that required a solution was finding subject matter jurisdiction in federal court and a means to enforce a subpoena in California.
The eventual solution, after some misfires, was to get the arbitrator to agree to sit for a hearing in California, have the arbitrator issue a by now "revised" subpoena, and file an action in the USDC, Northern District of California, to enforce the subpoena. While this solution eventually worked, it did not work in the USDC, Northern District, because the judge construed the Federal Arbitration Act to only allow the arbitrator to issue a subpoena where the arbitrator was sitting, i.e., DC. Jones Day then petitioned the Ninth Circuit — successfully — in order to enforce the arbitral summonses.
Judge Wardlaw explains, "[W]e must decide whether an action to enforce an arbitral summons issued by the arbitrator in an ongoing international arbitration under the [New York] Convention also “falls under the Convention.” We join our sister circuits in holding that (1) if the underlying arbitration agreement or award falls under the Convention, and (2) the action or proceeding relates to that agreement or award, then the federal district court has jurisdiction over the action or proceeding." Here, there was subject matter jurisdiction, because the international arbitration fell under the Convention, and the proceeding to issue summonses for the subpoenas related to the agreement.
One question remained: where could the subpoenas be enforced? An arbitral subpoena can be enforced by the district court sitting in the district where the arbitration is located pursuant to 9 U.S.C. § 204, but the court in Washington DC lacked personal jurisdiction over Orrick in San Francisco. Solution: "[W]here, as here, that federal district court lacks personal jurisdiction over the party against whom enforcement is sought, we hold that the action may be brought in any district court deemed appropriate under the general venue statute, 28 U.S.C. § 1391, because [9 U.S.C.] § 204 supplements, rather than supplants, other venue rules."
COMMENT: While Orrick may be displeased with the outcome of this discovery skirmish, the ruling will be welcomed by litigators who seek documents in international arbitration and are sometimes stymied by jurisdictional rules.
Stay: CCP Section 1281.4 Does Not Authorize Staying Litigation On Basis Of Pending Arbitration To Which Plaintiff Is Not A Party
Under Proper Circumstances, A Stay Of The Action, Or An Arbitrable, Severable Issue, Would Have Been Mandatory.
Ann Leenay brought a PAGA action for various Labor Code violations against her former employer, Lowe's Home Centers, LLC. The trial court consolidated her action with five other actions. Lowe's moved to stay the six consolidated actions based on 50 pending arbitrations with overlapping issues. The trial court stayed the litigation, and Leenay sought a writ of mandate to undo that court's stay order. Ann Leenay, petitioner, v. Superior Ct. of San Bernardino Cty., Lowe's Home Centers, respondent and real party in interest, E077292 (4/2 7/22/22) (Menetrez, Ramirez, Slough).
The key fact, which led to the granting of the writ of mandate petition, was that neither Ann Leenay, nor the other five plaintiffs, were parties to the 50 pending arbitrations. The statutory provision authorizing a stay of litigation based on pending arbitration is Cal. Code of Civ. Proc., § 1281.3. Justice Menetrez explained: "Section 1281.4 does not authorize the court to stay a plaintiff’s action on the basis of a pending arbitration to which the plaintiff is not a party.
Consumers, Employment, FAA: Second Dist. Div. 1 Holds CA Statutes Protecting Employee From “Procedural Limbo” In Arbitration Are Not Preempted By Federal Law
Business That Dilly-Dally About Paying Arbitration Fees Face Consequences.
In a case of first impression, the California Court of Appeal asks whether California Code of Civil Procedure, §§ 1281.97, 1281.98, and 1281.99 are preempted by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Sunny Gallo v. Wood Ranch, USA, B311067 (2/1 7/25/22) (Hoffstadt, Ashmann-Gerst, Chavez). Those statutory provisions were enacted in California to protect employees and consumers from falling into a state of "procedural limbo" when a business that has drafted an arbitration agreement fails to pay arbitration fees within 30 days after the fees are due. This failure to pay fees can lead to delay and "procedural limbo" in an arbitration. The consequences are significant under the recent California statutes because the "drafter" can end up paying all the fees, or lose the right to arbitrate, or even face sanctions such as termination, evidence preclusion, monetary payment, and even contempt.
The court holds that the California statutes are not preempted, "because the procedures they prescribe further—rather than frustrate—the objectives of the FAA to honor the parties’ intent to arbitrate and to preserve arbitration as a speedy and effective alternative forum for resolving disputes."
COMMENT: Businesses with arbitration provisions should not dilly-dally about paying their share of arbitration fees in employment and consumer disputes, given the severe consequences. Consumers and employees should also be alert to whether fees are timely paid, as the failure by the "drafter" to make timely payment creates options for the consumer or employee.
Arbitration, FAA: Federal Arbitration Act Applied To Intrastate Driver Who Worked For Paratransit Service For Persons With Disabilities
Federal Preemption Of California's Gentry Rule Means Class Action Waiver Can Be Enforced.
David Evenskaas, a driver, filed a wage and hour lawsuit against his employer, California Transit, Inc., which operates paratransit services for persons with disabilities in West and Central Los Angeles. Evenskaas's employment agreement included a broad arbitration agreement with a class action waiver that the employer tried, unsuccessfully, to enforce in the trial court. The employer appealed. Evenskaas v. California Transit, Inc., B308354 (2/7 7/15/22) (Segal, Perluss, Feuer).
The issue was whether the Federal Arbitration Act preempted California law and the rule in Gentry v. Superior Court, 42 Cal.4th 443 (2007), which holds that certain class action waivers in employment arbitration agreements are unenforceable. The trial court had determined that interstate commerce was not involved, because California Transit, Inc. operated in California, and absent involvement in interstate commerce, there could be no federal preemption by the FAA.
However, the Court of Appeal reached a different result, distinguishing those cases holding intrastate activities not affecting interstate commerce do not trigger federal preemption. "None of them involved an arbitration agreement between an employer and an employee hired to provide commercial services required by federal law enacted by Congress under its commerce power. Moreover, in Carbajal, Lane, and Woolls the party arguing the FAA applied did not present evidence of the party’s business that would show a connection to interstate commerce." The ADA is enacted with Congress exercising its commerce powers to the fullest, and transportation through a paratransit service affects the ability of persons with disabilities to participate in the national economy.
COMMENT: If the driver, like a trucker, fell within a class of workers who was actually engaged in interstate commerce, then he would specifically be excluded from coverage under the FAA. 9 USC § 1.