Arbitration, Vacatur, Illegality, Fees: Second District, Div. 8 Holds That Arbitrator Could Decide Contract Was Illegal
Who Decides Illegality Of A Contract, The Arbitrator Or The Court?
Michael Bacall, an actor, was represented by Jeffrey Shumway, an attorney, who provided "legal/management services and [Chief Content Officer] services." Bacall alleged Shumway failed to disclose he was "inactive" with the State Bar, and Bacall terminated the contract with Shumway and his company Timaeus. Timaeus filed a demand for arbitration with the AAA, and Bacall filed a complaint asserting various claims, including breach of contract and rescission. The trial court granted the motion to arbitrate (be careful what you ask for), and the arbitrator issued an award requiring Shumway and Timaeus to return $201,025.82 to plaintiffs/respondents Bacall and his company RBC Entertainment, and also to pay them $237.607.25 in fees and costs.
Shumway and Timaeus appealed. Michael Bacall et al. v Jeffrey Shumway et al., B302787 (2/8 3/16/21) (Ohta, Grimes, Wiley).
The chief argument by Shumway was that it was the duty of the court, not the arbitrator, to review the legality of the contract. This was somewhat curious, given that it was Bacall who filed a lawsuit and Shumway who successfully moved to compel arbitration. Shumway relied on a case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949), in which a party sought to vacate an arbitration award on the basis the arbitrator enforced an illegal contract, and the California Supreme Court held the arbitrator who enforced an illegal contract exceeded his powers. Why? An arbitrator who enforces an illegal contract presumably has no rights and powers conferred under the contract. But the Loving case did not convince the court here, because the situation was the opposite: instead of enforcing an illegal contract, "the arbitrator severed the unlawful legal services rendered on a contract that Respondents had terminated . . . and allocated damages accordingly."
Russian-made antipersonnel mine in Cambodia. Creative Commons License.
Another aspect of the case concerning legal fees is troubling as an example of the landmines litigators can step on in arbitration. Shumway alleged the arbitrator engaged in misconduct by denying an opportunity to address issues related to attorney fees and costs. After the arbitration hearing, Bacall requested attorneys fees and costs and submitted billing records. Shumway's counsel wrote to the arbitrator that arbitrators typically entertain such requests after an award has been rendered. The arbitrator wrote back: "Consideration of attorney fees will not take place until the case is decided and a prevailing party is determined. Anything submitted in that regard will not be read until then." Shumway did not submit a response, and the arbitrator's final award also included the fee award.
Evidently Shumway felt sandbagged by the arbitrator's response. But the Court of Appeal disagreed, though it did acknowledge, "the arbitrator's response was vague," and that one might not know best how to argue the attorneys fees issue before one knew who would be the prevailing party However, the court pointed out that the arbitrator had not never explicitly ordered that Shumway could not file an opposition before the arbitrator addressed fees and costs.
COMMENT: Regarding the briefing of the fees and cost issue, the Court explained, "the onus was on Appellants to seek clarification, which they failed to do." Good advice — and a painful lesson.
Confidentiality, Videoconferencing: What Information Does Zoom Keep?
Do You Know What Information Zoom Has About Your Communications?
Mediators, arbitrators, litigators, and parties are rightly concerned about the confidentiality of communications. Mediators rely on the mediation confidentiality protections in the California Evidence Code, sections 1119 et seq, and litigators and arbitrators rely on confidentiality agreements. Today, many of us are using online videoconferencing platforms to communicate, and we also seek assurances that those platforms preserve confidentiality. The widespread use of Zoom led to concerns about how Zoom communications were encrypted, and also led to the use of passwords and waiting rooms to protect participants from unwanted intruders. And it is common at the beginning of Zoom conferences, if not earlier, to insist that participants agree that they will not take screen snapshots, or record Zoom video or chat.
But what information does Zoom preserve that might be reached by a government agency or a subpoena?
There are several online sources that are helpful in answering this question:
First and foremost, the Zoom Government Requests Guide is the place to go. The Guide discusses types of data Zoom has, data retention practices, preservation requests, U.S. and international government requests for user information, notification to users of requests for user or meeting information, details that must be included in information requests, production of documents, user consent, emergency requests, and expert witness testimony and authentication of records.
Zoom provides the following high-level summary of types of data it has: "We obtain data that users provide to us, as well as data that our system collects. We may also obtain some data from visitors to our marketing websites. . . .We have not built a mechanism to decrypt live meetings for any purpose, including lawful intercept, and we do not have the means to insert our employees or others into meetings without that person being visible as a participant. As such, we do not collect or maintain information related to meeting content unless requested by the meeting host, for example, to record and store the meeting in our cloud. Zoom does not sell user data and we have no intention of selling user data going forward."
Zoom's information about data it has should be read together with its Privacy Statement.
Our takeaway is that metadata may be kept by Zoom, as well as video, audio, and chat recording that the user decides to store in the cloud. The limitations to accessing such information are set forth in greater detail in the Guide.
Second, in addition to the policies described on the Zoom website, take a look at the Stored Communications Act, 18 U.S.C. sections 2701-2712. This is a law that addresses voluntary and compelled disclosure of "stored wire and electronic communications and transactional records" held by third-party internet service providers.
Third, here are some articles still available online, at the time of this post, that are relevant to understanding the accessibility of Zoom's data:
- Dan Zelenko, Nimi Aviad, John Davis, Rukiya Mohamed and Bridget Carr, Anticipate Gov't Subpoenas of Your Zoom Recordings, April 23, 2020, Law360
- Suhauna Hussain, Is Zoom safe to use? Here's what you need to know, April 13, 2020, Los Angeles Times
- Nico Grant and Candy Cheng, Zoom Says Subpoena Is Needed to Work with Law Enforcement, June 5, 2020, Los Angeles Times
Arbitration, PAGA, Delegation: Second District, Div. 5 Holds That Question Of Whether Plaintiff Is “Aggrieved Employee” Under PAGA Cannot Be Delegated To Arbitrator
Efforts By Employers To Have An Arbitrator Decide A Dispositive Part Of A PAGA Claim Continue To Founder.
The wreck of the Atlantic. c1873. Currier and Ives. Library of Congress.
The Court of Appeal holds that the delegation of the question whether plaintiffs are "aggrieved employees" to an arbitrator frustrates the purpose of the Private Attorneys General Act of 2004, and is therefore prohibited under California Law. Robina Contreras et al. v. Superior Court of Los Angeles, Respondent; Zum Services, Inc., Real Party in Interest, B307025 (2/5 3/1/21) (Rubin, Baker, Moor).
Contreras and Ets-Hokin alleged Zum misclassified them as independent contractors rather than employees, and committed PAGA violations. Zum, however, argued that an arbitration agreement required the parties to arbitrate, and that under applicable JAMS rules, the parties were required to arbitrate the issue of arbitrability. Zum further argued that the issue of arbitrability turned on whether the plaintiffs were "aggrieved employees." If the arbitrator determined plaintiffs were aggrieved employees, then the case could be litigated in court. But if the arbitrator decided the plaintiffs were not "aggrieved employees", because the plaintiffs were independent contractors instead, then there would be no need to litigate the PAGA claim. The trial court agreed with Zum that the issue of whether plaintiffs were "aggrieved parties" was an issue of arbitrability that had been delegated to the arbitrator to decide.. Plaintiffs sought a writ of mandate, and the Court of Appeal issued a peremptory writ directing the trial court to vacate its order granting the motion to compel arbitration, and issue a new order denying the motion.
California courts have held that employees cannot be forced to arbitrate PAGA claims, unless the state consents, because PAGA claims are like qui tam claims, and the ultimate holder of the claim is the state, which is not a party to the agreement to arbitrate. Like efforts to split a PAGA claim, Zum's effort to delegate to the arbitrator the narrow issue of whether the plaintiffs were "aggrieved employees" is an effort to delegate a dispositive issue of the entire PAGA claim to an arbitrator. Just as California Courts of Appeal have not allowed the splitting of PAGA claims, the court in Contreras would not allow the delegation of a narrow issue that was in fact dispositive of the entire PAGA claim to the arbitrator. "We agree with the chorus that in California, a PAGA plaintiff may not be compelled to arbitrate whether he or she is an aggrieved employee."
Section 998: Fourth District, Div. 3 Holds Later Offer To Enter Into Stipulated Judgment On Only One Cause Of Action Extinguished 998 Offer On All Causes Of Action
A Case Of First Impression.
Section 998 offers belong to the armamentarium of litigators engaged in settling cases, because the potential of such offers to shift costs can be a source of negotiating leverage. Hence, our blog about ADR has a sidebar category "Section 998 (Settlements)".
In Varney Entertainment Group, Inc. v. Avon Plastics, Inc., No. G058903 (4/3 2/23/21) (Goethals, Aronson, Fybel), the court had to decide whether defendant/appellant Avon's second offer to settle extinguished its pending section 998 offer. "Section 998 is silent about the revocability of statutory offers to compromise, but our Supreme Court has held that section 998 offers are fully revocable prior to acceptance." That would seem to make this an easy case to decide (and perhaps it was easy to decide). However, the case had unusual facts that made it a case of first impression.
Plaintiff Varney alleged two causes of action, one for breach of contract, and one alleged in an amended complaint after a year of litigation, for unauthorized use of Varney's name and likeness in violation of Civil Code section 3344. Defendant Avon offered to settle the entire lawsuit for $250,000 for a stipulated judgment pursuant to section 998. Defendant then offered to settle just the contract cause of action for $191,626.03. Plaintiff Varney accepted the offer as to the single contract cause of action, and on the eve of trial, dismissed the section 3344 cause without prejudice, later filing a new complaint for unauthorized commercial use of name, voice, signature, photograph, and likeness in Tennessee.
So now you see the twist: Varney would claim the stipulated judgment on one cause of action completely superseded Avon's 998 offer to settle the entire lawsuit, and thus no cost shifting should be permitted to Avon under section 998. Avon would claim that the voluntary dismissal of Varney's second cause of action meant that Avon had bested its $250,000 998 offer, entitling Avon to attorney fees it incurred after serving its section 998 offer.
Justice Goethals presented the issue: "does a later offer to enter into a stipulated judgment on only one cause of action extinguish an earlier pending section 998 offer covering all causes of action?" The answer is yes, the stipulated judgment did extinguish the earlier 998 offer. A different result would inject uncertainty into the 998 process.
Arbitration, Disclosures, Vacatur: Second District, Div. 7 Holds That Party Cannot Waive Right To Timely Object To Appointment Of An Arbitrator
Years Earlier, The Parties Had Agreed To The Appointment Of A Particular Arbitrator.
Brothers Harry and Ted Soussos fought over control of family business interests. Harry moved to compel arbitration, and Ted timely objected. The arbitrator refused to recuse himself, and Harry obtained an award in his favor. The rub here is that several years earlier, Ted and Harry had agreed that in case future disputes arose, they would not object to the appointment of Judge John P. Shook (ret.) as the arbitrator. After the arbitrator issued the award, Ted unsuccessfully sought to vacate it in the trial court. Did the earlier agreement not to contest the appointment of Judge Shook mean that Ted had waived the right to object?
The right to timely object to the appointment of an arbitrator cannot be waived, holds the court in Soussos v Soussos, No. B293358 (2/7 2/15/21) (Feuer, Perluss, Segal).
Arbitration, Automobiles, FAA, Public Policy: A “Satellite Service Facility” Agreement With Subaru Was Not Subject To Statutory Exception To Arbitration That Would Apply To Manufacturer-Dealer Franchise Agreements
Automobile Dealerships Are Subject To A Narrow Exception To Arbitration — But The Exception Did Not Apply Here.
1958 Subaru 360. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. Author: Mytho88.
Who knew? Automobile dealer franchises are subject to a narrow statutory exception to arbitration under the Motor Vehicle Franchise Arbitration Fairness Act, 15 USC section 1226. The key issue in Subaru of America, Inc. v. Putnam Automotive, Inc., No. A159686 (1/2 2/10/21) (Kline, Stewart, Miller) was whether Putnam's "Satellite Service Facility" agreement to service Subarus was part of Putnam's franchise agreement as an automobile dealer with Subaru. Because the arbitrator construed the two agreements to be separate, rather than a single integrated agreement, Putnam did not fall under a statutory exception that would have allowed it to escape arbitration.
Putnam also argued that forcing it to arbitrate was contrary to the public policy protecting dealers from mandatory arbitration. However, since the arbitrator and the court concluded the service agreement was not a dealer franchise agreement, this argument did not prevail.
COMMENT: The statutory exemption that allows dealers to avoid having to arbitrate with distributors or manufacturers of motor vehicles is a narrow exception. Apparently it exists to level the playing field between the dealers and economically more powerful manufacturers and distributors. We surmise that, though they may have less economic clout than manufacturers and distributors, dealers nevertheless had enough influence in the legislative process to obtain the narrow carve-out from arbitration. While the same "level the playing field" logic might apply to consumers and borrowers seeking an escape hatch from mandatory arbitration, evidently they have been less successful obtaining legislative carve-outs from arbitration.