Arbitration, Unconscionability: Third District Agrees That Solar Power Lease Agreement Contained Unconscionable Arbitration Provision
The Court Avoided Deciding Whether The McGill Rule Applied.
The Cabatits entered into a solar power lease agreement, and sued Sunnova Energy Corporation, alleging roof damage. The Court of Appeal affirmed the trial court's order denying Sunnova's motion to compel arbitration, because the arbitration provision was unconscionable. Cabatit v. Sunnova Energy Corporation et al., C089576 (3rd Dist. 1/29/21) (Mauro, Blease, Duarte).
Sunnova forfeited arguing that the issue of enforceability had been delegated to the arbitrator by failing to raise it in the trial court. Substantive unconscionability existed because the agreement was one-sided, allowing Sunnova to file lawsuits, while requiring customers to arbitrate, and the one-sidedness was not justified and supported by a showing of commercial need based on evidence. Procedural unconscionability existed because it was a "take it or leave it" contract of adhesion.
Sunnova argued that the arbitration provision was conspicuous. However, as the Court of Appeal explains, "[a] finding of procedural unconscionability is highly dependent on context." Here, the agreement was presented by a salesperson on an electronic device. The salesperson showed the Cabatits where to sign, but did not point out or explain the arbitration provision, and the Cabatits were not given a hard copy of the agreement.
COMMENT: The trial court had also concluded that the contract was unenforceable under the rule announced in McGill, which held an arbitration agreement waiving statutory remedies under the Consumer Legal Remedies Act, unfair competition law, and false advertising law is unenforceable. The Court of Appeal avoided the issue, since it agreed the agreement was unconscionable. Perhaps it also avoided the issue so as not to confront whether interstate commerce was involved, and whether the McGill rule was preempted by the Federal Arbitration Act?
Arbitration, Waiver: Second District, Div. 5 Holds Delay + Conduct Inconsistent With Arbitration + Prejudice Adds Up To Waiver Of Right To Arbitrate
Complaint Filed November 11, 2016 And Motion To Compel Arbitration Filed November 20, 2018.
Given two years elapsed between the time Plaintiff filed his putative class action wage and hour lawsuit, and the time Defendant filed its motion to compel arbitration, Defendant was going to have an uphill battle convincing the Court of Appeal that Defendant had not waived its right to arbitrate. Paul Garcia v. Haralambos Beverage Co., B296923 (2/5 1/4/21) (Kim, Baker, Moor).
The leading California case for analyzing waiver of the right to arbitrate is Agnes Medical Center v. PacifiCare of California, 31 Cal. $th 1187 (2003). Agnes lays out six factors to examine to determine if there has been a waiver of the right to arbitrate. Here, the court found three of the six to be present: undue delay, conduct inconsistent with asserting the right to arbitrate, and prejudice to the Plaintiff.
COMMENT: Courts do not like it when they whiff defendants delayed moving to compel arbitration while waiting to see if they could first accomplish favorable results in litigation. Perhaps the court caught a scent of that here, for Justice Kim wrote, "defendant here raised arbitration as a belated strategy, if not as a strategy of last resort."
Arbitration, FAA, Unconsionability: First Distriction, Div. 2 Holds FAA Does Not Apply To Transportation Workers And Agreement Is Unconsionable
Court Distinguishes Baltazar.
Plaintiff Sabid Ali sued Daylight Transport, LLC, claiming he had been misclassified as an independent contractor, and alleging various California labor violations. Daylight move to compel arbitration, failed, and appealed. Sabid Ali v. Daylight Transport, LLC, No. A157104 (1/2 12/31/20) (Kline, Richman, Miller) (partial pub.).
In the trial court, Daylight had claimed Federal Arbitration Act preemption. Under the FAA, parties engaged in interstate commerce are subject to the FAA, unless they are interstate transport workers. Daylight argued in the trial court that Sabid Ali was a trucker engaged in intrastate commerce within California, delivering goods after other truckers had move the goods in interstate commerce. This argument had no traction after cases holding that a truck driver who drove the intrastate portion of interstate trips for a transportation company was engaged in interstate commerce and therefore exempt from FAA preemption. Daylight abandoned the preemption argument on appeal, because its fallback argument was that the arbitration clause was binding under state or federal law.
However, Sabid Ali argued the arbitration provision was unconscionable, a defense he could have asserted whether or not the FAA applied, since under the FAA, state law defenses to the enforcement of a contract still exist.
The Court of Appeal, performing an unconscionability analysis under California law, explained that both procedural and substantive unconscionability existed. Therefore, the arbitration clause was not enforceable.
The most consequential part of the opinion explains why it mattered in this case that the contract did not include the AAA rules that it had incorporated by reference, distinguishing the case from Baltazar v. Forever 21, Inc., 62 Cal.4th 1237 (2016). In Baltazar, the party challenging the arbitration provision on the grounds that it did not include a copy of the AAA rules was not actually objecting to any specific element in the AAA rules. Here, however, Sabid Ali did object to the fact that the AAA rules provided for a sharing of expenses, as set forth in AAA Rule 54, and that this was "artfully hidden" by the incorporation of the rules. Thus, the court found this case to be distinguishable from Baltazar. That the AAA rule being challenged as unfair was "artfully hidden" weighed in the unconscionability analysis.
Arbitration, Choice Of Law, Nonsignatories: Foreign Nonsignatory To Partnership Deed Could Not Invoke Equitable Estoppel To Compel Arbitration
The Partnership Deed With The Arbitration Clause Was Entered Into In India, But The Court Applied US Federal Substantive Law To The Equitable Estoppel Issue.
Incense for sale in Bangalore. Author: Meanest Indian. Creative Commons License.
Appellant/Defendant Shrinivas Sugandhalaya LLP (SS Mumbai), in a lawsuit with Appellees/Plaintiffs (SS Bangalore), sought to enforce an arbitration provision in a Partnership Deed, relying on the doctrine of equitable estoppel. SS Mumbai failed in its efforts to compel arbitration, and appealed. Setty v. Shrinivas Sugandhalaya, No. 18-3557 (9th Cir. 1/20/21) (Nelson, Rawlinson, dissent, Bea).
The doctrine of equitable estoppel provides that one cannot accept the benefits of a contract and avoid the burdens, in this case, a requirement to arbitrate. SS Mumbai's problem was that the Partnership Deed containing the arbitration clause had been signed by two brothers, but SS Mumbai was a company and a nonsignatory. The majority opinion holds that federal substantive law must be applied to determine whether equitable estoppel can be applied to prevent the plaintiff from avoiding arbitration. Judge Nelson explains that under federal substantive law, for equitable estoppel to apply, "it is 'essential . . . that the subject matter of the dispute [is] intertwined with the contract providing for arbitration.' Rajagopalan v. NoteWorld, LLC, 718 F.3d 844, 847 (9th Cir. 2013)." Finding intertwinement to be lacking here, the majority held equitable estoppel did not apply, and thus, the arbitration provision could not be enforced against the nonsignatory.
Judge Bea has written an interesting dissent. For one thing, the facts of the case are interesting. Two brothers took over their father's incense business in India after the father died, and ended up as incensed competitors in a lawsuit involving federal trademark claims and state tort claims. The Partnership Deed was negotiated and entered into in India under Indian law. The father's firm was in Mumbai. SS Bangalore and SS Mumbai, nonsignatories to the agreement, were Indian companies owned by Indian nationals. Applying choice of law principles, Judge Bea opines that substantive Indian law would likely apply to the estoppel issue. He would have remanded to the district court to apply choice of law principles. The district court would then have had to determine which substantive law applied, and then apply the correct law to determine whether equitable estoppel could be applied.
COMMENT: Following the route proposed by the dissent would have added complexity, though it might have led to the same destination.
Happy New Year 2021 !
Library of Congress. December 30, 1908. Albert Levering, artist.
The Puck magazine illustration shows Father Time departing, and taking Thomas C. Platt with him. Platt was a two-term member of Congress and a three-term Senator from New York. According to Wikipedia: "Upon his death, the New York Times stated that 'no man ever exercised less influence in the Senate or the House of Representatives than he,' but 'no man ever exercised more power as a political leader.'"
Arbitration: Ninth Circuit Rules That Plaintiff’s Voluntary Dismissal With Prejudice, After Defense Motion To Compel Arbitration Is Granted, Does Not Create Appellate Jurisdiction
A SCOTUS Case Effectively Overruled An Earlier Ninth Circuit Opinion.
In Damian Langere v. Verizon Wireless Services, No. 19-55747 (9th Cir. 12/29/20) (Bumatay, Parker, Watford), the court holds, "the voluntary dismissal of claims following an order compelling arbitration does not create appellate jurisdiction."
The rule had been otherwise in the Ninth Circuit in Omstead v. Dell, Inc., 594 F.3d 1081 (9th Cir. 2010). However, now the Ninth Circuit finds that its earlier opinion in Omstead, allowing a plaintiff compelled to arbitrate to create appellate jurisdiction by voluntarily dismissing its claims, is incompatible with Microsoft Corp. v. Baker, 137 S. Ct. 1702 (2017).
Microsoft involved a situation where there was a voluntary dismissal of claims after plaintiff had been denied class certification, and the Supreme Court held that did not create appellate jurisdiction. While Olmstead involved a dismissal following an order compelling arbitration, and Microsoft involved a dismissal following an order denying class certification, the court in Langere finds that the ultimate question in both cases is the same: "whether a plaintiff may bypass a regime for discretionary appellate review through a voluntary dismissal." And the answer in both cases is the same: no. A plaintiff cannot create appellate jurisdiction by voluntarily dismissing claims after a denial of class certification, and a plaintiff cannot create appellate jurisdiction by voluntarily dismissing claims after being ordered to arbitrate.
COMMENT: If a plaintiff files in federal court, hoping to obtain class certification, and the defendant successfully moves to compel arbitration, what are the plaintiff's alternatives? The plaintiff can arbitrate and challenge the decision to compel arbitration by appeal after the merits of the case are decided by the arbitrator and confirmed as a judgment. Alternatively, the plaintiff can seek an interlocutory appeal if the district judge certifies that an appeal involves a “controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b).
Neither alternative is likely to be very tempting. The interlocutory appeal requiring district court certification is usually a longshot. As to arbitration, arbitrating for the class will be impossible unless the arbitration agreement allows class arbitration, or the rules of the arbitral forum permit the consolidation of claims by the claimants. Arbitrating one small claim is likely to be very uneconomical, and appealing the district court's decision to compel arbitration at the end would be very expensive and perhaps ultimately pointless, as a judge or jury might reach the same result as an arbitrator is the dispute were to be litigated instead of arbitrated. Another possibility, filing serial small claim arbitrations, only makes sense if there are fee and cost shifting provisions in the agreement between plaintiff and defendant and the plaintiff has a strong case.