Arbitration: On Issue Of First Impression, 9th Circuit Holds Arbitration Obligations Survived Contract Termination
Shivkov v Artex Risk Solutions Arises From Tax Shelter Gone Sideways . . .
The numerous Plaintiffs in Shivkov, et al v. Artex Risk Solutions, Inc., et al, No. 19-16746 (9th Cir. 9/9/20) (Smith, Fisher, Hawkins), probably felt that the Artex Risk Solutions was a misnomer by the time they brought suit. Defendants allegedly set up and managed "captive" insurance companies owned by Plaintiffs, to which Plaintiffs paid insurance premiums, claiming the insurance premiums as tax-deductible business expenses without recognizing them as income. Evidently the IRS had other ideas, for as the Court of Appeals wryly observes, "Although this arrangement offered the prospect of tax benefits, that prospect proved fleeting." After having to deal with an audit, delinquency notices, and threatened penalties, Plaintiffs brought suit against Defendants, alleging that the captive insurance companies "were illegal and abusive tax shelters, about which Defendants failed to inform or advise Plaintiffs." Risk solutions too good to be true?
Defendants, including some non-signatories, moved to compel arbitration, the trial court granted Defendants' motion to compel, and Plaintiffs appealed.
The most interesting part of the opinion is "an issue of first impression in our circuit concerning the survival of arbitration obligations following contract termination," as to which the Court of Appeals holds: "the Agreements do not expressly negate the presumption in favor of post-termination arbitration or clearly imply that the parties did not intend for their arbitration obligations to survive termination." So the arbitration obligations survived. If arbitration obligations did not regularly survive contract termination, a party could always avoid arbitration by terminating a contract.
The Court also held that Arizona state law recognized no fiduciary duty to point out and fully explain an arbitration clause. The arbitration clause encompassed all Plaintiffs' claims here. The availability of class arbitration was a gateway issue to be decided by the court, because there was no "clear and unmistakable" delegation of that issue to the arbitrator. And because the agreements were silent about class arbitration, they did not permit class arbitration. Finally, non-signatories, who were sued for alleged wrongs that arose from the contracts between the parties that Plaintiffs relied upon to bring suit, could invoke the arbitration clause.
Affirmed.
COMMENT: The slip opinion is 36 pages long. I appreciate the Court's concise enumeration of its resolution of the issues at the beginning of the opinion.
Arbitration, Celebrities, Delegation: Second District Div. 2 Explains No Authority Permits Sending Matter To Arbitration Simply Because Parties Agreed To Arbitrate Different Matter
A Case To Read On The Limits Of The Delegation Doctrine.
Neal Moritz, the film producer and industry executive associated with the Fast and Furious (FF) franchise, sued Universal City Studios LLC and others for breach of an oral contract and promissory estoppel after the distributor allegedly removed him as lead producer of the FF spinoff, Hobbs & Shaw. Defendants moved unsuccessfully to compel arbitration, and appealed the order denying the motion to arbitrate. Neal Moritz v Universal City Studios LLC, et al. B299083 (2/1 9/2/20) (Chaney, Rothschild, Bendix).
Moritz had entered into several FF film contracts with arbitration clauses. Appellants argued first, that the court compel arbitration of the threshold question of arbitrability, based on delegation provisions in any arbitration clauses in the FF contracts. Alternatively, if the Court of Appeal decided it had jurisdiction to decide arbitrability, then it should compel arbitration, because the dispute "related to" one or more of the FF contracts.
The interesting part of the case, which perhaps explains why it is published, is the discussion in footnote 2, and in the body of the opinion, about the so-called "wholly groundless" doctrine. If there is a valid delegation clause, i.e., clear and convincing evidence establishes that the parties intended to delegate a decision about arbitrability to the arbitrator, then the fact that the arbitrability argument itself is "wholly groundless" does not mean that the decision can't be delegated to the arbitrator. Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524 (2019). This, at least, is the rule under the Federal Arbitration Act, and it was undisputed that the FAA governed the case. Avoiding whether the "wholly groundless" rule might still be good California law, the Court of Appeal explains that "Schein presupposes a dispute arising out of the contract or transaction, i.e. some minimal connection between the contract and the dispute. That is so because under the FAA, contractual arbitration clauses are 'valid, irrevocable, and enforceable' if they purport to require arbitration of any 'controversy thereafter arising out of such contract.'" Such was not the case here, because Hobbs & Shaw was not the subject of the earlier FF contracts. The FF contract relied upon by appellants applied to "remakes" or "sequels", and the court states that Hobbes & Shaw was neither.
Does this mean that the Court of Appeal has smuggled the "wholly groundless" exception in through the back door by using different words to say that appellant's arbitrability argument was "wholly groundless"? We don't think so. There still needs to be "some minimal connection between the contract and the dispute." Just because the parties entered into a contract providing for the delegation of arbitrability issues and covering prequels and sequels doesn't mean the delegation of arbitrability issues applies to a film, if it is undisputed that the film is neither a prequel nor a sequel.
Affirmed.
COMMENT: Unless the matter now settles, the parties will get to litigate whether an oral contract isn't worth the paper it's written on.
COMMENT ON COMMENT: Did Samuel Goldwyn really say that an oral contract isn't worth the paper it's written on? Quote Investigator tells us that he disavowed this, and many other malapropisms attributed to him. In fact, this witticism has been floating around since the 19th century.
Samuel Goldwyn by photographer Arnold Genthe. 1919 or 1920. Library of Congress.
Statutorily Mandated Arbitration, Disclosures: Fourth Dist. Div. 3 Reverses Order Denying Petition To Confirm Arbitration, Because The Arbitration Was Contractual, Not Statutory
And The Attack On Arbitrator's Bias Came Too Late.
The trial judge in Rivera v. Shivers et al., G057919 (4th Dist. Div. 3 8/31/20) (Bedsworth, Thompson, Goethals) sua sponte ordered the unlawful detainer action to mandatory statutory arbitration. What could go wrong? For one thing, unlawful detainer actions are exempt from mandatory statutory arbitration.
The parties advised the trial judge they had stipulated to an arbitrator. However, after further proceedings, the attorneys stipulated to another arbitrator, but the parties did not sign the stipulation. The trial judge noted in a minute order: "Pursuant to stipulation of parties, arbitration is proceeding as a binding arbitration." The case was arbitrated, leading to an adverse result for the plaintiff/landlord. The defendants petitioned to confirm the award, and the trial judge denied the motion, expressing "concern that the stipulation for arbitration was entered into by counsel rather than the parties and concluded the arbitration had been nonbinding."
The Court of Appeal reversed, finding that the statutory proceeding had morphed into a binding contractual proceeding. Why? First, the trial court had no authority to send an unlawful detainer action to mandatory statutory arbitration. Furthermore, the attorneys and the parties acted all along as if they intended to achieve a binding result. Though the parties had not signed a stipulation to binding arbitration, they did not object to the binding arbitration, nor did they object to binding arbitration during the course of the arbitration. While it is true that the right to a jury trial is not easily relinquished, and it would certainly have been better practice to place the parties' agreement to binding arbitration on the record, everyone's conduct, consistent with binding arbitration (as explained in greater detail in the Court of Appeal's unanimous published opinion), ratified the binding nature of the arbitration. "[E]ven an unauthorized act by an attorney concerning substantial rights can be later ratified by the client and thus bind him or her."
A secondary issue was that the disgruntled landlord attacked the arbitrator's credibility because at the time the arbitrator took on the arbitration, he failed to disclose that as a young attorney, the opposing counsel' father had been the arbitrator's mentor. The arbitrator did not realize the connection until the commencement of the arbitration hearing, at which time he disclosed the relationship, and nobody objected. Plaintiff also failed to object within 10 days of the filing the petition to confirm the award, and thus plaintiff's objection was untimely.
COMMENT: The dramatis personae will be familiar to longtime Orange County practitioners who can read the opinion if they are interested. Oh what a difference it made that the ultimate determination was that the arbitration was contractual. Contractual arbitration is binding, whereas a statutorily mandated arbitration might lead to a trial de novo in Superior Court.
Interestingly, the Court of Appeal never tells us whether the disclosure that would have allegedly revealed the arbitrator's bias was material– to wit, the arbitrator's mentorship decades ago by the father of one of the attorneys. However, we note that the information was not concealed, because it was disclosed when the arbitrator became aware of it. And whether or not the information was material, it certainly was proper and appropriate for the arbitrator to disclose the relationship, leaving it to the parties and counsel to determine whether they considered it to be important. And if someone considered the information important enough to object, they should have done so at the time. The dispositive issue was the failure to timely object — at the time of the arbitration, compounded by failure to object within ten days of the filing of the petition to confirm. Might not judges look with a jaundiced eye at untimely objections about arbitrator bias made only after a party finds itself on the receiving end of an unfavorable arbitration award?
Arbitration, Employment, Unconscionability: Second District Div. 8 Reverses Order Denying Arbitration, Because Unconscionable Provision Was Severable
Employer Had No Duty To Call Arbitration Agreement To Attention Of Employee.
When Michael Conyer became employed by Hula Media, the employer's handbook did not have an arbitration clause. Several months later, Conyer signed the "receipt and acknowledgment" page, which was the final page of a revised employee handbook that did include an arbitration clause. Conyer sued the employer for sexual harassment, and claimed he would never have signed an arbitration agreement if he knew it existed. The trial court denied a motion by the employer to compel arbitration, and defendant Hula Media appealed. Michael Conyer v. Hula Media Services, LLC, et al., B296738 (2/8 8/26/20) (Grimes, Bigelow, Wiley). Reversed.
The Court of Appeal held "the employee demonstrated his assent to the arbitration clause by signing the acknowledgment, and the employer had no duty to call the arbitration agreement to the employee's attention."
However, under an unconscionability analysis, the Court of Appeal found that the provisions in the arbitration clause concerning arbitrator's fees and costs and attorneys fees, were unenforceable. Why? A clause providing the arbitrator shall award attorney fees to the prevailing party conflicts with FEHA, since "the defendant in a FEHA case may only recover attorney fees when the plaintiff's action was frivolous, unreasonable or groundless." But that was not enough to make the arbitration clause unenforceable, because the unenforceable provision could be severed.
Arbitration, Landlord/Tenant, Waiver, Public Policy: Under California Law, Arbitration Clause In Residential Lease Is Void
Case Was Governed By State Law Rather Than The Federal Arbitration Act.
The defendant landlord in Keisa Williams et al. v. 3620 W. 102nd Street, Inc., et al., B297824 (2/8 8/24/20) (Wiley, Grimes Stratton), did not discharge the burden of establishing that the residential lease at issue involved interstate commerce, and hence California state law, rather than the FAA, was applied here. And under California law, an arbitration clause in a residential lease is void. Cal. Civ. Code section 1153(a)(4); Jaramillo v. JH Real Estate Partners, Inc., 111 Cal.App.4th 394 (2003).
COMMENT: We note that in this age of legal specialization, the plaintiffs' attorneys have found a niche practice. Their business name is MYBEDBUGLAWYER. Their trademarked war cry is, "When bed bugs start biting . . . We start fighting! "Wikipedia has an interesting article on bed bugs, with some photos of nasty looking bed bugs, and the cute 19th century advertisement for cockroach and bed bug exterminators reproduced below.
Arbitration, Standard Of Review: 1st District Div. 5 Independently Reviews Arbitrator’s Questions Of Law Under Cable Connection, Inc.
An Arbitrator's Decision Is Not Ordinarily Reviewable For Error . . . Unless The Parties Agree That It Is In California State Courts.
In Oakland-Alameda County Coliseum Authority v. Golden State Warriors, LLC, A157688 (1/5 8/18/20) (Jones, Simons, Needham), high stakes depended on whether a contract between the Oakland-Alameda County Coliseum Authority and Golden State Warriors terminated by nonrenewal or terminated by expiration. The arbitrator ruled that the contract could terminate by nonrenewal. The Golden State Warriors failed to renew the contract, the arbitrator ruled it terminated, and the dire consequence was that Golden State Warriors had to continue servicing debt incurred to renovate the arena till 2027.
Given the rule that an arbitrator's mistake of law or fact is ordinarily no basis to review or overturn it, my first question was why the Court of Appeal was reviewing whether the arbitration award had properly been confirmed by the Superior Court. The simple answer is that the parties had agreed that "either party may file an application to correct or vacate the arbitration award or an application for de novo review on all questions of law based on the arbitrator's finding[s] of fact (which are deemed for such purpose to be stipulated by the parties) . . ." The parties can "agree that legal errors are an excess of arbitral authority that is reviewable by the courts." Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334, 1347, 1361 (2008).
And so the Court of Appeal independently reviewed questions of law decided by the arbitrator. However, the review did not change the outcome, as the judgment was affirmed.