Arbitration, Unconscionability: 3rd Appellate Districts Reminds Us That Unconscionability Doctrine Applies To Commercial As Well As Consumer Contracts
College That Wanted To Participate In Intercollegiate Athletics Had No Choice Other Than To Contract With Athletic Association.
Bakersfield College et al. v. California Community College Athletic Association et al., C085099 (3d Dist. 10/31/19) (Robie, Duarte, Renner), was described both by the trial court and the appellate court as a "close case". However, concluding that an arbitration agreement was "unconscionable", the Court of Appeal reversed the judgment of the trial court.
The dispute between Bakersfield College, its football coach, and the California Community College Athletic Association arose when the Athletic Association sanctioned and penalized the college for providing football players with meal, work, and housing benefits not available to other students. Apparently if Bakersfield College wanted to participate in intercollegiate athletics, it had to contract with the Athletic Association, and of course the contract contained an arbitration provision. The College appealed the sanction/penalty decision, and proceeded through three steps of a multi-level appeal process that did not go well for the College. Rather than proceeding to levels four and five, the College filed a petition for writ of mandate and a complaint for breach of contract and a motion for judgment on the writ. The Athletic Association opposed on the grounds plaintiffs failed to exhaust administrative remedies by foregoing binding arbitration, and the College argued that arbitration was unconscionable.
This was not consumer arbitration. The College was a sophisticated institution and represented by counsel. Furthermore, once entering into an agreement, it had the ability to propose and seek amendment to the Athletic Association's constitution and bylaws, and thus to seek amendment to arbitration provisions. The trial court found "at least a minimal degree of procedural unconscionability", but did not find enough substantive unconscionability to make the arbitration agreement unenforceable.
The Court of Appeal rejected the Athletic Association's argument that there was no procedural unconscionability because the parties were sophisticated and because the College could, after entering into agreement with the Athletic Association, seek to change the rules. In fact, the Court of Appeal found the ability to seek to change the rules "after" entering into an agreement to be irrelevant for an unconscionability analysis, because unconscionability must be determined as of the time the parties enter into agreement, not as of a later date.
Most interesting is the Court of Appeal's analysis of procedural unconscionability, which parallels the same analysis that goes into determining whether consumer arbitration is unconscionable. Do the parties have equal bargaining power? Is there an alternative to agreeing to arbitrate? Is there an opt-out? Who drafted the terms? Is it a "take it or leave it agreement"? The Court of Appeal agrees here that there was procedural unconscionability, without weighing in on the quantum of procedural unconscionability, but reading between the lines, one suspects that the Court of Appeal believed that the procedural unconscionability was more than "minimal" — even though the parties were sophisticated and represented by counsel. As stated in the opinion, the College "had no meaningful choice but to accept the arbitration provision as drafted by the Athletic Association", and the Athletic Association had "superior bargaining strength."
The Court of Appeal found several examples of a lack of mutuality in the agreement, leading to the conclusion that the agreement was substantively unconscionable, and that problem could not be cured by simply severing one unconscionable provision among several.
HAT TIP: Hat tip to appellate attorney Ben Ginsburg, who brought this case to my attention. Ben, among other accomplishments, is Managing Editor of the California Lawyer Association's Litigation Update.
Arbitration, FAA, Vacatur: Sixth District Holds FAA Preempts Argument That Arbitration Is Incompatible With Following Commercial Code Sections Governing Wire Transfers
Plaintiff/Appellant Unsuccessfully Argued Following California Commercial Code Required Legal Proceeding, Not Arbitration.
Plaintiff/Appellant Prima Donna Development Corporation appealed from a judgment confirming an arbitration award in favor of Wells Fargo Bank, N.A., and challenged an order compelling arbitration and denying its motion to vacate the award. Prima Donna Development Corporation v. Wells Fargo Bank, N.A., H045379 (6th Dist. 11/13/19) (Danner, Greenwood, Grover). The underlying facts provide a painful example of how transacting business over the internet can go horribly wrong. A third party hacked the email account of Prima Donna's President, and used the information obtained to fraudulently induce a "Company Administrator" — an employee of Prima Donna — to initiate a wire transfer of Prima Donna's funds to an overseas account. Prima Donna lost $638,400 wired from its Wells Fargo accounts. Of course, Prima Donna wanted Wells Fargo to bear the loss, and the dispute was subject to arbitration.
The arbitrator found in favor of Wells Fargo, concluding that Wells Fargo had followed commercially reasonable security procedures, and that under the California Commercial Code, "security procedure" did "not include a procedure for establishing that the customer is not being defrauded by a third party into making the transfer."
The California Commercial Code governs the law of wire transfers, and the key California case, Zengen v. Comerica Bank, 41 Cal.4th 239 (2007), makes it clear that the UCC provisions displace common law provisions and provide the law under which claims are analyzed. Prima Donna argued that this meant that the matter could not be arbitrated, since arbitration is an equitable proceeding, and the arbitrator might not follow the statute. The trial court, when considering the initial motion to compel arbitration, concluded that there was no reason that the arbitrator could not adjudicate a UCC claim, and evidently, the Court of Appeal agreed. In fact, the Court of Appeal pointed out that the arbitration agreement provided that the governing law of the state whose laws governed Prima Donna's accounts was to be applied, thus California law applied, and the arbitrator's award applied California's Commercial Code to the dispute.
Prima Donna further argued that the arbitration agreement was substantively unconscionable because it denied Prima Donna's right to trial by jury, and because it limited judicial review, but those arguments were preempted by the Federal Arbitration Act, which governed the agreement.
Finally, Prima Donna argued that the arbitrator had failed to address whether Wells Fargo had acted in "good faith", because there was evidence that a high "risk score" had been triggered by the transaction at Wells Fargo. But the Court of Appeal explained that Prima Donna was allowed to bring its claims against Wells Fargo and was not prevented "from receiving a review on the merits," so the failure to address "good faith" amounted only to a contention that the arbitrator made a legal error. And that is not a question subject to judicial review.
COMMENT: Under Cal. Code of Civ. Proc., section 1286.2, vacatur may be based on arbitrators exceeding "their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." But legal error per se doesn't meet the "exceeding their powers" test. Rather, the error must be "so egregious as to constitute misconduct or so profound as to render the process unfair." This becomes a matter of degree subject to specific facts and circumstances.
Arbitration, Disclosures: 9th Circuit Panel Holds That JAMS Arbitrator Must Disclose Ownership Interest In JAMS
Judge Friedland Dissents.
Billboard for Chero-Cola, a long-defunct soft-drink brand, in Louisville, a town in northeastern Georgia. Carol M. Highsmith, photographer. Library of Congress.
Monster Energy, FKA Hansen Beverage Company, designates JAMS as an arbitral forum in its agreements with distributors. So when a dispute arose between Monster Energy and its distributor City Beverages, LLC, dba Olymbic Eagle Distributing, Monster and City Beverages arbitrated with JAMS. In compliance with JAMS disclosure rules, the arbitrator duly disclosed that he had mediated with Monster before and ruled against it, that he had "an economic interest in the overall financial success of JAMS", and that the parties should assume that other JAMS neutrals participated in ADR with the parties. However, the arbitrator did not disclose that he had an ownership interest in JAMS, or that JAMS had administered 97 arbitrations with JAMS over the past 5 years. The arbitrator's disclosures were good enough for the district court, but not for a majority of the panel. Monster Energy Company v. City Beverages, LLC, Nos. 17-55813 and 17-56082 (9th Cir. 10/22/19) (Smith, Simon; Friedland, disst.).
The majority concluded, "[G]iven the Arbitrator's failure to disclose his ownership in JAMS, coupled with the fact that JAMS had administered 97 arbitrations for Monster over the past five years, that vacatur of the Award is necessary on the ground of evident partiality." Therefore, the court reversed the district court, vacated the Award, and vacated the district court's award of post-arbitration fees to Monster.
COMMENT: Judge Friedland, dissenting, would have upheld the award in favor of Monster, because she believed that the arbitrator had disclosed enough, i.e., that he had mediated before with Monster, that he had ruled against it once, that he had a general financial interest in JAMS' success, and that the parties could assume Monster was a repeat player. She raises some good points: (1) that the parties had already agreed to arbitrate with JAMS; (2) that 1/3rd of JAMS arbitrators have ownership interests; (3) that it is questionable that an arbitrator without an ownership interest has less interest in making a client like Monster happy than does an arbitrator with an ownership interest.
The real elephant in the room is the perception that JAMS and other ADR organizations favor repeat players — a problem that will not be remedied by requiring disclosure of an arbitrator's ownership interest. Aside from the arbitrator ownership interest, there is the other issue — the 97 arbitrations that JAMS has administered for Monster. Will there be satellite litigation in the future as to how many arbitrations constitute "non-trivial business dealings"? If so, perhaps we have entered a gray area without a bright line.
On the other hand, Judge Friedland's concern that this will "require vacating awards in numerous cases decided by JAMS owners" may be overblown. As Judge Friedland notes in her footnote 6, the short statute of limitations for filing a motion to vacate places a limit on how much litigation there will be. In the future, JAMS can disclose whether an arbitrator has a financial ownership interest. And just because a party loses an arbitration doesn't mean the party will seek to undo it, unless by spending more time and money the party believes it can get a better result with another arbitrator who does not have an ownership interest in JAMS. Does JAMS have to disclose that it was involved in 97 arbitrations, if it discloses that a party is a repeat player, and that the arbitrator has an ownership interest? That question is not answered.
The pragmatic question is whether the additional disclosure, by heightening awareness of the financial connections between ADR organizations and repeat players, and the additional financial stake that owners have in ADR organizations, will lead to any different decisions and outcomes.
Settlement Agreements: On Second Thought, Trial Judge’s Speculation About Rekindled Romantic Relationship Is Removed From Modified Appellate Opinion
The Case Held That Judgment Creditor's Release Of Judgment Debtor Does Not Preclude Creditor's Attorney From Pursuing Contingency Fee And Costs From Judgment Debtor.
We posted about Mancini & Associates v. Jason Schwetz, B290498 (2nd Dist. Div. 6) (Gilbert, J.) on September 5, 2019. This is an unusual case in which the judgment creditor, Gina Rodriguez, and her former employer and judgment debtor, Jason Schwetz, buried the hatchet, and entered into a settlement agreement and release, without consideration. The trial judge thought something was amiss and said so. The Court of Appeal evidently thought the trial judge's observations were noteworthy, and quoted the judge: "In ruling, the trial judge commented, 'Something about this [factual situation] doesn’t seem right. It’s inconsistent. Sometimes I see this happen, this sort of resolution when there is evidence of a kind of romantic relationship that’s been rekindled . . . .'” We also thought this was worth quoting in our earlier post, because perhaps it explained why the judgment creditor released her debtor. On September 30, 2019, the Court of Appeal had second thoughts, modifying its opinion to remove the trial judge's comments.
We surmise that the Court of Appeal recognized that the comments were in the realm of the speculative, unnecessary to its holding, and better left unsaid.
Mediation/Attendance: Fifth District Holds That Agricultural Employees Do Not Have Right Of Access To On-The-Record Mandatory Mediation And Conciliation
California's Labor Code Provides For A Mandatory Mediation And Conciliation (MMC) Process To Promote The Collective Bargaining Process In Agricultural Labor Relations.
When collective bargaining between the United Farm Workers Union and Gerawan Farming, Inc. reached an impasse, the UFW requested, and the California's Agricultural Labor Relations Board ordered the parties to mandatory mediation and conciliation under the MMC statutory scheme. "On-the-record" mediation sessions, meaning sessions in which witness testimony was transcribed by a court reporter, were held, and a Gerawan employee, Garcia, sought access to the sessions. The mediator denied the request, and the Board upheld the denial, holding the public does not have a constitutional right to attend MMC hearings. The superior court granted summary judgment in favor of the Board. Garcia and Gerawan separately appealed from the resulting judgment in the Board's favor on their complaints. Gerawan Farming, Inc., Plaintiff and Appellant, v. Agricultural Labor Relations Board, Defendant and Respondent; Lupe Garcia, Intervener and Appellant, F076148, F076150 (5th Dist. 9/24/19) (DeSantos, Franson, Pena).
The issue presented on appeal is "whether there is a public right of access to on-the-record MMC proceedings under the federal and state Constitutions, and whether Gerawan has standing to challenge the Board's decision." The Court of Appeal held that Gerawan lacked standing, and went on to analyze Garcia's argument that Garcia had a "presumed right of access" to the mediation sessions. The Court emphasized that the sessions were not "ordinary civil trials", and that whether a right of access existed would be analyzed with a two-prong test that looks at: (1) experience; and (2) logic. Applying the two-prong test, the Court held:
"In sum, given that on-the-record MMC proceedings are part of the collective bargaining process, the benefits of open MMC proceedings are far less than the benefits of open criminal or ordinary civil proceedings. This finding, coupled with the absence of a showing of a historical tradition of public access, leads us to conclude there is no constitutional right of public access to on-the-record MMC proceedings."
The judgment is affirmed.
On May 15, 2016, we blogged about another aspect of the Gerawan/UFW labor dispute, in which the Fifth District held that California Labor Code section 1164.9, which limited judicial review of the California Agricultural Labor Board's action on a collective bargaining agreement, after MMC, was unconstitutional.
"He came from an Oklahoma farm in April, 1938. Became a migratory farm worker in California, joined the United Agricultural Packing and Allied Workers of America (Congress of Industrial Organization-CIO) at the beginning of the cotton strike of October, 1938 and became the leader of the "Flying Squadron" which attempted to picket the large fields of corporation farms by automobile caravans. He drove the first car. Kern County, California." Dorothea Lange, photographer. 1938. Library of Congress.
International Arbitration: 9th Circuit Holds Case Seeking To Collect International Arbitration Award Properly Belonged In State Court
Collection Efforts Case Was Not Related To International Arbitration Agreement Or Award, And So Belonged In State Court.
The District Court for the Western District of Washington denied plaintiff Cerner's motion to remand to state court an action that defendants had removed to federal court on the basis that it related to an international arbitration award. 9 U.S.C. section 205 authorizes removal from state to federal court of an action that "relates to an arbitration agreement or award falling under" the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958. And in fact plaintiff Cerner had obtained an international arbitration award against iCapital, LLC and Dhaheri. Problem was that those two defendants were not the defendants in the state court action brought to enforce the award and alleging alter ego status. So the issue presented in the 9th Circuit appeal of the district court's order denying remand was whether the case fell within section 205 — whether the case "relates to an arbitration agreement or award falling under the Convention." Cerner Middle East Limited v. Belbadi Enterprises LLC, et al., No. 17-35157 (9th Cir. 9/23/19) (Clifton, Callahan, Benitez).
Ultimately, the 9th Circuit panel held that the case did not relate to the arbitration agreement. For one thing, the defendants in the case were not the same as the respondents in the arbitration (though maybe they will be found to be related). The arbitration award did not have preclusive effect over issues in the arbitration that would have to be adjudicated, and the findings in the arbitration would be inadmissible hearsay in the lawsuit. That the court might find the legal analysis "persuasive" in the arbitration did not mean that the arbitration "relates to" and "conceivably affects" the arbitration. So the case will be remanded, because removal jurisdiction is lacking.
BEST LINE IN THE CASE: "It has famously been observed that "'[jurisdiction' is a word of many, too many, meanings.""
Quasi-In Rem Jurisdiction Existed Over Defendant Because Court of Appeal of Paris Confirmed International Arbitration Award And Defendant Owned Property In Oregon.
In Cerner Middle East Limited v. iCapital, LLC, a U.A.E. Limited Liability Company; Ahmed Saeed Mahoud Al-Badi Al-Dahari, No. 17-35514 (9th Cir. 9/23/19) (Clifton, Callahan, Benitez), an appeal from the District Court for the District of Oregon, the panel reversed the district court's dismissal, for lack of personal jurisdiction, of an action to enforce a foreign arbitration award against property in Oregon owned by defendants. Note: in the two Cerner cases, the defendants are not the same, and in fact, the district court judges are different. This Cerner case involved efforts to enforce the arbitration award against the arbitration respondent's property in Oregon. The other Cerner case involved efforts to enforce collection against property owned by related entities in Washington.
In this case, the panel found that quasi in rem jurisdiction over defendants existed (a) because plaintiff possessed a valid judgment against the defendant; and (b) the defendant owned property in Oregon. A "court of competent jurisdiction" — to wit, the Court of Appeal of Paris — confirmed the international arbitration panel's conclusion that the defendant was subject to its jurisdiction, while the appeal from the District Court to the 9th Circuit was pending!
And so this Cerner case is also reversed and remanded for further proceedings.