ADR Case Updates
Compelling Arbitration, 04/16/09
Although California courts have not published any opinions concerning mediation since my last update of March 5, 2009, six decisions have been rendered regarding the nuances of compelling arbitration that hold:
- Class arbitration waivers unenforceable (two cases);
- Employment contract arbitration provision not unconscionable;
- Nursing home may not compel arbitration where conflicting rulings of law and fact possible with co-defendant hospital;
- Real property open listing agreement deemed �real property sales transaction� subject to requirements of CCP � 1298; and
- High arbitration cost imposed by commercial contract term not substantively unconscionable where opposing party proposed it.
In Sanchez v. Western Pizza Enterprises, Inc., (Mar. 17, 2009, Second District, Div. Three), 90 Cal. Rptr. 3d 818, Plaintiff was a pizza delivery driver working for Domino�s Pizza. He filed a putative class action alleging violation of minimum wage and reimbursement laws. Defendant moved to compel arbitration under an agreement signed by Plaintiff containing an arbitration provision and waiver of class arbitration. Plaintiff opposed the motion claiming that the class arbitration waiver was unenforceable and the entire agreement unconscionable. Agreeing with Plaintiff, the trial court denied the motion to compel.
Affirmed. Under Gentry v. Superior Court (2007) 42 Cal. 4th 443, courts must determine if class arbitration waivers improperly interfere with unwaivable statutory rights. Specifically, the trial court must consider the modest size of an individual recovery, potential for retaliation, the fact that absent members may be unaware of their rights, and other obstacles presented by individual arbitration. If the court finds that class arbitration would be more effective, then it must invalidate the class arbitration waiver.
Here, the court found Plaintiff�s potential recovery was modest, the potential for retaliation high, and that most drivers had limited English skills and were unlikely to be aware of their rights. Therefore, under Gentry, the waiver was unenforceable.
The second class action waiver case is Franco v. Athens Disposal, Inc., (Mar. 10, 2009, Second District, Div. One), 90 Cal. Rptr. 3d 539. Plaintiff, a trash truck driver, filed a class action complaint against his employer alleging violation of wage and hour laws (overtime, meal breaks, and rest periods). Defendant moved to compel arbitration, asserting that Plaintiff had signed an arbitration agreement waiving the right to bring class actions against Defendant. The trial court compelled arbitration. Plaintiff moved for reconsideration, and submitted declarations from employment attorneys who claimed they would not arbitrate Plaintiff�s claims because of the low amount of damages. Nevertheless, the trial court again ordered Plaintiff to arbitrate.
Reversed. Under Gentry, the Plaintiff�s statutory rights to overtime pay, meal and rest periods could be undermined unless the class action waiver is invalidated. First, individual awards in �wage and hour� cases tend to be modest. Second, current employees with individual claims would be subject to a higher risk of retaliation. Third, individual employees may be unaware of any violations. Finally, class actions are the best way to insure employer compliance. Because all of those factors were present here, the waiver was unconscionable as it undermined Plaintiff�s ability to enforce statutory rights.
In Roman v. Superior Court (Flo-Kem, Inc.,) (Apr. 13, 2009, Second District, Div. Seven), ___Cal. Rptr. 3d ___, 2009 WL 975994, an employment application arbitration provision was found not unconscionable where a mutual obligation existed to arbitrate all claims arising out of Plaintiff�s employment with Flo-Kem, Inc. After working for ten years, Plaintiff was diagnosed with depression and placed on disability leave. Later that year, Flo-Kem fired her. She sued under the Fair Employment and Housing Act, asserting several statutory claims including disability discrimination. Flo-Kem sought to compel arbitration. Notwithstanding Plaintiff�s opposition, claiming that the arbitration provision was unconscionable because it required her to arbitrate without limiting Flo-Kem�s right to a judicial forum, the trial court compelled arbitration. Plaintiff petitioned for writ of mandate.
Petition denied. Unconscionability requires both procedural and substantive elements. The more substantively oppressive a term, the less evidence of procedural unconscionability is needed, and vice versa. Adhesions contracts usually contain some procedural unconscionability, such as where an employer offers a position on a �take-it-or-leave-it� basis. Substantive unconscionability occurs if a term fails to impose on the employer a corresponding obligation to arbitrate. Although the subject contract was one of adhesion, Plaintiff failed to show substantive unconscionability. The mere inclusion of the words �I agree� applicable to Plaintiff failed to constitute substantive unconscionability in an otherwise mutual arbitration provision. (Cf. Higgins v. Superior Court (2006) 140 Cal. App. 4th 1238, 1252-1253).
In Birl v. Heritage Care, LLC, (Apr. 8, 2009, Second District, Div. Two), ___Cal. Rptr. 3d ___, 2009 WL 608340, Defendant, a nursing home, could not compel arbitration where conflicting rulings of law and fact were possible with co-defendant hospital and others. Decedent, Jerome Birl, underwent surgery at Kaiser Permanente Hospital, and was ultimately transferred to Defendant�s facility, where he later died. His family brought a wrongful death action. Defendant moved to compel arbitration based upon an arbitration agreement signed by decedent�s wife. The trial court denied the motion.
Affirmed. Under CCP � 1281.2, courts must order parties to arbitrate if they have entered into a written agreement to arbitrate. However, an exception exists if one of the parties is also a party to a pending action with a third party, arising out of related transactions, and conflicting rulings of law or fact are possible. Here, the fact that Defendant provided services separated in time from services provided by others is of no consequence. Kaiser doctors continued to treat decedent while at the nursing home. Because conflicting rulings of law and fact could occur if Plaintiff was required to arbitrate with Defendant while pursuing jury trials with the other co-defendants, the trial court exercised its sound discretion in denying Defendant�s motion to compel arbitration.
In McAvoy v. Hilbert (Mar. 24, 2009, Fourth District, Div. One), 91 Cal. Rptr. 3d 437, a real property open listing agreement was deemed a �real property sales transaction� subject to the requirements of CCP � 1298. Randall and Trudy McAvoy owned commercial property that housed their woodworking business. They hired Dale Hilbert as their real estate broker to sell the property and business. The McAvoys signed an open listing agreement (OLA) with Hilbert, which included an arbitration provision that did not comply with the disclosure requirements of CCP � 1298. The McAvoys sold the property to Charles Hughes, who then defaulted on the seller carry-back promissory note. After the McAvoys recorded a notice of default, the property was sold to Sidney and Judith Levine on Hughes� assurance that he would use the sale proceeds to revive the business. At the close of escrow, the McAvoys received full payment on their secured lien, but Hughes declared bankruptcy. Because they were left with an empty building but still obligated on the loan to procure it, the Levines sued the McAvoys and other parties. The McAvoys cross-complained against Hilbert for his alleged negligent preparation of documents. Hilbert sought to compel arbitration under the arbitration provision in the OLA. Finding that the OLA pertained to a �real property sales transaction� subject to requirements of CCP � 1298, which were not met, the trial court denied the motion.
Affirmed. Since the subject transaction involved the sale of a business and real property, the OLA was included in the plain language of � 1298. Therefore, the arbitration clause�s failure to comply with � 1298 rendered it void and unenforceable.
In Kam-Ko Bio-Pharm Trading Co., Ltd-Australasia v. Mayne Pharma (USA) Inc., ___ F. 3d ___ (9th Cir., Mar. 11, 2009), 2009 WL 606162, the Ninth Circuit held that the high arbitration cost imposed by a commercial contract term was not substantively unconscionable where the opposing party proposed it. Plaintiff helped Defendant obtain a distribution deal with a drug producer in exchange for a royalty agreement. The parties had entered into an arbitration agreement that provided for arbitration before the International Chamber of Commerce (ICC). After a dispute arose, Plaintiff sued to compel arbitration. The district court referred the dispute to the ICC, which set advance costs to arbitrate at $220,000. Both parties objected to the fee as unreasonably high and failed to pay, causing the ICC to withdraw arbitration. Plaintiff returned to district court arguing that the arbitration was unconscionable and that the dispute should be adjudicated by the court. The court denied Plaintiff�s declaratory judgment motion, and ordered the parties to arbitrate. When they did not, the court dismissed the action.
Affirmed. When a party seeks to invalidate an arbitration agreement due to prohibitive expense, that party must prove the contract�s unenforceability. Under Washington law, substantive unconscionability occurs when a clause is alleged to be one-sided or overly harsh. Moreover, in the commercial context, �the relevant clauses must be substantively unconscionable at the time of contracting.� Here, Plaintiff proposed the arbitration clause, and possessed at that time the ICC rules governing fees, and thus knew that they would be considerable. Therefore, the clause was not unconscionable due to the fees imposed.
The California Court of Appeal opinions may be viewed at: http://www.courts.ca.gov/opinions.htm. The Ninth Circuit case may be viewed at: http://www.ca9.uscourts.gov/opinions/.
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