ADR Case Updates
Mediation "Stay" Does Not Toll 5-Year Statute; Only Court-Annexed (Not Private) Mediation Tolls Statute; U.S. Supreme Court Compels Arbitration in California Case (Again); Successor Law Firm May Compel Arbitration Against Attorney; And More, 03/09/2016
Partial "Stay" to Engage in Mediation and Complete Discovery Does Not Toll 5-Year Period Within Which to Bring Case to Trial (Only a "Complete" Stay Tolls the Statute)
In Gaines v. Fidelity National Title Insurance Co., (2016) 62 Cal. 4th 1081, a divided California Supreme Court affirmed dismissal of a lawsuit that the trial court had "stayed" so the parties could engage in mediation. The mediation was unsuccessful, the 5-year period within which to bring the case to trial ran, and the trial court dismissed the entire action after refusing to exclude the time the case was stayed. If the 120-day mediation stay had been excluded, defendant's motion to dismiss would have failed and plaintiff would have been entitled to a trial on the merits.
Fannie Marie Gaines and her husband, Milton, owned a home with over $500,000 in equity. After falling behind in their mortgage payments and facing foreclosure by the lender, they agreed to sell their property with a leaseback and option to repurchase. On November 13, 2006, they filed a complaint for rescission and cancellation of the deed that transferred ownership because the defendants failed to follow the home equity sales contract requirements as set forth in the Civil Code.
Ultimately, the parties were ready to engage in mediation. In April 2008, Gaines submitted an application to the trial court based upon an agreement between the parties. Accordingly, the trial court entered an order that "struck" the trial date, "stayed [the case] for a period of 120 days except that [the] parties are to respond to all previously served and outstanding written discovery," set a post-mediation and trial setting conference, and directed "all parties … to participate in good faith in a mediation … within 90 days."
After an unsuccessful mediation, the mediation stay was lifted. Defendant Fidelity National Title Insurance Company later moved for dismissal based upon the five-year statute. The trial court concluded that section 583.340(b) did not apply to the 120-day mediation stay because it was not a complete stay of the prosecution of the action as required under that exception. The trial court also determined that the mediation stay did not create a circumstance of impossibility, impracticability, or futility under section 583.340(c). The Court of Appeal affirmed the trial court's dismissal and the California Supreme Court upheld the Court of Appeal.
In Bruns v. E-Commerce Exchange, Inc. (2011) 51 Cal. 4th 717, 725, the high court addressed the effect of a stay of discovery and other specific proceedings, holding that "the prosecution of an action is stayed … only when the stay encompasses all proceedings in the action." The court reasoned that the statute envisioned a "bright-line, nondiscretionary rule" only when "all the proceedings in the action are stayed," which "stop the prosecution of the action altogether." The circumstances of a partial stay can vary and may not have the same effect.
Here, the parties were ordered to complete outstanding discovery and to engage in mediation. Therefore, the court's order did not stop the prosecution of the action altogether. The trial court found this stay to be only partial that did not qualify for the automatic tolling of section 583.340(b).
The trial court also determined that the mediation stay did not create a circumstance of impossibility, impracticability, or futility under section 583.340(c). The crucial question is whether the plaintiff exercised reasonable diligence in prosecuting the case. Following the unsuccessful mediation and lifting of the stay, plaintiff had ample time to bring the case to trial – over three years. – and did not. An August 29, 2009 trial date was set, still well within two years to commence trial. Thus, the trial court was within its discretion to find that the mediation and partial stay were not so exceptional, extenuated, or beyond plaintiff's control to qualify under the exception of impossibility, impracticability, or futility to bring the case to trial within five years.
The holding provides a cautionary tale for unwary plaintiff's counsel. A stay may not be a "stay" for purposes of 583.340(b). The safest course is to obtain a written stipulation to extend the time within which an action must be brought to trial under 583.330(a).
Only Court-Annexed (Not Private) Mediation Tolls 5-Year Statue Within Which to Bring Case to Trial
In Castillo v. DHL Express (USA) (2015) 243 Cal. App. 4th 1186, truck driver Henry Castillo filed a wage-and-hour class action against KWK Trucking, Inc., and DHL Express on March 5, 2009. On September 30, 2013, the parties informed the court that they planned to pursue private mediation. On February 28, 2014, the parties advised the court that mediation had been unsuccessful. On April 4, 2014, more than five years after the complaint was filed, defendants successfully moved to dismiss the action for failure to prosecute within five years.
Affirmed. California Code of Civil Procedure Section 583.310 provides that, "[a]n action shall be brought to trial within five years after the action is commenced against the defendant." If trial is not commenced by that time, dismissal is mandatory, subject to certain exceptions. Under Code of Civil Procedure Section 1775.7(b), participation in a court-sponsored mediation program may extend the five-year period. Here, the court had not ordered the parties to mediation, nor was there a stipulation between them to mediate the case and bring it within Section 1775.7(b). After analyzing the statutory language and legislative history, the appellate court rejected Castillo's contention that private mediation triggered the tolling provisions of Section 1775.7(b). Only court-annexed mediation tolls Section 583.310.
However, Section 583.330 provides that the parties may extend the five-year period within which to bring the case to trial. They may do so by written stipulation or oral stipulation before the court. A footnote in the Castillo opinion makes clear that the court's holding should not be construed to limit in any way the parties' ability to stipulate a stay to the proceedings while they pursue mediation. They just cannot rely on the tolling from court-annexed mediations if they engage in private mediation.
U.S. Supreme Court Reverses California Court of Appeal and Compels Arbitration of DIRECTV's Arbitration Agreement With Customers
In DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), Amy Imburgia filed a putative class action against DIRECTV, Inc. on behalf of herself and other California customers asserting that DIRECTV had violated various consumer rights laws. The customers' service agreement with DIRECTV included an arbitration provision that waived class arbitration and was governed by the Federal Arbitration Act (9 U.S.C. § 1, et seq., "FAA"). The service agreement also stated that the entire arbitration provision was unenforceable if the "law of your state" made class arbitration waivers unenforceable. At the time Imburgia entered into her service agreement, California law made class arbitration waivers unenforceable under Discover Bank v. Superior Court (2005) 36 Cal. 4th 148. After the trial court granted partial class certification, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which preempted state rules that rendered class-arbitration bans unenforceable. Citing Concepcion, DIRECTV moved to stay the action, decertify the class, and compel arbitration of Imburgia's claims. The trial court denied the motion. DIRECTV appealed. Notwithstanding Concepcion overruling Discover Bank, the Court of Appeal found the entire arbitration provision unenforceable and affirmed the trial court.
Reversed and remanded. The FAA favors arbitration. A written arbitration agreement is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Therefore, the state court's interpretation of the contract must be consistent with the FAA. Here, the parties' agreement invalidated the arbitration provision if the "law of your state" rendered such waivers unenforceable. However, the underlying state law must be valid, and because Concepcion invalidated Discover Bank, that rule was no longer valid. Thus, the state court's reliance on an invalid state court rule was contrary to the FAA's policy favoring arbitration. Therefore, the arbitration provision in DIRECTV's customer service agreements was valid and enforceable.
Client Successfully Overturns Order Confirming Arbitration Award of $1.1 Million in Attorney Fees for Violation of Rule Barring Simultaneous Representation of Adverse Clients
In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., (2016) 244 Cal. App. 4th 590, J-M Manufacturing, a manufacturer of polyvinyl chloride (PVC) pipe, was sued in a federal qui tam (whistleblower) action for allegedly misrepresenting to customers that its PVC pipe conformed to applicable industry standards for water works parts. J-M retained Sheppard Mullin to defend it. The retainer agreement contained an arbitration clause and conflict waiver provision. Sheppard Mullin did not inform J-M that it was simultaneously representing a plaintiff in the qui tam action, the South Tahoe Public Utility District, in unrelated matters. The district court disqualified Sheppard.
Sheppard then sued J-M in state court for outstanding attorney fees. J-M challenged the legality of the retainer agreement and its obligation to pay fees. The trial court ordered the matter to arbitration pursuant to the arbitration provision. The arbitration panel found the contract was not illegal, denied J-M's request to disgorge fees, and ordered J-M to pay Sheppard's outstanding fees of over $1.1 Million plus interest. The trial court confirmed the award.
Reversed and remanded. Under California law, "a challenge to the legality of an entire contract that contains an arbitration provision must be determined by the trial court, not the arbitrator." Rule 3-310 of the California Rules of Professional Conduct bars simultaneous representation of adverse clients "without the informed written consent of each client." Here, the trial court erred by deferring to the arbitrators the question of the retainer agreement's enforceability since J-M challenged the legality of the entire contract. Sheppard violated Rule 3-310 because it failed to secure the informed written consent to the conflict, which violated an expression of public policy. Therefore, Sheppard was precluded from recovering unpaid attorney fees, and the matter was remanded to the trial court to determine the amount of fees that J-M had paid to Sheppard that must be disgorged and reimbursed to J-M.
Assisted Living Facility Cannot Force Representative of Decedent's Estate to Arbitrate Wrongful Death Action Because Representative Is Not Bound by Arbitration Agreement
In Monschke v. Timber Ridge Assisted Living, LLC, (2016) 244 Cal App. 4th 583, Valerie Monschke placed her mother, Marjorie Fitzpatrick, in the memory care unit of a facility owned by Timber Ridge Assisted Living, LLC. Because Fitzpatrick suffered from dementia, Monschke signed the residency agreement with Timber Ridge as the attorney-in-fact under her mother's power of attorney. The residency agreement included an arbitration clause.
The following year, Fitzpatrick was allowed to wander outside of the facility, where she fell and sustained fatal injuries that led to her death a few weeks later. As personal representative of Fitzpatrick's estate and on behalf of Fitzpatrick's surviving children, Monschke filed a wrongful death and elder abuse action against Timber Ridge. Timber Ridge moved to compel arbitration. Concluding that the wrongful death claim was not subject to arbitration, the trial court denied the motion.
Affirmed. Despite the strong public policy favoring arbitration, the general rule is that only parties to an arbitration agreement may be bound by it. Here, Monschke signed the residency agreement in her capacity as her mother's attorney-in-fact thereby binding her mother. Consequently, only Fitzpatrick and Timber Ridge were parties to the arbitration agreement. Monschke did not sign the agreement in her individual capacity and was not bound by it.
In bringing the action as the personal representative of Fitzpatrick's heirs, Monschke was not acting as a representative of the decedent. Finally, because the wrongful death action belonged to the heirs, Timber Ridge's theory that Monschke "stepped into the shoes of decedent and was bound by [her] obligations," was unpersuasive. Accordingly, the trial court was correct in denying the motion to compel arbitration.
Law Firm, As Successor By Merger, Has Standing to Enforce Arbitration Agreement Entered Into Between Resigning Associate Attorney and Prior Employe
In Jenks v. DLA Piper Rudnick Gray Cary US LLP (2015) 243 Cal. App. 4th 1, attorney M. Todd Jenks accepted an offer of employment with the law firm of Gray Cary Ware & Friedenrich. The Offer Letter contained an arbitration provision that applied to all employment-related disputes. Five years later in 2005, Gray Cary merged into DLA Piper Rudnick Gray Cary US LLP (DLA Piper). Upon his resignation in 2006, Jenks signed a Termination Agreement that was silent regarding dispute resolution. In 2009, Jenks sued DLA Piper for breach of contract and other claims, claiming the Termination Agreement required DLA Piper to provide him with short-term disability benefits. DLA Piper successfully moved to compel arbitration based upon the Offer Letter. The arbitration ultimately resulted in an arbitration award in favor of Jenks. The trial court affirmed the award. Jenks appealed claiming that DLA Piper lacked standing to enforce the arbitration agreement.
Affirmed. A written agreement to arbitrate is valid, enforceable, and irrevocable except on such grounds as exist for the revocation of any contract. California Code of Civil Procedure Section 1281.2 allows a party to an arbitration agreement to petition to compel arbitration. Although the general rule is that only parties to an arbitration agreement may be bound by it, exceptions exist. A nonsignatory may enforce an arbitration agreement "where there is sufficient identity of parties." Here, notwithstanding Jenks' waiver of the issue, DLA Piper succeeded Gray Cary's contract rights under the merger, including the right to enforce the arbitration agreement. Moreover, there was no evidence that the terms of Jenks' employment were modified after the merger. The Termination Agreement did not supersede the Offer Letter because it only covered Jenks' resignation and made no mention of arbitration. Consequently, the arbitration agreement applied to Jenks' employment-related dispute. DLA Piper had standing to enforce it.
Judgement Confirming Arbitrator's Award In Favor of Medical Management Company Affirmed Where Alleged Illegality of Contract Not Reviewable (And Even If Reviewable, Contract Not Illegal)
In Epic Medical Management LLC v. Paquette (2015) 244 Cal. App. 4th 504, Epic Medical Management LLC entered into a contract with Justin Paquette, M.D., to provide non-medical management services to Dr. Paquette's medical practice. The contract included an arbitration clause. Epic was to be paid 120% of the aggregate costs it incurred in providing management services. However, the parties modified the payment provision to provide that Epic would receive 50% of office medical services, 25% of surgical services, and 75% of pharmaceutical expenses (the "50-25-75" method).
After the parties had a falling out, they proceeded to arbitration. At issue was Epic's entitled to payment based upon fees that were billed before the contract was terminated by Dr. Paquette, but received by him after termination. The arbitrator found in favor of Epic and awarded over $286,000 in earned management fees. The trial court confirmed the award. On appeal, Dr. Paquette claimed the arbitration award was invalid because the contract was illegal as interpreted by the arbitrator.
Affirmed. The general rule is that an arbitrator's award is not reviewable for errors of fact or law. An exception exists for illegality if the entire contract is illegal. Business and Professions Code Section 650 prohibits the payment or receipt of any consideration by a physician for referring patients. Even assuming the 50-25-75 method constituted kickbacks for referrals, the issue did not go to the entirety of the contract. Therefore, the arbitration award was not reviewable.
However, even if the award was reviewable, the contract was not illegal under Section 650 because Epic's fees were commensurate to the services it rendered. Finally, modifying the fee calculation from 120% of aggregate cost to the 50-25-75 method did not result in Epic exercising control over Dr. Paquette's medical practice. Therefore, the trial court did not err in affirming the award in favor of Epic.
Employer's Motion To Compel Arbitration of Employee's Wage And Hour Claims Denied Where Trial Court Correctly Holds That Arbitration Provision Is Unconscionable
In Carbajal v. CWPSC, Inc., (2016) 245 Cal. App. 4th 227, Martha Carbajal was hired by CWPSC, Inc. ("CW"), a painting company, to market its services and manage the painting crews. She signed an employment agreement that included an arbitration provision that was subject to the rules of the American Arbitration Association ("AAA"). Carbajal quit about nine months later, and then filed a wage and hour class action. CW moved to compel arbitration on an individual basis. Finding the agreement was procedurally and substantively unconscionable, the trial court denied the motion.
Affirmed. Before refusing to enforce an arbitration agreement, the trial court must find both procedural and substantive unconscionability, although "the two elements need not be present in the same degree." Ultimately, the issue is whether the arbitration terms were "sufficiently unfair." Here, CW's employment agreement was procedurally unconscionable because it was an adhesion contract imposed as a term of Carbajal's employment. The arbitration provision was substantively unconscionable since it did not identify which of AAA's many different rules would apply. In addition, it was one-sided and unfair as it allowed CW to seek injunctive relief (without posting a bond,) but limited Carbajal's relief to only arbitration. Perhaps most importantly, it waived Carbajal's statutory right to recover attorney fees if she prevailed on certain Labor Code claims. Thus, because the employment agreement was both procedurally and substantively unconscionable, the trial court correctly determined that the arbitration provision was unenforceable.
The California opinions are posted at: click here, the Ninth Circuit opinions at: click here, and the U.S. Supreme Court opinions at: http://www.supremecourt.gov/.
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