ADR Case Updates
Motion to Enforce Settlement Agreement Granted - Satisfaction of Medicare "Super Lien" Not Condition Precedent to Payment; Cal. Supreme Ct. Upholds Employer's Arbitration Agreement; Arbitration Clause in Hyperlink "Terms of Use" Inconspicuous; and More, 06/08/2016
Court Correctly Enforced Settlement Agreement Because Satisfaction of Medicare "Super Lien" Not Condition Precedent to Payment, Even Though Insurance Company Liable if Plaintiff Does Not Pay Lien
In Karpinski v. Smitty's Bar Inc., (2016) 246 Cal. App. 4th 456, Keith Karpinski was beat up by drunk patrons at Smitty's Bar in Sausalito. He sued the patrons for assault and battery and Smitty's for negligence. Karpinski and Smitty's engaged in mediation where they reached a settlement for $40,000 and signed an initial written settlement agreement. Following the mediation, a more formal "Settlement Agreement and Release of All Claims" was prepared and signed by Karpinski and his attorney. The settlement proceeds were subject to outstanding statutory liens in favor of Medicare and the California Victims of Crime Program that arose by virtue of the assault on Karpinski and his resultant medical care.
A dispute subsequently arose regarding payment of the settlement proceeds and satisfaction of the liens. Karpinski brought a motion to enforce the settlement agreement under Code of Civil Procedure Section 664.6. In its opposition to the motion, Smitty's stated that it was prepared to pay immediately if Karpinski would accept a check made payable to him and both lien holders. Alternatively, Smitty's explained that it required specific written instructions from Medicare and the California Victims of Crime program before it would issue separate checks to Karpinski and each lien claimant.
Notwithstanding Smitty's objection, the trail court granted the motion forcing Smitty's insurance company (Crusader Insurance Company) to pay the settlement proceeds to Karpinski before payment of the Medicare lien. The trial court reasoned that the terms of the settlement agreement required Karpinski and his counsel to "negotiate, satisfy, and dispose of all liens," and "to hold [Smitty's], its attorneys, and [Crusader] Insurance Company harmless with respect to any lien claims." The settlement agreement did not require Karpinski to satisfy the liens before receipt of the settlement payment, nor that the lien claimants be made co-payees on the settlement check. Smitty's timely appealed.
Affirmed. The appellate court reviewed the statutory nature of both liens, and the Medicare Secondary Payer Act (42 U.S.C Section 1395y), and Medicare's rights to recover payment from the "primary payer" (Crusader), as well as Smitty's concern that it could be required to pay the settlement twice (or thrice) if Karpinski failed to satisfy the Medicare lien. Under Medicare's "super lien" that attaches to any settlement payment to a plaintiff for an injury that Medicare paid to treat, if the settlement proceeds are not used to reimburse Medicare, counsel who have held the settlement funds, as well as the insurance company that paid them, may be liable to Medicare if the lien is not paid. It is no defense that the insurance company has already reimbursed the plaintiff. In fact, if Medicare takes legal action, it may recover twice the amount against counsel or insurance carrier. 42 C.F.R. Section 411.24 (c) (2); see also 42 U.S.C. Section 1395y(b)(2)(B) (iii).
Nevertheless, the court noted the hold harmless provisions in the settlement agreement. Conspicuously absent in the agreement was any provision that expressly or impliedly required Karpinski to satisfy the liens before he received the settlement proceeds. From a contractual analysis, the settlement agreement did not require satisfaction of the liens as a condition precedent to payment.
Finding no cited California case on the issue, the court observed: "We find persuasive the reasoning of the Georgia Court of Appeals, in which a similar case concluded that public policy does not preclude a court from enforcing a settlement that does not include Medicare as a co-payee on a settlement check where the plaintiff signed a release acknowledging his responsibility to pay any Medicare claim and/or agreeing to indemnify the released parties."
This theoretical remedy may prove cold comfort to an insurance company that is required to reimburse Medicare after paying settlement proceeds to a plaintiff. Such is a cautionary tale to defense counsel drafting a settlement agreement at the conclusion of a successful mediation. As the Court of Appeal noted, Smitty's and Crusader could have negotiated the terms of the settlement agreement to require satisfaction of the liens as a condition precedent to payment, or that the lien holders be included as co-payees on the settlement check. Since they did neither, the court would not require it.
Of course, in many cases, this may be a solution in search of a problem. As most settlement payments are made directly to plaintiff's counsel, Medicare may also seek payment from him or her as an attorney "that has received primary payment." Therefore, such counsel will be motivated to negotiate and pay the lien before dispersing the settlement proceeds to the plaintiff.
As a practical matter, defense counsel and insurance carriers may have a sufficient comfort level with competent plaintiff's counsel with whom they have previously worked, or enjoy a professional working relationship. In such cases, they may be more flexible in allowing payment to be made to plaintiff counsel's client trust account for satisfaction of the liens before disbursement to plaintiff.
Plaintiff's counsel can assist the mediation process by having preliminary discussions with the lien holders before the mediation, and bringing to the mediation the most up-to-date lien payoff information and demand. If the lien claimant representatives are available, lien payoff amounts can be negotiated by phone during the course of the mediation.
In short, the terms of a written settlement agreement should always address the timing and manner of the settlement payment as well as satisfaction of outstanding liens.
California Supreme Court Upholds Employer's Arbitration Agreement Even Though It Allowed Employer to Seek Injunctive Relief Against Employee, Which Merely Confirmed Parties' Statutory Rights
In Baltazar v. Forever 21, Inc., (2016) 62 Cal. 4th 1237, Maribel Baltazar signed an arbitration agreement as a condition of her employment with Forever 21, Inc., that included the right of the parties "to seek preliminary injunctive relief" under California Code of Civil Procedure Section 1281.8. Baltazar resigned and sued Forever 21 alleging harassment, discrimination, and retaliation. Forever 21 moved to compel arbitration. Finding the agreement unconscionable, the trial court denied the motion.
The appellate court reversed. Although finding the agreement was procedurally unconscionable, since it was presented to Baltazar on a take-it-or-leave-it basis when she was hired, the appellate court concluded that the agreement was not substantively unconscionable because there was no element of surprise. Therefore, the arbitration agreement was enforceable.
The California Supreme Court affirmed the appellate court. An unconscionable contract must have both procedural and substantive elements, but both need not be present in the same degree. The former focuses on oppression or surprise resulting from unequal bargaining power, and the latter emphasizes overly harsh or one-sided results. According to Justice Leondra R. Kruger, who wrote the opinion for a unanimous high court, Baltazar was "not lied to, placed under duress, or otherwise manipulated into signing the arbitration agreement." Because there was no surprise or sharp practices, the agreement was not procedurally unconscionable even though it was required as a term of employment.
Regarding substantive unconscionability, Baltazar claimed that the right to seek injunctive relief favored Forever 21, since it was more likely to seek an injunction against her than aggrieved employees would seek to enjoin Forever 21. However, because Section 1281.8 permits parties to an arbitration agreement to seek provisional remedies in any event, the arbitration clause at issue merely confirmed those statutory rights and did not place Baltazar at an unfair advantage. Therefore, the agreement was not substantively unconscionable. Thus, the arbitration clause was enforceable.
In Arbitration Between Lawyer and Former Clients Under Mandatory Fee Arbitration Act, Attorney Arbitrator Need Not Disclose His Experience In Auditing Attorney Bills and Writing Extensively On Attorney Overbilling
In Baxter v. Bock (2016) 247 Cal. App. 4th 775, Attorney Joseph Baxter rendered legal services on behalf of his former clients, Michael and Lorie Bock. Following a dispute over the value of Baxter's services, the parties agreed to participate in binding arbitration under the Mandatory Fee Arbitration Act (Bus. & Prof. Code, § 6200 et. seq; "MFAA"). The State Bar of California appointed Attorney James Schratz to serve as arbitrator. The arbitrator concluded the legal services provided by Baxter was valued at the amount already paid by the Bocks and awarded Baxter nothing. Baxter subsequently discovered that Schratz had been in the business of auditing attorney bills and had written extensively about attorney overbilling. Arguing that Schratz failed to make required disclosures regarding his background or, alternatively, should have disqualified himself for bias, Baxter moved to vacate the award. The trial court denied the motion and confirmed the award.
Affirmed. The trial court may vacate an arbitration award if an arbitrator fails to timely disclose a ground for disqualification or does not disqualify himself or herself based upon a disqualification. The law pertaining to MFAA arbitrations requires disclosure of matters relating to impartiality or appearance of impartiality. Extending this obligation to disclose, the holding in Benjamin, Weill & Mazer v. Kors (2011) 195 Cal. App. 4th 40, requires attorney mediators to disclose any private economic interest that could create an incentive to rule in a particular way. Here, however, Schratz did not represent one side or another in fee disputes. He simply evaluated legal bills. Therefore, the nature of Schratz's business did not place his impartiality at issue that would require further disclosures. As there was no evidence of bias in the arbitration proceeding, the trial court correctly confirmed the award.
Purchaser Of Flowers Over The Internet Cannot Be Compelled To Arbitrate Dispute Based Upon Inconspicuous Arbitration Provision In "Terms of Use" Hyperlink On Company's Website
In Long v. Provide Commerce, Inc. (2016) 245 Cal. App. 4th 855, Brett Long purchased a floral arrangement through ProFlowers.com, one of several websites owned and operated by Provide Commerce, Inc., an online retailer. Long claimed that the floral arrangement was represented on the website as a "completed assembled product", but which was delivered as a "do-it yourself kit in a box requiring assembly by the recipient." He filed a putative consumer fraud class action. Provide Commerce moved to compel arbitration based upon its arbitration clause in the company's "Terms of Use" that were viewable via a hyperlink displayed at the bottom of each page on the ProFlowers.com website. In opposition to the motion, Long claimed he was never prompted to agree to the terms, nor did he read them before placing his order. Finding the hyperlink too inconspicuous to give notice to Long, the trial court denied the motion compel arbitration.
Affirmed. A party cannot be bound by "inconspicuous contractual provisions of which he [or she] was unaware, contained in a document whose contractual nature is not obvious," regardless of any apparent manifestation of his or her consent." "Clickwrap" (or "click through") and "browsewrap" agreements are two different types of contracts formed on the Internet. Unlike a "clickwrap" agreement, the ProFlowers.com website used a "browsewrap" agreement that did not require users to affirmatively click a button to confirm their assent to the agreement's terms. Instead, a user's assent is inferred from his or her continued use of the website. Because assent is inferred, the determination of whether a binding browsewrap agreement has been formed depends on whether the user has actual or constructive knowledge of the website's terms and conditions.
Here, the Terms of Use hyperlinks were too inconspicuous to impose constructive knowledge on Plaintiff. Under Nguyen v. Barnes & Noble Inc., 763 F. 3d 1171 (9th Cir. 2014), and Specht v. Netscape Communs. Corp., 306 F. 3d 17 (2d Cir. 2002), two leading federal cases concerning broweswrap agreements, the terms in such agreements must, at a minimum, be reasonably conspicuous to give notice. The ProFlowers.com hyperlink placement in the webpage was less conspicuous and did not impart constructive knowledge on Plaintiff. Since he did not agree to the arbitration clause in the Terms of Use, the trial court was correct in denying the motion to compel arbitration.
Trial Court Erroneously Excluded Declaration Establishing Existence of Arbitration Agreement and Should Have Granted Petition to Compel Arbitration
In Espejo v. Southern California Permanente Medical Group (2016) 246 Cal. App. 4th 1047, physician Jay Espejo sued Southern California Permanente Medical Group ("SCPMG") and others for wrongful termination and whistleblower retaliation. Defendants petitioned to compel arbitration pursuant to Espejo's employment agreement and related documents that included an arbitration provision. The moving papers included a declaration from a SCPMG systems consultant who stated that Espejo electronically signed the documents. Defendants subsequently filed a supplemental declaration providing additional details regarding the electronic signature process. The trial court granted Espejo's motion to strike the supplemental declaration as untimely under Code of Civil Procedure Section 1005(b), and denied the petition because defendants failed to establish the existence of an enforceable arbitration agreement.
Reserved and remanded. Under Condee v. Longwood Management Corp. (2001) 88 Cal. App. 4th215, and several courts that have followed it, the trial court, as a preliminary matter, need only "make a finding of the agreement's existence, not an evidentiary determination of its validity." Here, defendants met their initial burden by attaching to their petition a copy of the purported arbitration agreement reflecting Espejo's electronic signature. Their supplemental declaration was timely because defendants were not required to file it until Espejo challenged the authenticity of his signature in his opposition. Therefore, the trial court should have granted the petition to compel arbitration, and its order denying the motion was reversed. However, the case was remanded for the trial court to make an evidentiary determination as to the agreement's validity and enforceability.
Order Compelling Arbitration Reversed Where Document Containing Arbitration Clause Was a Sham
In Casa Del Caffe Vergnano S.P.A. v. Italflavors, LLC, 816 F. 3d 1208 (9th Cir. 2016), another divided Ninth Circuit case, Hector and Cesar Rabellino formed Italflavors, LLC to open an Italian-style coffee shop in San Diego. They began discussions with Caffe Vergnano, an Italian corporation, to open a franchise. They met with a representative of Caffe Vergnano in Italy. During the course of a three-hour meeting, they signed two documents - the Commercial Contract, a franchise agreement that included an arbitration clause, and the Hold Harmless Agreement, a single-page document that stated that the Commercial Contract "does not have any validity or effectiveness between the parties," and provides that "they will sign a future contract which will regulate their commercial relationship."
After the coffee shop failed, Italflavors sued Caffe Vergnano in federal court in San Diego. The district court granted Caffe Vergnano's motion to compel arbitration, leaving it to the arbitrator to determine if the Commercial Contract survived the Hold Harmless agreement, and stayed the underlying action.
Reversed. Reiterating the U.S. Supreme Court's admonition that arbitration is a consensual process, "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." The declaration in the Hold Harmless Agreement signed contemporaneously with the Commercial Contract establishes that the latter was a "mere sham" to assist Hector Rabellino obtain a visa and was not a contract with an enforceable arbitration agreement. The district court should have denied the motion to compel arbitration.
Justice Consuelo Callahan dissented. According to her, the record reflected that the parties had concerns that the Commercial Contract may not comport to California's Franchise Investment Law and the Business and Professions Code. They also wanted to allow Hector to use the Commercial Contract to obtain a visa to work in the United States. Their "solution" was the Hold Harmless Agreement. While the latter provides that they will sign a contract in the future, they never did so. Rather, they proceeded to act as "contractually related parties" for over a year. Because the Commercial Contract preceded the Hold Harmless Agreement, the district court correctly referred to the arbitrator the question of whether and when the Commercial Contract was terminated.
Motion to Compel Arbitration Properly Denied Where Current Dispute Is Beyond Scope of Arbitration Agreement From Previous Settlement Agreement
In Boardman v. Pacific Seafood Group, 822 F.3d 1011 (9th Cir. 2016), an underlying antitrust action (Whaley v. Pacific Seafood Group) was brought by West Coast fisherman against West Coast seafood processor entities, Pacific Seafood Group and Ocean Gold Seafoods, Inc., that was settled and documented in a Resolution Agreement that included an arbitration provision. Subsequently, Pacific Seafood informed the other parties to the agreement that it planned to acquire Ocean Gold. A second group of fisherman, including some of the Whaley plaintiffs, brought another antitrust action against Pacific Seafood, its owner, and Ocean Gold under the Sherman Act and Clayton Act. The district court granted a preliminary injunction to halt the acquisition. Defendant moved to compel arbitration under the arbitration clause in the Resolution Agreement. Finding the current dispute beyond the scope of the arbitration clause, the district court denied the motion.
Affirmed. Under Section 2 of the Federal Arbitration Act (9 U.S.C. § 1, et seq., "FAA"), a written arbitration provision in "a contract evidencing a transaction involving commerce" is enforceable. The court must compel arbitration if it determines that (1) "a valid agreement to arbitrate exists [within the contract]," and (2) "the agreement encompasses the dispute at issue." Here, the Resolution Agreement resolved claims regarding seafood processors' purchases of fish from West Coast fisherman and, therefore, evidenced a transaction involving commerce. However, plaintiff's current claims were not within the scope of the Resolution Agreement because the current claims pertained to Pacific Seafood's proposed acquisition of Ocean Gold, whereas the previously settled claims dealt only with objections to a marketing arrangement between Pacific Seafood and Ocean Gold. Therefore, the current claims were beyond the scope of the arbitration provision and the district court correctly denied the motion to compel.
Bankruptcy Court May Decide Motion To Compel Arbitration and Did Not Abuse Discretion In Denying It
In In the Matter of EPD Investment Company, LLC, 821 F.3d 1146 (9th Cir. 2016), EPD Investment Company, LLC, and Jerrold Pressman filed separate Chapter 7 bankruptcy proceedings that were substantively consolidated. Plaintiff Jason Rund was the Chapter 7 Trustee. Defendant John Kirkland, an attorney, acted as counsel for EPD and Pressman. Kirkland transferred the interests he held in the debtors to his family trust. The Trustee filed an adversary proceeding against Kirkland seeking to avoid the allegedly fraudulent transfers. Kirkland filed a motion in the bankruptcy court to compel arbitration of the adversary proceeding under the arbitration clauses in the agreements with EPD and Pressman. The bankruptcy court denied the motion.
Affirmed. In core bankruptcy proceedings, the bankruptcy court "has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purpose of the Bankruptcy Code." Here, the Trustee's fraudulent conveyance, subordination, and disallowance causes of action were core proceedings. Consequently, the bankruptcy court had discretion to weigh competing bankruptcy and arbitration interests. It applied controlling caselaw to properly conclude that the arbitration provisions conflicted with the Bankruptcy Code's purpose "of having bankruptcy law issues decided by bankruptcy courts; of centralizing resolution of bankruptcy disputes; and of protecting parties from piecemeal litigation." Therefore, the bankruptcy court did not abuse its discretion in denying the motion to compel arbitration.
In Labor Law Case, District Court Erred In Vacating Arbitration Award Based Upon Arbitrator's "Implausible" Contractual Interpretation and On Public Policy Grounds
In Southwest Regional Council of Carpenters v. Drywall Dynamics, Inc., 823 F. 3d 524 (9th Cir. 2016), Drywall Dynamics, Inc., a Utah-based construction company, entered into a Memorandum Agreement with the Southwest Regional Council of Carpenters ("Union"). In the Memorandum Agreement, Drywall agreed to be bound by a Master Labor Agreement ("MLA") between the Union and a contractor's association, the Drywall/Lathing Conference of the Western Wall & Ceiling Contractors Association ("Association"). Drywall further authorized the Association to represent it with respect to the Union. Some years later, Drywall sought to terminate the MLA. Unbeknownst to Drywall, the Association and the Union had signed a Memorandum of Understanding ("MOU") extending the term of the MLA thereby making Drywall's notice of termination untimely. The parties submitted their dispute to an arbitration panel, which held that Drywall was bound by the MOU, and rendered an award in favor of the Union. Finding the panel's interpretation of the agreement both "not plausible" and contrary to public policy, the district court vacated the award.
Reversed. In light of the centrality of the arbitration process to stable collective bargaining relationships, courts reviewing labor-arbitrator awards afford a "nearly unparalleled degree of deference" to the arbitrator's interpretation of the parties' agreement and findings of fact. Here, in finding the panel's contractual interpretation implausible, the district court inquired into the MLA's substantive merit, which is contrary to the well-established rule that an arbitrator's award must be upheld "as long as the arbitrator is even arguably construing or applying the contract and acting with the scope of his or her authority." Thus, the district court erred in failing to defer to the panels contractual interpretation. As to the "public policy" exception to this rule of deference, it is a narrow one and applies only when the award "runs contrary to an explicit, well-defined, and dominant public policy, as ascertained by reference to positive law and not from general considerations of supposed public interests." For those reasons, the district court's vacatur of the arbitration award was err and required reversal.
The California opinions are posted at: click here, and the Ninth Circuit opinions at: click here.
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