ADR Case Updates
Emails Accepting Mediator's Proposal Admissible To Prove Settlement; California Supreme Court Holds that Arbitrator Decides Issue of Class Arbitration; And More, 09/07/2016
Emails Accepting Mediator's Proposal Admissible To Prove Settlement
In In Re TFT-LCD (Flat Panel) Antitrust Litigation, 835 F. 3d 1155 (9th Cir. 2016), involving the settlement of a price-fixing dispute, a divided Ninth Circuit held that emails from counsel accepting a mediator's proposal are admissible to enforce the settlement notwithstanding California's mediation privilege. Federal common law, not California law, generally governs claims of privilege where the underlying action includes both federal and state law claims.
The case arose from the sale of LCD panels by Defendant HannStar Display Corporation to plaintiff's Sony Electronics, Inc., and Sony Computer Entertainment America, LLC. The parties agreed to mediate their dispute before litigation was commenced, which resulted in a mediator's proposal for $4.1 million that the mediator sent by email to counsel for both sides requesting a confidential response. Both lawyers sent reply emails accepting the proposal.
After the mediator informed both parties that the case had settled, HannStar refused to abide by the mediated settlement agreement and informed counsel for Sony that it did not intend to pay the settlement proceeds. Sony then filed the underlying action against HannStar and others in district court alleging federal and state antitrust claims and breach of contract for HannStar's reneging on the settlement agreement. After the antitrust litigation was concluded against the other defendants, Sony dismissed its antitrust claims against HannStar, and moved for summary judgment on its state-law breach of contract claim for breach of the settlement agreement. The district court denied the motion reasoning that California's mediation privilege (Evidence Code § 1123[b]) precluded admission of the email exchange and resulting contract.
Reversed and Remanded. While state contract law governed whether the parties formed an enforceable contract, the issue of whether federal or state law applies to privilege depends on the underlying action. Federal Rule of Evidence 501 provides that federal common law generally governs claim of privilege. Thus, if the underlying action involves both federal and state claims, as here, the federal privilege prevails. Therefore, the district erred in concluding that the California mediation privilege applied. Rather, federal privilege applied, and evidence of the email exchange with the mediator was admissible to prove the settlement agreement.
The Dissent. Chief District Judge Barbara Lynn (for the Northern District of Texas, sitting by designation) dissented. Whether federal or state law privilege applied would depend on the nature of the underlying action when admission of the evidence was sought. Since only the California breach of contract cause of action was pending in the underlying action at the time of the email exchange with the mediator, California privilege law applied. The district court's application of Evidence Code § 1123(b) was correct. The email exchange was inadmissible to prove the settlement agreement.
California Supreme Court Holds That Arbitrator, Not Court, Determines Whether Arbitration Agreement Provides For Class Arbitration
In Sanquist v. Lebo Automotive, Inc., 1 Cal. 5th 233 (2016), a divided California Supreme Court held that an arbitrator, not a judge, decides whether classwide arbitration is available under an unclear arbitration agreement.
Timothy Sanquist, an African-American, and Lebo Automotive were parties to three different arbitration agreements. Sanquist sued Lebo alleging an individual claim for constructive discharge and class claims for discrimination and creation of a hostile work environment under the Fair Employment and Housing Act. Lebo moved to compel individual arbitration based on the arbitration agreements signed by Sanquist on his first day of work. Finding the agreements enforceable and not unconscionable and the dispute within their scope, the trial court granted the motion. The trial court found that the agreements did not permit class arbitration and struck the class allegations. Thereafter, the court dismissed the class claims with prejudice since all the employees at the dealership were subject to the same agreements.
On appeal, disagreeing with the trial court's conclusion that current precedent compelled the court to determine whether class arbitration was available, the Court of Appeal found the issue an open and unsettled one. After consulting case law on both sides of the dispute, the Court of Appeal ultimately concluded that the availability of class proceedings under an arbitration agreement is a question of contract interpretation for the arbitrator to decide in the first instance. Lebo petitioned for review, contending that the Court of Appeal's decision contributed to an existing state and federal split over who should decide whether an arbitration agreement permits class arbitration.
The Supreme Court granted review of the "who decides" question. First, the court pointed out that examination of the arbitration agreement was the "mandatory" starting point and that state law applied to the interpretation of the agreement. Second, in applying California contract law, the court concluded that the agreements suggested the "who decides" question was one for the arbitrator.
However, because the agreements were ambiguous, the court relied upon other principles applicable to interpretation of arbitration clauses and contracts generally. The first principle was that under either state or federal law, when the allocation of a matter to arbitration or the courts is uncertain, all doubts are resolved in favor of arbitration. The second principle was that ambiguities in written agreements are to be construed against their drafters. Since the written agreements were prepared exclusively by Lebo, the court construed the ambiguity against it.
Next, the court noted there was no established contrary state law presumption that would require submission of the question of class arbitration to a court. Likewise, the court found nothing in the Federal Arbitration Act, 9 U.S.C. §1 et seq. ("FAA"), or its underlying policies, to support a contrary presumption. In the end, the court held that the determination whether a particular agreement allows for class arbitration is "precisely the kind of contract interpretation matter arbitrators regularly handle."
The Dissent. Writing for the dissent, Justice Leondra Kruger, joined by Justices Ming Chin and Carol Corrigan, focused on the FAA and concluded that class certification is a "gateway question" of arbitration under federal law, instead of a procedural matter an arbitrator is empowered to determine.
Employer May Compel Arbitration Agreement, Attached As Appendix To Employee Handbook, Which Is Enforceable And Not Illusory
In Harris v. TAP Worldwide, LLC, 248 Cal. App. 4th 373 (2016), plaintiff sued his former employer for alleged wage and hour claims, harassment, discrimination, and wrongful termination in violation of the California Labor Code and Fair Employment and Housing Act. Defendant moved to compel arbitration based upon Appendix A, an arbitration agreement, to the Employer Handbook that plaintiff acknowledge receiving. Plaintiff opposed the motion arguing that his signature was merely to acknowledge receipt of documents, not to agree to the terms of the arbitration agreement. The trial court denied the motion. Defendant timely appealed.
Reversed. The issue was whether plaintiff consented to the arbitration agreement under contract law principles. The Employee Handbook stated, "If for any reason, an applicant fails to execute the Agreement to Arbitrate yet begins employment, that employee will be deemed to have consented to the Agreement to Arbitrate by virtue of receipt of this Handbook." Plaintiff unequivocally accepted defendant's employment, and assented to the terms of the Handbook, by commencing work and accepting payment. Therefore, the arbitration agreement was enforceable, not illusory. The trial court should have granted the motion to compel arbitration.
However, A Contrary Result Was Reached Where Handbook Stated That It Was Not Intended to Create Enforceable Obligations - Employee's Signed Acknowledgement of Receipt Did Not Constitute Assent To Arbitration
In Esparza v. Sand & Sea, Inc., (2016) 2 Cal. App. 5th 781, plaintiff began working for defendant and was given an employee handbook with an arbitration provision. The first page was a welcome letter that stated, "[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees." Plaintiff signed a "Policy Acknowledgement" form acknowledging receipt of the handbook, which specifically made reference to the arbitration provision as one of the defendant's "policies, practices, and procedures." The Policy Acknowledgement did not state that plaintiff agreed to the arbitration provision. To the contrary, it confirmed that plaintiff had not read the handbook at the time she signed the form.
After her employment ended, plaintiff sued defendant for sexual harassment, sex discrimination, wrongful termination, and intentional infliction of emotional distress. Defendant moved to compel arbitration. The trial court denied the motion finding that the handbook did not create an agreement to arbitrate because, "The Policy Acknowledgement signed by plaintiff does not impose an obligation to arbitrate nor is the arbitration provision in the handbook incorporated by reference. To the contrary, the acknowledgement stated that the handbook is not an employment agreement." Defendant timely appealed.
Affirmed. The issue was whether plaintiff had agreed to arbitrate under California contract principles. The very terms of the handbook established that it did not create a legally enforceable contract to arbitrate plaintiff's dispute. While the Policy Acknowledgement mentioned arbitration, it reflected a company policy, not an agreement that bound plaintiff if she chose to forgo arbitration. The trial court was correct in denying the motion to compel arbitration.
Motion To Compel Arbitration Properly Granted Where None Of Challenged Arbitration Provisions Are Unconscionable Under California Law
In Tompkins v. 23ANDME, Inc., 2016 WL 6072192 (9th Cir. Oct. 13, 2016), defendant provided direct-to consumer genetic testing services. Plaintiffs purchased DNA test kits through defendant's website. After receiving their kits, plaintiffs returned to the website to create online accounts and use the genetic testing service. They were required to click on a box indicating agreement to Terms of Service that included an arbitration agreement. Prior to 2013, defendant claimed its service could be used to help customers manage health conditions and mitigated maladies, including diabetes, heart disease, and breast cancer. In November 2013, the Food and Drug Administration ("FDA") demanded that defendant cease marketing its services for health purposes until the company obtained government approval. Defendant complied and stopped its health-related marketing. As a result of the FDA's determination, multiple plaintiffs filed different class actions against defendant that were consolidated in district court in the Northern District of California. Defendant moved to compel arbitration. The district court concluded that although the arbitration provision was procedurally unconscionable, it was not substantively unconscionable under California law, and granted the motion. Plaintiffs timely appealed.
Affirmed. Under the savings clause of the Federal Arbitration Act ("FAA"), 9 U.S.C. §2, "a court may strike or limit an arbitration provision on ‘such grounds as exist at law or in equity for the revocation of any contract.'" Plaintiffs contended the arbitration provision was unconscionable because it included a prevailing party clause, providing that the losing party would pay significant attorney fees for both parties as well as arbitration costs. Since the California Supreme Court has ruled that the unconscionability standard must be the same for arbitration and nonarbitration agreements, and because of the general rule allowing parties to agree to bilateral prevailing party clauses outside the arbitration context, the fee-shifting clause in the arbitration agreement could not be unconscionable under California law. Therefore, the district court was correct to grant the motion to compel arbitration.
Hastily-Signed Contract With Arbitration Clause Requiring California Signatories To Arbitrate In Indiana Is Unconscionable
In Magno v. The College Network, Inc., 1 Cal. App. 5th 277 (2016), plaintiffs were Licensed Vocational Nurses ("LVNs"), and California residents, who sought to become Registered Nurses ("RNs"). Defendant was an Indiana-based company with customers nationwide. Defendant's California sales representative visited plaintiff's homes in San Diego County to encourage them to enroll in defendant's "distance-learning partnership" with Indiana State University ("ISU") and California State University ("CSU"). Plaintiffs were told they could complete much of the necessary coursework for a B.S. degree in nursing online through ISU's distance learning program, and the clinical work through CSU. Plaintiffs executed form purchase agreements, the reverse side of which included an arbitration provision requiring arbitration in Indiana. In their first year of study, plaintiffs learned they would not be eligible for formal admission into ISU, a critical phase of defendant's program. They alleged that ISU had suspended enrollment into its LVN to RN nursing program after an investigation into the clinical component of the program at CSU, and sought refund of the moneys they had paid for the program. Defendant refused and the lawsuit followed. Defendant moved to compel arbitration. Finding the arbitration clause unconscionable, the trial court denied the motion.
Affirmed. Arbitration agreements are revocable if they are both procedurally and substantively unconscionable. The procedural element was met since plaintiffs were rushed into signing an adhesion contract without time to read it in detail, were powerless to negotiate its terms, and did not fully understand its legal implications. The substantive element was also satisfied since the contract required young, college-aged students to participate in arbitration proceedings in Indiana. Even though the arbitration agreement allowed them to participate by telephone or video, they would forgo the ability to testify in person. On the other hand, defendant could arbitrate in "its own backyard," an unreasonable advantage. Thus, the arbitration clause was unenforceable. The trial court correctly denied the motion to compel arbitration.
Trial Court Errs In Compelling Parties To Arbitrate Legal Malpractice Claim That Did Not Arise From Parties' Operating Agreement
In Rice v. Downs, 247 Cal. App. 4th 1213 (2016), Attorney Gary Downs, acting as counsel, drafted an operating agreement for Highland Property Development, in which he had an ownership interest, to develop properties in the affordable rental market. The operating agreement included an arbitration provision. Plaintiff sued Downs for legal malpractice, breach of fiduciary duty, and breach of the written agreement, alleging that Downs failed to advise him regarding any potential or actual conflicts of interest, nor "comply with California Rules of Professional Conduct, Rule 3-300." Downs successfully moved the trial court to compel arbitration. The arbitrator rendered an arbitration award favorable to Downs. Rice appealed, contending the tort claims for legal malpractice and breach of fiduciary duty fell outside the scope of the arbitration clause.
Reversed in part and Remanded. The phrase "any dispute" or "any controversy" may include tort claims, but those claims must "have their roots in the relationship between the parties which was created by the contract." The arbitration provision encompassed contractual claims, and those based upon tort that arose from the agreement. However, it did not include claims arising from an independent duty - such as the professional duties an attorney owes to clients - that do not arise from the agreement and fall outside the scope of its arbitration clause. Therefore, the trial court erred in compelling arbitration of the malpractice and breach of fiduciary claims.
Thirty-Day Rescission Period For Medical Arbitration Contracts Preempted By Federal Arbitration Act
In Scott v. Yoho, 248 Cal. App. 4th 392 (2016), plaintiffs brought a wrongful death action against defendants, a plastic surgeon and his medical center, based upon alleged medical malpractice resulting in the death of their relative. The decedent died of respiratory arrest within hours after undergoing lipoplasty and suction lipectomy. Defendant moved to compel arbitration based upon three arbitration agreements the decedent signed before her medical procedures. Plaintiffs opposed the motion contending the arbitration agreements were unenforceable because they did not include the 30-day revocation period required under Code of Civil Procedure section 1295, subdivision (c), that applies to health care agreements to arbitrate. The trial court agreed and denied the motion. Defendants timely appealed.
Reversed. The defendants' medical practice in Pasadena involved interstate commerce. Twenty percent of the medical supplies were shipped from out of state and some of the materials used for decedent's liposuction procedure originated from outside California. Defendants advertised on the internet and had out-of-state patients. Because there was a sufficient nexus with interstate commerce, enforcement of the three arbitration agreements was required under the Federal Arbitration Act, 9 U.S.C. §1 et seq. ("FAA"). Under the FAA, states may regulate contracts with arbitration clauses so long as they are not given "an unequal footing." Because the 30-day rescission period of section 1295 applied only to contracts requiring arbitration of medical care disputes, and not to contracts generally, it was preempted by the FAA. Thus, the arbitration agreements were enforceable and the motion to compel arbitration should have been granted.
Dismissal Of Legal Malpractice Case Reversed Where Plaintiff Should Have Been Allowed To Proceed In Federal Court After Arbitrator Terminated Proceedings Due To Plaintiff's Nonpayment
In Tillman v. Tillman (Rheingold, Valet, Rheingold, Shkolnik & McCartney), 825 F.3d 1069 (9th Cir. 2016), Renee Tillman hired the law firm of Rheingold, Valet, Rheingold, Shkolnik & McCartney ("Rheingold") to represent her in a wrongful death action following the death of her husband, Tim Tillman, who died in a truck accident. Rheingold sued the manufacturer of the truck Tim was driving. Renee won the suit and was awarded about eight million dollars. Sean Tillman, Tim's son from a prior marriage, then sued Renee and Rheingold alleging he was wrongfully excluded from the suit as an heir that should have been included in the wrongful death action under California law. In turn, Renee sued Rheingold in district court alleging legal malpractice. Rheingold move to compel arbitration under an arbitration clause in its retainer agreement with Renee. The district court granted the motion. Arbitration commenced in New York under the rules of the American Arbitration Association ("AAA"). However, the arbitrator terminated the proceedings without rendering an award or judgment after Renee ran out of funds. Rheingold sought dismissal of the district court action. Although the district court made findings that Renee was unable to pay for her share of the arbitration, it dismissed her action nevertheless. Renee timely appealed.
Reversed and Remanded. Under the Federal Arbitration Act, 9 U.S.C. § 3 ("FAA"), courts are required "to stay court proceedings on issues subject to arbitration ‘until such arbitration has been had in accordance with the terms of the agreement.'" Under AAA rules, incorporated in the arbitration agreement, the arbitrator was authorized to terminate the arbitration for non-payment without issuing an award or judgment. Renee complied with the AAA rules as long as she could. Consequently, the arbitration was "had in accordance with the terms of the agreement." No provision in the FAA mandated dismissal of the action once the arbitration concluded notwithstanding the lack of resolution. The district court should not have dismissed the case. Remand was ordered to allow Renee's case to proceed in district court.
Where Defendant Litigated For 17 Months Before Seeking To Compel Arbitration, District Court Correctly Deemed Right To Compel Waived
In Martin v. Yasuda, 829 F. 3d 1118 (9th Cir. 2016), Plaintiffs brought Fair Labor Standards Act claims against the Milan Institute of Cosmetology, a national group of accredited colleges, and its president, Gary Yasuda, claiming the school required them to do 1,600 hours of unpaid labor (technical instruction and practical training) in order to earn their degrees. As part of their enrollment, each plaintiff signed an Enrollment Agreement that included an arbitration clause. Instead of immediately moving to compel arbitration, defendants brought a Federal Rules of Civil Procedure 12(b)(6) motion to dismiss that was partially successful. Plaintiffs and defendants jointly completed a Rule 26(f) report detailing the scope of discovery that they conducted. At a scheduling conference 14 months into the case, the district court asked defense counsel if he planned to move to compel arbitration. Counsel responded, "[W]e haven't made a decision about that. And frankly ... I think our view of it is we are probably better off just being here in the court with the procedures of Rule 23 and discovery and federal practice than handling it in arbitration." The court warned counsel about the possibility of waiver. Defendants then moved to compel arbitration 17 months after the original complaint was filed. Finding that the defendants waived their right to arbitration, the court denied the motion. Defendants timely appealed claiming they had not waived arbitration and the issue should be decided by the arbitrator in the first instance.
Affirmed. In order to establish waiver, the party opposing arbitration must demonstrate that the party subject to waiver (1) had knowledge of the right to compel arbitration; (2) engaged in acts inconsistent with that right, and (3) prejudice to the party opposing the arbitration from those acts. Defendants conceded the first element. Regarding the second, defendants committed inconsistent acts by "delaying [their] right to compel arbitration by actively litigating [their] case to take advantage of being in federal court." The litigation prejudiced plaintiffs by forcing them to invest time and resources in responding to the defense. Arbitration would have given defendants a second chance to defense the case, which was "dispositive because plaintiffs would be prejudiced if the defendants got a mulligan on a legal issue it chose to litigate in court and lost." Finally, the question of "who decides" waiver by litigation - the court or arbitrator - is a "gateway issue" dealing with "the question of arbitrability" that is for the court, not the arbitrator. For those reasons, the trial court's order denying defendants' motion to compel arbitration was correct and affirmed.
FINRA Arbitration Panel's Expungement Award Properly Vacated By Trial Court Where Client Of Stock Broker Denied Opportunity To Present Evidence Against Broker's Request For Expungement
In Royal Alliance Associates, Inc. v. Liebhaber, (2016) 2 Cal. App. 5th 1092, Sandra Liebhaber obtained financial advice from Kathleen Tarr, a financial advisor with Royal Alliance Associates, Inc. ("RAA"). As a securities broker-dealer, RAA was a member of the Financial Industry Regulatory Authority, Inc. ("FINRA"), and subject to its rules, including those regarding dispute resolution. After becoming dissatisfied with Tarr's services, Liebhaber filed a securities complaint with FINRA alleging Tarr sold her "illiquid, high-risk investments" that were "inappropriate and unsuitable for her individual retirement account." Liebhaber sought $325,000 in compensatory damages and agreed with RAA to submit the claims "in accordance with FINRA By-Laws, Rules, and Code of Arbitration Procedure."
After an arbitration panel was convened, but before an arbitration hearing was held, Liebhaber and RAA settled for $30,000. Pursuant to FINRA rules, Liebhaber's allegations against Tarr were documented in FINRA's electronic database, the Central Registration Depository ("CRD").
After the case settled, RAA requested that the arbitrators keep the case open so it could seek expungement of Liebhaber's allegations from Tarr's CRD. At the hearing, Tarr spoke at length strenuously defending her investment advice. To the contrary, the panel prevented Liebhaber's counsel from questioning Tarr, or taking Liebhaber's testimony, and issued an award recommending expungement. RAA petitioned the trial court to confirm the award. Liebhaber and FINRA opposed the petition claiming the panel violated FINRA rules. The court agreed and vacated the award.
Affirmed. As a general rule, an arbitrator's decision cannot be disturbed for errors of fact or law. However, under Code of Civil Procedure § 1286.2, a trial court "shall vacate" an arbitration award if it finds that "the rights of a party were substantially prejudiced by the refusal of the arbitrators ... to hear evidence material to the controversy ...." Regardless of whether FINRA rules governing expungement hearings incorporate the right to cross-examination, section 1282.2, subdivision (d), "entitles a party to cross-examine witnessed if they appear at a hearing." Even though Tarr was not technically a witness at the hearing, she was allowed to speak unfettered, while Liebhaber was not allowed to speak at all, thereby substantially prejudicing Liebhaber's rights. For those reasons, the trial court's order vacating the award was correct and affirmed.
Lack Of Final Decision In District Court Precludes Ninth Circuit Jurisdiction Over Motion To Compel Arbitration
In Van Dusen v. Swift Transportation Company Incorporated, 830 F. 3d 893 (9th Cir. 2016), two truck drivers brought a class action against Swift alleging that Swift had misclassified them as independent contractions. Swift moved to compel arbitration, which the truck drivers opposed on the ground that Federal Arbitration Act, 9 U.S.C. §1, did not apply to the contracts of workers who engaged in foreign or interstate commerce. The district court determined that the arbitrator should decide whether section 1 applied to the parties' agreement. The Ninth Circuit reversed, holding that the decision was one for the district court. The district court then established a plan to such a determination. Swift appealed from the scheduling and case management order.
Dismissed. The Ninth Circuit dismissed the appeal because the order appealed from was interlocutory since it did not deny a petition to order arbitration to proceed. The court noted that absent statutory authorization, district court certification, or application of the collateral doctrine, it lacked jurisdiction and thus dismissal was proper.
The California opinions are posted at: click here, and the Ninth Circuit opinions at: click here.
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