ADR Case Updates
Waiver Injunctive Relief, Liquidated Damages, CCP 998 Costs, Enforcement by Nonsignatory, Arbitrator Disclosures, and More, 06/07/2017
California Supreme Court Holds That Arbitration Provision In Citibank's Credit Card Agreement Purporting To Waive Right To Seek Public Injunctive Relief Violates California Law And Is Not Preempted By Federal Arbitration Act
In McGill v. Citibank, N.A., (2017) 2 Cal. 5th 945, Sharon McGill opened a credit card account with defendant Citibank, N.A. (Citibank) and purchased a "credit protector" plan (Plan). Under the Plan, Citibank agreed to defer or to credit certain amounts on McGill's credit card account when a qualifying event occurred, such as long-term disability, unemployment, divorce, military service, or hospitalization. Citibank charged a monthly premium for the Plan based on the amount of McGill's credit card balance. An amendment to the credit card agreement added an arbitration provision.
McGill filed a class action based on Citibank's marketing of the Plan and the handling of a claim she made under it when she lost her job. She alleged claims under the Unfair Competition Law ("UCL;" Bus. & Prof. Code, § 17200 et seq.), False Advertising Law ("FAL;" id., § 17500 et seq.), and the Consumer Legal Remedies Act ("CLRA;" Civ. Code, § 1750 et. seq.), as well as the Insurance Code. For relief, McGill sought, among other things, an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.
Pursuant to the arbitration provision, Citibank petitioned to compel McGill to arbitrate her claims on an individual basis. The trial court granted the petition in part and denied it in part based on Broughton v. Cigna Health Plans (1999) 21 Cal. 4th 1066, and Cruz v. Pacific Health Systems, Inc. (2003) 30 Cal. 4th 303, which together established the following rule: Agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or FLA are not enforceable in California. Applying this rule - known as the Broughton-Cruz rule - the trial court ordered McGill to arbitrate all claims other than those for injunctive relief under the UCL, FAL, and CLRA. The Court of Appeal reversed and remanded "for the trial court to order all of McGill's claims to arbitration," concluding that the Federal Arbitration Act ("FAA;" 9 U.S.C. § 1 et seq.), as recently construed by the United States Supreme Court in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (Concepcion), preempts the Broughton-Cruz rule.
REVERSED AND REMANDED: Under Civil Code Section 3513, "a law established for a public reason cannot be contravened by a private agreement." The UCL, CLRA, and FAL provide for public injunctive relief that is primarily "for the benefit of the general public." Accordingly, the private arbitration agreement between McGill and Citibank may not contravene McGill's right to seek public injunctive relief. Furthermore, the FAA does not preempt the Broughton-Cruz rule. The FAA requires courts to "place arbitration agreements on equal footing with other contracts ... and [to] enforce them according to their terms." Since Section 3513 established a state law contract defense by which any contract (not just arbitration agreements) may be rendered unenforceable, the FAA did not preempt it. Therefore, the arbitration provision waiving the right to seek public injunctive relief was invalid and unenforceable as against public policy.
Mediated Settlement Agreement Enforced Notwithstanding Liquidated Damages Penalty Where Issue Raised For First Time On Appeal And Subject To Forfeiture
In Krechuniak v. Noorzoy (2017) 11 Cal.App.5th 713, Aisha A. Krechuniak (Sister) and her brother, Zia Jamal Noorzoy (Brother) were enmeshed in litigation over a failed development of a residential parcel in Pebble Beach. They went to mediation and settled their dispute. Brother defaulted and the trial court awarded Sister a stipulated judgment of $850,000 against Brother as provided in their "MEMORANDUM OF SETTLEMENT." Brother appealed contending that this amount included an impermissible liquidated damages penalty of $250,000 that was unenforceable under Civil Code section 1671, an argument he advanced for the first time on appeal.
AFFIRMED. Brother forfeited his fact-based contention. The determination of whether a contract provision is an illegal penalty or an enforceable liquidated damage clause is a question to be determined by the trial court. On review, appellate deference to the trial court's factual findings is required unless the facts are undisputed and susceptible to only one reasonable conclusion.
Arbitrator Must Address CCP Section 998 Request For Costs After Award Issued
In Heimlich v. Shivji (2017) 12 Cal.App.5th 152, Attorney Alan Heimlich (Attorney) sued his former client, Shiraz Shiviji (Client), for unpaid attorney fees notwithstanding an arbitration provision in the retainer agreement. Client issued a Code of Civil Procedure Section 998 (CCP 998) offer of settlement for $30,001, and successfully moved to compel arbitration that resulted in no recovery by either side. Client promptly sought from the arbitrator an award of costs under CCP 998. After the arbitrator responded that he no longer had jurisdiction, Client asked the trial court to confirm the arbitration award and award him CCP 998 costs as well. The trial court confirmed the award, but determined that Client failed to make a timely CCP 998 claim to the arbitrator and denied Client's request for CCP 998 costs.
REVERSED WITH DIRECTIONS: Contrary to the Attorney's suggestion that Client should have presented his CCP 998 request for costs to the arbitrator before the arbitration award was rendered, section 998(b)(2), provides that a CCP 998 offer which is not accepted "cannot be given in evidence or upon the trial or arbitration." Therefore, Client correctly requested CCP 998 costs after the arbitrator rendered his arbitration award, not before. In his motion with the trial court to confirm the award, Client established that the arbitrator refused to hear any evidence of Attorney's rejection of the CCP 998 offer. Thus, Client timely presented his CCP 998 claim to the arbitrator, who should have reached the merits of that claim. Consequently, the order confirming the arbitration award was partially vacated to allow a determination of Client's CCP 998 request by the arbitrator or, if that avenue is not availing, by the trial court.
Nonsignatory To Arbitration Agreement May Compel Arbitration Of Employment Dispute Under Doctrine Of Equitable Estoppel And Agency
In Garcia v. Pexco LLC (2017) 11 Cal.App.5th 782, temporary staffing company, Real Time Staffing Services, LLC, hired Plaintiff Narciso Garcia as a non-exempt hourly employee, and assigned him to work for Defendant Pexco LLC. As part of the hiring process, Garcia filled out an employment application that included an arbitration agreement between Garcia and Real Time. Pexco was not a signatory to the arbitration agreement. Garcia later filed suit for Labor Code wage and hour violations against Real Time, Pexco, and others. Real Time and Pexco successfully moved to compel arbitration. Garcia opposed the motion on the ground that Pexco was not a party to the arbitration agreement.
AFFIRMED: Garcia was equitably estopped from denying Pexco's right to compel arbitration and the agency exception applied. A nonsignatory to an arbitration agreement may compel arbitration of a dispute arising out of the scope of the agreement "when the causes of action against the nonsignatory are 'intimately founded in and intertwined with' the underlying obligations." The wage and hour claims were intimately founded and intertwined with Garcia's employment relationship with Real Time. Moreover, because Garcia did not distinguish between Real Time and Pexco, rather generally alleging "all DEFENDANTS" engaged in the wage and hour violations, he was estopped from refusing to arbitrate his claim with Pexco. The trial court was correct in compelling Garcia to arbitrate with Real Time and Pexco.
Court Compels Arbitration of Former Employee's Suit By Severing from Arbitration Provision the "Carve-Out" of Confidentiality Claims
In Farrar v. Direct Commerce, Inc., (2017) 9 Cal. App. 5th 1257, Plaintiff Wilson Farrar sued her former employer, Direct Commerce, Inc., for wage and hour and related claims. Her employment agreement included an arbitration provision. Direct Commerce petitioned to compel arbitration. In opposing the petition, Farrar claimed the arbitration provision was substantively unconscionable because of a "carve-out" from arbitration of "any claim based on or related to the Assignment of Inventions & Confidentiality Agreement between you and Direct Commerce." Farrar maintained this exception made the arbitration provision unduly one-sided because these are the claims the company was most likely to bring, whereas the claims she was most likely to bring must be arbitrated. The trial court agreed and denied Direct Commerce's petition to compel arbitration on the ground that the arbitration provision was procedurally and substantively unconscionable.
REVERSED: Substantive unconscionability results when a contract's terms are "unreasonably favorable to the more powerful party." Pursuant to Civil Code section 1670.5(a), the court may refuse to enforce a contract "permeated" by unconscionability, or it may strike the unconscionable provision from the agreement. Here, the appellate court acknowledged the arbitration provision was one-sided, as it excluded any claims arising from the confidentiality agreement. However, the contract was not permeated by unconscionability and the offending exception was readily severable and should have been severed by the trial court. Therefore, order denying the petition to compel arbitration was reversed and the matter remanded for arbitration.
$7 Million Arbitration Award Upheld Notwithstanding Arbitrator's Failure To Disclose Fact That Attorney From Defendant Law Firm Represented Party In Prior Arbitration Before Arbitrator
In ECC Capital Corporation v. Manatt, Phelps & Phillips, LLP (2017) 9 Cal.App.5th 885, ECC Capital Corporation (ECC) sued its former law firm, Manatt, Phelps & Phillips, LLP (Manatt), for legal malpractice in a complex transaction regarding the sale of ECC's subprime mortgage loan origination business. Pursuant to an arbitration clause in its engagement agreement with ECC, Manatt compelled arbitration and prevailed. The arbitrator awarded Manatt nearly $7 million in costs. ECC moved to vacate the award because the arbitrator violated mandatory disclosure rules governing arbitrations. Specifically, the arbitrator failed to disclose that a Manatt attorney had represented a party in a Uniform Domain Name Dispute Resolution Policy Proceeding (UDRP) in which the arbitrator had served as a panelist. Because the arbitrator was unaware of this ground for disqualification, and had no contact with the Manatt attorney in the UDRP arbitration, the trial court denied ECC's motion to vacate and confirmed the award in Manatt's favor.
AFFIRMED: "[A]n arbitration award may be vacated only upon a finding that a neutral arbitrator failed to disclose a ground for disqualification 'of which the arbitrator was then aware' [citation], and this requirement of scienter is a deliberate expression of the Legislature's intent to prevent the undoing of an arbitration award based upon an arbitrator's unknowing failure to disclose information."
The arbitrator stated in his letter responding to ECC's request that he disqualify himself: "[L]et me state unequivocally that at the time I undertook this matter in December 2010 I was unaware that an attorney from [Manatt] had been listed as counsel in [the Lyekis matter]. The letter I received from [ECC] was the first, and only time, I became aware that an attorney from Manatt had been listed as a party representative in [that] matter." Because the arbitrator was not aware a former Manatt lawyer participated in the Lyekis UDRP proceeding, his failure to disclose that matter was not a ground for vacating the arbitration award under Code of Civil Procedure section 1286.2, subdivision (a)(6)(A).
Defendant Employer That Believes PAGA Suit Includes Individual, Non-PAGA Claims Must File Motion To Strike Or Demur Instead Of Moving To Compel Arbitration
In Betancourt v. Prudential Overall Supply (2017) 9 Cal. App. 5th 439, Roberto Betancourt filed suit against his former employer, Prudential Overall Supply, under the California Private Attorney General Act ("PAGA," Labor Code § 2698, et. seq.), alleging wage and overtime violations. Prudential moved to compel arbitration under an arbitration agreement Betancourt had signed. Prudential argued that the PAGA claim was merely a disguised wage and hour case that was subject to arbitration, and that Betancourt waived his right to bring representative and class claims. The trial court denied Prudential's motion to compel arbitration under Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 387, holding that employees cannot waive their right to bring PAGA suits. Prudential appealed, asserting that Betancourt's suit contained non-PAGA claims.
AFFIRMED: Under PAGA, an aggrieved employee may act as a private attorney general to recover civil penalties for Labor Code violations on behalf of the state. The recoverable penalties are distinct "statutory damages to which employees may be entitled in their individual capacities." This right is unwaivable and not subject to arbitration. If Prudential believed the complaint included non-PAGA, individual claims, the correct procedural vehicle to challenge those individual claims was by way of demur or motion to strike, not a motion to compel arbitration.
U.S. Supreme Court Compels Arbitration Of Claims Against Nursing Home Because FAA Preempts Kentucky State Rule That Requires Express Authorization From Principal Before Agent May Waive Principal's Right To Jury Trial
In Kindred Nursing Centers v. Clark, 137 S. Ct. 368 (2017), Beverly Wellner and Janis Clark (Representatives) each held a power of attorney (POA) granting broad powers to manage their family members' affairs. Representatives placed their relatives in Kindred Nursing Centers' facility (located in Kentucky) and completed paperwork that included arbitration agreements using their respective POA. Representatives sued Kindred after their relatives died due to allegedly substandard care. Kindred moved to enforce the arbitration agreement and sought dismissal of the state court actions. The trial court denied the motions. The Kentucky Court of Appeals affirmed. The Kentucky Supreme Court consolidated the claims by Wellner and Clark and affirmed under Kentucky's "clear-statement rule" that safeguards a person's "right to access the courts and to trial by jury," holding that the arbitration agreements were invalid because neither POA specifically authorized Representatives to enter into arbitration agreements on behalf of their principals that would waive access to the courts and trial by jury.
REVERSED IN PART AND REMANDED: The Federal Arbitration Act (FAA, 9 U.S.C. § 1 et seq.) requires courts to place arbitration agreements "on equal footing with all other contracts," and preempts any state rule that discriminates on its face against arbitration agreements or that covertly accomplishes the same objective that disfavors contracts that have the defining features of arbitration agreements. Kentucky's clear-statement rule singled out arbitration agreements because it required Representatives to possess specific authority in their respective POAs to "waive his [or her] principal's fundamental rights to access the courts [and] trial by jury." Therefore, the clear-statement rule was preempted by the FAA. Both the Wellner and Clark arbitration agreements were enforceable.
California opinions are posted at: click here, and the U.S. Supreme Court opinion at: https://www.supremecourt.gov/opinions/16pdf/16-32_o7jp.pdf.
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