ADR Case Updates
FAA Does Not Preempt California Procedure; PAGA Claim Not Arbitrable, But Private Wage Claims Are; Employer's Citation To "Futility Rule" Was Futile; Sonic II's "Affordability and Accessibility" Satisfied; Delegation Clause Upheld; and More, 09/06/2017
FAA Does Not Preempt California's Procedural (Versus Substantive) Provision That Allows Court To Deny Motion To Compel Arbitration Where There Is A Possibility Of Conflicting Rulings In Pending Litigation With Third Parties
In Los Angeles Unified School Dist. v. Safety Nat'l Cas. Corp. (2017) 13 Cal. App. 5th 471 , Los Angeles Unified School District (LAUSD) sued Safety National Casualty Corporation (SNCC) and other insurers alleging, among other things, breach of their insurance contracts for refusal to provide coverage for lawsuits relating to the Miramonte litigation, which involved sexual abuse claims at an elementary school. SNCC filed a motion to compel arbitration. There was no dispute that the substantive provisions of the Federal Arbitration Act (FAA, 9 U.S.C. § 1, et seq.) governed the arbitration agreement because the insurance contract involved interstate commerce. However, the arbitration agreement did not contain a choice of law clause or state that the FAA's procedural provisions governed the arbitration. The trial court denied the motion, concluding that California rules of procedure applied. The court further found that there was a possibility of conflicting rulings under Cal. Code Civ. Proc. Section 1281(2)(c).
Affirmed: Because the parties did not expressly designate that any arbitration proceeding was governed by the FAA's procedural provisions, rather than under state procedural law, the appellate court followed the reasoning of Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, and found that California procedure necessarily applied and was not preempted by the FAA. Next, the court found that the trial court did not abuse its discretion in denying the motion to compel under Cal. Code Civ. Proc. Section 1281(2)(c) because the record showed there was a possibility of conflicting rulings on a common issue of law or fact.
Employee's Claim For Civil Penalties Under PAGA Not Arbitrable, But Private Claim To Recover Wages Is Subject To Arbitration
In Esparza v. KS Industries L.P., Inc., (2017) 13 Cal. App. 5th 1228, plaintiff Richard Esparza completed an application for employment with defendant KS Industries, L.P. that included an arbitration provision. Later, Esparza filed a complaint against KS Industries as an aggrieved employee on behalf of himself and other current and former aggrieved employees. The complaint was a representative action brought pursuant to the Private Attorneys General Act of 2004 (PAGA, Lab. Code, § 2698 et seq.) for wage and hour violations under the California Labor Code. KS Industries filed a motion to compel arbitration claiming that plaintiff sought to circumvent his arbitration agreement by filing a single, nonarbitrable cause of action under PAGA and stylizing the relief sought as civil penalties under PAGA. KS Industries argued the label "civil penalties" could not disguise the true nature of the relief sought, which was individualized damages, wages, reimbursement and statutory penalties, which are not "civil penalties" that PAGA and holding under Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, preclude from being arbitrated.
Esparza opposed the motion to compel and argued that a claim for civil penalties under PAGA is not subject to arbitration and, for purposes of this rule, the civil penalties recoverable under PAGA include the recovery of wages. Plaintiff argued the plain language of Labor Code sections 558 and 1197.1 identifies wages as part of the civil penalties that are recoverable under PAGA. The trial court denied the motion to compel based upon Esparza's contention that he only sought "PAGA civil penalties and no individual damages."
Affirmed in part and remanded: Some of Esparza's claims were PAGA representative claims that sought civil penalties, where a portion of the recovery would be allocated to the Labor and Workforce Development Agency. Under the Iskanian rule, those claims are not subject to arbitration and that part of the trial court's order was affirmed.
However, plaintiff's complaint also alleged claims to recover wages under Labor Code section 558, which did not involve "civil penalties." The Federal Arbitration Act (9 U.S.C. § 1, et seq.) mandates enforcement of arbitration agreements covering private disputes and preempts state law to the contrary. The Iskanian rule does not exempt such private claims from arbitration. Therefore, the matter was remanded to the trial court to allow Esparza to unambiguously state his intention regarding his private claims to recover wages. If he wishes to pursue them, the trial court must grant KS Industries' motion to compel arbitration as to those private claims.
Citing "Futility Rule," Employer Nevertheless Waived Arbitration Of Exotic Dancers Wage And Hour Claim By Withdrawing Previous Motion To Compel Lead Plaintiff's Case Before Class Certification
In Sprunk v. Prisma (2017) 14 Cal. App. 5th 785, Maria Sprunk worked as an exotic dancer for Prisma LLC doing business as Plan B Club. She filed a wage and hour class action, alleging Plan B misclassified dancers as independent contractors rather than employees and misappropriated tips. Sprunk and other class members signed contracts containing arbitration clauses, although the version Sprunk signed did not address class arbitration while the other versions contained a waiver of class arbitration. Plan B filed a motion to compel arbitration against Sprunk, but later withdrew the motion. After the class had been certified, Plan B sought arbitration against class members. In explaining its earlier motion to compel arbitration, Plan B cited the "futility rule," which excuses a party in some circumstances from seeking to enforce an arbitration right when the state of the law at the time would make the effort futile. The trial court denied the motion, concluding that Plan B waived its right to seek arbitration.
Affirmed: Under the "futility rule," a party may be excused from seeking to enforce an arbitration right when the state of the law at the time would make the effort futile. Plan B argued that its delay in filing a motion to compel arbitration against class members was not a waiver of its right to seek arbitration because the state of the law at the time it moved to compel arbitration against Sprunk would have made the motion "futile." However, Plan B waited over a year after the law became well settled in California on class arbitration waivers to file its motions. Substantial evidence supported the conclusion that Plan B's delay in moving to compel arbitration until after a ruling on class certification was a strategic decision aimed at winning the case by defeating the class prior to seeking arbitration. Because this was inconsistent with an arbitration right and supported a waiver finding, the trial court's denial of the petition to compel arbitration was affirmed.
Parties May Delegate Adjudication of "Gateway Issues," Such As Arbitrability Of Dispute, To Arbitrator (Not Court) If They "Clearly And Unmistakably" Agree To Do So
At issue in Portland General Electric Co. v. Liberty Mutual Insurance Co., 862 F.3d 981 (9th Cir. 2017), was whether the court or the arbitrator should decide the scope of an arbitration provision contained in one of three related contracts between Portland General Electric Co. (PGE), Liberty Mutual Insurance Co., and others (Sureties) in connection with the building of a power plant. One of the contracts did not require arbitration, another did not mention arbitration, and the third contract, a guaranty, contained a provision which required arbitration and stated that the arbitration was to be conducted by the International Chamber of Commerce (ICC) under its procedural rules and Oregon substantive law and that "[o]nce the arbitration proceeding is commenced hereunder, either Party may implead any other person or entity (with such person or entity's consent) in, and/or raise any claim against, any other person or entity provided such claim arises out of or in connection with an agreement with a Subcontractor or this Guaranty."
PGE declared the construction contract in default and terminated it. The guarantor filed a request for arbitration with the ICC, and sought to join Liberty and another surety, invoking both the impleader provision in the guaranty and Article 7 of the ICC Rules.
PGE then filed a diversity action in the District of Oregon against the Sureties, alleging breach of the bond and bad faith. PGE sought a preliminary injunction prohibiting the Sureties from arbitrating their claims against PGE, claiming that the guarantor had improperly impleaded the Sureties. The Sureties opposed, arguing that by virtue of PGE's selection of the ICC Rules, it had expressly agreed that the arbitrator shall decide questions of arbitrability, and that it was up to the ICC tribunal to decide whether the guarantor validly joined the Sureties and for what purposes. The district court granted the preliminary injunction, finding that the parties never agreed to arbitrate this dispute.
Vacated and remanded: The Ninth Circuit vacated the judgment entering a preliminary injunction which prohibited the Sureties from pursuing claims against PGE in arbitration. The court reasoned that parties may delegate the adjudication of gateway issues, such as questions of arbitrability, if they "clearly and unmistakably" agree to do so. The court observed that under Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015), it had found such delegation when the parties incorporated by references the rules of the American Arbitration Association (AAA), which state in relevant part that the "arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the … validity of the arbitration agreement." Because of the similarity between the ICC Rules and those of the AAA, the Ninth Circuit joined the First and Second Circuit in holding that incorporation of the ICC rules into an arbitration agreement also constituted clear and unmistakable evidence of a delegation of gateway issues to the arbitrator.
Arbitration Agreement's Delegation Clause Is Enforceable If It Is Clear And Unmistakable And Not Revocable For Unconscionability Under Tiri V. Lucky Chances, Inc.
In Aanderud v. Superior Court (2017)13 Cal. App. 5th 880, the Aanderuds entered into an agreement with Vivint Solar Developer LLC (Vivint) under which Vivant agreed to install a solar power generating system on the Aanderuds' property in exchange for their agreement to purchase the solar power generated by the system. The Aanderuds later sued Vivint in superior court, seeking rescission of the agreement and asserting individual and class claims for declaratory relief and violations of the Unfair Competition Law (UCL), Business and Professions Code section 17200, et seq. Vivant filed a petition to compel arbitration.
The trial court granted Vivint's petition based on the arbitration provision in the agreement, ordered the Aanderuds to submit their individual claim to arbitration, and dismissed the class claims without prejudice. The Aanderuds appealed contending, among other things, that the clause in the arbitration provision that delegated to the arbitrator "the determination of the scope or applicability" of that provision (the delegation clause) was unenforceable. Although the enforceability of the delegation clause was raised, the trial court did not explicitly decide the issue.
Vacated in part: The California Court of Appeal found that since the trial court had decided the enforceability of the arbitration provision itself, it presumed the court implicitly found the delegation clause did not apply. The appellate court concluded that the delegation clause was enforceable because it was neither unclear nor unconscionable and thus the trial court erred by deciding issues reserved for the arbitrator, including that the arbitration provision was not procedurally or substantively unconscionable. Accordingly, while the appellate court affirmed the trial court's decision to compel arbitration, it vacated those portions of the order in which the trial court made findings that were reserved for the arbitrator, including whether class arbitration was available.
Employer's Arbitration Process Satisfied The Sonic II Requirements Of "Affordability And Accessibility" And Was Therefore Enforceable
In OTO L.L.C. v. Kho (2017) 14 Cal. App. 5th 691, Ken Kho filed a claim for unpaid wages with the California Labor Commissioner against his former employer, OTO, L.L.C., doing business as One Toyota of Oakland. After settlement discussions failed, One Toyota filed a petition to compel arbitration. Under the arbitration agreement, which One Toyota required Kho to execute without explanation during his employment, the wage claim was subject to binding arbitration conducted by a retired superior court judge. Because the intended procedure incorporated many of the provisions of the Code of Civil Procedure and the Evidence Code, the anticipated arbitration proceeding would resemble ordinary civil litigation.
The trial court denied the petition to compel. Under Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II), an arbitration agreement that waives the various advantageous provisions of the Labor Code governing the litigation of a wage claim is substantively unconscionable if it fails to provide the employee with an affordable and accessible alternative forum. The trial court concluded that the alternative anticipated by One Toyota's arbitration agreement failed this standard because it effectively required Kho to retain counsel and did not expressly provide for him to recover his attorney fees if he prevailed.
Reversed: A court may refuse to enforce a contract or clause under the doctrine of unconscionability, provided that both procedural and substantive unconscionability are present. Sonic II held that an arbitration agreement requiring waiver of certain employee-friendly wage claim provisions under the Labor Code is substantively unconscionable if it does not provide the employee with "an affordable and accessible alternative for him." Here, given the circumstances of Kho's execution of the arbitration agreement, "the degree of procedural unconscionability was extraordinarily high." However, the agreement was not substantively unconscionable under I. Affordability was satisfied because Kho was not required to pay any costs of arbitration not required by the civil courts. Nor was the arbitration proceeding inaccessible to Kho, where the proceeding was similar to civil litigation and thus no more complex than a proceeding under the Labor Code's "Berman" hearing procedure. Because the arbitration proceeding satisfied the Sonic II requirements of affordability and accessibility, the trial court should have granted One Toyota's petition to compel arbitration.
Contrary To General Rule, Trial Court Must Review Arbitration Award For Errors Of Fact Or Law Where Arbitration Agreement So Provides
In Harshad & Nasir Corporation v. Global Sign Systems, Inc. (2017) 14 Cal. App. 5th 523, Friendly Franchisees Corporation (FFC) provided management services to its affiliates, who owned Carl's Jr. restaurants in Los Angeles County. Global Sign Systems Inc. manufactured and repaired commercial signs. Global sued FCC for unpaid invoices. The parties went to arbitration. The arbitration agreement provided that the arbitrator shall apply California law and endeavor to decide the controversy as though he were a judge in a California court of law. It further provided that the arbitrator shall prepare a written decision, supported by written findings of facts and conclusions, and which cites the statutes and law applied and relied upon in reaching his decision. Finally, the parties agreed that the decision of the arbitrator and the findings of fact and conclusions of law shall be reviewed on appeal to the trial court and thereafter to the appellate courts upon the same grounds and standards of review as if the arbitration award were entered by a court.
The arbitrator found in favor of Global and also added several of FFC's affiliates as joint and several obligors under the award. Global petitioned the court to confirm the award while FFC and its affiliates petitioned to vacate the award. The trial court vacated the award as to the affiliates and confirmed the awarded as to FFC.
Reversed: The trial court erred in determining that it could not review the arbitrator's decision for errors of fact or law. The parties plainly agreed to have the merits of the arbitration award subject to judicial review. Thus, contrary to the general rule that courts will not review arbitration awards for errors of fact or law, the trial court must do so where the arbitration agreement sets forth that standard of review. Turning to the merits, the appellate court ruled that substantial evidence did not support the award and reversed the judgment in favor of Global and against FFC. The appellate court however agreed with the trial court that the arbitrator exceeded his authority by adding the affiliates as obligors under the award.
Denial Of Motion To Compel Arbitration Of Plaintiff Home-Buyer's Dispute Against Real Estate Brokers Reversed Where Arbitration Agreements Covered Claims Asserted
In Laymon v. J. Rockcliff, Inc. (2017) 12 Cal. App.5th 812, two sets of plaintiff homebuyers (Laymon and Hernandez) filed materially identical class action lawsuits against their real estate brokers, title companies, and other service providers. Plaintiffs' claims were premised on the brokers' use of a software program, "TransactionPoint," that allegedly facilitated improper kickback payments from the service provider defendants to the broker defendants. Defendants moved to compel arbitration based upon three separate agreements: the Residential Listing Agreement (RLA), the 2007 Residential Purchase Agreement (RPA), and the 2010 RPA, all of which included an arbitration clause. Each plaintiff signed at least one of the agreements. The trial court denied the motion as to the RLA and 2007 RPA, affecting Laymon and others, while granting the motion to compel arbitration against Hernandez based upon the 2010 RPA. In addition, the court compelled plaintiffs to arbitrate their claims against the service providers under the doctrine of equitable estoppel, even though the service providers were neither signatories to nor mentioned in the 2010 RPA. Defendants appealed denial of the motion to compel arbitration as to Laymon and others, while the Hernandez group cross-appealed the order requiring them to arbitrate against the broker and service provider defendants.
Reversed and remanded: The RLA required arbitration between a client and a broker of disputes "regarding the obligation to pay compensation under this Agreement." Plaintiff's allegations, which included seeking disgorgement, implicated this obligation and were thus subject to arbitration. Therefore, the trial court's refusal to compel arbitration of the Laymon claims under RLA against each plaintiff that signed it was error and reversed. The trial court's order compelling arbitration of the Hernandez claims under the 2010 RPA was correct. The Hernandez cross-appeal of the order compelling arbitration by the broker and service provider defendants was dismissed because an order compelling arbitration is not appealable.
California opinions are posted at: click here, and the Ninth Circuit opinion at: click here.
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