ADR Case Updates
U.S. Supreme Court Upholds Class Action Waivers In Employment Cases; Compelling Arbitration Against Non-Signatories; Inability to Pay; Tolling 5-Year Statute; Ex Parte Communications; and More, 06/06/2018
U.S. Supreme Court Upholds Class Action Waivers In Employment Cases
In Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), a 5-4 divided U.S. Supreme Court, upheld an employer's right to require that workers arbitrate disputes individually, waiving their right to class or collective actions. The high court ruling came in a trio of consolidated cases from the Fifth, Seventh, and Ninth Circuits.
Several employers and their employees agreed to individualized arbitration proceedings to resolve employment disputes under their respective employment contracts. Nevertheless, the employees brought class actions against their employers under the Fair Labor Standards Act and state law. They claimed their employment contracts, which required individualized proceedings in light of class action waivers, violated Section 7 of the National Labor Relations Act that guarantees workers "the right ... to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection." Because the class action waivers violated Section 7, the employees argued that the Federal Arbitration Act's "saving clause" obviated their obligation to individually arbitrate their claims. The Ninth Circuit agreed and reversed a district court's grant of an employer's (Ernest & Young) motion to compel arbitration. The U.S. Supreme Court granted certiorari.
Reversed and remanded: According to the majority opinion, authored by Justice Neil Gorsuch, the Federal Arbitration Act requires that arbitration agreements "must be enforced, and neither the Arbitration Act's saving clause nor the [National Labor Relations Act] suggests otherwise" ... "The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written."
The ruling followed several Supreme Court decisions endorsing similar provisions, generally in contracts with consumers. The question for the justices in the new cases was whether the same principles apply to employment contracts.
Justice Ruth Bader Ginsburg authored a strong dissent emphasizing public policy concerns and the harm the majority opinion will cause employees, "The Court today subordinates employee-protective labor legislation to the Arbitration Act. In doing so, the Court forgets the labor market imbalance that gave rise to the ... NLRA, and ignores the destructive consequences of diminishing the right of employees 'to band together in confronting an employer.'"
The majority opinion effectively sanctions the use of class action waivers in the workplace, a practice by employers that has grown increasingly common.
Arbitrator Has No Power To Compel Arbitration Against Non-Signatory To Arbitration Agreement - Judicial Determination Necessary
In Benaroya v. Willis, (2018) 23 Cal.App.5th 462, the actor Bruce Willis commenced a JAMS arbitration against a movie producer over fees. The parties signed a contract with an arbitration clause. Willis moved to add the individual owner of the production company under an alter ego theory. The arbitrator granted the motion, and then rendered a $5M award against the production company and its owner, even though the individual owner never signed the agreement.
Reversed and remanded: Although non-signatories to an arbitration agreement may be compelled to arbitrate in limited circumstances, such a determination must be a judicial one. An arbitrator has no power to compel a third-party to arbitrate, even if the arbitration agreement grants the arbitrator the power to determine the parties to the arbitration. Otherwise, a non-signatory may be compelled to arbitrate under an agreement he or she did not sign.
An Inability To Pay For Arbitration May Form Basis For Party To Successfully Oppose It
In Weiler v. Marcus & Millichap Real Estate Investment Services, Inc., (2018) 22 Cal.App.5th 970, the court weighed the contractual right to arbitrate against the ability to pay. Plaintiff Rae Weiler sought a declaration that defendants Marcus & Millichap Real Estate Investment Services, Inc., et al., had to either: (1) pay plaintiff's share of the costs in the previously ordered arbitration; or (2) waive their contractual right to arbitrate the underlying claims and allow them to be tried in the superior court.
Plaintiff and her husband allegedly lost more than $2 million at the hands of defendants. She sued for breach of fiduciary duty, negligence and elder abuse claims. After being ordered to arbitration and pursuing her claims in that forum for years, plaintiff asserted she could no longer afford to arbitrate. According to plaintiff, if she had to remain in arbitration and pay half of the arbitration costs (upwards of $100,000) she would be unable to pursue her claims at all.
Plaintiff initially sought relief from the arbitrators (pursuant to Roldan v. Callahan & Blaine (2013) 219 Cal.App.4th 87); they ruled it was outside their jurisdiction, and directed her to the superior court. So, plaintiff filed a declaratory relief action in the superior court, again seeking relief under Roldan. The trial court granted summary judgment to defendants on the grounds the arbitration provisions were valid and enforceable, and that plaintiff's claimed inability to pay the anticipated arbitration costs was irrelevant.
Reversed: "Though the law has great respect for the enforcement of valid arbitration provisions, in some situations those interests must cede to an even greater, unwavering interest on which our country was founded - justice for all." Consistent with Roldan, and federal and California arbitration statutes, a party's fundamental right to a forum she or he can afford may outweigh another party's contractual right to arbitrate. In this case, the Court found triable issues of material fact regarding plaintiff's present ability to pay her agreed share of the anticipated costs to complete the arbitration. The trial court therefore erred in granting defendants' motion for summary judgment.
Arbitration Agreement Exception for Issues "Not Arbitrable" Under State Law Does Not Preclude Arbitration Where State Law Is Preempted By FAA
In Saheli v. White Memorial Medical Center (2018) 21 Cal.App.5th 308, Plaintiff enrolled in a medical residency program at White Memorial Medical Center. She signed a "Post-Doctoral Training Agreement," in which she agreed to submit "all issues" to final and binding arbitration, except those "not arbitrable under applicable state law." After her termination, she filed a complaint alleging harassment and discrimination along with other causes of action. Defendants moved to compel arbitration. The trial court granted the petition in part and compelled Plaintiff to arbitrate all her claims except those under California's Ralph and Bane Acts, which make unenforceable the waiver "of any forum or procedure ... unless expressly not made as a condition of entering into a contract for services."
Reversed: The fundamental rules of contract interpretation "are based on the premise that the interpretation of a contract must give effect to the mutual intention of the parties." The U.S. Supreme Court held in DirecTV Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015), that language very similar to that in the instant case "unequivocally excluded state law preempted by the Federal Arbitration Act (FAA), and a contrary interpretation would itself be preempted by the FAA." Courts may not apply state law rules in a manner that "does not place arbitration contracts on equal footing with all other contracts." Moreover, the FAA "requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Here, the phrase "not arbitrable under applicable state law" was interpreted to encompass only California law that was not preempted by the FAA. Since the Ralph and Bane Acts were preempted by the FAA, the trial court should have compelled arbitration of those claims as well. Therefore, the order denying in part Defendants' petition to compel arbitration was reversed.
Initial, Partial Arbitration Award Concerning Attorney Fees And Costs Appropriate Where Not All Underlying Issues Resolved
In EHM Productions, Inc. v. Starline Tours of Hollywood, Inc., (2018) 21 Cal.App.5th 1058, Starline Tours of Hollywood, Inc. (Starline) appealed from a judgment confirming an arbitration award. The arbitration involved a contract dispute between Starline and EHM Productions, Inc. doing business as TMZ (TMZ) regarding Starline's duty to defend TMZ in pending litigation. Starline had agreed to run a "TMC- branded, multi-media Hollywood bus tour" for TMZ, which resulted in a putative class action by the bus drivers against Starline and TMZ. TMZ obtained an award requiring Starline to defend TMZ in the bus driver action. Following arbitration, the award was confirmed by a JAMS appellate panel. TMZ filed a petition to confirm the award, which the trial court granted over Starline's objection that the piecemeal award confirmations violated the "one final judgment rule."
Affirmed: Ordinarily, "there may be but one final judgment in an action," as "piecemeal dispositions in a single action are oppressive and costly". However, an "incremental award process may be appropriate in situations where not all issues may be resolved at the time of the initial partial final award." Therefore, as the cost award was subject to confirmation, the trial court did not error by confirming it.
A Co-Plaintiff In Arbitration Does Not Toll 5-Year Statute Within Which Other Co-Plaintiff Must Bring Case To Trial
In Tanguilig v. Neiman Marcus Group, Inc., (2018) 22 Cal.App.5th 313, Bernadette Tanguilig brought suit against her former employer, Neiman Marcus Group, Inc. (NMG), alleging a combination of individual and class claims for wrongful termination in violation of public policy and multiple violations of the California Labor Code. Early in the trial court proceedings, NMG successfully demurred to Tanguilig's wrongful termination and related claims, and several years later, moved to dismiss the remaining claims pursuant to California's five-year dismissal statute, Code of Civil Procedure section 583.310. The trial court granted the motion and dismissed the suit. Tanguilig appealed, seeking to overturn the five-year dismissal order, arguing primarily that the trial court erred in failing to toll the five-year clock under section 583.340, subdivision (c), for the period during which an order compelling co-plaintiff Juan Carlos Pinela to arbitration was in effect.
Affirmed: California Code of Civil Procedure section 583.310 provides for dismissal of a case that is not brought to trial within five years after it is filed. An appellate court's review of a trial court's determination of whether the five-year period was tolled "for impossibility, impracticability, or futility is limited," since "trial courts are best equipped to evaluate the complicated factual matters that could support such a finding." Overall, because "it was not impossible, impracticable, or futile for plaintiff to commence trial ... during the ... period the arbitration order was in effect," for the co-plaintiff, the trial court's order dismissing the case for failure to bring the case to trial within five years was correct.
In Attorney Fee Arbitration Proceeding, Client's Confidential Brief Submitted To Arbitrators Constitutes Impermissible Ex Parte Communication Requiring Arbitration Award In Favor Of Client To Be Vacated
In Baker Marquart LLP v. Kantor (2018) 22 Cal.App.5th 729, the law firm Baker Marquart LLP represented respondent James R. Kantor on a contingency fee basis in litigation that resulted in a $1.6 million recovery for Kantor. Following the conclusion of Baker Marquart's representation, Kantor filed a demand for fee arbitration in accordance with the parties' contingency fee agreement. In his arbitration demand, Kantor argued Baker Marquart charged him an incorrect contingency fee (35% instead of 30%) because Baker Marquart failed to complete two specified tasks. In advance of the arbitration, however, Kantor submitted, and the three-person arbitration panel accepted, an ex parte "confidential arbitration brief" that Kantor did not provide or otherwise reveal to Baker Marquart. In the confidential brief, Kantor raised and argued additional claims not presented in his arbitration demand. A majority of the panel ruled in Kantor's favor and awarded him a refund of a portion of the fees he had paid to Baker Marquart. In its ruling, the panel majority addressed and relied on claims Kantor raised in the confidential brief. Baker Marquart filed a motion in superior court to vacate the arbitration award, which the trial court denied. Baker Marquart timely appealed.
Reversed and remanded: Under Code of Civil Procedure section 1286.2, the trial court was required to vacate the arbitration award because it was procured by "corruption, fraud or other undue means." The confidential brief was an improper ex parte communication, relied on by the panel and to which Baker Marquart had no adequate opportunity to respond. Since the arbitration award was procured by "undue means" as that term is used in section 1286.2, the judgment in Kantor's favor was reversed and remanded with directions that the trial court vacate the award.
Arbitration and Delegation Provisions Were Unenforceable Where They Were Made In Violation of Insurance Regulatory Statute and No Exception Justifying Violation Applied
In Nielsen Contracting, Inc. v. Applied Underwriters, Inc., (2018) 22 Cal.App.5th 1096, Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) sued several entities (defendants) alleging these entities fraudulently provided workers' compensation policies to Nielsen that were illegal and contained unconscionable terms. Defendants moved to compel arbitration and stay the litigation under an arbitration provision in one of defendant's contracts, titled Reinsurance Participation Agreement (RPA). Nielsen opposed the motion, asserting the arbitration provision and the provision's delegation clause were unlawful and void. The trial court agreed and denied defendants' motion. On appeal, defendants contended: (1) the arbitrator, and not the court, must decide the validity of the RPA's arbitration agreement under the agreement's delegation clause; and (2) if the court properly determined it was the appropriate entity to decide the validity of the delegation and arbitration provisions, the court erred in concluding these provisions were not enforceable.
Affirmed: The provisions in the RPA were void and unenforceable because defendant failed to file the provisions with the Insurance Commissioner contrary to Insurance Code section 11658 and Title 10 of the California Code of Regulations section 2268. As set forth in Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, 70, a contract that is made in violation of a regulatory statute is generally void, absent exceptions that are inapplicable here. The "arbitration and delegation provisions were prohibited because they were not properly filed with the Insurance Commissioner." Therefore, the provisions were unenforceable and the trial court's ruling denying the motion to compel arbitration was correct.
California opinions are posted at: click here, the Ninth Circuit opinion at: click here, and the U.S. Supreme Court opinion at: click here.
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