ADR Case Updates
Appellate Court Fills In Gap Left By California Supreme Court In Landmark Ruling; Nonseverable PAGA Waiver Renders Entire Arbitration Agreement Unenforceable; California Supreme Court Upholds Arbitrator's Award Even If "Honest Belief" Defense Was Error; Mediation Confidentiality Does Not Protect Financial Disclosures in Divorce Mediation; Enforceability of Electronic Signatures, and More, 03/12/2015
PAGA Representative Claims Stayed Until Employee First Arbitrates Individual Claims
In Franco v. Arakelian Enterprises, Inc., (2015) 234 Cal. App. 4th 947, the state appellate court filled in one of the gaps left by the California Supreme Court in its landmark ruling, Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal. 4th 348. In Iskanian, the high court held that an employer may enforce an arbitration agreement that compels waiver of a class action, but cannot compel the employee to arbitrate a representative action under the Private Attorneys General Act (PAGA, Lab. Code § 2699). Iskanian left open the procedural question of which goes first, the arbitration or PAGA claim? The Second District Court of Appeal ruled that all PAGA claims must be stayed until the arbitration claims are resolved.
Edixon Franco filed a wage and hour claim against his employer for individual and class relief. He also asserted a PAGA representative action. His employer, Athens Disposal (later amended to Arakelian Enterprises, Inc.) moved to compel pursuant to the parties' arbitration agreement that included a waiver of class and representative actions. The trial court granted the motion, which this court overturned in Franco v. Athens Disposal Co., Inc. (2009) 171 Cal. App. 4th 1277 (Franco I), by relying on Gentry v. Superior Court (2007) 42 Cal. 4th 443. On remand, the trial court found the waiver unenforceable and refused to compel arbitration, a decision this court affirmed in Franco v. Athens Disposal Co., Inc. (2012) (2d civ. No. B232583) (Franco II). The California Supreme court transferred the case back to this court following its decision in Iskanian.
Reversed and remanded. Iskanian abrogated Gentry, and held that class action waivers are not categorically invalid or unenforceable. Therefore, the trial court's order denying arbitration was reversed. However, Iskanian also held that an arbitration agreement that compels arbitration of a representative action under PAGA is unenforceable as a matter of public policy. Consequently, Franco may not be forced to arbitrate his PAGA claim. The fact that the PAGA waiver was unenforceable did not make the entire arbitration agreement invalid. Rather, the matter was remanded to the trial court to stay the PAGA claim until after the arbitration of Franco's individual claims under Code of Civ. Proc. § 1281.4.
If Arbitration Agreement Includes Provision That Is Nonseverable PAGA Waiver, Then Entire Arbitration Agreement Rendered Unenforceable
In Montano v. The Wet Seal Retail, Inc., (2015) 232 Cal. App. 4th 1214, Elizabeth Montano was employed by The Wet Seal Retail, Inc., and filed a putative wage and hour class action against her employer that included a representative claim under the Private Attorneys General Act (PAGA, Lab. Code § 2699). The Wet Seal moved to compel arbitration under the parties' arbitration agreement. The agreement included a nonseverable clause waiving the PAGA claim. In light of the state supreme court's recent ruling in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal. 4th 348, holding PAGA waivers unenforceable, the trial court concluded the PAGA waiver rendered the entire agreement unenforceable and denied the motion to compel.
Affirmed. California law prohibits PAGA waivers as a violation of public policy because such waivers enable employers to avoid liability for labor law violations. Furthermore, PAGA claims are not preempted by federal law, which generally allows class action waivers, because the Federal Arbitration Act (9 U.S.C. § 2) seeks to ensure the efficient adjudication of private disputes through arbitration as set forth in AT&T Mobility LLC v. Concepcion et ux. (2011) 563 U.S. __, 131 S.Ct. 1740. To the contrary, a PAGA claim is not a private dispute, but one between an employer and the state, which alleges directly, or through its agents (aggrieved employees), that an employer has violated the Labor Code. Therefore, the trial court correctly determined the nonseverable PAGA waiver was invalid thereby rendering the entire arbitration agreement unenforceable.
California Supreme Court Upholds Pro-Employer Arbitrator's Award Regardless of Whether Honest Belief Defense Applied After Employee Was Terminated While On CFRA Medical Leave
In Richey v. AutoNation, Inc., (2015) 60 Cal. 4th 909, Avery Richey was employed by Power Toyota Cerritos, which was part of AutoNation, Inc. Richey was terminated while absent on approved medical leave, but engaged in outside employment activity contrary to company policy. After an eleven-day arbitration hearing, the arbitrator found in favor of the employer, relying on the federal "honest belief" defense and rejecting the employee's claim that the employer violated the employee's right to reinstatement under the Moore-Brown-Roberti Family Rights Act (CFRA, Gov. Code §§12945.1 - 12945.2) and its federal counterpart, the Family and Medical Leave Act of 1993 (FMLA, 29 U.S.C. §§ 2601-2654).
The trial court confirmed the award, but the court of appeal reversed and vacated the award on the basis that the arbitrator committed legal error by adopting the honest belief defense. The state supreme court granted review to determine if, in the absence of an express agreement between the parties, courts may review and correct an arbitration award involving both an employee's unwaivable statutory rights and an employer's written policy forbidding outside employment while on leave.
Court of Appeal reversed. Although the arbitrator may have committed error in adopting the honest belief defense that is untested in the California Supreme Court, any error that may have occurred did not deprive the employee of an unwaivable statutory right because the arbitrator found that the employee was terminated for violating the employer's written policy prohibiting outside employment while on medical leave.
Financial Statements Mandated By the Family Code and Produced In Divorce Mediation Are Not Protected By Mediation Confidentiality
In Lappe v. Superior Court (2014) 232 Cal. App. 4th 774, Gilda and Murray Lappe were married for 16 years and had two children. She was a stay-at-home mother and he was a medical doctor and successful businessman. The relationship ultimately soured and a dissolution of marriage petition followed. They attended a mediation without counsel to divide their assets and resolve the divorce. Despite declarations by both that they served each other with preliminary and final declarations of disclosure of assets, Gilda maintained that she never received Murray's declarations. During the mediation, the parties executed a marital settlement agreement under which Murray was to pay Gilda $10 million in full satisfaction of her entire community interest in a community business known as eScreens, Inc. Later, Gilda learned that Murray had sold eScreens for $75 million. She moved to set aside the divorce judgment claiming that Murray never disclosed in the mediation that he was shopping eScreens, and that she never would have agreed to the $10 million settlement had she known otherwise. She also moved to obtain copies of the financial disclosures that Murray claimed he served on Gilda. Murray objected on the grounds of mediation confidentiality. The trial court ultimately concluded that Murray's declarations were protected by the mediation privilege codified under Evidence Code § 1115 et seq. and denied Gilda's motion. Gilda timely sought a writ of mandate seeking to reverse the trial court's order.
Writ issued. Murray's financial disclosures were prepared pursuant to and for the purpose of complying with Family Code § 2100 et seq., not because the parties participated in mediation. Accordingly, they were not protected by mediation confidentiality. The trial court committed error in denying Gilda's motion, and was directed to enter a new and different order granting the motion with respect to the declarations of disclosure.
Plaintiff May Not Voluntarily Dismiss Lawsuit Against Defendant After Arbitral Claims Decided In Defendant's Favor
In Mesa Shopping Center-East, LLC v. Hill (2014) 232 Cal. App. 4th 890, a case of first impression, Plaintiff and Defendant owned equal shares to adjacent properties in Newport Beach. They entered into contracts governing the ownership and management of the properties. The agreements provided for the arbitration of disputes and the award of reasonable attorney fees to the prevailing party. Alleging violation of the agreements, Plaintiff sued Defendant and sought a preliminary injunction. The parties stipulated to stay the hearing on the preliminary injunction pending arbitration. The arbitrator issued an interim decision in favor of Defendant and awarded attorney fees and cost in the arbitration, not in the state court action. The trial court then denied Plaintiff's motion for a preliminary injunction. Apparently to avoid an adverse award of fees and costs in the state court action, Plaintiff successfully moved to dismiss the action without prejudice. In response, Defendant moved to vacate the dismissal, recover fees and costs as the prevailing party, and confirm the final arbitration award. However, the trial court found the arbitration proceeding had no bearing on the state court action and refused to vacate the dismissal.
Reversed and remanded. A prevailing party in a breach of contract case may recover reasonable attorney fees if the contract so provides. However, there can be no prevailing party in an action that had been voluntarily dismissed. A plaintiff may dismiss an action voluntarily and without prejudice "before the actual commencement of trial" under Code of Civ. Proc. § 581. Here, the state court action was based on the same facts and causes of action submitted to the arbitrator. The difference was only in the remedies sought - injunctive relief in court, and damages from the arbitrator. Once the hearing on the merits of the dispute commenced in arbitration, it was too late under section 581 for Plaintiff to voluntarily dismiss the state court action and avoid an attempt by Defendant to recover attorney fees as the prevailing party. Thus, the order denying Defendant's motion to vacate the dismissal was reversed, and the matter remanded for further proceedings.
Country Club Cannot Force Members into Arbitration Based on Bylaws that Became Effective After Members Filed Suit
In Cobb v. Ironwood Country Club (2015) 233 Cal. App. 4th 960, William Cobb and three other former and current members sued Ironwood Country Club based upon a loan agreement that Ironwood had entered into with each of its members. At the time the lawsuit was filed, Ironwood's bylaws did not contain an arbitration clause. Four months later, Ironwood adopted an arbitration agreement in the bylaws and sought to compel arbitration. The trial court denied the motion to compel.
Affirmed. The implied covenant of good faith and fair dealing prohibits any party from making unilateral changes to an arbitration agreement that apply retroactively to "accrued or known claims". Here, the bylaw amendment violated the implied covenant of good faith and fair dealing because Cobb's suit had not only accrued, but had actually been filed, when the amendment was adopted. Furthermore, because arbitration is a matter of agreement between the parties, there was no basis to infer an agreement to arbitrate between these parties. Therefore, the trial court correctly denied the motion to compel arbitration.
Trial Court Abused Discretion in Failing to Hold Evidentiary Hearing Before Compelling Arbitration Where Opponents allege Fraud and Breach of Fiduciary Duty
In Ashburn v. AIG Financial Advisors (2015) 234 Cal. App. 4th 79, former employees took early retirement upon the advice of their investment advisor, and signed documents authorizing her to manage their funds. They subsequently sued her and AIG Financial Advisors. Defendants petitioned to compel arbitration, and provided arbitration agreements purportedly signed by the Plaintiffs. In opposition, Plaintiffs declared that they did not review documents prior to signing, but relied on the investment advisor's representations. Plaintiffs denied that the investment advisor discussed arbitration with them, and further disputed that she provided them with arbitration agreements. The trial court granted the motion to compel arbitration without an evidentiary hearing.
Reversed and remanded. Under Code of Civ. Proc. § 1290.2, petitions to compel arbitration are heard "in a summary way", and do not necessarily entitle the parties to an evidentiary hearing. Nevertheless, the trial court must determine the existence or validity of the underlying arbitration agreement that may require a live hearing, especially when the existence of the arbitration agreement is strongly contested, and a fiduciary relationship existed between the Plaintiffs and their investment advisor. For those reasons, the trial court abused its discretion in failing to hold an evidentiary hearing before granting the motion to compel arbitration.
Failure to Authenticate Electronic Signature on Arbitration Agreement that Employee Did Not Recall Signing is Sufficient Basis to Deny Petition to Compel Arbitration
In Ruiz v. Moss Bros. Auto Group (2014) 232 Cal. App. 4th 836, Plaintiff worked for Defendant as a service technician and filed a putative class action for wage and hour violations. Defendant petitioned to compel arbitration based upon an arbitration agreement that it claimed Plaintiff signed electronically and submitted a declaration from its business manager. She stated that all employees were presented with the agreement, and that each was required to use a unique login ID and password to electronically execute it. She further declared that Plaintiff electronically signed the agreement, but did not explain how Defendant verified Plaintiff's signature. In his opposition, Plaintiff stated that he did not recall signing the arbitration agreement. Concluding that Defendant failed to establish the existence of an arbitration agreement, the trial court denied the motion to compel arbitration.
Affirmed. Under Civil Code § 1633.9, an electronic signature may be authenticated if it was the "act of the person" and such act may be shown in any manner. The fact that the agreement had an electronic signature in Plaintiff's name was insufficient to show that it was the act of Plaintiff. While the office manager stated that Plaintiff was the person who electronically signed the agreement, she failed to explain how the electronic signature was actually placed on the agreement. Therefore, the trial court correctly denied the motion to compel arbitration because the evidence was insufficient to show that the electronic signature was that of Plaintiff.
Businessman's Automatically Generated E-Mail Signature Insufficient to Support Motion to Enforce Settlement Agreement under CCP § 664.6
In J.B.B. Investment Partners, Ltd. v. Fair (2014) 232 Cal. App. 4th 974, Plaintiff invested in Defendant's company and then threatened to sue Defendant for fraud. Plaintiff's attorney emailed a settlement offer to Defendant, who replied by email purportedly agreeing to settle. Since the reply was ambiguous, Plaintiff filed suit anyway, and then sent Defendant a final draft of the settlement documentation, which Defendant never signed. Notwithstanding the lack of Defendant's signature, Plaintiff filed a motion to enforce the settlement under Code of Civ. Proc. § 664.6, and submitted various email, voicemail, and text messages between Plaintiff and Defendant in support of the motion. Defendant opposed the motion claiming there was never a meeting of the minds, and that his automatically generated email signature did not meet the requirements of the Uniform Electronic Transactions Act (UETA, Civ. Code § 1633.1 et seq.). The trial court disagreed, and granted the motion to enforce the settlement. A judgment for $362,811 was entered against the Defendant.
Reversed and judgment vacated. Under the UETA, an electronic record satisfies the requirement that a record be in writing, and an electronic signature satisfies the requirement that the writing be signed. An electronic signature can be a symbol "attached to or logically associated with an electronic record", and "executed or adopted by a person with the intent to sign the electronic record". However, the UETA applies only when the parties consent to conduct a transaction by electronic means. Here, although the correspondence reflected that the parties agreed to negotiate the terms of the settlement by email, Plaintiff failed to demonstrate that the parties agreed to conduct transactions by electronic means for the UETA to apply. Moreover, Defendant's printed name at the end of his email did not meet the UETA's strict signature requirements because the record was devoid of any evidence that Defendant intended to formalize a settlement agreement. Therefore, the trial court's order granting the motion to enforce the settlement was reversed and the corresponding judgment vacated.
"Evident Partiality" of Arbitrator Must Be Supported By Significant Showing Before District Court Can Disqualify Arbitrator
In Sussex v. U.S. District Court, 776 F. 3rd 1092 (9th Cir. 2015), several purchasers of luxury condominiums brought civil actions against the developer. Under the purchase agreements, the actions were submitted to arbitration. The arbitrator failed to disclose that he was investing in litigation finance activities. The developer moved to disqualify the arbitrator, and the district court granted the motion. Plaintiff sought a writ of mandamus to vacate the district court's ruling.
Writ of mandamus granted. Under AerojetGeneral Corp. v. Am. Arbitration Ass'n, 478 F. 2nd 248 (9th Cir. 1973), district courts should intrude on ongoing arbitrations "only in the most extreme cases". An arbitrator's "evident partiality" is usually based on undisclosed issues, such as financial or other ties to one of the parties. Here, the arbitrator's litigation-financing ventures had no connection to the dispute he was arbitrating and would not give rise to the impression that he would be partial to the condominium buyers or developer. Consequently, the district court erred in granting the developer's motion.
Subcontractor May Compel Arbitration Against General Contractor Without First Making Demand Because General Contractor's Lawsuit Clearly Demonstrated Refusal to Arbitrate
In Hyundai Amco America, Inc., v. S3H, Inc., (2014) 232 Cal. App. 4th 572, Plaintiff was a general contractor that entered into a subcontractor services agreement with Defendant for mechanical services on a construction project. The agreement included an arbitration provision. A dispute arose leading Plaintiff to sue Defendant. In response, Defendant filed a motion to compel arbitration that the trial court denied because Defendant failed to allege that it made an arbitration demand that Plaintiff refused.
Reversed and remanded. In order to compel arbitration under Code of Civ. Proc. § 1281.2, a party must prove the existence of a written agreement to arbitrate, and "that a party thereto refused to arbitrate such controversy". This section does not require a party to prove that a demand for arbitration was made. A refusal to arbitrate can occur without such a formal demand. Here, Plaintiff filed a lawsuit against Defendant rather than commencing arbitration as required under the agreement, which affirmatively established Plaintiff's refusal to arbitrate the dispute. This refusal was sufficient to enable Defendant to compel arbitration. A formal demand was unnecessary. Therefore, the trial court's order denying the motion to compel arbitration was reversed.
Employee's Appeal Is Dismissed As Nonappealable Because Order Vacating Arbitrator's Construction Award Is Not Final Award Resolving All Disputes
In Judge v. Nijjar Realty, Inc., (2014) 232 Cal. App. 4th 619, Plaintiff was employed by Defendant as a property manager and signed an arbitration agreement agreeing to submit all disputes concerning her employment to arbitration. After she was terminated, Plaintiff sued Defendant alleging various employment-related claims. Ten months later, she filed a class action against Defendant alleging similar employment-related claims. Defendant petitioned to compel arbitration in both suits. The trial court granted the petition, but only as to Plaintiff's "individual claims". In the arbitration proceeding, the arbitrator issued a "clause construction award" construing the arbitration agreement to permit class arbitration. Plaintiff filed a petition with the trial court to vacate the clause construction award. The trial court granted the petition and vacated the award finding that the arbitrator exceeded her powers. Defendant appealed the order, claiming the arbitrator's clause construction award was proper.
Appeal dismissed. An order is generally not appealable unless it constitutes a final determination of a case. In arbitrations, Code of Civ. Proc. § 1294(c) allows appeals from an "order vacating an award unless a rehearing in arbitration is ordered". Section 1283.4 requires that an arbitration award determine all issues submitted to the arbitrator that are necessary to determine the controversy. Here, the clause construction award only decided a threshold issue regarding whether the arbitration clause permitted class arbitration, and was not an award under section 1283.4 because it did not decide all issues in the dispute. Consequently, the clause construction award was not appealable under section 1294(c) and the appeal dismissed.
Trial Court's Denial of Motion to Stay Action Is Nonappealable Where Moving Party Failed To Bring Corresponding Motion To Compel Arbitration
In Wells Fargo Bank, N.A. v. The Best Service Co., Inc., (2014) 232 Cal. App. 4th 650, Defendant demanded mediation and arbitration pursuant to the parties' servicing agreement after the action was filed, which Plaintiff rejected. Defendant moved to stay the action pending compliance with the arbitration demand, but stressed in its stay motion that it was not a motion or petition to compel arbitration. Moreover, Defendant never filed a petition or motion to compel arbitration or compel compliance with the mediation provision. The trial court denied the motion to stay the action and Defendant appealed.
Appeal dismissed. Code of Civ. Proc. § 1294(a) allows an aggrieved party to appeal an order dismissing or denying a petition to compel arbitration. Section 1294.2 provides, in part, that the appellate court may review an order or decision that "involves the merits or necessarily affects the order or judgment appealed from, or which substantially affects the rights of a party". Neither provision allows for an appeal from an order denying a stay without an accompanying motion or petition to compel arbitration. Consequently, the appeal was dismissed because the trial court's order was a nonappealable interlocutory order.
Entire Consumer Class Action Against Citibank Must Proceed To Arbitration, Including Claims for Injunctive Relief for Alleged Consumer Law Violations
In McGill v. Citibank, N.A., (2014) 232 Cal. App. 4th 753, Plaintiff opened a credit card account with Defendant. An amendment to her "Citibank Card Agreement" included an arbitration provision that was governed by the Federal Arbitration Act (FAA, 9 U.S.C. § 1 et seq.). Plaintiff then filed a class action against Defendant alleging violations of the unfair competition law (UCL, Bus. & Prof. Code § 17200 et seq.), false advertising law (FAL, Bus. & Prof. Code § 17500 et seq.), and the Consumer Legal Remedies Act (CLRA, Civ. Code § 1750 et seq.) Her complaint sought both monetary damages and injunctive relief enjoining Defendant from allegedly deceptive and illegal practices. Defendant moved to compel arbitration on an individual basis. The trial court granted the motion as to all claims except the injunctive relief claims under the UCL, FAL, and CLRA relying on the California Supreme Court's rulings in Broughton v. Cigna Healthplans (1999) 21 Cal. 4th 1066, and Cruz v. PacifiCare Health Systems, Inc, (2003) 30 Cal. 4th 303. Under the "Broughton-Cruz rule", arbitration provisions are unenforceable as against public policy if they require arbitration of UCL, FAL, or CLRA injunctive relief claims brought for the public benefit.
Reversed and remanded. In AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___, [131 S. Ct. 1740], the U.S. Supreme Court declared that any state law that interferes with the FAA's purpose of "enforcing arbitration agreements according to their terms" is preempted, regardless of the law's objective. Plaintiff argued that the FAA did not preempt the Broughton-Cruz rule because it would prevent the "effective vindication" of the underlying statutory rights. The Appellate Court disagreed and concluded that the effective vindication exception applied only to federal statutory exceptions. Thus, the FAA preempted the Broughton-Cruz rule, and the trial court was ordered to compel arbitration of all claims, including those for injunctive relief.
Trial Court Cannot Stay Arbitration Pending Litigation of Non-Arbitrable Issues Where No Non-Arbitrable Issues Exist
In Association for Los Angeles Deputy Sheriffs v. County of Los Angeles, (2015) 234 Cal. App. 4th 459, Plaintiff Association consisted of union employees from various law enforcement agencies who had signed collective bargaining agreements with Defendant L.A. County. The collective bargaining agreement directed employees to submit any grievances to the County and arbitrate disputes with the County's Employee Relations Commission. Plaintiff filed class grievances seeking overtime pay for "donning and doffing" (putting on and taking off their gear outside of assigned work hours). The County denied the grievances, but the Commission granted class arbitration. The County then filed a declaratory relief action seeking to compel individual arbitration. Plaintiff responded with a cross-complaint addressing the merits of the donning and doffing issue. The County moved to dismiss or stay the cross-complaint and to compel individual arbitrations. Instead, the trial court stayed the arbitrations to deal with the cross-complaint under Code of Civ. Proc. § 1281.2.
Reversed. Section 1281.2(c) grants discretion to the trial court to delay compelling arbitration when it determines that the adjudication of the non-arbitrable issues by the trial court may make arbitration unnecessary. Here, since all of the issues in the cross-complaint were covered by the arbitration, the trial court erred by staying the arbitration to allow litigation of non-arbitrable issues in the cross-complaint, which did not exist.
California's Large-Scale Providers of Arbitration Services Must Now Make Certain Disclosures Pursuant To AB 802
Effective January 1, 2015, Assembly Bill 802 (Code of Civ. Proc. § 1281.96) requires large-scale providers of private arbitration services to make certain disclosures regarding their completed arbitrations. The disclosures include information about the nonconsumer party, usually the respondent, as well as the history between the "nonconsumer party" and the arbitration provider. These disclosures must the made available to the public in a searchable format accessible through a conspicuous link on the arbitration company's website.
The California opinions are posted at: click here, the Ninth Circuit opinions at: click here, and AB 802 at: click here.
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