Dubow Arb Case Report to 2004 California Dispute Resolution Council

Updated February 9, 2010

Paul Dubow Arbitration Case Report up to 2004

ARBITRATION

Adhesion Contract-Who Decides

Goliger v. AMS Properties, Inc., 123 Cal App 4^th 374, 19 Cal Rptr 3d 819 (2004)-An arbitration clause in a contract with a nursing home, which the patient’s daughter signed as “responsible party” and left the “agent” line blank, did not bind the patient to arbitration even though the nursing home dealt with the daughter as agent in matters regarding health care decisions. There was no evidence that the patient authorized the daughter to act as agent in agreeing to arbitration because decisions regarding health care do not equate with waiving the constitutional right to trial by jury. The daughter was not bound in her individual capacity either because there was no evidence that she signed the agreement in her individual capacity. Her act in signing as responsible party meant only that she would be responsible for the patient’s bills.

Agreement to Arbitrate

Balandran v. Labor Ready, Inc., 124 Cal App 4^th1522, 22 Cal Rptr 3d 441 (2004)-A service which supplied temporary workers to third parties required workers to sign an application in which they agreed that they would only be employees of defendant during periods that they were assigned to a job. The application also contained a clause calling for arbitration of disputes “arising out of my employment”. Plaintiffs filed suit against defendant alleged gender discrimination because defendant allegedly agreed with a third party not to hire women for a particular job. Defendant’s motion to compel arbitration was denied because plaintiffs were not employees when the discrimination occurred since they were not assigned to a job, hence the dispute did not arise out of their employment.

Appeal-Section 16 of FAA

Bushley v. Credit Suisse First Boston, 360 F3d 1149 (9^th Cir 2004)-CSFB moved to compel arbitration of a claim filed by a former employee. It alleged that the dispute was subject to arbitration before the NASD because the employee had signed a form U4. Alternatively, it sought arbitration pursuant to its Employee Dispute Resolution (“EDR”) program. The U4 that CSFB maintained in its files did not indicate that the plaintiff had checked the box for the NASD or any other forum. The form in the NASD files contained the checkmark. The court therefore concluded that the checkmark was inserted after plaintiff signed the form and, ergo, he did not consent to NASD arbitration. But the court ordered arbitration pursuant to the EDR program. CSFB appealed from the order denying arbitration before the NASD. Plaintiff argued that the Court did not have jurisdiction because Section 16(b)(2) of the FAA prohibits appeals from order “directing arbitration” and here the court arbitration pursuant to the EDR program. CSFB argued that the Court had jurisdiction pursuant to Section 16(a)(1)(C) which allows for an appeal from an order denying arbitration. The Court sided with the plaintiff, holding that if it adopted CSFB’s view, it would defeat the purpose of Section 16, which was designed to prevent parties from “frustrating arbitration through lengthy preliminary appeals.”

Appeal to Second Arbitrator

Finley v. Saturn of Roseville, 117 Cal App 4^th 1253, 1258, 12 Cal Rptr 3d 561 (2004)-A court does not have jurisdiction to compel a second arbitration where the arbitration agreement provides for an appeal to a second arbitrator. When a court grants a petition to compel arbitration, it effectively orders specific performance of the arbitration agreement, including the appeal provision. Hence, there is no need for a further petition to compel review by a second arbitrator. In this case, there was an issue of whether the petition to appeal to the second arbitrator was timely and the court determined that that issue will be decided by the second arbitrator.

Arbitrability

Power Agent, Inc v Electronic Data Systems Corporation, 358 F 3d 1187 (9^th Cir 2004)-Defendant’s motion to compel arbitration was granted by the District Court. Notwithstanding this decision, the plaintiff, at the outset of the arbitration, asked the arbitrators to determine again whether the dispute was arbitrable. The arbitrators did so, finding that the dispute was arbitrable, and then ruled in favor of defendant. The plaintiff moved to vacate the decision on the ground that the arbitrators erred in finding arbitrability, but the court held, that once the plaintiff voluntarily asked the arbitrators to determine arbitrability, the arbitrators’ ruling could not be reversed, except on grounds of manifest disregard of the law or irrationality, neither of which applied in this case.

Arbitration Clause

Buckhorn v. St. Jude Heritage Medical Group, 121 Cal App 4^th 1401, 1407, 18 Cal Rptr 3d 215 (2004)-An employment agreement providing for arbitration of disputes “concerning the enforcement or the interpretation of any provisions of this agreement” applied to claims of defamation and interference with prospective economic advantage that occurred after the employee was terminated. The issue turned on whether the tort claims were “rooted” in the contractual relationship between the parties, not when they occurred.

Award Correction

Weinberg v. Safeco Ins. Co. of America, 114Cal App 4^th 1075, 1083, 8 Cal Rptr 3d 224 (2004)-In this underinsured motorist arbitration, the arbitrator failed to determine what the insurer’s liability to the insured was, as required by Insurance Code Section 11580.2 but instead awarded damages to the insured which were in excess of the policy limits. The insurer raised this issue on appeal from a judgment confirming the arbitration award. The judgment was affirmed. Resolving such an issue of interpretation is properly done through a request for correction or vacation made to either the arbitrator or trial court, not saved for argument on appeal.

Landis v. Pinkerton’s Inc., 122 Cal App 4^th 985, 990, 18 Cal Rptr 3d 890 (2004)-The arbitrator herein issued an award that included legally erroneous damages for emotional distress and then “corrected” it, upon motion by the defendant, by striking the award of emotional distress damages. However, it was beyond the arbitrator’s power to do so. An arbitrator may not correct an award that he or she intended on the ground that a factual or legal error had been made in the original award. The arbitrator may not reconsider the merits of the original award and make a new award under the guise of correction of the award. An arbitrator may issue an amended or supplemental award if he or she inadvertently omitted a ruling on a submitted issue in the original award, but the amended award here did not fall within that category. It purported to amend or correct the original award, not to add a ruling on an issue submitted for decision but not addressed in the original award. Furthermore, even if the amended award was within the arbitrator’s power to issue, it was nugatory because Section 1286.6 provides that a corrected award must be served within 30 days after service of the original award and if no denial of the application or correction of the award is served within the 30 day period, the application or correction shall be deemed denied. In this case, the “corrected” award was served more than 30 days after the original award was served.

Consolidation with Other Matters in Arbitration

Yuen v. Superior Court, 117 Cal App 4^th 1253, 1259, 18 Cal Rptr 3d 127 (2004)-Under the doctrine set forth in Green Tree v Bazzle, 559 US 444 (2003), once a matter has been referred to arbitration, the court’s involvement is strictly limited until the arbitration is completed. Thus, where the clause states that all disputes relating to the contract shall be submitted to arbitration, Green Tree mandates that consolidation is such an issue.

Consolidation with Other Matters in Litigation (Section 1281.2(c) )

Whaley v. Sony Computer Entertainment America,Inc., 121 Cal App 4^th 479, 486, 17 Cal Rpter 3d 88 (2004)-Code of Civil Procedure 1281.2(c) contains no provision stating that it may be invoked only in favor of the party caught “in the middle” between arbitration and litigation. The statute is unambiguous: it allows the trial court to deny a motion to compel arbitration whenever “a party” to the arbitration agreement is also “a party” to litigation with a third party that (1) arises out of the same transaction or series of transactions, and (2) presents a possibility of conflicting rulings on a common issue of law or fact. It makes no difference if the party seeking to avoid arbitration is the party involved in both the arbitration and litigation or one of the other parties to the suit.

Court Appointed Arbitrator (Section 1281.6)

Martinez v Master Protection Corp, 118 Cal App 4^th 107, 120, 12 Cal Rptr 3d 663 (2004)-The arbitration agreement in this case required arbitration before the AAA. But the AAA refused to hear the case because the defendant’s arbitration policy did not comport with the AAA’s due process protocol. The court thereupon appointed a retired judge to hear the case pursuant to Section 1281.6 of the Code of Civil Procedure. The arbitrator ruled against plaintiff, he appealed, the decision to appoint a substitute arbitrator was reversed, and the case was remanded for trial in the Superior Court. Section 1281.6 is simply a legislative means of implementing California’s policy in favor of arbitration by permitting parties to an arbitration contract to expedite the arbitrator selection process. Section 1281.6 does not permit the trial court to choose an alternate forum when the chosen forum refuses to hear the case.

Cumis Counsel

Gray Cary Ware & Freidenreich v Vigilant Insurance Co,, 114 Cal App 4^th 1185, 8 Cal Rptr 3d 475 (2004)-The insurer refused to pay Gray Cary’s request to be reimbursed for fees that it paid to any attorney whom it had retained to defend another defendant in a suit where Gray Cary was defending itself as Cumis counsel. Gray Cary sought to arbitrate the dispute pursuant to Civil Code Section 2860(c). Gray Cary conceded that the insurance company was not obliged to pay the expenses directly because the third party was not an insured. But Gray Cary characterized its payments as expenses and argued that Section 2860(c) permitted a Cumis counsel to be repaid for expenses as well as actual fees incurred. But the court rejected this argument, holding that the Legislature focused on the rates to be paid to Cumis counsel and a method for resolving disputes over those rates, with the Legislative history devoid of any indication that the Legislature considered disputes regarding Cumis expenses.

Disclosure

IATSE Local No. 316 v. Laughon, 118 Cal App 4^th 1380, 1385-90, 14 Cal Rptr 3d 341 (2004)-During the course of an arbitration proceeding, a ruling by the arbitrator in a previous case was introduced. It happened that counsel for IATSE was also counsel in the cited case and that the arbitrator had previously failed to disclose the existence of the cited case. After an adverse award by the arbitrator, the party whose counsel was not involved in the previous case moved to vacate the award because of the arbitrator’s failure to disclose. The motion was denied on the ground of waiver and that there was no reasonable impression of bias by the arbitrator because he had ruled against the party whose counsel had appeared in the prior case. On appeal, the decision was reversed. Waiver only applies if the arbitrator makes a disclosure under Code of Civil Procedure Section 1281.9 and no objection is lodged within 15 days. Here, there was a failure to disclose and, in any event, the objecting party’s counsel asserted that he had not noticed the conflict until the case was over. With respect to bias, Section 1281.9(a) makes clear that a potential arbitrator is required to disclose “all facts that could cause a reasonable person aware of the facts to reasonably entertain a doubt that the…arbitrator would be able to be impartial”. The statute enumerates specific instances in which a reasonable doubt of impartiality would exist. One such instance is when an arbitrator has served in “prior or pending noncollective bargaining cases involving a…lawyer for a party for which the proposed neutral arbitrator served as….a neutral arbitrator”. Under the plain language of the statute, the disclosure explicitly mandated in the statute involves facts that could cause a reasonable doubt of impartiality.

Azteca Construction, Inc. v. ADR Consulting, Inc., 121 Cal App 4^th 1156, 1167-69, 18 Cal Rptr 3d 142 (2004)-Code of Civil Procedure Sections 1281.9 and 1281.91, which require the automatic disqualification of an arbitrator if a party objects to his service within 15 days after receiving a conflicts disclosure, cannot be waived by an agreement to abide by AAA rules, which permit the AAA to make the ultimate decision on disqualification. There are three reasons for this rule. First, there is no doubt that these statutes were enacted primarily for a public purpose because the statement of purpose in the Judicial Council Ethical Standards, the bases for these statutes, provides that the standards were promulgated to “protect participants in arbitration and to promote public confidence in the arbitration process”. Second, there is a fundamental distinction between contractual and statutory rights. While parties may be free to contract among themselves for alternate methods of dispute resolution, such contracts would be valueless without the state’s blessing. The state retains the ultimate control over “the structural aspects of the arbitration process”. The critical subject of arbitrator neutrality is a structural aspect of the arbitration and falls within the Legislature’s supreme authority. Finally, the neutrality of the arbitrator is of such critical importance that the Legislature could not have intended that its regulation be delegable to the unfettered discretion of a private business.

Theis Research, Inc. v. Brown & Bain, 386 F 3d 1180 (9^th Cir 2004)-Where an arbitrator disclosed at the beginning of the hearing that he had arbitrated other legal malpractice claims involving the carrier, had recognized the carrier’s representative’s name on the attendance list, had dealt with the representative in the context of prior arbitrations, and had asked for any objections and received none, all parties are deemed to have consented to his service. By failing to object to the arbitrator proceeding as arbitrator and continuing to participate in the hearing after the arbitrator’s full disclosure, any claim that the arbitrator’s subsequent award should be vacated by reason of corruption, fraud, or undue means is waived.

Discovery

Fitz v NCR Corp, 118 Cal App 4^th 702, 716-17, 13 Cal Rptr 3d 88 (2004)-A provision in an arbitration agreement that limited the number of depositions to two and prohibited all other discovery was substantively unconscionable. This was an employment discrimination case and the court found that the provision favored the employer because it already “has its possession many of the documents relevant to an employment discrimination case as well as having in its employ many of the relevant witnesses.” Although the contract also provided that the arbitrator could require additional discovery, he was overly constrained because he could only do so if the aggrieved party demonstrated that it was impossible to have a fair hearing without the additional discovery. The contract was subject to the AAA rules, which provide that they must be applied if there is an inconsistency between them and the arbitration contract. But the court refused to consider this because there was no assurance that every arbitrator would find an inconsistency.

Martinez v Master Protection Corp, 118 Cal App 4^th 107, 118, 12 Cal Rptr 3d 663 (2004)-The arbitration provision in this case limited the parties to one deposition each and a single document request. The court found the limitations severe, but could not state as a matter of law that the agreement did not afford adequate discovery because of the possibility that the plaintiff’s Labor Code claims would rest largely on documentation rather than testimony. Furthermore, given that the agreement was unconscionable for various other reasons, the court was reluctant to state that the discovery provision, in and of itself, prevented the plaintiff from vindicating his rights. However, it did compound the one sidedness of the arbitration agreement.

Forum Fees-Inability to Pay

Lifescan, Inc. v.Premier Diabetic Services, Inc.. 363 F3d 1010 (9^th Cir 2004)-In the midst of an arbitration before the AAA, the respondent announced that it could not proceed because it no longer could afford its share of the forum fees. The arbitrators gave the claimant the option of advancing the fees so that the arbitration could proceed with the expectation that it might recoup the fees should it prevail. The claimant declined the offer and demanded that the arbitration proceed with respondent barred from presenting evidence. The AAA declined to do so and the arbitration was suspended. The claimant then petitioned the District Court to compel arbitration pursuant to Section 4 of the FAA and order the respondent to pay its pro rata share of the forum fees. The petition was granted and the Ninth Circuit reversed. Section 4 limits the court’s discretion. The court must order the parties to proceed to arbitration only in accordance with the terms of the agreement. The parties incorporated the AAA rules into their agreement. Rule R-45 of the Commercial Arbitration Rules gives arbitrators broad discretion to allocate fees and expenses among the parties. Rule R-51 empowers the arbitrators to reduce or defer administration administrative fees in the face of extreme hardship. The arbitrators exercised their discretion by allowing the arbitration to proceed on the condition that the claimant advance the remaining fees. Section 1284.2 does not help the claimant. It provides that each party shall pay his pro rata share of the expenses and fees of the arbitrator “unless the arbitration agreement provides otherwise”. The agreement between the parties “provided otherwise” because it incorporated the AAA rules, which allow the decision to be made by the arbitrators.

Forum Fees-Effect on Unconscionability

Martinez v Master Protection Corp, 118 Cal App 4^th 107, 116, 12 Cal Rptr 3d 663 (2004)-The employer’s forum fee provision was clearly unconscionable, but the employer’s attorney argued that this was irrelevant because the employer had decided to waive the requirement that the employee pay half of the forum fees. The court rejected the offer because 1) the contract provided that it could only be modified in writing executed by both parties; 2) no existing rule of contract law permits a party to resuscitate a legally defective contract merely by offering to change it; and 3) the mere inclusion of the costs provision in the arbitration agreement produces an unacceptable chilling effect.

Immunity

Stasz v. Schwab, 121 Cal App 4^th 420. 17 Cal Rptr 3d 116 (2004)-Both arbitrators and arbitration providers have immunity from suit in connection with the performance of their duties.

Manifest Disregard of the Law

Luong v. Circuit City Stores, Inc., 368 F 3d 1109 (9^th Cir 2004)-An arbitrator does not manifestly disregard the law if his opinion discusses the case but gets it wrong.

Carter v.Health Net of California, Inc., 374 F 3d 830, 838 (9^th Cir 2004)-An allegedly erroneous finding that the defendant was not the plan administrator of an ERISA health plan did not constitute manifest disregard of the law. It was an error of fact, and errors of fact do not generally constitute manifest disregard of the law.

Preemption

Hedges v. Carrigan, 117 Cal App 4^th 578, 583-87, 13 Cal Rptr 3d 787 (2004)-Code of Civil Procedure 1298 provides that an arbitration clause in a contract to convey real property is enforceable only if it is in eight point bold type and warns the parties that they are giving up certain rights in court if they initial the arbitration clause. The Court here found that Section 1298 is preempted by the FAA because it only applies to arbitration contracts. Section 1298 could still be enforced if the contract did not involve interstate commerce. But the phrase “involving commerce” must be interpreted broadly and is akin to the term, “affecting commerce”. Here, the contract in question involved commerce because the mortgage loan was administered by the Federal Housing Administration and the copyrighted forms used by the parties could only be utilized by members of the National Association of Realtors.

Unconscionability

Crippen v. Central Valley RV Outlet, Inc., 124 Cal App 4^th1159, 22 Cal Rptr 3d 189 (2004). Although the contract in issue here, one for the purchase of a used recreational vehicle, prohibited the purchaser from filing or participating in a class action and gave the vendor, but not the purchaser, the option of going to court rather than arbitrating, the arbitration provision was not found to be unconscionable because there was no evidence of procedural unconscionability. The arbitration provision was on a separate page, in regular type, and was signed by the purchaser. There was no evidence that plaintiff lacked the power to bargain with the vendor. In general, nothing prevents purchasers of used vehicles from bargaining with dealers, even though dealers use form contracts.

Nyulassy v. Lockheed Martin Corp., 120 Cal App 4^th 1267, 16 Cal Rptr 3d 296 (2004). The fact that an attorney represented an employee when he executed a mandatory employment agreement that contained an arbitration clause did not save the arbitration provision from being deemed to be unconscionable. The arbitration clause provided that only the employee was required to arbitrate and that he had to commence the arbitration within 180 days of the event or the date of termination. Although the attorney was able to negotiate a change in the at will provision in the contract, the arbitration clause itself was non-negotiable and, given its terms, unconscionable. The contract also contained an extensive dispute resolution mechanism which required the employee to submit to counseling and mediation before commencing the arbitration. Although such a provision is often considered to be laudable, it was not here, given the unilateral nature of the arbitration requirement, because it gave the employer a “free peek” at the employee’s case.

Abramson v. Juniper Networks, Inc., 115 Cal App 4^th 638, 665, 9 Cal Rptr 3d 422 (2004). Even though an employee was considered to be “a person of renown” and was able to negotiate substantive terms of his employment contract, the arbitration clause was found to be procedurally unconscionable because the employee’s claim that the clause was non-negotiable was corroborated by a provision requiring his acknowledgment that he was “offered employment in consideration of his promise to arbitrate claims”. The contract was substantively unconscionable because it required the employee to pay half of the arbitration costs and it lacked mutuality. The lack of mutuality stemmed from a carve out clause which permitted judicial relief for misuse of trade secrets. Although the clause nominally gave “both parties” the right to seek judicial relief, the contract stated that it constituted a waiver of the employee’s right to a jury trial and it provided that the reason for the carve out was the inability to measure and calculate the Company’s damage for misuse of trade secrets.

Fitz v NCR Corp, 118 Cal App 4^th 702, 13 Cal Rptr 3d 88 (2004). Although the contract provided that both parties could seek judicial relief in claims involving misuse of trade secrets or covenants not to compete, the provision was unconscionable because these were causes of action that the employer was more likely to bring.

Martinez v Master Protection Corp, 118 Cal App 4^th 107, 12 Cal Rptr 3d 663 (2004)-The arbitration contract in this case was found to be substantively unconscionable because it required the employee to bear half of the forum fees, claims had to be brought within six months or be lost, and the claims that were not arbitrable were those that normally would be brought by the employer.

Underinsured Motorist’s Liability

Weinberg v. Safeco Ins. Co. of America, 114 Cal App 4^th 1075, 1084, 8 Cal Rptr 3d 224 (2004)-Insurance Code Section 11580.2 provides that an arbitrator in a UIM case is to determine the liability of the insurer to the insured, rather than the total damages incurred by the insured. However, it is not unusual for an arbitrator to issue an award in excess of the policy limits that represents the insured’s full damages. Although the insured may then accept an amount equal to the policy limits from the insurer and then seek the balance from the UIM, this is not always the case. Thus, in order to protect itself, the insurer must move in a timely manner, either before the arbitrator or in court, to vacate the award or correct it or risk having the court confirm the entire award upon a motion to confirm by the insured.

Vacatur-Federal Jurisdiction

Luong v Circuit City Stores, Inc., 368 F 3d 1109 (9^th Cir 2004)-In contrast to grounds for review that concern the arbitration process itself—such as corruption or abuse of power—review for manifest disregard of federal law necessarily requires the reviewing court to do two things: first, determine what the federal law is, and second, determine whether the arbitrator’s decision manifestly disregarded that law. This process so immerses the federal court in questions of federal law and their proper application that federal question subject matter jurisdiction is present.

Theis Research, Inc. v. Brown & Bain, 386 F 3d 1180 (9^th Cir 2004)-Federal jurisdiction on a motion to vacate in a case where a party is appealing from a zero award will be based on the amount in controversy and not the amount of award. Note: If a party is seeking to vacate a monetary award for less than $75,000, there will be no federal jurisdiction even if the original complaint demanded more than $75,000. See Baltin v. Alaron Trading Corp., 128 F 3d 1466 (11^th Cir 1997); Ford v. Hamilton Investments, Inc., 29 F 3d 255 (6^th Cir 1994).

Carter v. Health Net of California, Inc., 374 F 3d 830, 837-8 (9^th Cir 2004)-It is not the presence of federal issues in an underlying arbitration that determines whether federal question jurisdiction exists, but rather the grounds asserted for federal review. The petition herein relied solely on California law, to wit, that the award should be vacated because the arbitrator exceeded his contractually defined powers, refused to hear material evidence, and failed to disqualify himself for appearance of bias. No reference was made to the FAA nor to any federal common law ground for vacatur, such as irrationality or manifest disregard of the law. (Note: Reference to California law was undoubtedly made because the motion to vacate was in response to a motion to confirm filed in state court and removed by the defendant to federal court. The court also held that a request for attorney fees pursuant to a federal statute in the underlying arbitration also does not give rise to federal jurisdiction.)

MEDIATION

Condition Precedent to Recovering Attorney Fees

Frei v. Davey, 124 Cal App 4^th 1506, 22 Cal Rptr 3d 429 (2004). Defendant, who prevailed in litigation involving the conveyance of real estate, asserted that a clause in the contract prohibiting the recovery of attorney fees by a prevailing party if that party had refused to mediate was inapplicable in this case, inter alia, because 1) it did not provide for a time within which to respond to the demand for mediation; 2) the parties had engaged in settlement negotiations which would have made the mediation unnecessary; and 3) the defendant had taken in part in a mediation, albeit on the eve of trial 22 months after initially refusing to mediate. The court rejected all three arguments. In the absence of a specific time within which to respond to a demand for mediation, a reasonable time would suffice. Settlement negotiations are not the same as a mediation where a neutral third party analyzes the strengths and weaknesses of each party’s case, works through the economics of litigation with the parties, and otherwise attempts to aid them in resolving the matter. Finally, the agreement called for mediation prior to filing suit. Defendant did not cure his original refusal to mediate by mediating on the eve of trial, by which time the parties had incurred substantial costs, an outcome that early mediation would have avoided.