The Los Angeles County Bar Blog

Vacating Awards for Arbitrator Error

As a ground for vacating an award, C.C.P. 1286.2 [a][5]) includes an arbitrator's "refusal to hear evidence material to the controversy," causing "substantial prejudice" to the parties; Flanagan v. Orbison, 2005 WL 2224836 (Cal. App.). The court must accept the arbitrator's legal theory and conclude the arbitrator might have rendered a different award having excluded the evidence; Hall v. Sup. Ct., 18 Cal. App. 4th 427 (1993); Gonzales v. Interinsurance Exchange, 84 Cal. App. 4th 58 (1978). Without citing either of these cases, the court in Burlage v. Sup. Ct., 2009 WL 2712382 (Cal.App.) vacated an award on the ground (apparently) the court majority disliked the arbitration award despite two California Supreme Court cases holding arbitrator legal error is not subject to review; Cable Connection, Inc. v. DIRECTV, Inc., 44 Cal. 4th 1334 (2008); Moncharsh v. Heily and Blasé, 3 Cal. 4th 1 (1992).

Failure to "hear material evidence", literally interpreted, would engender an endless round of appeals if reviewed in litigation terms of "materiality." The ground, if established, requires substantial prejudice; Schlessinger v. Rosenfeld, et al., 40 Cal. App. 4th 1096 (1995). CCP 1286.2 is "a safety valve in arbitration that permits a court to intercede when an arbitrator has prevented a party from fairly presenting its case;" Schlessinger; Hall v. Sup. Ct.

In Kaiser Foundation Health Plan, Inc. v. Ayon Alexandre, 2006 WL 552631 (Cal. App.) [Non. Cite.] the court interprets CCP 1286.2 [a] [5] to require evidence of prejudice first, not materiality.

See, Cable Connection, Inc. v. DIRECTV, 143 Cal. App. 4th 207 (2006) (distinguishing the failure to "hear" material evidence and "consider" material evidence), reversed on other grounds); Gonzales v. Interinsurance Exchange.

Arbitrable & Non Arbitrable Parties

With increasing frequency, the courts must determine whether to order arbitration between named parties in an arbitration clause that does not contain the name of a third party who is involved in the underlying contractual dispute. Although the scenarios vary, if the plaintiff files an action naming a third party not subject to the arbitration clause, i.e., a non signatory, the trial court should follow the following procedure according to Muhoberac v. Boyle, a non published and not citeable Court of Appeal case. (The court does cite major California cases and serves as a research vehicle.)

"[T]he [trial] court should first determine the arbitrable and nonarbitrable claims alleged in the complaint, order all of the arbitrable claims to arbitration, and stay all such claims pending arbitration. The court would then have discretion to delay its order to arbitrate the arbitrable claims under CCP 1281.2, subdivision (c) only if it first determined that the adjudication of the nonarbitrable claims in court might make the arbitration unnecessary. Absent that determination, the arbitrable claims would proceed to arbitration and the nonarbitrable claims would continue to be litigated in court unless a party moved successfully pursuant to CCP 1281.4 to stay further litigation of such nonarbitrable claims."

"When a trial court has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before the court, it 'shall, upon motion of a party...stay the action or proceeding until the arbitration is had in accordance with the order to arbitrate; CCP 1281,4. It is irrelevant under the statute whether the movant is a party to the arbitration agreement. Any party to a judicial proceeding is entitled to a stay of those proceedings whenever (1) the arbitration of a controversy has been ordered, and (2) that controversy is also an issue involved in the pending judicial action.The purpose of the statutory stay is to protect the jurisdiction of the arbitrator by preserving the status quo until arbitration is resolved.In the absence of a stay, the continuation of the proceedings in the trial court disrupts the arbitration proceedings and can render them ineffective."

This procedure obviously is fact dependent and continues to forecast delays in litigation or arbitration.

Multiple Issues with Third Parties in Arbitration

The California Court of Appeal discussed whether the wife and heirs were compelled to arbitrate the deceased husband's wrongful death claims against a physician. Under Code of Civil Procedure Section 1295 a physician can demand arbitration of a claim for medical malpractice with a patient pursuant to an arbitration agreement not statutorily adhesive, and the husband had signed that kind of agreement. The court held that the surviving heirs' claim for a wrongful death of their father is not a derivative claim, and they cannot be compelled to arbitrate despite a collateral statute that requires consolidation of all wrongful death claims against the estate. Code of Civil Procedure Sections 377.60 et seq. The wife had conceded she was bound by her husband's agreement and must arbitrate. Result: the claims of the husband for wrongful death, and the claims of the wife, will be arbitrated; the heirs will try the same case in court.

Incorporating Arbitration Rules in Contract

The parties may incorporate arbitration service provider rules into an arbitration agreement. JAMS and AAA have prepared extensive rules applicable to their respective organizations. These rules will apply unless overridden by a specific statute; Dream Theater, Inc. v. Dream Theater, 124 Cal.App.4th 547 (2005); Rodriguez v. American Techs., Inc., 136 Cal.App.4th 1110 (2006).

But in Gilbert Street Developers, LLC v. La Quinta Homes, Inc., an arbitration clause provided the parties would abide by AAA Rules "existing at the date of [an arbitration]" in the event of a dispute. At the time the parties executed the contract, the AAA had no rule providing that arbitrators had jurisdiction to rule on their own jurisdiction. In later amended rules, AAA inserted a Rule that the arbitrators had jurisdiction to determine their jurisdiction. At the time the dispute occurred in Gilbert Street, subsequent to the amended rule, the moving party demanded that the arbitrator--not the court--determine jurisdiction of the dispute pursuant to the AAA Rules. Ordinarily the court, not the arbitrator, jurisdictionally determines whether a dispute is arbitrable unless the parties specifically assign that task to the arbitrator. The Gilbert Street court held that parties cannot incorporate arbitration rules not in existence at the time they executed the contract and therefore the arbitrator lacked jurisdiction.

Arbitration: Broad Form Clauses

The courts have drawn a distinction between "broad" arbitration clauses and "narrow clauses." This categorization is fact specific and contingent on the language of the clause and its scope.

Although a "broad form" arbitration clause includes torts "arising out of the contract," not every dispute clearly outside the contemplation of the parties and their intention in contracting is covered. The California Court of Appeal illustrates this distinction in a case involving a securities transaction. The parties disputed the scope of the clause based on the definition of their contractual relationship; Valentine Capital Asset Management, Inc. v. Agahi. 

Although Valentine is based on the distinction between "broad" and "narrow" arbitration clauses, the court reaches its conclusion based on the language of the pleadings.  The plaintiff pled multiple causes of action alleging misconduct by various defendants.  When the court ruled on a motion to compel arbitration, the legal characterization of the parties in the Complaint controlled the ruling. 

Valentine is also an excellent case for reviewing the role of Self Regulating Organizations (SRO) now consolidated under the Financial Industry Regulatory Authority (FINRA).

Non Signatories to Contract Enforcing Arbitration

Section 9 U.S.C.1 of the Federal Arbitration Act (FAA) requires a "written" document as a condition of enforcing a contractual arbitration clause. When a nonsignatory attempts to join  signatories to a contract, no writing, exists, and in Carlisle v. Curtis Mallet-Prevost, Colt & Mosle, LLP, 521 F.3d 597 (6th Cir. 2008) the court held that in the absence of a "writing" any appellate jurisdiction to review an interlocutory order staying litigation unenforceable under 9 U.S.C. 16.

The Supreme Court granted cert. and reversed. In Andersen LLP v. Carlisle, 129 S.Ct. 1896 (2009) a nonsignatory petitioned the court to stay litigation and compel arbitration of a contractual dispute between signatories whose contract contained an arbitration clause. The FAA 9 U.S.C. 2 empowers courts to order arbitration and 9 U.S.C. 3 enables the court to stay litigation. These sections are the relevant jurisdictional statutes, and nothing prohibits a third party from seeking a stay of the litigation and compel joinder with signatories pursuant to the doctrine of equitable estoppel. The merits of the nonsignatory case, a separate issue, are governed by state contract law

Sanctioning of Counsel in Arbitration

The Second Circuit has held that the Federal Act (FAA) confers authority upon arbitrators to sanction attorneys for "bad faith" conduct occurring during an arbitration; ReliaStar Life Ins. Co. of N.Y. v. EMC National Life Co., 2009 WL 941173 (C.A. 2). The arbitration clause in the contract provided that each party bear its own costs and fees, a familiar version of the American rule. In the award, the majority of arbitrators in ReliaStar imposed monetary sanctions on counsel representing the nonprevailing party based on "bad faith conduct" but without any explanation of the underlying facts.

The Second Circuit held the FAA "grants wide authority to the arbitrator to determine entitlement to attorney fees...if the parties so provide, or if authorized by statute...or if justified by circumstances in which the losing party acted in bad faith." (italics in original)

The opinion cites the Ninth Circuit for a similar rule: Todd Shipyards Corp. v. Cunard Line, LTD, 943 F. 2d 1056 (9th Cir. 1991).

The court neither cites any section of the FAA for this authority nor defines the conduct warranting imposition of monetary sanctions.

CBA Can Mandate Arbitration after Adverse Grievance Ruling

For over a quarter century all federal courts have adhered to the U.S. Supreme Court decision in Alexander v. Gardner-Denver, 415 U.S. 35 (1974) permitting union employees to file litigation of ADEA claims despite an adverse ruling in a grievance hearing. The Supreme Court has modified Alexander and held that a union can sign a collective bargaining agreement (CBA ) with an employer waiving the right of union members to litigate and, in the alternative, compel resolution of their ADEA claims in arbitration (114 Penn Plaza LLC v. Pyett, 2009 WL 838159 (U.S.)). As long as the union and management bargained in good faith for this provision, federal courts must enforce the right of an employer to petition for arbitration in the event the union member files litigation.

Undoubtedly controversial, 114 Penn Plaza promises to result in more litigation on related issues. For example, what recourse is available to the union employee in the event the union refuses to proceed either in the grievance or the arbitration? Does 114 Penn Plaza apply in actions against the union? What is the role of the E.E.O.C?

Presumably 114 Penn Plaza will encourage other employers to include a litigation waiver of ADEA claims in CBAs and mandate arbitration of employee disputes after an adverse grievance ruling.

Arbitration and Declaratory Relief

In Ball v. FleetBoston Financial Corp., 164 Cal.App.4th 794 (2008) the plaintiff filed a declaratory relief cause of action (CCP §1060) challenging the arbitration clause in a credit card contract on grounds of unconscionability. The Consumer Legal Remedies Act (CC §1770) statutorily provides grounds to file a complaint alleging a consumer contract containing an unconscionable arbitration clause. The court held the CRLA does not apply to credit card transactions, nor can the plaintiff obtain a remedy under the declaratory relief statute. The California Supreme Court has agreed, and in Meyer v. Sprint Spectrum L.P., 2009 WL 197560 held that in the absence of a dispute resulting in damage to the plaintiff, a declaratory relief cause of action is not viable to challenge an arbitration clause on grounds the remedies are unconscionable. In California a party files a petition to compel arbitration whether litigation is on file or not (CCP §§1280 et seq.). In federal court, when litigation is on file, a party files declaratory relief seeking an order to arbitrate. If no litigation is on file in federal court the moving party must first establish jurisdiction, usually by diversity of the parties, then file an action for declaratory relief or summary judgment.

The Changing Arbiration Landscape

California courts continue to confront controversial issues in arbitration.

1. When the California Legislature enacted CCP 1291, mandating disclosure of any personal or professional relationships between an arbitrator and a party or counsel for a party, the  prospect of additional litigation on this subject was easily foreseeable. In Agri-Systems, Inc. v. Foster Poultry Farms, 168 Cal. App. 4th 1128 (2008), the court held neither the statute nor the Ethical Standards for Arbitrators requires disclosure of an arbitrator's legal representation of a third party with interests adverse to a party to the arbitration.
2. Generally speaking, failure of a party to read a contract or an arbitration clause does not qualify as a defense in litigation or arbitration. But if the parties are in a fiduciary relationship, the court may impose a duty to explain arbitration to the other party; Brown v. Wells Fargo, N.A., 168 Cal. App. 4th 1243 (2008). A concurring opinion casts some doubt on the result in this case.
3. When one or more multiple tortfeasors settle with the plaintiff, the remaining defendants are entitled to a credit against any subsequent judgment. In Wade v. Schrader, 168 Cal. App. 4th 1039 (2008), the court applied this rule to arbitration.
4. Whether the parties submit their dispute to arbitration or are ordered to (contractual) arbitration, jurisdiction no longer exists in the superior court except to appoint an arbitrator or confirm, correct, or vacate an award. Accordingly, any dispute among the parties is the responsibility of the arbitrator to resolve. This rule forecloses a party from seeking mandate; Briggs v. Resolution Remedies, 168 Cal. App. 4th 1395 (2008).