Too Late to Vacate

Bacall v. Shumway, No. B32787 (D2d8 Mar. 16, 2021)

An arbitrator partially cancelled a contract after finding that some of the services provided under it included the unlicensed practice of law because Attorney let his license lapse during the period of performance. In moving to vacate the award, Attorney and his company argue that the arbitrator violated public policy in making that finding—this exceeding his authority—and committed misconduct by failing to consider arguments related to costs and fees. The trial court rejected those arguments, and now the Court of Appeal does too.

On the authority point, Attorney points to a line of cases where courts have vacated arbitral awards premised on the enforcement of contracts that would be illegal under California law. (Much like this recent case, where the Court of Appeal vacated an award declining to void a non-compete.) But the facts here are the other way—the arbitrator declined to enforce the contract because it was partially illegal. So the same policy isn’t implicated.  

On the misconduct, Attorney seems to have blew the Arbitrator’s deadline to respond to Client’s fee request. After the award issued, Attorney requested to file an opposition. The Arbitrator considered the late opposition to be a request to modify the award and—under the applicable AAA Commercial Rules—ruled that he lacked the authority to re-determine an issue that had already been decided. Although Attorney tries to frame the issue as a refusal to consider evidence, it’s really not. Attorney had a chance to oppose the fee request. The fact that he blew the deadline did not mean that the arbitrator committed misconduct meriting vacation of the award under Code of Civil Procedure 1281.2 in rejecting the late arguments.

Affirmed.

This Was a Terrible Strategy

Malek Media Grp. v. Axqg Corp., No. B. 299743 (D2d3 Dec. 16, 2020)

After losing an arbitration about the dissolution of a partnership, Loser did a deep Internet dive on the arbitrator’s background. It discovered that, many decades ago, the arbitrator was involved with a prominent gay rights organization. According to Loser, because the case purportedly involved sexual harassment by Loser, who is purportedly Catholic, and because gay rights proponents have some kind of purported relationship to #metoo or to hostility against the Catholic church, Arbitrator should have disclosed the relationship under Code of Civil Procedure § 1281.9(a). And then this failure to disclose is purportedly a basis to vacate the arbitration.

But potential arbitrators are only required to disclose facts that would cause a disinterested, objective observe to have doubts as to the arbitrator’s impartiality. It does not require disclosure of any fact that might concern a “partisan litigant emotionally involved in the controversy.” 

The Court finds Loser’s theory here to be ridiculous. (Or, more precisely, “strained and convoluted to say the least.”) The idea that the arbitrator’s involvement, decades ago, with an organization that supported a cause, which is arguably sympathetic with a different cause espoused by different organizations, whose views, if attributed to the arbitrator, might suggest some favoritism towards sexual harassment claimants or against Catholics, in a partnership dissolution case where Loser’s alleged sexual harassment was a minor and collateral issue and his Catholicism a nonissue is the kind of chain of crazy inferences that a rational disinterested observer would not draw. Were the disclosure standard to require otherwise, it would put a bullseye on every arbitrator for post-hoc allegation of inadequate disclosure by any losing party based on facts that could not possibly be even known to the arbitrator at the time of the disclosures.

Indeed, Loser’s argument is so far off the mark that the Court of Appeal awards sanctions for filing a frivolous appeal under Code of Civil Procedure § 907, which permits a sanction when any reasonable attorney would agree that the appeal is totally and completely without merit. Here, the Court finds Loser’s appeal to be “objectively and subjectively frivolous.” It was based on a series of dots, themselves largely unsupported by the evidence, that couldn’t be connected. 

It certainly did not help that Loser absurdly sought judicial notice of entire “the #MeToo” movement. Or that his whole theory was imbued with a deplorable bigotry. As the Court explains, the “Court of Appeal is not an appropriate forum to peddle far-fetched conspiracy theories, laced with sexism and homophobia, disguised as a legitimate appeal.”

Affirmed and sanctions awarded.

Even Deference to Arbitration Can’t Save a Void Covenant

Brown v. TGS Mgm’t Co., LLC, No. G058323 (D4d3 Nov. 12, 2020)

Arbitration rulings are generally subject to subject to very limited review by courts. One such ground is that the “arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” Code Civ. Proc. § 1286.2(a)(4). And, as a gloss on that standard, courts will not confirm arbitral awards that are inconsistent with certain statutory rights or legislative expressions of public policy. 

One such public policy is the policy protecting an employee’s right to work in his chose profession. That is embodied by Business and Professions Code § 16600, which invalidates many post-employment restrictive covenants. Here, Plaintiff sought declaratory relief invalidating a number of post-employment anti-competitive covenants in his employment contract. In particular, Plaintiff sought to invalidate certain confidentiality obligations that were so broad as to “operate as a de facto noncompete provision” that would bar Plaintiff “in perpetuity from doing any work in” his chosen field. 

The Arbitrator, however, declined to award declaratory relief. He found the challenge not to be “ripe” because Plaintiff had not yet gone to work for a competitor. And because the evidence showed Plaintiff did, in fact take some confidential material upon his departure, the Arbitrator also denied relief based on unclean hands. 

But, as the Court of Appeal explains, those reasons aren’t good enough. An employee subject to invalid restrictive covenants has the right, under § 16600, to make a facial challenge the covenants are invalid as a matter of law. He needs not violate the covenants to show a ripe controversy. Nor do the factual particulars do not save the enforceability of a facially void provision. The Arbitrator thus exceeded his power by declining to award declaratory relief.

The Arbitrator also ruled that Plaintiff forfeited some deferred compensation due to his violation of the confidentiality provisions. The Employer, for its part, argues that the forfeiture was due to violation of different provisions permitting a retroactive for-cause termination, which provisions don’t implicate § 16600. The Court of Appeal, however, notes that the award specifically referenced the confidentiality breaches and thus vacates the award on that ground too. But on remand, Employer can have an opportunity prove that the forfeiture is justified by the alternative grounds, and Plaintiff can argue that the forfeiture is an invalid form of liquidated damages. 

Reversed.

Taking an Appeal of Third Party Arbitration Discovery

Uber Techs., LLC v. Google, Inc., No. A153653 (D1d3 Oct. 10, 2018)

The California Arbitration Act permits arbitrators and arbitral bodies to issue subpoenas. See Code Civ. Proc. § 1282.6. But a non-party that gets a subpoena issued out of an arbitration has never consented to having a private party adjudicate its rights. So, as the California Supreme Court has made clear, the nonparty can take the matter to a superior court and file a special proceeding for a de novo review of any order compelling discovery. See Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P., 44 Cal. 4th 528 (2008). Which is what happened here. 

Informed Consent Is Cruicial to a Conflicts Waiver

Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., No. S232946 (Cal. Aug. 30, 2018)

Back in 2016, the Court of Appeal vacated an arbitration award in an attorney fee arbitration, holding that a law firm’s retainer agreement (and the arbitration clause within it) was completely void under Rule of Professional Conduct 3-310(C)(3) due to an undisclosed conflict of interest. At the time the client engaged the firm, the firm was adverse to the client in an unrelated matter. Thus, notwithstanding the agreement’s general forward conflicts waiver, there was no informed consent because the actual conflict was not specifically disclosed. And that meant the law firm couldn’t get paid anything and had to disgorge what it had been paid to date. The Supreme Court granted review.

A Partial Final Arb Award Is Not Really Final

Maplebear v. Busick, No. A151677 (D1d2 Aug. 21, 2018)

California state courts generally only have jurisdiction to vacate or confirm arbitration awards when they are final. Under Code of Civil Procedure § 1283.4, that means the award “include[s] a determination of all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy.” It’s basically the equivalent of the one final judgment rule for taking an appeal under § 904.1.

Oh Yeah, Those Other Four Cases ....

Honeycutt v. JPMorgan Chase Bank, No. B281982 (D2d7 Aug. 2, 2018)

 

Potential arbitrators are required to make disclosures of potential conflicts. Many of the arbitration service providers accomplish this through a questionnaire where the arbitrator walks through a series of questions. In this case, the arbitrator’s disclosure consisted of 28 questions over 11 pages. To question 28, which asked if the arbitrator would entertain any other offers of employment from the parties while the case is pending, the arbitrator answered, “yes,” that he or she* would consider offers to serve as an arbitrator in other matters for the parties or their counsel. Unfortunately, the eleventh page of the disclosures was missing.

Secret Brief Spoils an Arbitration

Baker Marquart v. Kantor, No. B280861 (D2d2 Apr. 25, 2108)

In an arbitration over attorneys’ fees, Client submitted an ex parte (real ex parte, not California ex parte*) brief to the panel, which accepted it. The Panel ruled for Client, relying in part on claims raised in the secret brief. Attorneys never saw the brief until Client submitted it in connection with his motion to confirm the award. The superior court confirmed the award and denied a motion to vacate. 

That was error. Although arbitration awards are not subject to appeal on the merits, Code of Civil Procedure § 1286.2(a)(1) requires a court to vacate an award that has been “procured by corruption, fraud, or other undue means.” Among the variety of “undue means,” is improper ex parte contact with the arbitrator, which is a form of extrinsic fraud that deprives a party of an opportunity to fairly present its case. The fact that the brief contained only ex parte arguments—all of Client’s evidence had been served on attorneys—didn’t make it any less so.

Reversed.

*For reasons that have been lost to history, practice California state courts (as well as in several of the federal district courts in California) permit a filing called an “ex parte application.” It is generally the manner in which parties can request that a court address a motion outside of the ordinary statutory briefing schedule. See Cal. R. Ct. 3.1200–3.1207; C.D. Cal. L.R. 7-19. But contrary to the name, these filings require service on all opposing parties, except under extraordinary circumstances. See Cal. R. Ct. 3.1203, 3.1206; C.D. Cal. L.R. 7-19.1.

Can't Give a Half-Consent to Arbitrate.

Douglas v. Serenivision, Inc., No. B277574 (D2d2 Feb. 8, 2018)

The law’s pretty clear that unless a contract spells it out clearly otherwise, a court, not the arbitrator, determines the gateway issue of arbitrability. The contract in this case didn’t specify that the arbitrator was to make that decision. But that isn’t dispositive here, because the parties consented by their conduct the arbitrator making that decision.

No Damages for Taking an Arb-able Case to Court

Sargon Enters., Inc. v. Browne George Ross LLP, No. B271718 (D2d3 Sept. 26, 2017)

This is one of those issues that clients ask about with some frequency, but that hasn’t been the subject of a published opinion. Until now. The question is this: If a contract contains an arbitration clause, but, notwithstanding it, a party sues in court, can the other party recover its costs of the court litigation as damages for breach of the arbitration contract? The answer, apparently, is no. 

Where's Your Interim Award Now, Flanders...

Kaiser Foundation Heath Plan v. Superior Court, No. B272284 (D2d7 Jul. 31, 2017) 

This is a very complicated-seeming healthcare reimbursement litigation between some Hospitals and an Insurer. The parties ultimately agreed to arbitrate the dispute. A big issue in the arbitration was whether some of Hospital’s claims were preempted by provisions of the Medicare Act. The arbitrator found they were not and issued a “Partial Final Award” saying so.

Insurer asked the superior court to vacate the award. But instead, the superior court confirmed it. Insurer now appeals.

But that’s dead end.

Hard to Be Biased by Something You Don’t Remember

EEC Capital Corp. v. Manatt, Phelps & Phillips LLC, No. B265760 (D2d9 Mar. 15, 2017)

Clients sued Attorneys who represented them in a soured debt deal. The case was compelled to arbitration, where Attorneys won. The arbitrator awarded Attorneys $7 million in costs and fees. Clients seek to vacate the award.

Nope. 

Giving the Devil the Benefit of Civil Procedure, for Safety’s Sake...

Emerald Aero, LLC v. Kaplan, No. D070579M (D4d1 as modified on rehearing, Mar. 21, 2017)

I’m a little skeptical of the benefits of arbitration. The lack of formal procedure, in particular, makes me a bit queasy. But this case shows that some things are too much, even for arbitration.

Why Arbitrations Tend to Go on Too Long ...

Royal Alliance Assocs., Inc. v. Liebhaber, No. B264619 (D2d4 Aug. 30, 2016)

It’s pretty hard to get an arbitration award vacated. The arbitrator’s error, even a really really bad one, is not enough. But one way to do it is to show that the arbitrator refused even to hear evidence. Which is what happened here. 

During an informal hearing, Party A gave an informal explanation of her conduct in an effort to exonerate herself. The opposing party had doubts about the veracity of those statements, and asked to question A. The arbitrators—it was a three arbitrator panel—said no, in reliance on the rules of their arbitral forum. They then proceeded to rule in A’s favor, specifically noting in their decision that the found A’s explanation to be credible.

That goes too far, even for arbitration. Code of Civil Procedure § 1286.2 requires vacation of an award when the arbitrators commit misconduct, exceed their powers, or refuse to hear evidence material to the dispute. Regardless of whether the panel complied with their own rules, refusing the hear relevant evidence—such as the cross examination of a witness whose credibility is key to the whole case—crosses a red line. See Code Civ. Proc. § 1286.2(a)(5).

Affirmed.

Not Wrong Enought to Be Arbitration-Wrong

Baxter v. Block, No. A144112 (D1d1 May 24, 2016)

Attorney and Clients arbitrated a fee dispute under the Mandatory Fee Arbitration Act. The Arbitrator awarded $0, finding that Attorney’s services were worth less than he had billed. They were, instead, worth a lesser amount, which just happened to be exactly what Client had paid. 

But Clients hadn’t paid as much as the Arbitrator thought. He apparently relied on a mistaken document. Attorney noted the mistake. And Clients, to their credit, basically admitted it. But the Arbitrator refused to modify his award.
Attorney moved to vacate the award; Clients to confirm it. Clients also asked for their fees on confirmation, based on a fee provision in the retainer agreement. In addition to the payment mistake, Attorney claimed that Arbitrator had failed to disclose that a bunch of his recent work entailed auditing legal bills, which is Attorney claims is a significantly pro-client job for a fee arbitrator that it merited disclosure. The trial court refused to vacate the award on wither grounds and gave Clients their fees, although he cut their fee counsel’s hourly rates and hours significantly.

The court publishes its opinion only on the disclosure issue and the fee calculation. So far as the bill auditing (non-) disclosure goes, the record showed the arbitrator did a bunch of different consulting work around the issue of attorney fees. Some on the client-side like bill auditing. But also some on the attorney-side like testifying about reasonable rates for fee applications. His expertise was thus in billing issues in general, not in representing one side or another in fee disputes. Which meant his consulting work didn’t cause him to have a particular economic incentive to go one way or the other or to rule a certain way to garner the favor of future clients. Because the consulting didn’t create any reasonable doubt about the arbitrator’s impartiality, the judgment could not be vacated for failure to disclose, or to otherwise provide a grounds for disqualification.

And on the fees, Clients’ two attorneys billed Client—and Client sought fee recovery—at the same hourly rate. Both had roughly the same pedigrees and experience. Yet, the trial court gave only one of them a substantial rate cut without any explanation. The court finds this to be an abuse of discretion and sends the case back for an explanation. But it affirms the hours cut, deferring to the trial court’s judgment that the time billed was excessive for a motion to confirm an arbitration award. Such judgment can only be reversed if it is “clearly wrong,” which it wasn’t here.

Reversed in part.

Arb Judgment Survives Illegality Challenge

Epic Medical Mgm’t LLC v. Paquette, No. B261541 (D2d8 Jan. 28, 2016)

A doctor and his practice management company got into a dispute that went to arbitration. The management company won. But the doctor moved to vacate the award on the grounds that the contract, as interpreted by the arbitrator, was an illegal kickback agreement for patient referrals, and thus that it was beyond the arbitrator’s power to award any damages based on it. The doctor also claimed that the arbitrator’s interpretation created a brand new agreement, which was beyond her power, and that she improperly limited the doctor’s testimony. The trial court denied the motion and the Court of Appeal affirms.
 
So far as the “new agreement” claim goes, arbitrators generally don’t have the power to invent new agreements between the parties. But they can interpret existing agreements, including by finding that the parties orally modified written agreements or that their conduct evidenced implied consent to changes in terms. Which is what happened here. The arbitrator found that the parties implicitly agreed to a payment structure that was different than that in the written agreement. Indeed, they acted in accord with that change for three years. So that’s not a grounds to vacate.
 
As to the point about illegality, California recognizes an extremely limited exception to the enforceability of arbitration awards when enforcing the award would contravene a strong statutory or public policy to the extent it overcomes the presumption in favor of arbitration of disputes. (E.g., confirming an arbitrator’s injunction to enforce a California non-compete.) The doctor points to Business & Professions Code § 650(a), which prohibits patient referral fees for doctors. But § 650(b) has an exception for fee splits between doctors and management companies commensurate with the value of the services provided. Since that is basically what the award in this case did, it isn’t subject to the exception.
 
Finally, on the doctor’s testimony, the doctor didn’t provide an offer of proof as to what the excluded testimony would have been and how that would potentially have affected the result. Because the record didn’t reflect that the doctor was prohibited from giving testimony bearing on his liability, vacation of the award isn’t warranted.

Affirmed.

Meet the New Boss—Same Arbitration Clause as the Old Boss

Jenks v. DLA Piper Rudnik Gray Cary US LLP, No. A143990 (D1d1 Dec. 16, 2015)

Plaintiff was an associate at an estimable SF Bay Area law firm at the time it got absorbed into a firm that was in the process of merging its way to being one of the world’s largest law firms by headcount. Plaintiffs offer letter from the old firm had an arbitration clause. About a year after the merger, Plaintiff left the firm. His termination agreement, which didn’t have an arb clause, extended his benefits for about six months. Plaintiff subsequently sued the firm over a benefits issue. The firm successfully compelled an arbitration, in which Plaintiff won, but not as much as he would have liked.

Plaintiff challenged the original decision compelling arbitration, both in motion to vacate and then on appeal. For the first time on appeal, he argued that the successor firm wasn’t a party to the contract with the arbitration clause. Even if he didn’t forfeit the argument—which he did—as the surviving entity after a merger of partnerships, and in the absence of a novation, the successor firm accedes to the rights under any ongoing contracts with the prior firm. So it could enforce the arbitration clause.

Nor, as plaintiff argued, did the termination agreement novate the original employment contract. Although it had a merger clause disclaiming prior agreements, the clause was limited to agreements “with respect to the subject matter hereof.” Because that subject matter did not include a forum for the resolution of disputes, it did not work a novation on the arbitration obligations of the former employment contract, which remained in effect.

Affirmed.

Not So Fundamental When Partners Are Involved

Singerlewak LLP v. Gantman, No. B259722 (D2d8 Jul. 29, 2015*)

Substantive judicial review of the correctness of arbitration decisions is extremely limited. California does, however, recognize a narrow exception to that rule: an award may be vacated as beyond the arbitrator’s power if it contravenes an “explicit legislative expression of public policy.” The rule applies only if the award runs afoul of a very important and very clear public policy of the state that has been codified into statute.

Business & Professions Code § 16600—which prohibits employment non-compete agreements—is probably one of those policies. Ask someone about non-competes. If they know anything at all, they know they are basically not enforceable in California. 

But this case involves the enforcement of a non-compete against a partner departing a partnership. So the merits aren’t controlled by § 16600. They are instead are controlled by a special exception in § 16602, which make non-competes are enforceable against ex-partners, so long as they are reasonable and geographically limited. Given the non-categorical nature of §16602, claims that an arbitrator might have erred in applying § 16602 aren’t so anathema to a state statutory policy to fall within the public policy exception. So the trial court here didn’t have authority to review the substance of the award, and it erred with it decided otherwise.

Reversed.

*This case was decided back in July, by ordered published under Rule of Court 8.1120(c) by the California Supreme Court on Oct. 21, 2015. This is due to a glitch in publication rules, where sometimes the Court of Appeal runs out of time under the rules to order publication while it still technically has jurisdiction over the case. (For instance, if rehearing petitions take a long time before eventually being denied.) Rule 8.1220(c) is a fix. The Court of Appeal sends the decision to the Supreme Court and recommends that they order publication, which is what happened here.

An Arbitrator Is Free to Make Legal Errors

Safari Assocs. v. Superior Court, No. D065684 (D4d1 Dec. 2, 2014)

In awarding attorneys’ fees to the plaintiff in a breach-of-contract arbitration, an arbitrator declined to apply the agreement’s definition of prevailing party in favor of that provided in § 1717 of the Civil Code. According to the arbitrator,  the Code trumps any conflicting definition in a private agreement. The defendant moved the superior court to have the award corrected on the basis that the arbitrator exceeded his powers by ignoring the contractual definition in making the award. See Cal. Code Civ. Proc. § 1286.6. The trial court agreed; the award was amended. But the court of appeal here grants a writ reversing that decision. The arbitrator’s decision about the fee award was within the scope of his authority. His decision about what definition of prevailing party applied was, at worst, a legal error that is not subject to review by the court.

Writ granted.