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Archived UpdatesUpdates from 2008Summary of Significant Cases in 2008
Employment Arbitration (6/15/2008) The U.S. Supreme Court has held the FAA includes arbitration of employment disputes, yet State and Federal courts have refused to enforce arbitration agreements for a variety reasons as discussed in the text. In the latest California case, the Court of Appeal refused enforcement of an arbitration clause on grounds the employer had not incorporated the employee handbook of corporate policy explaining arbitration into a written form given to the employee to initiate dispute resolution. Employers cannot draft arbitration agreements with their employees (assuming the desire to arbitrate ) unless the employee handbooks are specifically incorporated into the employment contract-or duplicated-and include the standard provision absorbing costs and fees, mutuality of remedy, no damages limitations, and specific waiver of jury trial. Signatures and acknowledgment of receipt by the employee are mandatory. The most effective method to enforce arbitration clauses is inclusion of its terms in the employment contract and a reference in the employment handbook to this specific provision. An opt-out clause is helpful. Drafting unfair terms assures a court test and an unsatisfactory ruling. See, Text, Ch. XXI-C, D for necessary conditions to draft an enforceable employment contract. Non Arbitrable Parties & Incorporation (5/7/2008 Although an enforceable agreement may bind two parties, when third parties who have not signed an arbitration clause are also involved, the court must decide whether to deny arbitration on grounds of conflicting results in arbitration and litigation; CCP 1281.2 (c). A plaintiff can initiate litigation and sue non arbitrable parties in an attempt to avoid arbitration. More often, sub contracts, indemnity agreements or agency issues may emerge; or incorporation of parties; or the signatory may attempt to join the non signatory. And the issue of choice of law and preemption by the FAA are involved. The California Court of Appeal discusses these issues in a recent case. See, Text, Ch. XVI-F-b Other Issues with Third Parties
Summary Judgments (4/25/2008) In California courts, the defendant in a litigated case can file a petition to compel arbitration and stay litigation. Summary judgment is rarely used. In federal courts the defendant files either a declaratory relief cause of action or summary judgment. Both require the court to determine whether to order arbitration and stay litigation. One federal court has held that if the defendant files summary judgment, the consequence is a waiver of the petition to compel arbitration. The court cited no precedent for this result. The only source of authority are three cases all involving dilatory conduct or discovery abuse. See, Text, Ch III-B-12-c-(3}: Summary Judgment See, also, below. Same subject. Illegal Contracts Contracts violating express state statutory requirements for a valid agreement are "illegal" and unenforceable absent waiver, severance and not in interstate commerce. The court decides illegality and, in effect, the invalidity of the arbitration clause and the underlying contract. An "illegal" contract is not necessarily fraudulent either in the execution or inducement of the contract but unenforceable unless severable. Cal. Ct. of Appeal. See, Text, Ch. XVII-C-8: Illegal Contracts Incorporation of Documents 3/28/2008) Cal. App. Ct: Parties can incorporate documents in multiple contracts but if arbitration terms are included the terms must be clearly stated and readily visible. See, Text, Ch. XVI-F-4-c. Arbitrator Disclosure (3/28/2008) Disclosure of Arbitrator's personal and professional obligations under California statutorily and ethical requirements are not trigger until notified of selection to serve as neutral arbitrator. See, Text, Ch. XIX-A-1. Expired Contracts & Arbitration Agreements (3/28/2008) A California Court of Appeal has distinguished between enforcing expired contracts containing arbitration clauses enforceable after the contract has expired and contracse with no comparablae provision. Non. Pub. but included in Text. See, Text, Ch. XVI-F-11. Motions to Vacate, Modify or Confirm Awards (3/27/2008) FAA 9 U.S.C. 9-11 governing motions to vacate. modify or confirm awards are the exclusive grounds to appeal in cases governed by the FAA. The Supreme Court held the parties cannot, in effect, confer jurisdiction on the court, but, that aside, even if the court has jurisdiction the rules on appeal are the same. Nothing about "manifest disrgard" other than ambiguity. See, Text, Ch. V-A-B-C-D; Awards in Federal Court Pleading & Proving the Arbitration Clause (3/23/2008) According to a California Court of Appeal, allegations in a complaint do not satisfy an defendant's burden to prove the existence of the arbitration agreement. The moving party must plead and prove the existence of an agreement. See, Text, Ch. XVI-F-3: Existence of Agreement to Arbitrate "Existence" of Contract (3/18/2008) Despite the rule that the arbitrator decides the merits of a contractual dispute and the count decides "arbitrability," the court must decide challenges to a contract on grounds of fraud in its execution; forgery; unauthorized signatory; mental capacity; Cal. Ct. of Appeal. The federal rule is probably the same; Buckeye Check Cashing Co. v. Cardegna, -U.S._ (2007). See, Text, Ch. XVI-F-3; Ch. IV-F-1-a. Existence of Contract
Arbitrability (2/28/2008) The recurring issue of "who" decides arbitrability was addressed by the Supreme Court. The Court held that an administrative forum in a state court cannot trump the FAA. States cannot evade FAA preemption either legislatively, judicially or administratively. Waiver (2/24/2008) A party does not waive its right to arbitrate by moving to dismiss litigation or moving to transfer venue. See, Text, Ch. IV-K: Waiver of Right to Arbitrate Arbitrator Exceeds Powers (2/24/2008) An arbitrator who fails to adhere to an arbitration clause containing a choice of law clause exceeds powers and the non prevailing party can move to vacate. See, Text, Ch. V-D-4: Arbitrator Exceeds Powers Unilateral Terms in Arbitration Clause (2/24/2008) An illusory contract allowing one part to unilaterally change the terms is an illusory contract and unenforceable as to "distributors." See, Text, Ch. IV-F-8: Illusory Contracts Remand to Arbitrator (2/24/2008) An arbitration Award not an "interpretive path" between the evidence and the award is subject to remand to arbitrator for clarification. See, Text, Ch. V-E. Arbitration Awards (Three Strikes & the Award Might Be Out (2/16/2008) Strike 1: Two sophisticated business entities contract with each other and include an arbitration clause containing a choice of law provision mandating the arbitrator to "strictly apply [state] law." The arbitrator conducts the arbitration pursuant to FAA rules, identifies the prevailing party, and writes an award expressing his view of the case without any reference to state statutory or decisional law. In writing its decision on appeal, the 7th Circuit panel muses about the absence of appealable grounds; wonders how a court would resolve a case if the arbitrator wrote nothing at all; agrees we all know a court cannot set aside the award of an arbitrator (potentially confirmed in a judgment) who mistakes the law or facts, but presumably "there must be some boundaries ...[limiting] the extent to which the arbitrator could indulge his fancy..." In California terms, the California Supreme Court has said the award must reflect a "nexus" between the facts and the award; a "rational relationship;" Advanced Micro Devices, Inc. v. Intel Corp., Cal.4th 362 (1994). Comment: This decision is arguably an isolated case but the 7th Circuit is possibly sending a subtle message recommending that arbitrators specifically connect submitted claims to the award-despite the court's concession that arbitrators need not write an award and mistakes of law or fact are not grounds for reversal on appeal. Strike 2 & 3: In addition. a different 7th Circuit panel writes that "[a]n arbitral order that does not adhere to the legal principles specified by the arbitration agreement [choice of law provision] is one of two scenarios that warrants vacatur ... pursuant to the FAA; [9 U.S.C. 10 (a) (4)]. Ignoring a choice of law provision in an arbitration agreement exceeds the arbitrator's power since the arbitrator's power is borne from that arbitration agreement." The court denied the motion to vacate on other grounds. Is this case dicta or precedent? Collateral Estoppel & Res Judicata (2/4/2008) Two plaintiffs filed separate diversity actions against the same defendant alleging breach of their employment contract, fraud and failure to pay wages. The trial court, after denying a motion to consolidate the parties, denied defendant’s motion to compel arbitration as to one plaintiff but granted the motion as to the other plaintiff (a decision caused by a previous Ninth Circuit ruling subsequently reversed in the Supreme Court). The plaintiff in the litigated case obtained a judgment in its favor against the defendant. In the arbitration subsequently conducted between the second plaintiff and the same defendant, the arbitrators rendered an award confirmed in a [partial] judgment for the defendant. On appeal from that judgment, the second plaintiff contended the prior judgment against the defendant entered in litigation was subject to collateral estoppel in the arbitration. The court held . . . “where the prerequisites for collateral estoppel are satisfied, arbitrators must give preclusive effect to prior federal judgments”. . . Arbitrators are not free to ignore the preclusive effect of prior judgments under the doctrines of collateral estoppel and res judicata.” But the court explains there is a difference between offensive non mutual collateral estoppel and defensive non mutual collateral estoppel. According to the court, offensive non mutual collateral estoppel occurs when the plaintiff seeks to estop a defendant from relitigating an issue the defendant had previously litigated and lost against another plaintiff. Defensive collateral estoppel is a motion by the defendant to estop a plaintiff who had litigated and lost against another defendant. Noting the unfairness of offensive non mutual collateral estoppel when multiple plaintiffs repeatedly file litigation against the same defendant alleging the same issue, the Ninth Circuit panel criticized its use except in unusual cases. Not only must arbitrators consider application of collateral estoppel and res judicata, the Collins court also held that determination of whether these twin doctrines initially apply are an arbitrable issue-not judicial. The court cites Sixth and Seventh Circuit court cases as precedent for their decision, in part, but notes caveats in its holding. And, as noted by other courts, the absence of pleadings and records of the arbitration hearing impose a serious obstacle to applying collateral estoppel and res judicata to a previous judgment confirming an award. The Collins court also indirectly expresses a concern about the difference between a judgment entered in litigation and an award confirmed in a judgment as mandated by 9 U.S.C. 13 (c). See, Text, Ch.IV-J: Collateral Estoppel & Res Judicata
Updates from 2007Summary of Significant Cases in 2007 The California Court of Appeal reviews the statutory grounds for confirming, correcting and confirming, and vacating awards. CCP 1288 allows a party to confirm an award four years after service and filing of the signed award. A petition to vacate or correct an award must be served and filed within 100 days after the date of service of the award. In the absence of a petition to confirm, the filing of a petition to correct or vacate within the 100 day period is jurisdictional and invalid. If a prevailing party waits the 100 day period without filing a petition to confirm, and respondent files a petition to vacate thereafter, the petition should be denied. Note: grounds for correction are listed in CCP 1286.6; grounds for vacating an award are listed in CCP 1286.2 (a) (1)- (6). The California Supreme Court has assigned the role of resolving statute of limitations issues to the arbitrator. In determining whether a claimant is dilatory in demanding or initiating arbitration, the correct date to toll the statute is the receipt of a refusal from the other party to arbitrate. The petition to compel must be brought within the statutory time for written contracts (four years) but measured by the date of refusal to arbitrate. An arbitration clause requiring payment of attorney fees in the event any party initiates an action or administrative proceeding other than arbitration is subject to an interim award issued by the court. The usual rule awarding attorney fees to a "prevailing party" applies to the merits of the case. Arbitrator's Refusal to Postpone Hearing (2007) One of the grounds to vacate an award is CCP 1286.2 (a) (5), a refusal by the arbitrator to postpone a hearing to the prejudice of the other party. The Court of Appeal reviews this statute and the ground for vacatur in the FAA; 9 U.SC. 10 (a) (3). Both are similar in language. These cases are fact specific but in any event a refusal to postpone a hearing must cause prejudice to the moving party.See, Text, Ch. XXI-F-8-d: Grounds to Vacate Award Offers-in writing-are unilaterally revocable within the relevant time frame (T.M. Cobb Co. v. Sup.Ct., 36 Cal.3d 273 (1984). In a case recently decided by the Court of Appeal, the plaintiff unilaterally revoked her offer prior to expiration of the 30 day period disabling the defendant from determining whether to accept within the statutory time frame. The court held the cost triggering provisions of CCP 998 also expired along with the offer. The court does not equate withdrawal of an offer the equivalent of an offer statutorily “deemed withdrawn." The court notes, but does not decide, that plaintiff’s recoverable costs, when added to the jury award (which was less than the offer), exceeded the judgment thereby identifying her as the prevailing party.
Citing the FAA, in 1991 the Supreme Court enforced a clause in a contract compelling arbitration of disputes between employees and their employer; Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The employee alleged violation of ADEA, a federal statutory right, but the Supreme Court held the arbitration clause enforceable as long as the employee could vindicate statutory rights in a non-judicial forum. Ten years later, reversing the Ninth Circuit, the Supreme Court interpreted the FAA to include all employees-other than transportation workers-within the scope of the statute and subject to arbitration; Circuit City v. Adams, 532 U.S. 105 ( 2001). On remand, the Ninth Circuit refused to enforce the same arbitration clause on grounds the terms were unconscionable; Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002). The Ninth Circuit subsequently decided a trio of cases refusing to enforce arbitration agreements in employment cases; Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003); Ingle v. Circuit City Stores, 328 F.3d 1165 (9th Cir. 2003); Ferguson v. Countrywide Credit Inds., Inc., 298 F.3d 778 (9th Cir. 2002). In a 2005 opinion, a majority of the court concluded it should consider allegations in the complaint in determining whether to enforce the arbitration clause, albeit in a franchise dispute; Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006). The Ninth Circuit’s most recent foray into an employment contract containing an arbitration clause involves an employment dispute between a major law firm and one of its employees. The court struck down every element of the arbitration clause executed between an employee and her law firm employer. The court, classifying the employment clause as adhesive (“take or leave it”), and a corresponding failure to allow the employee to “opt out” of the arbitration clause, qualified as procedurally unconscionable conditions. Requiring the employee to file a claim against the employer within one year improperly accelerated the California statute of limitations for statutory claims and is substantively unconscionable. The clause requiring “confidentiality” of the proceedings is also substantively unconscionable; the employer’s exemption from arbitration to protect the attorney client privilege is unconscionable because the language of the arbitration clause is “too broad.” Severance was impossible, concluded the court. The Ninth Circuit occasionally cited Armendariz v. Foundation Psychcare Services, Inc., 24 Cal.4th 83 (2000), the leading California case interpreting arbitration clauses in employment contracts. But the Ninth Circuit panel followed none of the California Supreme Court recommendations listed in Armendariz to enforce arbitration clauses in employment contracts and thereby avoid a finding of “unconscionability.” Armendariz will enforce employment contracts if remedies for the parties are bilateral; the arbitrator is neutral; limited discovery is allowed; the employer pays the cost of arbitration; the arbitrator writes a reasoned opinion. By incorporating these prophylactic conditions in employment contracts, the California Supreme Court neutralizes the disproportionate bargaining strength of employers. The Ninth Circuit panel ignores these remedial measures, either omitting their presence in the arbitration clause or without acknowledging none exist. According to well-established Supreme Court law, federal courts must interpret arbitration clauses under general state contract law; Buckeye Check Cashing, Inc.,v. Cardegna, 546 U.S. 440 (2006). The Ninth Circuit cites a handful of selected California Court of Appeal cases but essentially writes its own arbitration law. Mediation & Confidentiality (2007)
Class Actions in Federal Court (2007) In Green Tree Fin. Corp v. Bazzle, 539 U.S. 1039 (2003) the Supreme Court ruled that arbitrators in state court litigation-not the judge-should determine whether an arbitration clause silent on class action permits classwide arbitration, and Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, (2002) assigned procedural issues to the arbitrator. Pedcor Mgmt. Co., Inc. Welfare Benefit Plan v. Nations Personnel of Texas, Inc., 343 F.3d 355 (5th Cir. 2003), decided after Green Tree Fin. Corp. and Howsam, held that under Bazzle a court ascribes resolution of the arbitration clause to the arbitrator if the agreement is silent on who makes the class action decision. In Employers Ins. Co. of Wausau v. Century Indemnity Co., 443 F.3d 57 (7th Cir. 2007) the court held class actions are a procedural mechanism and under Howsam the arbitrator decides procedural issues. Arbitrators are now applying these cases to class actions: Sutter v. Oxford Health Plans, LLC, 2007 WL 625625 (3d Cir.)[not precedential]. Although not precedential, the case discusses partial final awards, Federal Rule 23 guidelines, and vacatur of the award. See, Text, Ch. XVII-C-5. reviewing federal and state statutes regulating arbitration in other contexts.
Arbitration of Skilled Nursing Facilities Disputes (2007) The interplay between three statutes, CCP 1295 mandating arbitration of medical services claims, H & S 1430 (Elder Abuse and Dependent Adult Civil Protection Act), and H & S 1530 providing group medical insurance, have created a series of inconsistent decisions in the California Courts of Appeal. The latest example was decided by the First Appellate District. In admitting his wife as a resident to a skilled nursing facility, the plaintiff signed a contract containing an arbitration clause identifying himself as “Legal Representative/Agent.” The arbitration clause also bound heirs. Plaintiff, acting in the same legal capacity, also signed a second agreement requiring arbitration of medical services. Plaintiff's wife died during her tenure at the nursing facility. Plaintiff and two heirs filed allegations of fraud, wrongful death, elder abuse and H & S 1430, a statute referencing the Patient’s Bill of Rights (Title 22, section 72527 of Cal. Code of Regs). H & S 1430 prohibits arbitration of disputes between the facility and a patient or former patient. Only the nursing facility, and not the physician, who may have rendered medical services, is named in the complaint (& caption). Ruling on the motion to deny arbitration, the appellate court held that the H & S 1430 cause of action and the wrongful death cause of action survive as to the husband and heirs (although no reference is made to survival in the statute or the Regs.). According to the statute, the parties do not waive their right to file a civil action. The trial court never addressed the survival issue. Assuming wrongful death survives, the husband signed the arbitration agreement as an “agent” of his wife and the arbitration clause extends its coverage to the non-signatory heirs. According to the court, Plaintiff did not sign in his personal capacity-apparently not having gone to law school-although an agent can also bind non-signatories under agency law. Apparently the court did not want to confront another questionable decision written by the Fourth District Court of Appeal holding the husband is not the agent of his wife; Flores v. Evergreen at San Diego, LLC, 148 Cal.App.4th 581 (2007). Husbands and wives are fiduciaries and owe a higher legal duty to each other than an agent. Apparently not in some courts. The court rejects the obvious future course of action mandated by this case as argued by the defendant as follows: the plaintiff will just add a 1430 claim to other claims, i.e., plaintiff files an H & S 1430 non-arbitrable claim with arbitrable claims. Accordingly, the court under this case will select litigation of otherwise arbitrable claims (fraud; negligence, wrongful death; breach of contract) on the ground of potential inconsistent results in arbitration; CCP 1281.2. To this argument, the Court of Appeal responds by writing a vigorous defense of 1430 and a delivers a paean to jury trials. The court ultimately accepts the theory that dividing the case between two forums, i.e., litigation and arbitration, is a discretionary decision for the trial court; CCP 1281.2. What will happen when the plaintiffs seek to file their medical services claim? This claim, whether it survives or not, is subject to mandatory arbitration; CCP1295. Result: litigation of the wrongful death and H & S 1430 claim and arbitration of the medical services claim. The court also ignored the argument of plaintiff in the trial court that defendant’s fraud induced the arbitration clause. California law is clear that when a party alleges fraudulent conduct induced the arbitration clause, resolution of that issue is a judicial function. The court should have addressed the issue of whether the arbitration clause was the subject of fraud. Had interstate commerce been involved, the FAA would have preempted enforcement of the H & S 1430 anti-arbitration provision preventing jury waiver. “Commerce”, however, is not usually involved in the delivery of medical services or the operation and management of skilled nursing facilities.
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