Archives: December 2005
Mon Dec 19, 2005
Classwide Arbitration
Congressional impatience with purported abuse of class actions resulted in enactment of the Class Action Fairness Act of 2005; 28 U.S.C. 1711 (a) (2). Federal legislation attempts to shift state class actions to federal court without fulfilling conventional requirements of diversity jurisdiction; 28 U.S.C. 1332. Conversely, the California Supreme Court not only reaffirmed its commitment to class action litigation but also endorsed classwide arbitration; Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005).
In Keating v. Sup.Ct., 31 Cal.3d 584 (1982)[overruled on other grounds; Southland Corp. v.
Keating, 465 U.S. 1 (1984)] the California Supreme Court had originally endorsed classwide arbitration, and two subsequent Court of Appeals decisions confirmed the doctrine against challenges of Federal Arbitration Act pre emption; (FAA); 9 U.S.C. 2; Sanders v. Kinko's, Inc., 99 Cal.App.4th 1106 (2002); Blue Cross of California v. Sup.Ct., 67 Cal.App.4th 42 (1998). The defendant in Discover Bank, presumably cognizant that California courts had confirmed classwide arbitration, required plaintiff to sign an arbitration clause waiving participation in classwide arbitration, consolidation of claims or representational arbitration.
Based upon its prior decisional law, the Discover Bank court held classwide waivers violated public policy, unconscionable and unenforceable in consumer claims alleging fraud; Civ. Code 1670.5. But the underlying transaction involved interstate commerce, compelling the court to confront the federal role of pre emption mandating state courts to enforce arbitration clauses unless the terms are subject to revocation on "grounds of law or equity;" 9 U.S.C. 2.
The United States Supreme Court, avoiding the classwide arbitration issue in the 1984 case of Southland Corp., had held the FAA pre empts local anti arbitration substantive law, and invalidates any procedural artifice burdening or impairing the alternative dispute resolution process if the underlying transaction affects interstate commerce. Under Southland, state courts and Legislatures cannot single out arbitration for treatment differently than general contract law. In Discover Bank, judicial refusal to enforce a classwide waiver clause might collide with the FAA prohibition of a procedural evasion to avoid arbitration.
Class actions, and classwide arbitration, are a species of procedural law statutorily identified as a form of consolidation in litigation or arbitration; CCP 1048; 1281.3. To avoid labeling classwide arbitration and its concomitant waiver in an arbitration clause as a procedural device, the Discover court confirmed classwide arbitration as a mechanism to vindicate substantive rights recited in Civ. Code 1668. This statute provides that "all contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud or injury to the persons or property of another, or violation of law...are against the policy of the law."
In supporting its conclusion that waivers of classwide arbitration were unconscionable, the court wrote an extensive paean extolling class actions and lauded its salutary effect in denying rapacious parties from extracting small amounts of money from consumers in a sum insufficient to warrant litigation By not singling out arbitration for disapproval, applying general substantive law to all contracts, and disabling the waiver clause as unconscionable on grounds of "law and equity", the court avoided pre emption. CCP 1668 enabled the court to apply universally applicable statutory substantive contract law to invalidate the classwide arbitration waiver.
Thu Dec 08, 2005
Arbitration: Forum Selection Clause
The Court of Appeals has expanded the rationale of Discover Bank v. Sup.Ct. and the California Supreme Court's refusal to enforce a contractual clause waiving classwide arbitration in consumer litigation. In Aral v. Earthlink, Inc., 2005 WL 3164648 a consumer class action case, the plaintiff pled a violation of Bus. & Prof. Code 17200 Unfair Competition Law (UCL) and sought injunctive relief and restitution from the defendant. The defendant filed a petition to compel arbitration alleging the underlying contract contained an arbitration agreement requiring plaintiff to waive representational, class action or classwide arbitration. Citing Discover Bank, the court summarily denied the petition as unconscionable under Discover Bank (although the plaintiff had not raised this issue in the Superior Court).
The court also reviewed the forum selection clause contained in the contract. Under its terms, any dispute between the parties is governed by Georgia state law, the domicile of the defendant corporation. Aral cited several cases upholding forum selection clauses in general but invoked America Online, Inc. v. Sup.Ct., 90 Cal.App.4th 1, a case holding that forum selection clauses must be "fundamentally fair." Aral applied this principle to the arbitration clause requiring a California consumer to travel to Georgia to satisfy a minor monetary claim. "Forum selection clauses that discourage legitimate claims by imposing unreasonable geographical barriers is unenforceable under ....California law"; Aral, @13736.
In reaching this conclusion, the court relied on the Restatement of Laws suggesting a choice of law rule, not forum selection.
The decision also fails to mention the option of severing the arbitration clause (Bolter v. Sup. Ct., 87 Cal.App.4th 900 (2001).
Sat Dec 03, 2005
Arbitration Awards: Res judicata affect
Litigation doctrines have inevitably intruded into arbitration in determining whether courts should enforce arbitration clauses. Several years ago, the California Supreme Court decided Vandenberg v. Sup. Ct., 21 Cal.4th 815 (1999), a decision refusing to assign collateral estoppel effect to an arbitration award in a subsequent proceeding between non mutual parties. But the Vandenberg court left open the res judicata effect of arbitration awards. Resolution of this issue involves interpreting a California statute authorizing courts to accord the same force and effect to an arbitration award as a civil judgment; CCP 1287.4.
Richard B. LeVine, Inc. v. Higashi, 131 Cal.App.4th 566 (2005) addressed res judicata impact of a civil action filed against a third party uninvolved in a prior arbitration and not named in the award. The Levine court explained that third party liability, if any, was derivative of the party exonerated in the prior arbitration, and the award was entitled to res judicata effect in litigation. Absent the issue of derivative liability, the impact of res judicata on non mutual parties to a prior arbitration award remains unresolved.
Fri Dec 02, 2005
Arbitration: res judicata
Litigation doctrines have inevitably intruded into arbitration in determining whether courts should enforce arbitration clauses. Several years ago, the California Supreme Court decided Vandenberg v. Sup. Ct., 21 Cal.4th 815 (1999), a decision refusing to assign collateral estoppel effect to an arbitration award in a subsequent proceeding between non mutual parties. But the Vandenberg court left open the res judicata effect of arbitration awards. Resolution of this issue involves interpreting a California statute authorizing courts to accord the same force and effect to an arbitration award as a civil judgment; CCP 1287.4.
Richard B. LeVine, Inc. v. Higashi, 131 Cal.App.4th 566 (2005) addressed res judicata impact on a civil action filed subsequent to an arbitration award against a third party uninvolved in a prior arbitration. The Levine court explained that third party liability, if any, was derivative of the party exonerated in the prior arbitration, and the award was entitled to res judicata effect in litigation. Absent the issue of derivative liability, the impact of res judicata on non mutual parties to a prior arbitration award remains unresolved.
Thu Dec 01, 2005
Non Signatories Join Arbitration
Third parties are frequently involved in the context of non signatories to a contract attempting to enforce an arbitration clause against signatories. Unlike Cronus Investments, Inc. v. Concierge Services, Inc., 35 Cal.App.4th 376 (2005), a case involving parties who wanted to sever non signators, the latter can request joinder as participants to an extant arbitration clause.
As a general rule, a court cannot compel arbitration of a party not signatory to a contract containing an arbitration clause. Yet several theories allow a non signatory to enforce a contract against a signatory: incorporation by reference to other documents; assumption of obligations; agency; veil-piercing alter ago; equitable estoppel; Alliance Title Co., Inc. v. Boucher, 131 Cal.App.4th 262 (2005); Slaught v. Bencomo Roofing Co., 25 Cal.App.4th 744 (1994).
Participation in an arbitration by non signatories is not an issue of contract validity or formation and no one contends grounds exist for revocation of the contract; CCP 1282. But a non signatory can request joinder at the hearing on a petition to compel arbitration, or, unilaterally seek joinder from the court. Although not technically an issue of contract validity or formation, the doctrine of arbitrability permits the court to identify and join parties to an arbitration contingent on their legal relationship with the arbitrating parties.
Alliance Title provides a rich source of research on this topic.