Archives: July 2007
Mon Jul 30, 2007
Arbitration & Employment Contracts
Arbitration Clauses in Employment Contracts
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.
See, www.ArbitrationADR.com, Text, Ch. IV-G-a : Enforcing or Revoking Arbitration Clauses
Arbitrator Refuses to Postpone Hearing
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 statutes 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, www.ArbitrationAdr.com Text, Ch. XXI-F-8-d: Grounds to Vacate Award
More...
Class Actions in Federal Court
Class Actions in Federal Court Note: This
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, www.ArbitrationAdr.com, Text, Ch. XVII-C-5. reviewing federal and state statutes regulating arbitration in other contexts.
Mon Jul 23, 2007
Arbitration & Mandamus
The Ninth Circuit has invoked mandamus to reverse a District Court order granting a motion to compel arbitration and an order staying the underlying action. These orders are non-appealable under the FAA; 9 U.S.C.16 (b). Despite that specific statutory prohibition, coupled with the FAA provision allowing appeals only from orders denying arbitration and refusing to stay litigation (9 U.S.C. 16 (a) (1), the Ninth Circuit cited the basis for issuing mandamus lies in the All Writs Act; 28 U.S.C. 1651: “The Supreme Court and all courts established by an Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” Mandamus is within the scope of the Act.
The Ninth Circuit panel, citing its own previous interpretation of 28 U.S.C. 1651 in Bauman v. U.S. District Court, 557 F.2d 650 (9th Cir. 1977), quoted language from a Supreme Court case that “only exceptional circumstances amounting to a judicial ‘usurpation of power’ will justify this extraordinary remedy [mandamus].” The Ninth Circuit panel then outlines appellate guidance for invoking the writ, identifying five judicially created benchmarks, and concludes all are met.
The principle and indispensable benchmark to issue mandamus requires an appellate court to find a district court order “clearly erroneous as a matter of law.” (Of course, that finding will justify any breach of contract.). The court panel says the underlying action (a consumer class action) is procedurally unconscionable despite petitioner’s opportunity for meaningful alternative (telephone) service. The Ninth Circuit had previously held, in an extremely controversial decision, that the option for alternative service in consumer arbitration does not foreclose a finding of procedural arbitrability; Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006).
The contract in this case econtained a New York choice of law clause, but New York law is not in accord with the Nagrampa decision (Ranieri v. Bell Atl. Mobile, 759 N.Y.S.2d 448 (App. Div. 2003), causing the reader to wonder about the “clearly erroneous as a matter of law” benchmark. But California choice of law holds the availability of alternative service to consumers is irrelevant, or minimal, in determining procedural arbitrability. California law trumps, said the court.
Sat Jul 21, 2007
Party Arbitrators
In some cases, parties select non-neutral arbitrators aligned with their side in the arbitration. Typically, these arbitrators select a third party neutral arbitrator. The Eighth Circuit confirmed the right of parties to select a method of resolution that incorporates that provision. The non- prevailing party in an arbitration cannot move to vacate an award under FAA 10 (a) (2) on grounds of "evident partiality" of the party arbitrator.
There is no requirement that party arbitrators submit disclosures and any citation to the leading Supreme Court case on disclosure is inapposite. Commonwealth Coatings Corp. v. Continental Cas. Co., 393 U.S. 145 (1968) involves non-disclosure of a neutal arbitrator.
Fri Jul 13, 2007
Arbitration of Non-Signatories
Although the courts have repeatedly enforced the right of parties to compel arbitration pursuant to a dispute resolution provision included in their written contract, that policy does not warrant including third parties who have not signed the agreement; Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992). Nonetheless exceptions exist, as discussed by the Court of Appeal in a recent case involving a deceased actor.
All non-signatories in cases compelled by the courts to arbitrate are grounded on the basis of whether a benefit was conferred on them as a result of the contract, or a “pre existing relationship between the signatory and non-signatory exists making it equitable to compel the non-signatory to be bound by the arbitration agreement;” Co. of Contra Costa v. Kaiser Foundation Health Plan, Inc., 47 Cal.App.4th 237 (1996); NORCAL Mutual Ins. Co. v. Newton, 84 Cal.App. 4th 64 (2000). In most cases this “benefit” or “relationship” includes agents, third party beneficiaries, fiduciaries, and partners.
Third party beneficiary status is determined by interpreting the language of CC 1559. And assignees who received benefits from the assignor qualify as a third party beneficiary; Recorded Picture Co. Ltd. v. Nelson Entertainment, Inc., 53 Cal.App.4th 350 (1997).
The court also notes that determination of whether an arbitration clause is operative against a non-signatory is a question of “substantive arbitrability” and an issue for the court, citing Boys Club.
The Court of Appeal cites several categories of cases involving non-signatories and is a valuable resource for counsel.
See, ArbitrationAdr.com. Ch. XVI-F-5-f;g
Thu Jul 05, 2007
Arbitrator Authority
Moncharsh v. Heily & Blase, 3 Cal.4th1 (1992) states well-established California and federal law on vacatur. Vacating an award on grounds the arbitrators "exceeded their powers” by failing to apply the law, misapplying the law, or committing factual error is not a ground for appeal; CCP 1286.2 (a) (4); 9 U.S.C.10 (a) (4). But in Baize v. Eastridge Companies,142 Cal.App.4th 293 (2006) the court raised a serious question-without answering it-that Moncharsh nevertheless permitted the parties to limit and circumscribe the powers of an arbitrator in their agreement. The question is: to what extent?
In a recent California Court of Appeals case, the arbitration clause contained the following language: “In any arbitration proceeding arising under this Contract, the arbitrators shall not have the power to change, modify or alter any expressed condition, term or provision of this Contract or to grant an award which has such effect, and to that extent the scope of their authority is limited.”
Here is the contractual term in the arbitration clause: “This Warranty is in place of and lieu of all other warranties, . . . including warranties of merchantability and fitness of particular purpose and of any other obligations to the seller, which warranties . . . are specifically disclaimed, [and] seller shall not be liable for any loss, damages or injuries . . . arising from the use or inability to use said products or defective products.”
The arbitrator found in favor of the claimant on the merits (product defect) and held the warranty term “unconscionable,” a finding clearly correct, but his decision also “changed, modified and altered” the terms of the warranty. Is the arbitration clause enforceable?
The Court of Appeal finessed an answer to the question by finding the parties did submit the issue of unconscionability to the arbitrator, thereby implicitly agreeing to his resolution. Absent that finding, what should the court have done on a motion to vacate (or appeal) an award on grounds the arbitrator “exceeded his powers?”
The California Supreme Court will soon decide in two cases: Cable Connection, Inc. v. DIRECT TV, Inc., 143 Cal.App.4th 207 (2006) [Rev.Grtd.]; Gueyffier v. Ann Summers, Ltd, 144 Cal.App.4th 166 (2006) [Rev.Grtd.]. In Gueyffier the Court of Appeals held that failure of an arbitrator to comply with the express limitation of arbitral powers as reflected in the arbitration agreement constituted grounds for vacating the award [arbitration clause required notice of breach].
Two California cases have held arbitrators “exceeded their powers” in ignoring express limitations specified in the arbitration agreement; California Faculty Assn. v. Sup.Ct., 63 Cal.App.4th 935 (1998)[arbitrator failed to adhere to restrictions imposed by arbitration clause] and Bonshire v. Thompson, 52 Cal.App.4th 803 (1997) [arbitrator relied on extrinsic evidence prohibited by an integration clause].
A related issue: An arbitration clause in a contract required an arbitrator to . . . decide all issues submitted and shall set forth the legal principles supporting each part of the opinion.” In Pacific Gas & Electric Co. v. Sup. Ct., 15 Cal.App.4th 576 (1993) the court refused to enforce this clause.
www.ArbitrationAdr.com: Ch. XXI-F-8-c (Grounds to Vacate; Arbitrator Exceeded Powers)