Archives: August 2007
Thu Aug 30, 2007
Remedies in Arbitration Clauses
Most federal and state courts have recognized the doctrine of "unconscionable" arbitration clauses in contracts. Further judicial refinement includes "procedural" unconscionability and "substantive" unconscionability." Both these subjects in federal and state courts are discussed in the Text.
The courts have held that consumer contracts, employment contracts, franchise contracts, and residential real estate contracts are unconscionable and the arbitration clause unenforceable due to disproportionate bargaining power between the parties. But the Third Circuit reviewed an arbitration clause in a lender-borrower residential real estate contract allocating to the former a variety of legal,equitable, and provisional remedies not available to the borrower.
The court said "...[T]here is a facially apparent business justification for [these remedies] as the safeguards thereby preserved assure regularity and consistency for the benefit of both lender and borrower, and accordingly, there are sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law."
The court warned, however, that the borrower could pursue the merits of his allegations of predatory and deceptive lending practices in arbitration.
www.ArbitrationAdr.com
See, Text, Ch. IV-G-2-a: Unconscionable Clauses
Tue Aug 21, 2007
Classwide Arbitration (Ninth Circuit)
The Ninth Circuit has concurred with the California Supreme Court decision in Discover Bank v. Sup.Ct., 36 Cal.4th 148 (2005) in refusing to enforce class arbitration waiver clauses in consumer contracts. The panel rejected the argument that a consumer can select from “market place alternatives” to avoid procedural unconscionability of an adhesive contract.
The plaintiff filed a class action in state court, alleging multiple counts of unfair business practices, violation of consumer protection laws and fraud, but the defendant removed to federal court and petitioned for arbitration of individual claims. The Ninth Circuit reversed a District Court decision upholding the class arbitration waiver. The panel invoked the standard tests for substantive and procedural unconscionability in analyzing the arbitration clause written by a telephone service company precluding any customer from consolidating multiple comparable claims in a class or representative action. The court held the clause unenforceable on both grounds of unconscionability.
The panel tracked the California Supreme court decision in Discover Bank but the Ninth Circuit had already signaled its disapproval of class arbitration waivers in Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) and credit card transactions in Ting v. AT & T , 319 F.3d 1126 (9th Cir.2003).
The Ninth Circuit panel also responded to the defendant's argument citing the FAA and its pre emption doctrine forbidding states from foreclosing arbitration on state law grounds solely applicable to arbitration. The court discussed express preemption and conflict preemption, concluding neither doctrine applies.
Aside from the holdings of the case, the court confirms the value of class arbitration and ratifies the doctrine itself, encouraging arbitrators to fashion creative remedies in this language: “As consumers, corporations, lawyers and arbitration associations become more familiar with class arbitration, they may increasingly embrace the less formal and more flexible procedures and remedies that make arbitration desirable in the first place.”
This case is also valuable as a resource in discussing class arbitration waivers in California cases decided subsequent to Discover Bank.
See, www.ArbitrationAdr.com Ch. IV-H-8: Class Actions & Classwide Arbitration. For a review of this subject under California law, See Ch. XVII-B-2.
Fri Aug 17, 2007
Arbitration & Trade Secrets
According to Fitz v. NCR Corp. 118 Cal.App.4th 702 (2004), forbidding employee disclosure of trade secrets in a contractual arbitration clause should not be exempted from mutuality of remedy because in reality it is “a desire [by the employer]to maximize its advantage based on the perceived superiority of the judicial forum and is therefore unconscionable.”
A party with superior bargaining power may provide "extra protection" for itself in the arbitration agreement if "business realities" create a special need for such an advantage but that exception must be explained in the contract itself. In a recent case decided by an unpublished opinon of the California Court of Appeal, this rationale is confirmed in trade secret clauses for the reasons stated above.
See, www. ArbitrationADR.com; Text: Ch. XVII-C-6-a ; Mutuality of Remedy
NASD Arbitration in State Courts
Self Regulatory Organizations (SLOs) such as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers, Inc. (NASD) provide arbitration panels to resolve disputes between brokers and customers under the auspices of the FAA or their own individual local rules. Interpretation of NASD rules and the finality of the arbitrator’s decisions are questions of law; Peo. v. Lockyer Shamrock Foods Co., 24 Cal.4th 415 (2000). To the extent California courts rely on SEC’s interpretation of NASD rules, they give deference to the agency’s interpretation; Krull v. S.E.C., 248 F.3d 907 (9th Cir. 2001).
See, www.ArbitrationAdr.com for text; Ch. I-N: Trade or Industry Regulation
More...
Wed Aug 15, 2007
Summary of Three Cases Decided Prior to June 1, 2007
Arbitration Alerts:
The Supreme Court has denied cert. in a Fifth Circuit case of non-disclosure by the arbitrator; See, Text, Ch. V-D-2.
The Cal. Court of Appeal has also affirmed a trial court denial of an order denying a motion to disclose; See, Text, Ch. XIX-A-1
The Supreme Court has granted cert. to determine whether the parties can expand FAA rules to provide grounds for additional judicial review of arbitration awards; Hall St. Assocs. LLC v. Mattel, Inc., 196 Fed.Appx. 474 (9th Cir. 2006). See, Text, Ch. VI-A-1.
A California Court of Appeal, in distinguishing commercial contracts from consumer contracts, has rejected the availability of “market alternatives” to consumers as dispositive in resolving unconscionability of contracts. The dissent is an excellent rebuttal. See, Text, Ch. XVII-C-5-b.
Fri Aug 03, 2007
Confidentiality & Mediation
Mediators conduct innumerable meditations successfully, without incident and to the mutual satisfaction of the participants. But sometimes a mediation goes wrong as illustrated by a recent California appellate case.
Plaintiff filed a civil action alleging his attorney misinformed him of the settlement demand from the other party during the course of a prior mediation in a related case. The evidence, gleaned from mediation briefs and e mails contemporaneous with the mediation produced during discovery in the course of the legal malpractice action against his attorney, tended to corroborate that allegation. The trial court refused to exclude evidence of communications in the mediation briefs and e-mails reflecting allegedly inconsistent statements by plaintiff’s lawyer (now the defendant in the malpractice case).
Seeking mandate, the defendant sought reversal of the trial court order on the ground the plaintiff’s evidence was derived from communications occurring during the mediation and subject to the confidentiality provisions of the Ev. Code. The Court of Appeal, citing two previous California Supreme Court cases, held that Ev. Code 1119 imparts confidentiality to written or oral communications prepared “for the purpose of, in the course of, or pursuant to a mediation or mediation consultation” in addition to those communications occurring during the course of a mediation.
The Court of Appeal cites several other California cases interpreting Ev. Code 1119 precluding evidence of misconduct occurring during a mediation as well as any documents confirming criminal conduct. “Confidentiality” of communications is not confined to the parties or counsel. A mediator cannot report misconduct if the evidence emerges from mediation proceedings (other than a crime); Ev. Code 703.5.
Excluding all evidence of communications in mediation does not occur automatically. Any facts obtained prior to-and independent of- the mediation and otherwise admissible are not insulated from disclosure merely because counsel inserted those facts in a brief.
The central issue of disclosure in any mediation becomes whether the communications, written or oral “occurred or were prepared for the purpose of, in the course of, or pursuant to the mediation.” In the instant case, the appellate court excluded the mediation briefs, obviously prepared for the purpose of mediation, and the e-mails discussing the forthcoming mediation.
As a consequence of its ruling, the appellate court notes the probable inability of the plaintiff to prove his legal malpractice case. “Confidentiality” of communications is the necessary price paid for mediation to encourage candor and privacy among the participants, but the alterative of disclosure is equally perilous. The court notes the potential injustice of strict rules on confidentiality and encourages the legislature to revisit the issue.
See, www.ArbitrationAdr.com Ch. XI-B-2-a
Arbitration & Alter Ego
The recurring issue of whether a court can join non-signatory parties in an arbitration with a party who is signatory to an arbitration clause in a contract continues to trouble the judiciary.
The plaintiff, alleging breach of contract and statutory violations of the Corporations Code, sued a corporate defendant signatory to an arbitration clause and two non-signatory individual defendants in their capacity as alter egos of the corporation. Both individual defendants sought to arbitrate citing the arbitration clause indisputably enforceable between plaintiff and the corporate defendant.
The California Court of Appeal agreed it cannot compel arbitration of a party who has not signed an arbitration agreement but noted that other courts, state and federal, have crafted exceptions. Most commonly, a non-signatory sued as an agent of a signatory can enforce an arbitration clause on the grounds of an agency-principal relationship; County of Contra Costa v. Kaiser Foundation Health Plan, Inc., 47 Cal.App.4th 234 (1996). Or, a non-signatory can be compelled to arbitrate despite the absence of a signature if he is an agent of a signatory; Harris v. Sup.Ct., 188 Cal.App.3d 475 (1986).
The court commented that an agent acts on behalf of a corporation but an alter ego is the corporation. Accordingly, on the breach of contract claim, the court can order joinder of non-signatories presumably under a theory of derivative liability comparable to agency. But at the pleading stage, there is no resolution of whether the individual defendants are, in fact, alter egos of the corporation. At the arbitration hearing, the Claimant bears the burden of proof to establish alter ego, but the arbitrator may lack jurisdiction to issue an award on this issue; Jonesfilm v. Hoffman, 2006 WL 1174178 (Cal.App.)[Non.Cite.]. According to Jonesfilm, the arbitrator can only find facts for the judge to consider on post arbitration proceedings-contingent on the outcome of the arbitration.
That said, the causes of action alleging violation of the Corporations Code are not within the ambit of agency or derivative liability. The court cited the 2d Circuit decision in Thomson-CSF, S.A, v. AAA, 64 F.3d 773 (2d Cir. 1995) holding that the court can compel non-signatories to join as parties under five theories: incorporation by reference in another contract to which it is signatory; assumption (by conduct); agency; alter ego; estoppel. The California Court of Appeal adopted these exceptions, decided under the FAA, in Boucher v. Alliance Title Co., Inc., 127 Cal.App.4th 262 (2005) and these categories are also applicable to joinder in state court said the court.
Alternatively, if the plaintiff relies on the terms of a contract containing an arbitration clause and objects to a non-signatory joining the arbitration, the court may assert equitable estoppel on the theory a party seeking the benefits of a contract must bear the burdens. If the claims between the signatory and non-signatory are “intertwined” with the contract, the court can estop plaintiff from objecting to their joinder in arbitration; Boucher; Turtle Ridge Media Grp., Inc. v. Pacific Bell Directory, 140 Cal.App.4th 828 (2006).
See, Text, www.ArbitrationAdr.com Ch. XVI-F-5-g: Non-Signatories & Signatory Parties