Selected Developments in Business Law — California Law of Contracts

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the April 2023 update to California Law of Contracts.  References are to the book’s section numbers.  The most significant legal developments since the last update include developments in such important topic areas as contract formation and interpretation, unconscionability, arbitration, enforcement, and breach of contract. 

California Law of Contracts

April 2023 Update

For an interesting history of the early development of California law, including the Civil Code, see Tufeld Corp. v Beverly Hills Gateway, L.P. (2022) 86 CA5th 12. See §1.5.

Contract Formation

In Rogers v Roseville SH, LLC (2022) 75 CA5th 1065, 1075, the court found that there was insufficient evidence to establish that the son of a resident at an elder care facility had actual or ostensible authority to bind the resident to an arbitration agreement. Although the son signed the arbitration agreement as the resident’s “representative,” that term was not defined in the residency agreement or the arbitration agreement, and the signature blocks in the residency agreement and arbitration agreement did not identify the son as the resident’s agent. Moreover, the son averred that the resident did not direct him to sign the admission documents and never told him that he had the authority to sign any medical document or arbitration agreement, and there was no evidence that the resident was aware that his son had signed an arbitration agreement. See §§2.30, 9.41A.

Under CC §1568.5, a minor’s representation that their parent or legal guardian has consented to the contract will not be deemed to be consent for purposes of contract formation. In enacting CC §1568.5, the legislature was concerned that companies wishing to obtain consent to the terms and conditions of various internet services would often seek consent passively, through the minor child of a parent or guardian, and wanted to prevent contract formation in that manner. See §3.7.

In Fettig v Hilton Garden Inns Mgmt. (2022) 78 CA5th 264, 267–68, the court held that if a party’s consent is induced by a third party, “the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction'” (quoting Restatement (Second) of Contracts §175 (1981)). The court explained that “duress by a third person cannot void a contract when the other contracting party did not know about the duress and relied in good faith.” 78 CA5th at 265. See §3.21.

Tufeld Corp. v Beverly Hills Gateway, L.P. (2022) 86 CA5th 12 involved a commercial lease with a term longer than 99 years. The court held that the lease was illegal and void to the extent that it exceeded 99 years, and severed the void portion. The court’s opinion includes a helpful discussion of the distinction between void and voidable contracts—in general, contractual provisions that are prohibited by statute are void. However, there is an exception if the statute is not for the benefit of the public at large or if the public benefit is only incidental. An example is the Statute of Frauds. Under this so-called private benefit exception, the contract provision is voidable but not void. See §3.39.

An insured’s assignment of both the underinsured motorist and the medical payments benefits under an automobile policy to a hospital association as payment for emergency care in lieu of or in addition to the payments that health insurers would provide was contrary to public policy and unenforceable. Dameron Hosp. Ass’n v AAA N. Cal., Nev. & Utah Ins. Exch. (2022) 77 CA5th 971. See §3.40A.

As a general rule, California courts do not concern themselves with the adequacy of consideration. “PayPal’s provision of online payment services may be consideration for appellants’ assignment of interest on pooled funds even if PayPal also received additional payment for their services. It is not for the court to second guess the sufficiency of that consideration.” Chen v PayPal (2021) 61 CA5th 559, 577. See §3.43.

In Mendoza v Trans Valley Transp. (2022) 75 CA5th 748, 788–91, the court found that a former employee did not assent to arbitration of his wage-and-hour claims by working for his former employer after receiving a copy of an employee handbook that contained an arbitration policy. The parties did not enter into an implied-in-fact agreement to arbitrate when (1) the handbook did not expressly address the effect of a failure to execute the arbitration policy or provide that on commencing employment, the former employee was deemed to have consented to arbitration; (2) the handbook, and the forms signed by the former employee acknowledging receipt of the handbook, declared that they (a) did not create any binding obligations, (b) were designed for quick reference, and (c) provided general information; and (3) acknowledgment forms did not mention arbitration policy. See §§3.51, 4.31, 9.41A.

In Munoz v Patel (2022) 81 CA5th 761, 772 (citations omitted), the court stated the rule that “[p]reliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement.” See §4.16.

A “click-wrap” agreement is a contract formed by a user’s action of clicking on a button or icon on a web page, or a screen launched as part of the installation of a software program on the user’s computer, to indicate acceptance of contract terms. Click-wrap agreements are more accurately referred to as “click-through” or “click-to-accept” agreements and are now ubiquitous in online retail sales transactions. See Berman v Freedom Fin. Network, LLC (9th Cir 2022) 30 F4th 849, 856; Sifuentes v Dropbox, Inc. (ND Cal, June 29, 2022, No. 20–cv–07908–HSG) 2022 US Dist Lexis 125273 (plaintiff accepted Dropbox’s 2011 terms of service by clicking “I agree” box). See §4.63.

Website design is a crucial issue that will generally determine the enforceability of click-wrap agreements. In Sellers v JustAnswer LLC (2021) 73 CA5th 444, the court denied a petition to compel arbitration because notices on the defendant’s website were not sufficiently clear and conspicuous. See also Berman v Freedom Fin. Network, LLC, supra (design and content of website did not adequately call to plaintiffs’ attention either existence of terms and conditions or fact that plaintiffs agreed to be bound by those terms by clicking on “continue” button; enforceable agreement to arbitrate was never formed). See §§4.65–4.66.

In Sifuentes v Dropbox, Inc., supra, the court found that the plaintiff’s continued use of the defendant’s service was irrelevant to the question of whether the changes to the defendant’s terms of service were enforceable. The court found that there was no evidence that the plaintiff had actual or inquiry notice of the changed terms. See §4.66.

Contract Interpretation, Unconscionability

In JJD-HOV Elk Grove, LLC v Jo-Ann Stores, LLC (2022) 80 CA5th 409, 423, the court stated that the general rule that a court will not alter a contract or make a new contract for the parties applies “even if a contract gives one party what might appear to be an unfair windfall.” See §5.8.

In Ramirez v Charter Communications (2022) 75 CA5th 365, 387, the court found that the arbitration agreement at issue was permeated with many unconscionable terms, and thus not severable. The agreement was an adhesion contract, inasmuch as it was a mandatory condition of employment. It was substantively unconscionable based on (1) its restriction on the statute of limitations for claims under the California Fair Employment and Housing Act (FEHA) (Govt C §§12900–12996), (2) a provision granting the prevailing party any remedy (including attorney fees) available under applicable law, (3) a separate provision granting attorney fees in connection with a successful motion to compel arbitration, and (4) a limitation on the number of depositions. See §§5.71, 5.74, 5.75, 5.77.

In Mills v Facility Solutions Group, Inc. (2022) 84 CA5th 1035, the court found that the arbitration agreement at issue was procedurally unconscionable; it was in a small font and was difficult to read. The court also held that an employer’s arbitration agreement was substantively unconscionable; it required the employee to pay for filing, postponement, and attorney fees and costs for some claims absent bad faith, contrary to the Labor Code, lacked adequate discovery, conflicted with CCP §1281.12, and waived a representative Private Attorneys General Act of 2004 (PAGA) (Lab C §§2698–2699.5) claim. See §§5.76, 5.77.

In Nelson v Dual Diagnosis Treatment Ctr., Inc. (2022) 77 CA5th 643, 662, the court held that an agreement between a residential treatment facility and a psychiatric patient was procedurally unconscionable; it was presented to the patient experiencing a psychotic episode on a take-it-or-leave-it basis, and referenced American Arbitration Association rules that were contrary to the agreement’s express terms. The agreement agreement was also substantively unconscionable; it required the patient’s unilateral release of claims for the company’s negligence, and its reimbursement and attorney fee provision made the patient the financial guarantor in any dispute arising from his presence at the facility. See §§5.76, 5.77, 9.44A.

In Nunez v Cycad Mgmt. (2022) 77 CA5th 276, the court held that an employer’s failure to provide a Spanish-speaking employee with a Spanish translation of the arbitration agreement or an arbitration fee schedule demonstrated oppression and surprise amounting to procedural unconscionability; the employer knew the employee was not proficient in English, yet did not explain the arbitration provision in Spanish or provide a translation, and did not allow the employee time to review, ask questions, or have the agreement translated. The court also held that the arbitration agreement was substantively unconscionable; it allowed the arbitrator to shift all attorney fees and costs to the employee and severely limited discovery. See §§5.76–5.77.

In George v eBay, Inc. (2021) 71 CA5th 620, 631, the court ruled that an allegation by on-line sellers that their user contract with the operator of an e-commerce website was an adhesion contract offered on a take-it-or-leave-it basis was insufficient to show procedural unconscionability; the sellers did not allege that they had no alternatives, e.g., other online marketplaces through which to sell their products. The court further found that a provision of a contract between the sellers and eBay for “final value fees” to be payable by the sellers for transactions that were refunded as a result of buyers initiating a dispute resolution process did not render the contract substantively unconscionable; the fees legitimately incentivized the sellers to resolve disputes informally with buyers and thus benefited all users of the website. Finally, eBay’s policy of deleting duplicate listings of the same item and charging sellers an insertion fee for placing a duplicate listing was not substantively unconscionable. See §§5.76, 5.77.

In Chen v PayPal (2021) 61 CA5th 559, 581–82, the court held that provisions in a contract between an online financial services provider and users of an online marketplace that (1) allowed the provider to retain any interest earned on funds attributable to users while those funds were maintained in a pooled account and (2) allowed buyers 180 days in which to dispute purchases on certain grounds were not substantively unconscionable. See §5.77.

If the court finds that unconscionable provisions have tainted other sections of the contract, it may deny enforcement of the entire contract. See, e.g., Mills v Facility Solutions Group, Inc. (2022) 84 CA5th 1035 (pervasive unconscionability; severance denied). See §5.79.

Choice of Law

Any effort to import the laws of a different state into a contract to enforce a noncompete clause may not succeed. In Nuvasive, Inc. v Miles (Del Ch, Aug. 26, 2019, No. 2017–0720–SG) 2019 Del Ch Lexis 325, an employment contract included a choice of law provision that selected Delaware law to govern nonsolicitation and noncompete covenants. The court held that the covenants were unenforceable because Delaware’s interest in freedom of contract was outweighed by California’s interest in overseeing the conditions of employment relationships in that state by (among other things) prohibiting the enforcement of noncompete clauses. See §6.38.

Covid-19 and Force Majeure

In NetOne, Inc. v Panache Destination Mgmt. (Oct. 28, 2020, No. 20–cv–00150–DKW–WRP) 2020 US Dist Lexis 201129, NetOne planned to sponsor an event for 500 people in Hawaii in late March 2020. Panache agreed to provide services for the event, and NetOne made deposits of over $150,000 to Panache. NetOne cancelled the event in response to public health guidance from the Hawaii Governor, and when Panache refused to return its deposits, NetOne brought suit, arguing that Panache’s refusal to return the deposits violated the force majeure clause in their agreement. The district court granted Panache’s motion for judgment on the pleadings, holding there was nothing in the contract providing for the return of the deposits in the event of a force majeure. See §8.32.

Arbitration

In Aronow v Superior Court (2022) 76 CA5th 865, the court held that, in California, when a litigant in a judicial proceeding has qualified for in forma pauperis status, a court may not compel the indigent party to pursue an expensive private alternative proceeding that the litigant cannot afford and that, in effect, negates the benefit and purpose of the party’s in forma pauperis status. Although courts may generally outsource to private arbitrators all or part of the court’s judicial duties with respect to litigants who can afford private arbitration services, “a court may not engage in such outsourcing in the case of in forma pauperis litigants when the practical effect is to deprive such litigants of the equal access to justice that in forma pauperis status was intended to afford.” 76 CA5th at 880 (citation omitted). See §9.38.

Because only the slightest factual nexus to interstate commerce will bring a transaction within the FAA, an arbitration agreement between drivers and their employer may “involve” interstate commerce, thus triggering application of the FAA (see §9.39), but not trigger the transportation worker exemption because the driver was not “engaged” in interstate commerce. That exemption applies only to those workers actually engaged in the movement of goods in interstate commerce. Mendoza v Trans Valley Transp. (2022) 75 CA5th 748, 762–63 (parties conceded plaintiffs were transportation workers). See, e.g., Evenskaas v California Transit, Inc. (2022) 81 CA5th 285, 296 (transportation worker exemption inapplicable to paratransit drivers’ contract). See §9.39A.

Effective March 3, 2022, under 9 USC §§401–402, no predispute arbitration agreement or predispute joint-action waiver is valid or enforceable with respect to cases involving sexual harassment or sexual assault. Moreover, the validity and enforceability of the agreement or waiver are to be determined by a court, not by an arbitrator. 9 USC §402(b). See §9.40D.

In Kokubu v Sudo (2022) 76 CA5th 1074, 1084–91, the court found that the moving party’s right to compel arbitration had been waived when it delayed 2 years in seeking arbitration, invoked “litigation machinery,” and deprived the opposing parties of the benefits of arbitration by engaging in extensive litigation activity, including case management conferences, motion filings, seeking ex parte relief, and pursuing discovery. See §9.46.

In Morgan v Sundance (2022) ___ US ___, 142 S Ct 1708, 1713–14, the Supreme Court held that under the FAA, federal courts may not condition a waiver of the right to arbitration on a showing of prejudice, stating: “The FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules.… [9 USC §6] instructs that prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.” See §9.46.

In Viking River Cruises v Moriana (2022) ___ US ___, 142 S Ct 1906, 1924, the U.S. Supreme Court ruled that PAGA claims could be divided into individual and nonindividual claims in an arbitration agreement and confirmed that waivers of wholly representative PAGA claims were unenforceable. But in Gavriiloglou v Prime Healthcare Mgmt., Inc. (2022) 83 CA5th 595, 605, the California court of appeal clarified that “[w]hat the Supreme Court called, as shorthand, an ‘individual PAGA claim’ is not actually a PAGA claim at all. It would exist even if PAGA had never been enacted. It is what we are calling, more accurately, an individual Labor Code claim.” See §9.47B.

In general, only the signatory parties to an arbitration agreement may enforce it. Pacific Fertility Cases (2022) 85 CA5th 887. In Pacific Fertility Cases, finding that equitable estoppel did not apply, the court ruled that there are two situations in which equitable estoppel may apply in the context of arbitration: First, when a signatory to an arbitration clause must rely on the terms of the underlying agreement to assert claims against the nonsignatory; and second, when the claims against the nonsignatory are founded on or inextricably connected with the obligations imposed by the underlying agreement. See §§9.50, 9.50B.

In Starr v Mayhew (2022) 83 CA5th 842, 850, the court emphasized that the standard of any judicial review of an arbitration award is “highly deferential.” In the court’s view, the fact that the parties have chosen an arbitral forum means that the parties expect finality and the arbitrator’s decision should end the dispute. See §9.52.

In Honchariw v FJM Private Mortgage Fund, LLC (2022) 83 CA5th 893, the court found that an arbitrator’s decision enforcing an unreasonable liquidated damages provision in a mortgage contract exceeded the arbitrator’s powers, and thus was reviewable by the court. See §9.52B.

In Lewis v Simplified Labor Staffing Solutions, Inc. (2022) 85 CA5th 983, the court held that, under a predispute agreement to arbitrate all claims arising from the employment relationship, arbitration had to be compelled as to the PAGA claims because the FAA, construed by the U.S. Supreme Court in Viking River Cruises to be applicable to PAGA claims, preempted California case law that had found predispute agreements to arbitrate PAGA claims unenforceable based on the absence of state consent. In the Lewis case, the question whether nonindividual PAGA claims had to be arbitrated was a matter to be determined by the arbitrator because the parties’ agreement incorporated the rules of the specified arbitration provider, which made clear that a determination regarding the scope of the arbitration clause was an issue for the arbitrator to address. See §9.47B.

Enforcement Issues; Breach of Contract

Effective December 7, 2022, the federal Speak Out Act (Pub L 117–224, 136 Stat 22904), codified at 42 USC §§19401–19404, prohibits judicial enforcement of predispute nondisclosure and nondisparagement contract clauses in disputes relating to claims of sexual assault or sexual harassment. The Act applies only to nondisclosure and nondisparagement clauses signed before a dispute arises and makes such clauses unenforceable in sexual assault or sexual harassment disputes when the conduct is alleged to have violated federal, state, or tribal law. See §9.29A.

In Moore v Centrelake Med. Group, Inc. (2022) 83 CA5th 515, the plaintiff’s personally identifiable information had been stolen in a data breach. The court held that the plaintiffs had adequately pleaded general damages under the benefit-of-the-bargain theory because the plaintiff alleged the breach of a contractually binding promise to keep the data secure. Benefit-of-the-bargain damages compensate for a plaintiff’s lost expectation interest. See §§10.3, 10.8.

In JJD-HOV Elk Grove, LLC v Jo-Ann Stores, LLC (2022) 80 CA5th 409, 422–23, the court found that a cotenancy provision in a commercial lease, which allowed the tenant to pay substitute rent if the shopping center did not have either three anchor tenants or 60 percent of space leased, was not a liquidated damages provision or a forfeiture. See §10.42.