Alternate Dispute Resolution Update

by

ALTERNATE DISPUTE RESOLUTION UPDATE

Written by Paul Dubow*

2022 might be dubbed the Arbitration Year of the Supreme Court. The United States Supreme Court issued five arbitration related decisions this year, the highest in over a decade.1 Conversely, the California Supreme Court, for the second consecutive year, did not issue an ADR related decision. The Ninth Circuit issued eighteen ADR related decisions and the Court of Appeal issued 50 decisions. None of the decisions decided by the three courts involved mediation. The total of 73 decisions exceeded the record 64 issued in 2021. A discussion of the five Supreme Court decisions and some significant intermediate appellate court decisions follows.

THE PRIVATE ATTORNEYS GENERAL ACT

Viking River Cruises, Inc. v. Moriana2 is the United States Supreme Court decision that most directly affected California jurisprudence. Viking argued that the holding in Iskanian v. CLS Transportation Los Angeles LLC,3 which barred arbitration of individual and representative actions alleging violation of the Private Attorney Generals Act4 was preempted by the Federal Arbitration Act.5 In Viking, Moriana filed an individual PAGA claim against Viking, her former employer, alleging a violation of the Labor Code and a representative PAGA claim on behalf of her fellow employees. Because she had signed an arbitration agreement with a class action waiver, Viking moved to dismiss the representative claim and compel arbitration of the individual claim. The trial court denied both motions and the Court of Appeal affirmed in an unpublished opinion, a result dictated by Iskanian. The California Supreme Court declined review, but the United States Supreme Court granted Viking’s writ of certiorari.

The court ruled that the FAA preempted Iskanian, but only to the extent that it barred the arbitration of Moriana’s individual claims. That was so because Iskanian allowed Moriana to abrogate an otherwise valid and enforceable arbitration agreement after the fact by the simple expedient of adding a representative PAGA claim to her complaint But the court, noting that it had previously held that "arbitration is poorly suited to the higher stakes of massive scale disputes,"6 affirmed the California Supreme Court’s holding that the class action waiver in

[Page 9]

Moriana’s agreement was invalid, because it resulted in a wholesale waiver of PAGA claims. Thus, the representative claim remained non-arbitrable Although the court found that class action waivers did not bar an employee from pursuing a representative PAGA claim, it ruled that Moriana could not be one of those employees. It stated that PAGA "provides no mechanism to enable a court to adjudicate nonindividual PAGA claims once an individual claim has been committed to a separate proceeding. Under PAGA’s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action. . . . When an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit."7 Consequently, Moriana lacked statutory standing to maintain her non-individual claims in court, and her remaining claims were dismissed.

The court cited Kim v. Reins International California, Inc.,8 when it held that California did not provide a "mechanism" to adjudicate non-individual claims once an individual proceeding was committed to a separate proceeding. But Kim provides such a "mechanism." In Kim, the plaintiff filed a PAGA lawsuit asserting individual and representative claims and then accepted a statutory offer to settle the individual claim. When he attempted to pursue the representative claim, the trial court granted the employer’s motion for summary adjudication, holding that Kim was no longer an "aggrieved employee." The Court of Appeal affirmed.9 The California Supreme Court reversed. It held that an "aggrieved employee" is someone "who was employed by the alleged violator" and "against whom one or more of the alleged violations was committed," and that the plaintiff satisfied these requirements.10

Federal courts, including the United States Supreme Court, are bound by a state court’s interpretation of state law that does not conflict with federal jurisprudence. If the holding in Kim is an interpretation of state law that does not conflict with federal jurisprudence, then it will be up to California courts to determine whether an employee can pursue a representative claim after the individual claim is referred to arbitration or otherwise resolved.11

The Courts of Appeal have issued five decisions involving PAGA following the publication of Viking, but none of them directly addressed the question of whether reference of the individual claim to arbitration (or any type of resolution of the individual claim) barred the employee from pursuing a representative claim. In Howitson v. Evans Hotels LLC12 and Gavriiloglou v. Prime Healthcare Management, Inc.,13 the courts did hold that an arbitrator’s ruling in an individual claim did not bar the employee from pursuing the representative claim, but the decisions were based on the doctrine of claim preclusion because the state was the real party in interest in the representative claim.14 In Mills v. Facility Solutions Group, Inc.,15 the court concluded it did not need to decide whether plaintiff would have had standing to pursue his representative PAGA claim in the trial court had his individual PAGA claim been ordered to arbitration because the only question before it was whether the arbitration agreement’s waiver of the representative PAGA claim was valid. The court in Navas v. Fresh Venture Foods, LLC,16 discussed Viking but did not reach the issue of the employee’s ability to file a representative claim because it found the arbitration agreement to be unconscionable. And in Lewis v. Simplified Labor Solutions, Inc.,17 the court held that it need not decide whether an arbitration agreement could require that representative PAGA claims be arbitrated because the arbitration agreement incorporated the Employment Arbitration Rules & Procedures of the American Arbitration Association.18 Rule 6a of the AAA Employment Rules provides that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement." The court determined that this provision clearly left to the arbitrator to determine whether the agreement to arbitrate extended to the representative PAGA claims.

[Page 10]

The question of whether a plaintiff is an "aggrieved employee" at the time of the event or at the time of filing should be resolved in 2023 when the California Supreme Court decides Adolph v. Uber Technologies, Inc.19

WAIVER OF ARBITRATION

The most significant of the five Supreme Court decisions might be Morgan v. Sundance, Inc.,20 because it abrogated one of the long-standing tenets of arbitration law, to wit, that to deny a motion to compel arbitration on grounds of waiver, a court must find that the opposing party was prejudiced by the proponent’s delay. In Morgan, the Eighth Circuit reversed a denial of a motion to compel arbitration on the ground of waiver, holding that the federal policy favoring arbitration required Morgan to establish that she was prejudiced by Sundance’s delay and that she had failed to do so.21 The Supreme Court reversed and remanded. It held that the FAA’s policy favoring arbitration did not authorize federal courts to invent special, arbitration-preferring procedural rules. The policy is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts. Accordingly, a court must hold a party to its arbitration contract just as the court would to any other kind. But a court may not devise novel rules to favor arbitration over litigation. It concluded that the federal policy is about treating arbitration contracts like all others, not about fostering arbitration.22

California law still requires a showing of prejudice where a party opposes a motion to compel arbitration on grounds of waiver. Indeed, just before Morgan was decided, the Court of Appeal ruled that a defendant’s delay did not bar it from compelling arbitration because plaintiff was not prejudiced by the delay. It stated that the prejudice requirement for a waiver defense recognizes "that California’s arbitration statutes reflect a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution and are intended to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing."23 Plaintiff’s petition for review was granted by the California Supreme Court and so we will find out in 2023 if the United States Supreme Court and California courts differ on whether the policy favoring arbitration requires a party to show prejudice when opposing a motion to compel arbitration on grounds of waiver. If the difference persists, then a showing of prejudice will be required when a waiver argument is raised in those cases where the FAA does not apply because the transaction underlying the dispute is in intrastate commerce or the agreement states that the California Arbitration Act applies.24

MOTIONS TO VACATE OR CONFIRM — FEDERAL JURISDICTION

In Badgerow v. Walters,25 Badgerow filed a motion in Louisiana state court to vacate an arbitration award in favor of Walters. Both Badgerow and Walters were Louisiana residents. Walters removed the case to federal court and moved to confirm under section 9 of the FAA, citing a federal question in the cause of action as the basis for federal jurisdiction Badgerow moved to remand the case on the ground that the district court did not have jurisdiction. The court denied the motion, citing Vaden v. Discover Bank,26 which involved a motion to compel arbitration under section 4 Badgerow’s petition for certiorari was granted and the Supreme Court reversed.

Under section 4, a party to an arbitration agreement may petition for an order to compel arbitration in a "United States district court which, save for [the arbitration] agreement, would have jurisdiction" over "the controversy between the parties." The phrase "save for [the arbitration] agreement’" indicates that the district court should assume the absence of the arbitration agreement and determine whether the court would have jurisdiction over the controversy between the parties. Sections 9 and 1027 do not have section 4’s "save for" clause. They do not instruct a court to imagine a world without an arbitration agreement, and to ask whether it would then have jurisdiction over the parties’

[Page 11]

dispute. Indeed, sections 9 and 10 do not mention the court’s subject matter jurisdiction at all. So, under ordinary principles of statutory construction, the look-through method for assessing jurisdiction did not apply. In this case, there was no diversity of citizenship and a motion to confirm or vacate an arbitration award is similar to a contract claim and does not involve a federal question.28

TRANSPORTATION WORKER EXEMPTION FROM ARBITRATION

In Southwest Airlines Co. v. Saxon,29 plaintiff, a ramp supervisor for Southwest who loaded and unloaded cargo to and from aircraft filed a class action against Southwest alleging failure to pay overtime wages. Plaintiff opposed Southwest’s motion to compel arbitration on the ground that she was a transportation worker and thus a beneficiary of the exemption from arbitration found in section 1 of the FAA. Southwest argued that the exemption did not apply because she was not engaged in interstate commerce. The district court granted the motion and the Seventh Circuit reversed.30 The United States Supreme Court granted certiorari and affirmed the Seventh Circuit. The court held that the section 1 exemption applies only to individuals who are actively "engaged in transportation" of those goods across borders via the channels of foreign or interstate commerce. Cargo loaders exhibit this central feature of a transportation worker because one who loads cargo on a plane bound for interstate transit is intimately involved with the transportation of that cargo.31

The CAA does not contain an exemption for transportation workers and so if the CAA applies to an arbitration agreement, a transportation worker will be bound by it. In Mendoza v. Trans Valley Transport,32 plaintiff was identified as an "interstate truck driver" when he acknowledged receiving the employee handbook, but the parties stipulated that the FAA did not apply and so the court decided the case based on California law.33

THIRD PARTY DISCOVERY-INTERNATIONAL ARBITRATION

ZF Automotive US Inc. v. Luxshare Ltd.34 involved two cases where one party requested a United States court to order discovery in arbitrations to be held in Europe. In each case, the party requesting discovery asserted that its request was authorized by 28 U.S.C. § 1782, which allows district courts to order production of documents "in a foreign or international tribunal." In each case, the lower court enforced the subpoena and the party opposing discovery argued that the arbitration panels were not "foreign or international tribunals." One case involved a dispute between ZF and Luxshare following a failed acquisition where the arbitration was to be conducted before DIS, a private German provider. The other dispute was filed by a Russian bank investor who alleged that the government of Lithuania had stolen assets from the bank following its bankruptcy. The arbitration was based on a treaty between Russia and Lithuania which gave the disputants a choice of four different panels. The disputants chose an ad hoc panel that would arbitrate pursuant to the rules of the United Nations Commission on International Trade Law (UNCITRAL).

The two disputes reached the United States Supreme Court, and its task was to define what a "foreign or international tribunal" was and whether the panels herein fell within that definition. The court concluded that neither panel was a foreign or international tribunal "Tribunal" is a word with potential governmental or sovereign connotations, so "foreign tribunal" more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation. And for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation. A tribunal is "international" when it involves or is of two or more nations, meaning that those nations have imbued the tribunal with official power to adjudicate disputes. So understood, "foreign tribunal" and "international tribunal" complement one another; the former is a tribunal imbued with governmental authority by

[Page 12]

one nation, and the latter is a tribunal imbued with governmental authority by multiple nations.35

The court then turned to whether the two panels fit this definition. In the case of the dispute involving ZF and Luxshare, it found that DIS was a private dispute resolution organization that operated under its own rules, just like other private arbitration organizations that operate under private arbitral rules. DIS therefore did not qualify as a governmental body.

The ad hoc arbitration panel at issue in the dispute involving Lithuania presented a harder question. A sovereign was on one side of the dispute, and the option to arbitrate was contained in an international treaty rather than a private contract. But neither Lithuania’s presence nor the treaty’s existence was dispositive because Russia and Lithuania were free to structure investor-state dispute resolution as they saw fit. These two nations did not confer governmental authority on an ad hoc panel formed pursuant to the treaty. The treaty did not itself create the panel. The ad hoc panel functioned independently of and was not affiliated with either Lithuania or Russia. It consisted of individuals chosen by the parties and lacking any official affiliation with either country. Indeed, the ad hoc panel was materially indistinguishable in form and function from the DIS panel resolving the dispute between ZF and Luxshare. The Supreme Court therefore reversed both lower court decisions.

Jones Day v. Orrick Herrington & Sutcliffe36 also concerned discovery subpoenas to third parties in international arbitration. Jones Day, an international law firm based in Washington, filed an arbitration demand against one of its former partners, a German national, who left the firm to join Orrick, a San Francisco law firm. In response to a request by Jones Day, the arbitrator issued a subpoena to Orrick to produce certain records concerning the defendant Orrick refused to comply Jones Day moved in the Superior Court of the District of Columbia to enforce the subpoena. Orrick successfully argued that the court did not have jurisdiction because Orrick had no presence in the District of Columbia. At Jones Day’s request, the arbitrator issued a subpoena ordering Orrick to produce the documents at a hearing in San Jose. Again, Orrick refused to comply. Jones Day filed a motion in the Northern District of California seeking to enforce the subpoena. Orrick refused to comply. It argued: (1) the enforcement of subpoenas was not mentioned in the Convention on the Enforcement and Recognition of Foreign Arbitral Awards (also known as the New York Convention) and section 203 of the FAA37 only provided for district court jurisdiction where the issue would "fall under" the convention; and (2) section 204 of the FAA provided for hearings in the place designated as the place of arbitration.

The district court declined to enforce the subpoena and Jones Day appealed. The Ninth Circuit reversed. With respect to the enforcement issue, it held that neither the convention nor the FAA contains any language excluding the use of petitions to enforce arbitral summonses holding there is no language in either that limits the tools that may be utilized in international arbitrations in ways domestic arbitrations are not so limited. It held that a federal court has original jurisdiction over an action or proceeding involving international arbitration if two requirements are met: (1) there is an underlying arbitration agreement or award that falls under the convention; and (2) the action or proceeding relates to that arbitration agreement or award. For purpose of the second requirement, it adopted the meaning of "relates to," as whether the proceeding "could conceivably affect the outcome of the plaintiff’s case."38 The underlying arbitration agreement between Jones Day, an international law firm residing for jurisdictional purposes in Washington D.C., and its former non-U.S. citizen partner fell under the convention as defined by section 202. The petition to compel Orrick’s compliance with the arbitral summonses related to the underlying arbitration agreement, as the arbitrator determined that evidence adduced from the participation may be material to resolving the dispute.39 With respect to the venue issue, nothing in the text of section 204 indicated that Congress intended the FAA venue provision to be exclusive or restrictively applied. Section 204 uses

[Page 13]

the permissive "may be brought" to describe the additional authorized venues. The word "may," when used in a statute, usually implies some degree of discretion.40

FAILURE TO PAY FORUM FEES

In 2019, the Legislature enacted Senate Bill 707, later codified as Code of Civil Procedure sections 1281.97 through 1281.99, to deter employers and vendors from putting a complaint by an employee or consumer into limbo by not paying the arbitration fees. Sections 1281.97 and 1281.98 are virtually identical. Both provide that "if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach." Section 1281 97 pertains to fees needed to initiate the arbitration and section 1281.98 pertains to fees needed to continue the arbitration, such as arbitrator fees. The statutory scheme further provides that once the breach occurs, the employee or consumer has several options, one of which is to proceed in court.

In 2022, the Courts of Appeal decided four cases where they held that the statutes applied even if the failure to pay the fees were inadvertent. The rulings determined that there is nothing in the language of the statute that is ambiguous regarding the requisite circumstances to determine the existence of a statutorily defined material breach of an arbitration agreement. To the contrary, the statute’s language established a simple bright-line rule that a drafting party’s failure to pay outstanding arbitration fees within thirty days after the due date results in its material breach of the arbitration agreement.41 Under the plain language of the statute, the triggering event is nothing more than nonpayment of fees within the thirty day period.42 The statute specifies no other required findings, such as whether the nonpayment was deliberate or inadvertent, or whether the delay prejudiced the non-drafting party.

Faced with rejection of the defense of inadvertence, defendants tried different tactics. In Espinoza v. Superior Court,43 the defendant argued that the plaintiff had waived section 1281.98 because the arbitration agreement stated that the rules of the AAA would apply, and rule 47 permitted the arbitrator to suspend the arbitration until the defaulting party made the payment Although the court did not specifically decide whether the statute was waivable, it rejected the analysis. rule 47 concerns the actions the arbitrator or arbitration provider may take in the event of nonpayment. Section 1281.98, in contrast, concerns the actions the trial court may take upon nonpayment, including lifting the litigation stay so the matter may proceed in court and imposing sanctions.

In Gallo v. Wood Ranch USA, Inc.,44 the Court of Appeal rejected an argument that the statute was preempted. Although sections 1281.97 and 1281.99 undeniably singled out arbitration insofar as they define procedures that applied only to arbitrated disputes, they did not commit the additional sin of outright prohibiting arbitration or more subtly discouraging arbitration. Instead, they defined the procedures governing the date by which the party who drafted an agreement to arbitrate against an employee or consumer must pay the initial fees and costs to arbitrate and specified. In this respect, they were akin to the CAA’s statutes of limitation for confirming arbitration awards, which are not preempted by the FAA.45

The defendant in Williams v. West Coast Hospitals, Inc.,46 argued that the trial court had no jurisdiction to lift the stay of litigation and terminate the arbitration proceeding because a trial court cannot dismiss an arbitration proceeding. The Court of Appeal found jurisdiction. It pointed out that after a court grants a petition to compel arbitration and stays the litigation, it nonetheless retains vestigial jurisdiction over the action at law. Defendant also asserted that the statute only applied to mandatory predispute arbitration agreements, noting that its arbitration agreement stated that execution of the agreement was not a requirement for admission

[Page 14]

to defendant’s facility. The Court of Appeal held that the focus of the statute was the fair and timely resolution of the dispute anticipated in the parties’ arbitration agreement, not the means by which the drafting party secured the predispute agreement in the first place. That an abusive practice is more acutely prejudicial in the context of a mandatory predispute agreement than a voluntary one did not detract from the Legislature’s broader purposes.

AWARD CORRECTION

Code of Civil Procedure section 1286 sets forth the parameters within which a court can correct an arbitrator’s award Subdivision (b) states that an award can be corrected where "the arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted." Subdivision (c) states that an award may be corrected where "the award is imperfect in a matter of form, not affecting the merits of the controversy." This year, three cases were decided by the Courts of Appeal concerning the issue of award correction.

In E-Commerce Lighting, Inc. v. E-Commerce Trade LLC,47 the owners of E-Commerce Lighting (ECL) sold the business to E-Commerce Trade (Trade) for $11.5 million. Trade financed the acquisition by borrowing $7.25 million from Bank of California and executing a promissory note to ECL for $2.5 million. ECL agreed to subordinate its loan to the bank’s loan. A dispute arose between ECL and Trade, which they agreed to arbitrate. ECL sued Trade for the amount due on the promissory note and Trade filed a crossclaim against ECL and its former owners for breach of contract. The arbitrator found in favor of both parties on their claims and, after applying a setoff, issued an award of $145,000 in favor of ECL, the difference between the two amounts After the bank learned of the arbitration award, it directed Trade to seek correction of the award because the setoff violated the subordination agreement. The trial court agreed and corrected the award, citing section 1286.6, subdivision (b).

ECL appealed and the Court of Appeal, in a 2-1 decision, reversed. It held that the reversal of the arbitrator’s decision to setoff one award against the other affected the merits of the decision. The merits of the arbitrator’s decision included Trade’s argument that it had a right to a setoff because the damages due it from ECL’s conduct excused it from paying off the note and ECL’s argument to the contrary. The propriety of a setoff was thus a contested issue of law and fact submitted to the arbitrator for decision. The court determined that it need not address whether the arbitrator exceeded his powers because it was not raised in the briefs and it was irrelevant, given that the correction affected the merits.

The dissent held that the arbitrator did exceed his powers and that the court could have discussed this on its own motion, notwithstanding the parties’ disinclination to raise the issue. It noted that a part of an award that exceeds the arbitrator’s powers cannot be part of the merits and hence is correctable.

Starr v. Mayhew48 involved a dispute between three partners in a shopping center complex. Partners Starr and Hunt prevailed in their arbitration against partner Mayhew and were awarded compensatory damages and attorney fees. Pursuant to an indemnity clause in the operating agreement, the arbitrator awarded Mayhew part of the attorney fees, but the award was silent with respect to whether Mayhew could be indemnified for the compensatory damages. Mayhew claimed that the clause entitled him to indemnification for the compensatory damages and asked the arbitrator to clarify the award. She did so and specifically stated in the amended award that Mayhew was not entitled to indemnification of the compensatory damages.

Mayhew moved to vacate, reversing course by arguing that the arbitrator did not have the power to correct the award. The motion was denied, and Mayhew appealed. The Court of Appeal affirmed. The amendment was within the arbitrator’s power to amend because the general indemnity issue was before the arbitrator. The final award

[Page 15]

expressly addressed indemnity within the context of Mayhew’s incurred attorney fees but was ambiguous as to whether Mayhew could seek indemnity for the sums awarded against him. The amendment clarified this ambiguity by stating Mayhew could not. This finding was consistent with the final award.

In Taska v. The RealReal, Inc.,49 Taska filed a wrongful termination claim against The RealReal, Inc. (TRR). In its closing brief, TRR stated that it would seek attorney fees if it prevailed because Taska had filed the suit in bad faith. On April 3, 2020, the arbitrator issued an award in which she ruled in favor of TRR on liability but denied its claim for attorney fees, holding that "although Taska did not carry her burdens of proof, her claims were not frivolous or meritless." Nevertheless, TRR filed a motion for attorney fees. On June 11, the arbitrator issued an award dubbed "final award" in which she awarded TRR attorney fees, holding that Taska filed the suit in bad faith. The trial court granted Taska’s motion to vacate the portion of the award which granted attorney fees, holding that the April 3 award was a final award on the issue of Taska’s bad faith and could not be amended.

TRR appealed and the Court of Appeal affirmed. It held that the April 3 award met all of the statutory requirements to be deemed a final award with respect to attorney fees and costs, noting that the award was in writing and stated that it resolved all the issues before the arbitrator.

AWARD DEFINED

Code of Civil Procedure section 1283.4 defines an arbitrator’s "award" as a written ruling that "include[s] a determination of all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy" Section 1285 authorizes a party to an arbitration "in which an award has been made" to petition the superior court to confirm, correct or vacate the award. Section 1294(b) provides that an appeal may be taken from an order dismissing a motion to correct, confirm, or vacate "the award."

Kirk v. Ratner50 decided whether an injunction issued to preserve the status quo at the outset of an arbitration is an "award" that can be the subject of a petition to the superior court to vacate, and ultimately the subject of an appeal from the superior court’s decision.

Kirk and some movie executives entered into a settlement agreement following a mediation. The agreement contained an arbitration clause that entitled the parties to obtain a preliminary injunction should the other side breach the agreement Subsequently the executives filed an arbitration demand before JAMS against Kirk and her fiancé, Marshall, a non-party to the agreement, alleging that Kirk, abetted by Marshall, had breached the agreement, and seeking a preliminary injunction pending completion of the arbitration. The arbitrator issued the injunction. Kirk and Marshall moved to vacate the ruling, but the trial court held it lacked jurisdiction because the arbitrator’s decision was not a final award, and it denied the motion to vacate. Kirk and Marshall appealed. The executives moved to dismiss the appeal, arguing the trial court order was not appealable.

The Court of Appeal dismissed the appeal. It held that a particular ruling is an "award" only if the ruling: (1) determines all issues that are necessary to the resolution of the controversy being subject to arbitration; and (2) leaves unresolved only those issues that are potential, conditional, or otherwise could not have been determined at the time of the hearing.51 No part of the controversy between Kirk and Marshall, on the one hand, and the executives, on the other, was resolved by the preliminary injunction. The issues left open were neither potential nor conditional based on events yet to occur. They were known and capable of being resolved.

FEES EARNED BY UNLICENSED ATTORNEY

In Brawerman v. Loeb & Loeb LLC,52 Brawerman and his corporation, TMI, retained Loeb & Loeb to assist them in a financial transaction with another company. They executed a retainer agreement

[Page 16]

which was signed on Loeb’s behalf by a partner who was a licensed California attorney, but an associate did most of the work on the transaction. The relationship between Brawerman and the other company soured and resulted in litigation. Brawerman and TMI sued Loeb for malpractice, seeking to recover the attorney fees they expended in the litigation Loeb’s motion to compel arbitration was granted.

Just before the hearing, Brawerman and TMI discovered that the associate was licensed elsewhere, but not in California. They sought to dismiss the arbitration, asserting that Loeb fraudulently induced it to enter into the retainer agreement by not revealing the associate’s license status. The arbitrator denied the motion on the ground that the arbitration clause was severable from the rest of the agreement. The arbitrator ultimately ruled that Loeb was not responsible for the plaintiffs’ damages, but he ordered Loeb to return the fees that it charged for the associate’s services plus the fees that the plaintiffs expended in the arbitration. The plaintiffs moved to vacate the award. The trial court denied the motion and plaintiffs appealed. On appeal, plaintiffs relied on Sheppard Mullin Richter & Hampton LLP v. J-M Manufacturing Co.53 Loeb relied on Birbrower Montalbano Condon & Frank v. Superior Court.54

The Court of Appeal affirmed. In Sheppard, the law firm failed to inform its client that it represented the client’s adversary in unrelated matters and thus failed to obtain the client’s informed consent to the conflict as required by the Rules of Professional Conduct. The ethical violation served to invalidate the entire engagement agreement because the object of the agreement was itself the ethical breach. Birbrower did not address the enforceability of an arbitration provision in an engagement agreement. Birbrower was a New York firm which represented a California client in a dispute with another California entity None of its attorneys were licensed to practice law in California, but they traveled repeatedly to California to advise their client. They also performed work in New York. The dispute eventually settled. Dissatisfied with the result, the client sued Birbrower and Birbrower counterclaimed for unpaid fees. The client won summary judgment on Birbrower’s fee claims on the ground that, by practicing law in California without a license, Birbrower violated Business and Professions Code section 6125, rendering the fee agreement unenforceable. The California Supreme Court disagreed that the unlicensed work pursuant to the fee agreement invalidated the entire agreement. Acknowledging that the fee agreement became illegal when Birbrower performed legal services in violation of section 6125, it recognized that the Birbrower attorneys also did licensed work in New York and could recover that portion of their fee. Here, although the associate illegally did substantial work under the retainer agreement, other Loeb attorneys who were licensed in California also performed work for Brawerman and TMI under the same agreement Under these circumstances, the court concluded that the associate’s illegal work did not invalidate the entire retainer agreement and that Loeb could thus enforce the arbitration agreement contained therein.

LABOR CODE SECTION 925

Labor Code section 925 prohibits an employer from arbitrating a dispute with an employee resident in California outside of California. In Zhang v. Superior Court,55 Zhang, a California resident, attempted to use section 925 to prevent his former partners at Dentons U.S., a New York based law firm, from arbitrating a dispute over a contingency fee because the hearing would be in New York. He did so by filing a lawsuit in California seeking to enjoin Dentons from pursuing the arbitration. Dentons countered by arguing that the agreement had a delegation clause and thus, the arbitrator should decide whether the dispute was arbitrable in New York. The trial court agreed with Dentons, and Zhang appealed, asserting that this issue was not delegable.

The Court of Appeal affirmed. The court concluded that Zhang’s arguments regarding the application of section 925 might well render the claims non-arbitrable, but the contract clearly and unmistakably delegated this question to the arbitrator. However,

[Page 17]

the Court added that if section 925 were construed as Zhang would have it do, enabling him to avoid his agreement to delegate arbitrability issues to the arbitrator by unilaterally declaring himself an employee, and in so doing deprive a foreign court of jurisdiction to compel arbitration, the statute might well stand as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA and be preempted.

——–

Notes:

*. Paul Dubow is an arbitrator and mediator, based in Walnut Creek. He specializes in employment, ERISA withdrawal liability, commercial law, legal malpractice, and securities matters. He was the recipient of the California Law Association ADR Distinguished Service Award in 2022.

He is one of the founders and a former president of The Mediation Society of San Francisco, a former president and current board member of the California Dispute Resolution Council, a former chair of the State Bar Task Force on Complex Litigation and the Arbitration Committees of the ABA Dispute Resolution and Litigation Sections, State Bar Business Law Section, and Contra Costa County Bar Association, and a fellow and former board member of the College of Commercial Arbitrators.

He was also a member of the Judicial Council committee that developed standards for mediators in court connected mediations and the committee that initially developed the employment rules for the American Arbitration Association.

He is a member of the editorial board of California Litigation, the magazine of the Litigation Section of the California Lawyers Association.

1. The Court also granted a writ of certiorari in an arbitration related matter. See Coinbase, Inc. v. Bielski (2022) 143 S.Ct. 58. The Court will consider whether appealing denial of a motion in federal court to compel arbitration automatically stays the underlying court litigation while the appeal is pursued. The Court will issue a decision in the 2023 term.

2. (2022) 142 S.Ct. 1906 (Viking).

3. (2014) 59 Cal.4th 348.

4. Lab. Code, § 2698 et seq. (PAGA).

5. 9 U.S.C. § 1 et seq. (FAA).

6. Viking, supra, 142 S.Ct. at p. 1924 (citing AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 350).

7. Id. at p. 1925 (citing Lab. Code, § 2699, subds. (a) & (c)).

8. (2020) 9 Cal.5th 73 (Kim).

9. See Kim v. Reins International California, Inc. (2017) 18 Cal.App.5th 1052.

10. Kim, supra, 9 Cal.5th at pp. 83-84.

11. See Justice Sotomayor’s concurring opinion in Viking, supra, 142 S.Ct. at pp. 1925-26.

12. (2022) 81 Cal.App.5th 475 (Howitson).

13. (2022) 83 Cal.App.5th 595.

14. In dicta, the Howitson court did state that the employee could be the plaintiff in the representative claim because he was an "aggrieved employee." See Howitson, supra, 81 Cal.App.5th at p. 488.

15. (2022) 84 Cal.App.5th 1035, 1064.

16. (2022) 85 Cal.App.5th 626, 635.

17. (2022) 85 Cal.App.5th 983.

18. (AAA).

19. S274671.

20. (2022) 142 S.Ct. 1708 (Morgan).

21. See Morgan v. Sundance, Inc. (8th Cir. 2021) 992 F.3d 711.

22. Morgan, supra, 142 S.Ct. at p. 1713.

23. See Quach v. Commerce Club of California, Inc. (2022) 78 Cal.App.5th 470, 479.

24. (CAA). In a subsequent Court of Appeal opinion, the arbitration agreement provided that the FAA would apply and so the parties agreed to argue the issue of waiver without considering prejudice. See Davis v. Sheikh Shoes LLC (2022) 84 Cal.App.5th 956.

25. (2022) 142 S.Ct. 1310.

26. (2009) 556 U.S. 49.

27. Section 9 pertains to motions to confirm and Section 10 pertains to motions to vacate.

28. Vaden, supra, 556 U.S. at p. 63. If the arbitration involves at least one foreign party, Section 203 of the FAA is triggered. Under Section 203, any petition to confirm, vacate, or modify an international arbitration is federal in character and so a district court would have jurisdiction to consider a motion to vacate, confirm, or modify the award. See Hayday Farms, Inc. v. FeedX Holdings, Inc. (9th Cir. 2022) 55 F.4th 1232. In addition, if the subject matter of the arbitration demand is a federal statute that cannot be litigated in state court, then a district court would also have jurisdiction to consider a motion to vacate, confirm, or modify an award. (See Trustees of the New York State Nurses Association v. White Oak Global Advisors LLC (SDNY 2022) 2022 US Dist LEXIS 109171.)

29. (2022) 142 S.Ct. 1783 (Saxon).

30. See Saxon v. Southwest Airlines Co. (7th Cir. 2021) 993 F.3d 492.

31. Saxon, supra, 142 S.Ct. at p. 1790.

32. (2022) 75 Cal.App.5th 748, 763.

33. It is surprising that plaintiff stipulated that the CAA would apply because the agreement stated that the FAA applied and, if the FAA applied, then plaintiff had a valid defense to the motion to compel arbitration because the FAA states that transportation workers are exempt from arbitration. But it worked out for plaintiff because the motion to compel arbitration was ultimately denied on the ground that plaintiff did not execute the arbitration agreement and hence never agreed to arbitrate.

34. (2022) 142 S.Ct. 2078 (ZF Automotive).

35. ZF Automotive, supra, 142 S.Ct. at p. 2087.

36. (9th Cir. 2022) 42 F.4th 1131 (Jones Day).

37. Chapter 2 of the FAA, which consists of Sections 201 through 208, is the portion of the FAA which enforces the New York Convention.

38. Jones Day, supra, 42 F.4th at p. 1138.

39. Id. at p. 1139.

40. Id. at p. 1138.

41. De Leon v. Juanitas Foods, Inc. (2022) 85 Cal. App.5th 740.

42. Espinoza v. Superior Court (2022) 83 Cal.App.5th 761, 776.

43. Id. at p. 783.

44. (2022) 81 Cal.App.5th 621.

45. Id. at p. 641.

46. (2022) 86 Cal.App.5th 1054.

47. (2022) 86 Cal.App.5th 58.

48. (2022) 83 Cal.App.5th 842.

49. (2022) 85 Cal.App.5th 1.

50. (2022) 74 Cal.App.5th 1052.

51. See Hightower v. Superior Court (2001) 86 Cal. App.4th 1415.

52. (2022) 81 Cal.App.5th 1106.

53. (2018) 6 Cal.5th 59.

54. (1998) 17 Cal.4th 119.

55. (2022) 85 Cal.App.5th 167.

[Page 18]