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self-study / Civil Practice

Pandemic-era appellate rulings take on arbitration issues

Neville L. Johnson

Partner, Johnson & Johnson LLP

439 N Canon Dr
Beverly Hills , CA 90210

Email: njohnson@jjllplaw.com

Douglas L. Johnson

Partner, Johnson & Johnson LLP

439 N Canon Dr
Beverly Hills , CA 90210

During the pandemic, appellate courts in California have been active in deciding arbitration issues. Here are a few of the important decisions from the past year.

Third-Party Discovery Constraints

In Aixtron, Inc. v. Veeco Instruments Inc., 52 Cal. App. 5th 360, 370-73 (2020), an employee of Veeco left to work for a competitor, Aixtron. The employee had signed a confidentiality agreement with Veeco that contained an arbitration clause and prohibited the employee from sharing confidential information with third parties. After the former employee started working for Aixtron, Veeco commenced arbitration against the employee, alleging that he had breached the confidentiality agreement by not timely deleting sensitive information from his personal devices prior to starting to work for Aixtron.

Although Aixtron was not a party to the arbitration, Veeco applied for a prehearing discovery subpoena to determine whether Aixtron had any documents containing Veeco's confidential information. The JAMS arbitrator granted Veeco's application. When Aixtron objected, the arbitrator then granted Veeco's motion to compel and ordered Aixtron to comply. Aixtron filed a petition with the superior court, seeking judicial review of the discovery order. The superior court denied the petition and granted Veeco's subsequent application to enforce the arbitrator's discovery order.

The Court of Appeal reversed, holding that the arbitrator did not have the authority to issue the discovery subpoena to a third party because the arbitration agreement did not give the arbitrator such authority. The court reached this conclusion under both the Federal Arbitration Act and the California Arbitration Act, as well as JAMS's own rules.

This is an important development: Arbitrators cannot issue third-party subpoenas and the superior court was powerless to do so, thus any arbitration agreement must have a clause allowing an arbitrator to so act. Existing arbitration agreements may need to be amended to allow third-party discovery.

Arbitrator's Decision Reversed

In Brown v. TGS Management Company, 57 Cal. App. 5th 303, 322 (2020), something rare happened: The court reversed an arbitrator's decision. Brown had signed an employment agreement with TGS Management Company that contained a noncompete provision, a confidentiality clause, and an arbitration clause. When TGS terminated Brown, the parties began to negotiate a separation agreement.

Brown sued for declaratory relief, injunctive relief, and for reformation of the arbitrator selection process in the agreement. He then filed a petition to compel arbitration and attached as an exhibit a copy of the unsigned separation agreement, which included confidential information about TGS's profits and bonus calculations. TGS claimed that Brown had breached the employment agreement by revealing confidential information in his filing. The arbitrator denied all of Brown's claims and found in favor of TGS. Brown's request to the trial court to vacate the award was denied.

The Court of Appeal set aside the arbitration award, reasoning that the arbitrator's refusal to determine whether the noncompete provision was legal under Business and Professions Code Section 16600 violated Brown's statutory rights and that, in doing so, the arbitrator had exceeded his authority. Moreover, the court held that the nondisclosure provision of the agreement was void because the definition of "confidential information" was overly broad and also violated Section 16600.

This case illustrates one of the broader issues when it comes to arbitration and arbitrators: Can arbitrators be trusted to interpret the law correctly?

Inconspicuous Arbitration Clauses Violate Due Process

In Domestic Linen Supply Co., Inc. v. L J T Flowers, Inc., 58 Cal. App. 5th 180, 182 (2020), the plaintiff entered into a contract with the defendant, which contained an arbitration clause on the reverse side typed in eight-point type with no headings. A dispute arose regarding the plaintiff's performance and the defendant refused to pay plaintiff. The plaintiff attempted to compel arbitration. However, the trial court said the arbitration clause violated the defendant's due process rights due to the fact that the clause had been inconspicuously placed in the reverse side of the agreement. The defendant then made a motion for attorney fees pursuant to the arbitration agreement, which was granted, and the plaintiff appealed.

The Court of Appeal held that the agreement to arbitrate that was in the agreement was invalid because it was intentionally deceptive since it was on the reverse side of the form, was typed in tiny font, and was indistinguishable from the rest of the paragraphs contained on the reverse side. The court also held that the award of attorney fees to the defendant was proper because the defeat of plaintiff's petition to arbitrate had terminated the action, leaving the defendant as the prevailing party entitled to fees.

Arbitration Provisions Cannot Bar Public Injunctions

In Mejia v. DACM Inc., 54 Cal. App. 5th 69, 694 (2020), the plaintiff purchased a motorcycle and used a credit card that he obtained through the dealership to pay for the balance on the vehicle after the down payment. When applying for the credit card, the plaintiff signed a credit application acknowledging that he had received and read the card account customer agreement, which contained an arbitration clause. The clause explicitly stated that the only remedy for a dispute arising under the agreement would be a final and binding arbitration, and barred class arbitrations and public injunctive relief. The clause also contained a "poison pill" that restricted the right of the court to sever if the prohibition on public injunctive relief was found unenforceable.

Sometime after his purchase of the motorcycle, the plaintiff filed a complaint on behalf of himself and similarly situated customers, alleging that the defendant had violated numerous consumer protection laws by not providing all required financing information in a single document when setting customers up with credit card accounts. The defendant then moved to compel arbitration. The trial court denied the petition to compel, reasoning that the arbitration clause was unenforceable because of the limitations it placed on seeking public injunctions. The defendant appealed, arguing that the plaintiff had not been seeking a public injunction, and that the clause implied that the consumer still had the option to seek one.

The Court of Appeal affirmed and held that the clause was still unenforceable, reasoning that implying that public injunctions were an available remedy made no sense because of the existence of the poison pill clause that restricted the court's right to sever.

Fast but Not So Furious

Moritz v. Universal City Studios, LLC, 54 Cal. App. 5th 238, 241-42 (2020), involves the "Fast and Furious" film franchise and a spin-off film, "Hobbs & Shaw." Neal Moritz, a film producer who has produced eight films in the "Fast and Furious" franchise, had entered into seven producer contracts with Universal under which Moritz rendered his producing services. Six of the contracts had arbitration provisions, and the seventh stated that films produced as sequels or remakes would be bound by the arbitration clause in the sixth contract.

While shooting the eighth film in the franchise, Moritz and Universal began discussing a spin-off film called "Hobbs & Shaw," which would be based on characters from the franchise. The parties exchanged written drafts of a producer agreement that also contained an arbitration provision, but the agreement was never signed. Shortly before filming was to begin for "Hobbs & Shaw," Universal informed Moritz that it was under no obligation to involve him in the production or compensate him in connection with the film until an agreement was reached and papered.

Moritz sued Universal for breach of oral contract. Universal moved to compel arbitration based on the arbitration clauses in the previous "Fast and Furious" producer agreements, arguing that the issue of arbitrability was up to the arbitrator to decide, and in the alternative that the court should compel arbitration pursuant to the previous contracts. The trial court rejected Universal's motion to compel arbitration because the parties had not clearly and unmistakably provided that the threshold issue of arbitrability would be decided by the arbitrator, and that even if the parties had so provided, it still would not have applied to the spin-off because the parties had agreed that the film was not a remake or sequel.

The Court of Appeal affirmed, adding that the question of arbitrability is traditionally up for judicial determination absent a clear statement from the parties, and that Moritz was not subject to the arbitration clauses in the previous agreements because the parties had not specifically agreed to arbitration for this particular spinoff.

Arbitration Cannot Apply to Just Any Future Affiliate

In Revitch v. DIRECTV, LLC, 977 F.3d 713, 715 (9th Cir. 2020), the plaintiff brought a class action against DIRECTV under the Telephone Consumer Protection Act alleging that DIRECTV had initiated multiple phone calls to his cellphone using a pre-recorded sales message. The plaintiff claimed he had no previous contact with DIRECTV, and that DIRECTV had a history of unsolicited telemarketing campaigns. DIRECTV uncovered that the plaintiff was also a customer of AT&T, with which he had signed a contract in 2011 when he upgraded his telephone. The contract happened to have an arbitration clause that bound the plaintiff, AT&T and its affiliates. DIRECTV attempted to compel arbitration, arguing that it was an affiliate of AT&T because it had been acquired by AT&T in 2015.

The district court denied DIRECTV's petition. The 9th U.S. Circuit Court of Appeals affirmed the lower court's denial of the motion to compel and held that the defendant could not enforce the arbitration agreement against the plaintiff. The court reasoned that, under California law, which requires a contract to be construed in accordance with its plain language except where it would lead to absurd results, the arbitration agreement between AT&T and the plaintiff clearly did not contemplate the agreement to cover disputes with any company AT&T may choose to acquire in the future. Therefore, the court reiterated that the parties in the current dispute had not agreed to arbitrate.

Arbitrators Need Not Disclose Personal Affiliations

In Malek Media Grp. v. AXQG Corp., 58 Cal. App. 5th 817, 822 (2020), the plaintiff and defendant had agreed to start a film production company called Foxtail. The parties formed an LLC and executed an agreement that contained an arbitration clause. Shortly after the formation of the LLC, the relationship between the parties began to deteriorate, and the defendant repeatedly breached the agreement. The plaintiff filed a demand for arbitration with JAMS, arguing that Foxtail could no longer operate as intended because the parties had become alienated and deadlocked. The demand also alleged various claims against the defendant of breach of fiduciary duty, fraud, breach of contract, conversion, fraudulent concealment, sexual harassment and declaratory relief. The parties selected an experienced arbitrator, who found in favor of the plaintiff. The plaintiff petitioned the trial court to confirm the award, while the defendant petitioned to vacate it, arguing that the arbitrator's failure to disclose his affiliation with an LGBTQ rights organization had been improper considering the arbitration also involved a sexual harassment allegation. The trial court confirmed the award.

The Court of Appeal held that the arbitrator was not required to disclose his affiliation with the organization because it was irrelevant to the primary subject matter of the case, which was the dissolution of Foxtail and not a claim of sexual harassment.

Use or Lose the Right to Arbitrate

In Garcia v. Haralambos Beverage Co., 59 Cal. App. 5th 534, 537 (2021), the plaintiffs were two truck drivers who worked for the defendant. The employee handbook included a provision that stated the parties were required to resolve any dispute arising from their employment in arbitration. In addition, the plaintiffs signed arbitration agreements that were identical to the provision in the handbook. Eventually, the plaintiffs brought a class action against the defendant, alleging various violations of wage and hour laws. The defendant asserted as an affirmative defense that the plaintiffs' claims were subject to the arbitration agreement. Thereafter, the parties engaged in an initial trial conference, agreed to participate in class wide mediation, and commenced discovery. The defendant did not file a motion to compel arbitration until two years after the complaint was filed. The trial court denied the defendant's motion because it was apparent that the defendant knew of the arbitration agreements at the time it filed its answer and continued to act in a matter inconsistent with the right to arbitrate.

The Court of Appeal affirmed and held that the defendant had waived its right to arbitration because it had participated in the putative class action for 24 months before filing its motion to compel arbitration, and could not argue that it had only just discovered the arbitration agreement because it had raised the right to arbitration as one of its affirmative defenses.

Unconscionable Arbitration Clauses

In Cabatit v. Sunnova Energy Corp., 60 Cal. App. 5th 317, 320 (2020), the plaintiffs entered into a solar power lease agreement with the defendant that included an arbitration clause. After the solar power system was installed, the plaintiffs sued the defendant for damage done to their roof. The defendant moved to compel arbitration, and the trial court denied the motion because it found that the agreement to arbitrate was unconscionable.

The Court of Appeal agreed and held that the arbitration agreement was both procedurally and substantively unconscionable. The court reasoned that the clause was procedurally unconscionable because it amounted to a contract of adhesion, since the defendant had drafted the agreement language and there was no evidence that the plaintiffs were given any option other than to take it or leave it. Moreover, the agreement was presented on an electronic device by a salesperson who did not explain anything about the arbitration clause. The plaintiffs also had not been provided with a copy of the agreement. The clause was substantively unconscionable because it provided that, while the plaintiffs were forced to arbitrate their claims, the defendant could file a court action in the event of the plaintiffs' default, making it entirely one-sided.

A Large Arbitration Award Confirmed

In Bacall v. Shumway, 61 Cal. App. 5th 950, 955 (2021), Michael Bacall, a successful actor and screenwriter, through his loan-out RBC Entertainment, Inc., entered into a representation agreement with Timaeus Group, LLC, which was the company of Bacall's attorney, Jeffrey Shumway. The parties had agreed that Shumway's company would provide services of "Chief Content Officer," management, producing and business affairs. In exchange, RBC Entertainment agreed to pay Timaeus Group a $243,750 Chief Content Officer fee and a 10% management commission. This agreement, made in 2011, lasted one year. The parties entered into essentially the same agreement again in 2017.

In May 2017, Bacall terminated the agreement when he discovered that Shumway had been inactive with the California State Bar. Timaeus Group filed a demand for arbitration, alleging breach of contract. Bacall filed a complaint against Shumway for fraud, recission, legal malpractice, breach of fiduciary duty, and violation of unfair competition laws, alleging that "Shumway, who was the alter ego of Timaeus, had represented himself as a lawyer and provided legal services to Respondents, despite not being authorized to practice law." Timaeus responded by filing a motion to compel arbitration pursuant to the agreement, which was granted. The arbitrator found for Bacall, reasoning that Shumway had been providing unlicensed legal services and that the contracts were illegal, and awarded Bacall the commissions paid to Shumway under the agreement plus attorney fees and costs. Shumway petitioned the court to vacate the award, arguing that the arbitrator had exceeded his powers by declaring the contracts illegal, but the petition was denied.

The Court of Appeal affirmed and held that the arbitrator had not acted beyond the scope of his power when he found that the contracts were illegal and that Shumway had been practicing without a license. It had been Shumway who successfully moved the trial court to send the case to arbitration, never suggesting that the issue of legality was beyond the arbitrator's power to decide, and Shumway never actually showed how the award violated public policy.

The Pros and Cons of Arbitration

Costs of arbitrations can spiral out of control with motion practice and discovery. If a case is not worth more than six figures, does it make sense to have an arbitration? What if a party cannot afford an arbitration? Attorneys should give clients informed consent about the pros and cons of arbitration when negotiating agreements. If there is an arbitration clause, prevailing party attorney fees and costs provisions may make the arbitration worthwhile for a contingency fee attorney. Attorneys should also have arbitration clauses in retainer agreements to keep disagreements private and confidential. However, don't use prevailing party provisions as to fees for malpractice claims, given the rule that attorneys representing themselves are not entitled to the same. Trope v. Katz, 11 Cal. 4th 274, 278 (1995). 

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