Alternative Dispute Resolution

• Publication year: 2016
• Author: By Paul Dubow

Alternative Dispute Resolution

By Paul Dubow

In 2016 the California courts and the Ninth Circuit produced a number of interesting and significant opinions relating to ADR, particularly in the area of arbitration. Some of these cases are discussed below.

Arbitration

Agreement to Arbitrate

Rice v. Downs (2016) 248 Cal.App.4th 175

In Rice v. Downs (2016) 248 Cal.App.4th 175, Downs, an attorney, and two of the plaintiffs formed Highland Property Development (HPD), a business engaged in the construction of affordable housing. Upon the creation of HPD, the parties entered into an operating agreement that provided, "any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California." It further provided, "No Member or Affiliate of a Member, is entitled to remuneration for services rendered to the Company except as otherwise expressly provided for in this Agreement." Subsequently, a third plaintiff joined the enterprise. All three plaintiffs were non-attorneys. Later, a dispute arose and, acting on Downs's advice, HPD removed one of the plaintiffs from the business.

The removed plaintiff commenced an arbitration against his former partners. Downs represented himself and the other two partners in that proceeding. During the arbitration, the three non-attorney partners discovered that Downs had been billing HPD for his time, contrary to the operating agreement, and that Downs had been sharing bonuses and overrides from his law firm as a consequence of these billings. They also concluded that Downs had failed to advise them of actual and potential conflicts, in violation of California Rules of Professional Conduct, rule 3-300 and that he had committed malpractice with respect to the operating agreement and his representation of the two partners in the prior arbitration.

The three non-attorney partners filed suit in the Los Angeles Superior Court alleging malpractice, breach of fiduciary duty, and rescission. Downs's motion to compel arbitration was granted, and he prevailed at the arbitration. Plaintiffs' motion to vacate was largely denied. The plaintiffs appealed, arguing that they had pleaded certain non-arbitrable tort claims. Downs responded that a clause broadly requiring arbitration of disputes "arising out of" an agreement can cover tort claims. The Court of Appeal agreed with Downs, but noted, "that alone is not determinative. The parties did not simply agree to arbitrate 'any controversy' effectively meaning every controversy between them. 'Any controversy' is necessarily modified by 'arising out of this Agreement.' Moreover, even under a very broad arbitration provision, such as 'any controversy or claim arising out of or relating to this agreement,' tort claims must 'have their roots in the relationship between the parties which was created by the contract' before they can be deemed to fall within the scope of the arbitration provision."¹

The court then concluded that none of the three tort causes of action arose out of the agreement and reversed the trial court. The malpractice and breach of fiduciary duty claims were based on duties created by the attorney-client relationship, not by the operating agreement. Likewise, the cause of action seeking rescission and restitution "was expressly based upon 'Downs's legal malpractice, breach of fiduciary duty, and failure to comply with the California Rules of Professional Conduct and his failure to disclose and obtain informed consent with respect to actual and potential conflicts with his clients.'"² All of these claims, therefore, arose by virtue of the attorney-client relationship, "not as a result of any duty created by the operating agreement."³

Appeal to Second Arbitrator

Condon v. Daland Nissan, Inc. (2016) 6 Cal. App.5th 263

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When is an appeal not an appeal? In Condon v. Daland Nissan, Inc. (2016) 6 Cal.App.5th 263, claimant was awarded $180,175 at arbitration. Respondents asked ADR Services (ADR), the arbitration provider, to convene a new panel under a provision in the arbitration agreement that allowed a losing party to request a "new arbitration" before a second panel if the amount of the award was either zero or exceeded $100,000. Claimant objected to the convening of a new panel. ADR concluded that, in the face of one party's objection, it had no authority to proceed. ADR directed the parties to ask a court to determine whether it had authority to proceed. Claimant moved to confirm the award, while respondents asked the court to order the second arbitration. The court confirmed the award, holding that ADR did not have "appellate rules" and that the arbitration agreement did not provide for arbitration by an organization lacking the appropriate process.

The Court of Appeal reversed. The arbitration clause was not authorizing "an appeal as that term is used in our judicial system, involving different procedures than those used in the trial courts, and before different courts of defined, and often limited, review."⁴ Instead, the provision authorized "a 'new arbitration under the rules of the arbitration organization by a three-arbitrator panel.' In other words, in certain circumstances, the arbitration agreement permits a 'do-over'—governed by the same rules that applied to the first arbitration. The single reference to an 'appealing party'—who asks for a 'new arbitration'—does not change the fact that what that party will receive is an arbitration repeat."⁵ The court found that ADR "was ready and able to provide a new arbitration before a three-member panel and declined to do so only because it perceived it lacked the authority to impose the new arbitration on [claimant] absent a court order."⁶ The fact that ADR "had no specialized 'appellate' rules" was irrelevant.⁷

Browsewrap Agreements

Long v. Provide Commerce, Inc. (2016) 245 Cal. App.4th 855

In Long v. Provide Commerce, Inc. (2016) 245 Cal. App.4th 855, plaintiff filed a class action alleging fraud after purchasing flowers online. Defendant moved to compel arbitration under an arbitration clause that customers could find by clicking a Terms of Use hyperlink on the website. In other words, a "browsewrap agreement." To complete a purchase, customers were required to "input information and click through a multi-web-page 'checkout flow.'"⁸After several clicks, they would uncover a Terms of Use icon. A click on the icon lead to the arbitration clause. After plaintiff placed his order, defendant sent him an e-mail confirming the order. The e-mail also contained a Terms of Use icon in relatively the same place as on the page used to place the order, and the icon was in grey type on a grey background. Plaintiff asserted that, because of their placement, he did not notice the Terms of Use icons and hence was not bound by the terms of the arbitration agreement. The trial court agreed and denied defendant's motion.

Defendant appealed and the Court of Appeal affirmed. The court cited Specht v. Netscape CommunicationsCorp (2nd Cir. 2002) 306 F.3d 30, which held that "[r]easonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility."⁹ Here, the court determined that "the Terms of Use hyperlinks—their placement, color, size and other qualities relative to the [ ] website's overall design—[were] simply too inconspicuous to meet that standard."¹⁰ The court added, "our review of the screenshots reveals how difficult it is to find the Terms of Use hyperlinks in the checkout flow even when one is looking for them."¹¹ It found that "the subject hyperlinks are not 'located next to' the fields and buttons a consumer must interact with to complete [an] order."¹² The court outlined the five complicated steps a customer needed to follow to discover the Terms of Use hyperlink when checking out. Additionally, the Terms of Use hyperlink was located next to the "privacy policy" hyperlink, "both of which appear in the same font and light green typeface that, to the unwary flower purchaser, could blend in with the website's lime green background."¹³ Essentially, the layout of the checkout flow "'tended to conceal the fact that [placing an order] was an express acceptance of [defendant's] rules and regulations."¹⁴ In other words, a user does not contractually agree to a website's terms of use when those terms are contained within an inconspicuously placed hyperlink.

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Citing the Ninth Circuit's decision in Nguyen v. Barnes & Noble, Inc. (9th Cir. 2014) 763 F.3d 1171, 1178-79, the court observed that "the problem with merely displaying a hyperlink in a prominent or conspicuous place is that, without notifying consumers that the linked page contains binding contractual terms, the phrase 'terms of use' may have no meaning or a different meaning to a large segment of the Internet-using public" and "may not be enough to alert a reasonably prudent Internet consumer to click the hyperlink."¹⁵ The court warned, "Online retailers would be well-advised to include a conspicuous textual notice with their terms of use hyperlinks going forward."¹⁶

Class Action Waivers and the National Labor Relations Act

Morris v. Ernst & Young LLP (9th Cir. 2016) 834 F.3d 975, cert. granted Jan. 13, 2017, No. 16-300, ___ U.S. ___ [2017 WL 125665]

In AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, the U.S. Supreme Court held that class action waivers in arbitration agreements were enforceable. Thus, groups of employees with claims against their employers had to bring those claims in separate proceedings if their employment agreements contained a class action waiver. Subsequently, the National Labor Relations Board concluded that the requirement for separate proceedings violated the concerted activity protections of the National Labor Relations Act, 29 U.S.C. section 151 et. seq. (NLRA).¹⁷ The Second,¹⁸ Fifth,¹⁹ and...