Annual Update of Alternative Dispute Resolution Cases
| Publication year | 2019 |
| Author | Paul J. Dubow |
Paul J. Dubow
Paul Dubow was initially trained as a mediator in 1994, and became a full time neutral in December 2000, following his retirement after twenty-six years as director of litigation at Dean Witter Reynolds. He has arbitrated or mediated over 500 cases. He can be reached at pdubow2398@ aol.com.
The cases discussed below are those issued by California courts and Federal courts that have jurisdiction over California. The cases may be of interest to attorneys drafting contracts containing arbitration or mediation clauses.
Plaintiff brought suit against defendant arising from his father's death in the nursing home operated by defendant. The suit included a negligence claim on behalf of plaintiff's father and a wrongful death claim on behalf of himself. The trial court held that the father's claim may have been subject to an arbitration agreement, but that the wrongful death claim was not. It denied defendant's motion to compel arbitration, based on Code of Civil Procedure section 1281.2(c), a section of the California Arbitration Act (CAA) that gives a court discretion to deny a motion to compel arbitration where a lawsuit contains both arbitrable and non-arbitrable claims. Defendant appealed, arguing that the Federal Arbitration Act (FAA), which mandates that a court stay the litigation in favor of the arbitration, applied. The court of appeal affirmed.
The FAA, which includes both procedural and substantive provisions, governs agreements involving interstate commerce. The agreement herein did not mention the FAA at all, although it did mention California law several times, including the statement in the opening article, that disputes "will be determined by submission to arbitration as provided by California law."1The procedural aspects of the FAA do not apply in state court absent an express provision in the agreement. The agreement here did not even mention the FAA, much less expressly adopt its procedural rules. Accordingly, the FAA's procedural rules did not apply.
Comment. Although it was not the situation here, there are instances where plaintiffs deliberately add a defendant who was not party to the arbitration agreement so that section 1281.2(c) can be invoked. This occurs where a party has a claim against a vendor or franchisee, but also sues the manufacturer or franchisor to invoke section 1281.2(c) and, hopefully, avoid arbitration because there is no arbitration agreement with the manufacturer or franchisor. This outcome can be avoided if the arbitration agreement invoked by the vendor or franchisee states that the FAA, including its procedural rules, will apply. This is so because § 3 of the FAA2 mandates that in cases where a complaint contains arbitrable and non-arbitrable claims the court must stay the litigation until the arbitration is completed. However, if the draftsperson prefers that California law apply to the agreement, the outcome can also be avoided by stating in the agreement that a court may not invoke section 1281.2(c).3
Plaintiff, a minority shareholder in Kaggle, Inc. and its former president, sued Kaggle and several of its officers, alleging that they had conspired to dilute the shares of minority shareholders to their benefit. During his tenure with Kaggle, plaintiff signed several arbitration agreements. One was set forth in a stock repurchase agreement and required arbitration of "[a]ny and all controversies, claims, or disputes arising out of, relating to, or resulting from this Agreement." The other arbitration agreement covered any and all claims "arising out of, relating to, or resulting from my employment with the company."
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The defendants asserted that plaintiff's claims arose from his employment because most of the stock that he owned was employment compensation, and they moved to compel arbitration. The motion was denied, and defendants appealed. The court of appeal affirmed. The court held that the dispute was not rooted in plaintiff's employment relationship with Kaggle.
It was true that the complaint included allegations about events that occurred while plaintiff worked for the company. However, those allegations were nothing more than historical background. The harm plaintiff suffered was not measured by or dependent on the terms of his employment. Plaintiff's claim was instead rooted in, and any harm he suffered was measured by, his rights as a company stockholder.
The dispute was whether defendants wrongfully diluted the value of his shares, breached their fiduciary duties to plaintiff as a minority stockholder, and unjustly enriched themselves at his expense. Defendants' fiduciary duties to minority shareholders and alleged wrongs existed independently of any employment relationship between plaintiff and Kaggle. Any minority shareholder, whether or not the person had ever been employed at Kaggle, could bring the same claims. Defendants leaned heavily on the fact that plaintiff received much of his company stock as compensation for his employment with, and separation from, the company. However, plaintiff's former employment status, and the circumstances under which he received his shares or gained the right to retain them, did not affect defendants' independent obligations not to breach their fiduciary duties to him or aid and abet such a breach. Defendants would have owed plaintiff the same duty if he had acquired the stock in a completely different manner, for example, by purchasing it from a third party, or if the only shares he owned were those he acquired before he began working for the company.
Comment. The arbitration clause in the stock purchase agreement was...
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