Annual Update of Alternative Dispute Resolution Cases and Legislation
| Publication year | 2022 |
| Author | Paul J. Dubow |
Paul J. Dubow
Paul Dubow began arbitrating cases in 1972 and was initially trained as a mediator in 1994. He 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 550 cases. He can be reached at pdubow2398@aol.com.
The matters discussed below include cases issued in 2021 by California courts and federal courts that have jurisdiction over California that may be of interest to attorneys drafting contracts containing arbitration or mediation clauses.
Plaintiff sued her former employer, alleging various employment-related claims. The trial court denied defendant's motion to compel arbitration, holding, inter alia, that a provision in the arbitration agreement allowing for an appeal to a second arbitrator was substantively unconscionable. Altamed appealed. It contended the provision was identical to the provision that was held valid and enforceable by another branch of the court of appeal in Cummings v. Future Nissan.1
Cummings followed Little v. Auto Stiegler, Inc.,2 where the California Supreme Court held that a provision in an employment agreement allowing for an appeal to a second arbitrator where the award was $50,000 or more was substantively unconscionable because it was likely that the employee would be the claimant requesting damages in almost every arbitration and so the provision favored the employer. In a footnote, the Cummings court suggested that a review provision with no dollar threshold would be enforceable. The court of appeal here noted that this comment was dicta, because the basic holding was that the plaintiff had forfeited his claim that the review provision was unconscionable on its face by failing to raise it in opposition to the motion to compel arbitration. It also noted that the court in Little was also concerned with the extra expense and delay associated with procedures which potentially stood between a plaintiff employee and the confirmation of his or her award. The court stated that it shared those concerns and hence could not agree with the Cummings court's suggestion that an appellate arbitral review provision is always enforceable so long as it does not contain a dollar threshold.
The court also quoted from Beynon v. Garden Grove Medical Group3 that a second arbitration "can render arbitration an expensive and protracted proceeding," and continued:
a [party] who has already incurred substantial expenses in the first arbitration proceeding . and who faces the prospect of having to pay one-half the cost of a second and perhaps more costly proceeding before a panel.... might well be discouraged from further pursuit of the claim in the only forum available for the resolution of the dispute.
Finally, the court noted that the agreement did not contain any rules for the appellate arbitral review. Thus, the ambiguities created by the drafter, Altamed, gave it an even greater advantage.4
Comment. Although the court hinted that an appellate arbitration clause with an expedited procedure and unobjectionable rules might pass muster, it appears that appellate arbitration clauses are not likely to be enforced. These clauses are presumably inserted into arbitration agreements because the draftsperson is concerned by the possibility of an erroneous arbitration award. But if the draftsperson believes that this is a significant risk in arbitration, then the client should
[Page 30]
be advised not to include an arbitration clause in its employment agreements.
Plaintiffs filed suit alleging that defendant had damaged the roof when installing leased solar panels on their home. The installation contract provided that plaintiffs were required to arbitrate all their claims, but it allowed Sunnova to file a court action in the event that plaintiffs failed to make a payment, failed to perform an obligation under the lease, provided false information, or assigned the lease without prior authorization.
Plaintiffs opposed Sunnova's motion to compel arbitration on grounds of unconscionability. The trial court denied the motion, holding the agreement lacked mutuality and hence was substantively unconscionable. Sunnova appealed, arguing that the exceptions from arbitrability provided it with a "margin of safety," which courts had approved in the past as way for a party with superior bargaining strength to be provided with a type of extra protection for which it had a legitimate commercial need without being unconscionable.
The court of appeal affirmed. It held the business realities that create the special need for such an advantage should be explained in the contract itself. Sunnova claimed it needed more access to the courts "to seek relief arising out of a customer's failure to make payments provided under the contract, or to seek immediate injunctive relief in the event a customer engages in, inter alia, misuse or theft of Sunnova's systems, or modifies the system so as to create a hazardous condition."5 But none of this was explained in the agreement, and it did not tend logically to support giving Sunnova access to the courts while denying the plaintiffs the same privilege.
Comment. It is doubtful if an exception from arbitration for a customer's failure to make payments would ever be allowed under the "margin of safety" exception (also known as the "self-help" exception6), but the other reasons raised by Sunnova might have been permitted.
The parties herein entered into a long-term lease for retail space, which permitted several renewals. The rent for any renewal was designated "The Fair Market Rate." The lease provided that if Saks, the tenant, was dissatisfied by the rate set by California Union Square, the landlord, it could commence an arbitration proceeding in which it set forth what it considered to be "The Fair Market Rate," and then California Union Square could respond with its own rate. This would be a "baseball arbitration," i.e., the arbitrator would choose one of the two rates after hearing testimony.
Saks renewed and was dissatisfied by California Union Square's offer, so it commenced an arbitration proceeding. The arbitrator ruled in favor of California Union Square, but his decision was reversed by the court of appeal. Saks prevailed in the second arbitration (in front of a different arbitrator), and the decision was upheld on appeal. Each of the two proceedings involved a request to the superior court to appoint an arbitrator, a motion to vacate, an appeal to the court of appeal, and an unsuccessful request to the California Supreme Court to review the court of appeal decision.
Saks then filed suit to collect $1 million in attorney fees because it was the prevailing party. There were two clauses in the lease that pertained to attorney fees. Section 23.10 of the lease stated in relevant part:
Should either party institute any action or proceeding to enforce this Lease or any provision hereof, or for damages by reason of any alleged breach of this Lease or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with such action or proceeding.
However, section 3.1(c)(iv) stated that in connection with the arbitration proceeding held to determine the Fair Market Rate, each party would bear its own fees and costs.
In view of section 3.1(c)(iv), Saks advised the court that the attorney fees that it was seeking pertained only to the post-arbitration litigation, and not the proceeding used to determine the Fair Market Rate.
The trial court denied the motion, and the court of appeal affirmed. The judicial proceedings in connection with the arbitration awards were not actions to "enforce"
[Page 31]
or to obtain a "declaration of rights" under the lease, such as a dispute over a contractual term or obligation. In the underlying court proceedings, neither party alleged that the other had violated any provision of the lease, was refusing to comply with one of its provisions, or had breached the lease. The parties' resort to court in connection with the arbitration awards did not reflect a disagreement over a lease term or obligation. Rather, the judicial proceedings underlying Saks's claim to attorneys' fees arose from and were fully consistent with the parties' obligations under the terms of the lease regarding how to settle a Fair Market Rent dispute. Therefore, section 23.10 did not govern.
Comment. Given that there was a decent chance for an arbitration proceeding to arise from this lease document, and that there was always the possibility of post-arbitration litigation, it is surprising that the lease did not provide for attorney fees for the party who prevailed in this baseball arbitration, or at least attorney fees incurred in any post-arbitration litigation. The bottom line here is that an attorney fees clause should cover all contingencies, or at least where there could be post-arbitration litigation.
In 2019, Governor Newsom signed Assembly Bill No. 51 (2019-2020 Reg. Sess.), which created Labor Code section 432.6. The statute prohibited employers from requiring employees to enter into arbitration agreements as a condition of employment. The statute also imposed criminal penalties on employers who violate it. However, in an effort to avoid preemption by the Federal Arbitration Act ("FAA"), the statute did not specifically invalidate agreements to arbitrate, once entered into, between employers and employees. Plaintiffs filed suit...
To continue reading
Request your trial