ARBITRATION MAZE LEFT COURTS WITH PLENTY TO DECIDE IN '05 |
Daily Journal
, Jan. 10, 2006
|
|
State and federal courts continue to shape the course of alternative dispute resolution in all its formats. Issues of contractual arbitration, judicial arbitration, mediation, settlement agreements, referees and temporary judges comprised the span of judicial review during 2005. Courts in the past year also began interpretation of statutorily mandated arbitrator disclosure and the impact of California Rules of Court in arbitration. Appellate courts reviewed numerous employment, consumer and franchise contracts containing non-negotiated arbitration clauses, analytically separating these categories from negotiated commercial disputes. The California Supreme Court has focused on issues of federal pre-emption, multiple parties and multiple claims in arbitration. The Federal Arbitration Act, 9 U.S.C. 2, et seq., and its pre-emptive role intersecting state arbitration law continues to cause jurisdictional confusion between state and federal courts, not only in California but at a national level. Despite an admonition from the U.S. Supreme Court (Southland Corp. v. Keating, 465 U.S. 1 (1984)) warning state legislatures and the judiciary not to circumvent or evade the right of parties to arbitrate under the guise of public policy rationale, the California Supreme Court in Discover Bank v. Superior Court, 36 Cal.4th 14 (2005), refused to enforce an arbitration clause prohibiting classwide arbitration in consumer cases. Extolling the virtues of representational litigation of class actions in general, and classwide arbitration in particular, the Discover Bank court held both categories are grounded in public policy and waivers of this right are unenforceable in California courts. To buttress its ruling, the Discover Bank court also ignored Code of Civil Procedure 1283, the standard procedural role of arbitrable consolidation, by characterizing classwide arbitration as a judicial method vindicating substantive rights. Reformulated as an implementation of statutory substantive law, citing Civil Code Section 1668 prohibiting contracts exempting anyone from responsibility for conduct based on fraud or injury, the court applied the doctrine of unconscionable contracts (Civil Code Section 1670.5) as statutory ground for denying enforcement of arbitration clauses. Code of Civil Procedure Section 1281.2(b). Despite strengthening the groundwork for public policy exemption from arbitration, the court declined to extend its application to common law claims of disability benefits allegedly denied by an insurance company. Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495 (2005). The Boghos court conceded the insurance industry qualified as an entity of public interest and thus be heavily regulated, but concluded common law claims untethered to statutory claims did not warrant judicial interference on public policy grounds. Confronting the conflict arising when parties have signed contracts containing arbitrable and nonarbitrable claims, or when they are involved in arbitration or litigation either with each other or third parties, the California Supreme Court reviewed Code of Civil Procedure Section 1281.2(c) in Cronus Investments Inc. v. Concierge Services Inc., 35 Cal.4th 376 (2005). The statute permits a court to join parties or issues, stay litigation, or stay arbitration if a dispute arises out of the same transaction and "there is a possibility of conflicting rules on a common issue of law or fact." In Cronus, the court authorized trial courts to exercise discretion in determining implementation of these statutory options, including orders staying arbitration. The Cronus court reviewed U.S. Supreme Court decisions forbidding states from inhibiting or forbidding arbitration substantively or procedurally. Doctor's Associates Inc. v. Casarotto, 517 U.S. 681 (1996). Nevertheless, citing Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford University, 493 U.S. 871 (1989), the court concluded Code of Civil Procedure Section 1281.2 facilitated arbitration by eliminating potentially inconsistent results between parties contractually bound by an arbitration clause and those involved in litigation of nonarbitrable claims. Employment and consumer claims frequently manifest the most contentious categories of litigation and arbitration. The core objections in each category challenge the adhesive nature of an arbitration clause imposed unilaterally and without negotiation by the parties. Civil Code Section 1670.5 prohibits unconscionable contracts containing unfair or one-sided terms, and in Independent Association of Mailbox Center Owners Inc. v. Superior Court, 133 Cal.App.4th 659 (2005), the court expanded this contractual doctrine to franchise contracts. In Aral v. Earthlink, 134 Cal.App.4th 544 (2005), the court refused to enforce a Georgia forum selection clause in an arbitration agreement involving disputes between the parties arising in California under Business & Professions Code 17200 (unfair competition law). The Aral court ruled the clause statutorily unconscionable pursuant to California law but said nothing about the ability of the court to sever the unenforceable clause. Bolter v. Superior Court, 87 Cal.App.4th 900 (2001). Not all disputes fit into the conventional commercial model. Absent evidence of interstate commerce required for invoking the Federal Arbitration Act, California courts apply the California Arbitration Act, Code of Civil Procedure Section 1280, et seq. Unsurprisingly, arbitration clauses in these disputes often resonate in judicial language applicable to consumer and employment claims. Health care service contracts illustrate this relationship in the sense of quasi-employment-related contracts. Robertson v. Health Net of California Inc., 132 Cal.App.4th 1419 (2005), reviewed the terms of an arbitration clause in a health care services agreement issued to the plaintiff who had enrolled under an employer sponsored group policy. Health & Safety Code Section 1363.1(d) requires a health care service provider to place an arbitration agreement "immediately before the signature line provided for the individual enrolling in the health care service plan." The arbitration agreement in Robertson contained five lines of text between the arbitration clause and the signature line. After engaging in grammatical exegesis of the word "immediately," the Robertson court held the statute forbids intervening text and denied enforcement of the agreement. The court also criticized the agreement for noncompliance with Health & Safety Code Section 1363.1(b), which mandates "prominent display" of the arbitration clause. Although the document containing the arbitration agreement read "Arbitration Agreement" in bold letters, the balance of the text was written in regular textual font. Bold letters alone, said the 1st District Court of Appeal, fall short of compliance with the statute. Real estate agreements, another category resembling traits of consumer transactions, continue to draw judicial scrutiny. The majority of complaints in residential real estate transactions allege nondisclosure of latent or patent defects in a house, but the Legislature has attempted to avoid litigation between buyer and seller by offering the option of arbitration. Code of Civil Procedure Sections 1298(a) and 1298(c) mandate a written explanation of an arbitration agreement in real estate sales contracts, formatted in a bolded and capitalized statement, informing parties who elect arbitration that they waive a jury. In Villacreses v. Molinari, 132 Cal.App.4th (2005), the court held Code of Civil Procedure Section 1298 applies only to parties who elect arbitration. The statutory explanation only accompanies an arbitration clause in a real estate sales contract and is not part of the arbitration agreement itself. A homebuilder, apparently seeking an alternative to arbitration as well as litigation, drafted a clause in his sale contract with the buyer requiring the parties to submit disputes to a referee. Code of Civil Procedure Section 638. In Trend Homes Inc. v. Superior Court, 131 Cal.App.4th 950 (2005), the court agreed that the referee must respect all statutory and common law rights and remedies, but the buyer also objected to the agreement on grounds judicial reference imposed excessive costs and was unconscionable. Civil Code Section 1670.5. The Court of Appeal concluded the trial court could allocate costs if necessary. The traits extant in consumer cases emerge. Many homebuyers are unsophisticated and unfamiliar with laws governing arbitration, and lack comparable bargaining power with the seller. In residential sales, the seller submits a non-negotiated form-contract containing an arbitration clause arguably containing unconscionable terms. Judicial references do not amount to arbitration and are statutorily governed by different rules. Unlike the narrow grounds for appeal in arbitration, Trend Homes noted, judicial review of a court reference is broader. The California Legislature, foreclosed by the pre-emptive role of the Federal Arbitration Act forbidding states from burdening or inhibiting arbitration, has concentrated on process and procedure. Code of Civil Procedure Section 1281.9 mandates substantial requirements for arbitrators to disclose their financial and personal relationships with the parties and their counsel. Failure to timely disclose is grounds for vacating an award. Code of Civil Procedure Section 1286.2(a)(6). In Ovitz v. Schulman, 133 Cal.App.4th 830 (2005), the court reviewed
the application of Code of Civil Procedure Section 1286.2 and the statutory
implementation
of California Rules of Court Ethical Standards for Neutral Arbitrators in
Contractual
Arbitration (California Rules of Court Appendix, Div VI). In Ovitz, at no
time during arbitration did the arbitrator disclose his future participation
in
an
arbitration with one of the parties as required by Standard 12(b) of the
Rules of Court. The arbitrator wrote the parties explaining nondisclosure
was attributable
to an administrative mistake, but the trial court vacated the award. Lawrence Waddington, a retired judge of the Los Angeles Superior Court,
is currently an arbitrator and mediator for JAMS. *** |