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The following are summaries of recent federal and state appellate opinions that address significant legal issues involving alternative dispute resolution. The full text of each opinion is available by clicking on the case name. Luong v. Circuit City Stores Inc . Ninth Circuit U.S. Court of Appeals, January 30, 2004 For purposes of diversity jurisdiction over petition to vacate arbitral award, matter in controversy was amount awarded in arbitration proceeding, not sum claimed in underlying action . The court of appeals affirmed a judgment of the district court. The court held that the matter in controversy for purposes of diversity jurisdiction over a petition to vacate an arbitral award is the amount awarded in the arbitration proceeding, not the sum claimed in the underlying action. Appellant Vernon Luong, a citizen of California, brought an action in district court for discrimination in violation of the Americans with Disabilities Act (ADA) against appellee Circuit City Stores, Inc., a citizen of Virginia, seeking damages in excess of $75,000. Circuit City moved to compel arbitration based on an arbitration agreement. The district court granted the petition, dismissed the action, and the dispute was arbitrated. The arbitrator found that Luong was neither disabled nor regarded as disabled, thus Circuit City did not violate the ADA. Luong petitioned the district court to vacate the arbitration award; his petition premised federal jurisdiction only on the Federal Arbitration Act (FAA), but an amended petition alleged diversity of citizenship with more than $75,000 in controversy and a federal question on the ground that the arbitrator’s award was rendered in manifest disregard of the law. The court dismissed the action as the award was less than the jurisdictional amount required for diversity jurisdiction under 28 U.S.C. 1332(a). The court also ruled that even though the petition alleged that the arbitrator acted in manifest disregard of federal law, Luong’s petition did not raise a federal question, because the presence of federal questions in the underlying arbitration was insufficient to confer jurisdiction. Luong appealed, contending that it was the claim, rather than the award, that determined the amount in controversy, and that the Ninth Circuit so held in American Guaranty Co. v. Caldwell , 72 F.2d 209 (9th Cir. 1934). Federal courts must have an independent basis for federal jurisdiction to hear claims under the FAA. Hence, a petitioner seeking to vacate an award must establish diversity of citizenship or a federal question. Luong’s original action, initiated by his filing of a complaint for violation of the ADA, was dismissed. The court neither stayed the action nor retained jurisdiction. That action was over and done with when the petition to vacate was filed. The petition to vacate initiated a new, and separate, proceeding. The vacatur proceeding had to stand on its own jurisdictional feet. Thus, it was immaterial that the district court had jurisdiction to compel arbitration. The current case could not be a continuation of that action because the action in which arbitration was ordered was no longer pending. Therefore, the district court did not have jurisdiction over Luong’s petition to vacate based upon the jurisdiction that it had over the previous, and previously terminated, action. In American Guaranty Co., the Ninth Circuit stated that it is the amount in controversy that determines jurisdiction, not the amount of the award. While this remark in isolation lent support to Luong’s position that the amount that counted is the amount that was claimed, it was unlikely that the Ninth Circuit meant to hold that jurisdiction turned on the amount in controversy rather than the amount of the award given the posture in which the issue arose and the context in which the remark was made. It had to be concluded that the better rule was that the matter in controversy on a petition to vacate an arbitration award should be measured by the amount of the award. As the amount of the award in Luong’s case was below the jurisdictional threshold of 1332(a), Luong failed to establish diversity as an independent basis for jurisdiction. The Second Circuit has held that when a petition to vacate complains principally and in good faith that the award was rendered in manifest disregard of federal law, a substantial federal question is presented and the federal courts have jurisdiction to entertain the petition. Both the Second Circuit and the Ninth recognize a non-statutory escape valve from an arbitral award where the arbitrator has manifestly disregarded the law. “Manifest disregard of the law” means something more than just an error in the law or a failure on the part of the arbitrators to understand or apply the law. It must be clear from the record that the arbitrators recognized the applicable law and then ignored it. Luong’s petition fell short of this standard, so there was no basis for federal question jurisdiction regardless of whether the court of appeals accepted the Second Circuit’s analysis. The judgment of the district court had to be affirmed. Judge Kozinski dissented, writing that the Ninth Circuit’s statement in American Guaranty Co.that it was the amount in controversy that determines jurisdiction, not the amount of the award, was binding. Sink v. Aden Enterprises Inc . Ninth Circuit U.S. Court of Appeals, December 10, 2003 Party to arbitration agreement could not compel arbitration under � 4 of Federal Arbitration Act where prior default in arbitration of same claims precluded that party from obtaining stay of litigation pending arbitration under �3 of FAA. The court of appeals affirmed a judgment of the district court. The court held that a party to an arbitration agreement may not compel arbitration of claims under � 4 of the Federal Arbitration Act (FAA) where a prior default in arbitration of those claims precludes that party from obtaining a stay of litigation pending arbitration under �3 of the FAA. Appellee Todd Sink sued appellants Aden Enterprises, Inc. and Michael Luther (collectively, Aden) in federal district court, alleging that Aden breached Sink’s employment agreement by not providing payments and stock options due Sink. Because of an arbitration clause in Sink’s employment agreement, the district court stayed Sink’s action and referred the matter to arbitration. The parties entered into a written contract to arbitrate with United States Arbitration and Mediation of Oregon (USA&M). Although Aden was obligated to pre-pay the estimated costs of arbitration, and Aden received multiple notices that the costs were due by a certain date and that Aden was responsible for payment, Aden did not pay the costs or inform Sink and USA&M of its inability to pay before the payment deadline. When the deadline passed with no payment, USA&M informed the parties that it was cancelling the scheduled arbitration due to non-payment of fees. Sink then moved the arbitrator for an Order of Default, which the arbitrator granted. Sink next moved the district court to lift the stay of proceedings in Sink’s action, for judgment to be entered against Aden by default, and alternatively, for Aden to show cause why default judgment should not be granted. Aden opposed Sink’s motion for judgment by default. The district court granted the motion to lift the stay. At the scheduled hearing, Aden’s counsel informed the district court that Aden had obtained the money needed to pay the costs of arbitration and made an oral motion again to refer the matter to arbitration. However, Aden did not present any evidence that at the time payment was due in the arbitration, Aden made genuine efforts to make alternate payment arrangements. The district court denied Sink’s remaining motions for default judgment and to show cause. The district court also found Aden to be in default in proceeding with arbitration and found that Aden had waived its right to arbitrate, and therefore denied Aden’s motion that the parties be ordered to return to arbitration. The district court ordered that the case proceed to trial. Aden appealed, arguing that �4 of the Federal Arbitration Act (FAA) compelled the district court to order the parties to return to arbitration. Under the circumstances, it was not clearly erroneous for the district court to find that Aden had defaulted in arbitration, and its conclusion on this issue had to be affirmed. Section 3 of the FAA provides that before granting a stay of proceedings pending arbitration a court must determine that the issue involved is referable to arbitration under such an agreement, and that the applicant for the stay is not in default in proceeding with such arbitration. Because Aden was in default of arbitration, �3 precluded any attempt by Aden again to stay district court proceedings pending a further reference to arbitration. Aden’s contention that the FAA compelled a court to order a return to arbitration was inconsistent with the structure and purpose of the statute. It could not sensibly be maintained that a district court was required to enter an order under �4 compelling parties to return to arbitration under circumstances where �3 precluded the district court from staying its own proceeding. Accepting Aden’s reading of the FAA would also allow a party refusing to cooperate with arbitration to indefinitely postpone litigation. Under Aden’s interpretation, the sole remedy available to a party prejudiced by default would be a court order compelling a return to arbitration. Aden’s failure to pay required costs of arbitration was a material breach of its obligations in connection with the arbitration. Aden had a fair chance to proceed with arbitration, but it scuttled that prospect by its non-payment of costs, impeding the arbitration to the point where the arbitrator cancelled the arbitration and declared Aden in default. In these circumstances, �4 of the FAA did not compel a district court to return the parties once more to arbitration. The judgment of the district court had to be affirmed. Abramson v. Juniper Networks Inc . Sixth District Court of Appeal, February 6, 2004 Contractual arbitration provision in employment agreement was unenforceable as illegal and unconscionable because of requirement that effectively required employees to share arbitration costs in pursuing public rights claims . The Sixth Appellate District reversed a judgment. The court held in the published portion of its opinion that a contractual arbitration provision in an employment agreement was illegal, and thus unenforceable as a matter of law, where the agreement effectively required the employee to share arbitration costs in pursuing public rights claims. Regarding the employee’s private rights claims, the agreement was unconscionable to the extent that it operated in an oppressive and one-sided manner. David Abramson signed a written offer of employment and a written employment agreement before beginning work as director of corporate communications at Juniper Networks, Inc. Both writings contained arbitration provisions. Juniper terminated Abramson less than a year later. Abramson sued Juniper and certain employees (Juniper) for breach of contract, wrongful termination, and related claims. Juniper moved to compel arbitration, together with dismissal or a stay of litigation pending completion of arbitration. Abramson responded that the arbitration agreement was unconscionable. Abramson alleged that the agreement was not negotiated and operated as a surprise to him based upon its one-sided terms and unexplained costs. The trial court granted Juniper’s motion and dismissed the action without prejudice. The court of appeal reversed the judgment of dismissal and directed the trial court to stay the action pending arbitration. On remand, Abramson demanded arbitration with the American Arbitration Association. The parties disagreed about payment of the filing fee and administrative expenses, with the result that no arbitration ever occurred. Abramson sought an order lifting the arbitration stay and authorizing the action to proceed before the court. The court refused the request, and in doing so rejected Abramson’s contention that Juniper was required to pay all arbitration fees pursuant to Armendariz v. Foundation Health Psychcare Services, Inc., (2000) 24 Cal.4th 83. Abramson refiled his arbitration demand and paid one-half of the initial fees. During an arbitration conference, and in response to Abramson’s request, the arbitrator ordered the parties to brief two threshold issues, namely responsibility for payment of arbitration fees and the validity of the arbitration agreement. Juniper instead requested that the trial court grant relief from the arbitration stay and order enforcement of the court’s previous arbitration orders. The court concluded that it had already resolved the disputed arbitration issues. The court simultaneously cautioned Abramson that he would be subject to sanctions if he continued to dispute arbitrability in the arbitration forum. The AAA dismissed the arbitration proceeding after Abramson failed to make further payments. Juniper moved for summary judgment or summary adjudication on the ground that Abramson failed to exhaust his arbitration remedies. Abramson responded that he had no funds to continue paying the AAA’s costs, and that his only income consisted of unemployment benefits. The trial court granted summary judgment for Juniper. In its statement of decision the court noted that Abramson failed to offer sufficient evidence of his assets, and thus failed to prove his inability to pay the AAA’s costs. Abramson appealed, contending that the arbitration agreement relied upon by Juniper was unconscionable, that its cost-sharing provisions were invalid, and that the trial court erred in granting summary judgment based upon his ability to pay arbitration costs. The court of appeal reversed, holding that the disputed arbitration agreement was unenforceable as a matter of law. The court of appeal concluded that the trial court erred both procedurally and substantively in granting summary judgment. Procedurally, the issue was whether Abramson raised a triable issue of fact regarding his ability to pay the arbitration costs, yet the trial court effectively held that he had to establish prohibitive costs. The net effect was to increase Abramson’s burden from one of production to one of persuasion. Substantively, the trial court adopted an incorrect view of the legality of the arbitration agreement’s cost-sharing provisions, in light of subsequent binding case law. The court examined the arbitrability of Abramson’s claims for the guidance of the trial court on remand. The court noted first that Code Civ. Proc. �1280 declares written arbitration agreements valid, enforceable and irrevocable, subject to grounds that would support revocation of any contract. This reflects the strong policy in favor of arbitration agreements. The court next observed that Armendariz recognizes that statutory civil rights in the workplace are nonwaivable, and thus an arbitration agreement will not be enforced where it effectively results in a waiver of such rights. As for non-statutory claims, an arbitration provision will be rejected if its terms, conditions and practices undermine the vindication of unwaivable rights. To be lawful under Armendariz, an agreement to arbitrate public policy employment claims must satisfy several requirements, one of which is that it limit’s the employee’s forum costs. As a practical matter, the limitation has been interpreted to prohibit employers from requiring that employees pay forum costs unique to arbitration. The court explained further that arbitration agreements covering disputes over private, waivable rights are valid where they met the standards of conscionability, both procedurally and substantively. Finally, to the extent that an arbitration agreement violates public policy or contains provisions that are unconscionable, the agreement may be salvaged where, as a practical matter, the offending provisions can be severed in a way that serves justice and preserves the agreement’s central purpose. Applying these standards to Abramson’s claims, the court retroactively applied Little v. Auto Stiegler, Inc., (2003) 29 Cal.4th 1064, which extended the Armendariz standards to actions involving non-statutory public rights claims. Under that analysis, the disputed arbitration agreement was illegal an unenforceable in that it contained a fee provision that required Abramson to pay one-half of the costs of arbitration, which in this instance amounted to thousands of dollars at the very outset of the arbitration proceedings. The costs were unique to the arbitral forum and therefore were impermissible. As for Abramson’s claims arising from an assertion of private rights, the issue was conscionability, and again the arbitration agreement was invalid. The agreement was both oppressive, because it was imposed on Abramson in the absence of equal bargaining power (namely on a take-it-or-leave-it basis), and it operated as a surprise to Abramson. For these reasons the agreement was procedurally unconscionable. The agreement was substantively unconscionable, as well, in that it was entirely lacking in mutuality and basic fairness. In particular, both the offer letter and employment agreement arbitration provisions contained “trade secret carve-outs” that granted Juniper the right to seek judicial relief for misuse or appropriation of trade secrets, but contained no similar provisions granting Abramson the right to seek judicial relief on certain claims. The unilateral nature of the carve-outs demonstrated the one-sided nature of the arbitration agreement that, together with its oppressiveness, doomed the agreement as unconscionable as a matter of law. Nor could the offending portions of the invalid arbitration agreement be severed. Rather, the agreement was permeated with illegality and unconscionability and thus could not be resurrected by excising individual components. No policy would be served by attempting to salvage the agreement, either, as the parties’ relationship had come to an end and there was no contractual relationship to preserve. O’Flaherty v. Belgum Second District Court of Appeal, January 29, 2004 Arbitrator lacked authority to order forfeiture of law partners’ interests in firm’s capital accounts . The Second Appellate District reversed a judgment with directions. The court held that an arbitrator exceeded his authority by ordering forfeiture of law partners’ interests in the firm’s capital accounts. The court held further that the arbitrator lacked jurisdiction to decide claims asserted on behalf of the firm, which was in receivership, over the receiver’s objection. An internal dispute prompted Michael O’Flaherty and other equity partners of the law firm O’Flaherty & Belgum (OB) to leave the firm and form a new law partnership called O’Flaherty, Cross, Martinez, Ovando & Hatton LLP (OCMOH). Nancy Wanski, in her capacity as an OB partner, sued the withdrawing partners and their newly formed firm for breach of contract and related claims. Among other relief, Wanski sought appointment of a receiver, an accounting, and judicial dissolution of OB. The withdrawing partners cross-complained for declaratory relief and appointment of a receiver, with a reserved right to seek arbitration. According to the withdrawing partners, the disputes included the identity of the managing partner, whether Stephen Belgum had been expelled, whether OB was properly dissolved, and issues pertaining to OB’s offices and property. A receiver was necessary, according to the withdrawing partners, to hold the partnership property and wind up the partnership’s affairs while the parties resolved their disputes. The trial court appointed David Ray to act as receiver for OB. Ray’s powers included enforcement and collection of debts, instituting suit on behalf of OB to preserve the firm’s assets, discharging OB’s obligations, and engaging counsel. Belgum moved for Ray’s discharge and termination of the receivership on the grounds that OB had not been dissolved and that no receivership was required. Wanski joined in the motion. The withdrawing partners petitioned for an order staying the action and compelling arbitration pursuant to an arbitration clause in the parties’ partnership agreement. The trial court granted the petition and stayed the action, but retained jurisdiction to enforce the arbitration award, as well as jurisdiction over the actions of Ray and the receivership estate. Belgum filed a new action against the withdrawing partners and OCMOH for breach of contract and related claims. Belgum moved to vacate the stay of the Wanski action for failure to institute arbitration proceedings. The withdrawing partners responded that no arbitration proceedings were instituted because they could litigate their claims regarding shares of the net assets in the receivership proceeding. After the trial court set an order to show cause why the stay should not be dissolved for failure to arbitrate. The withdrawing partners sent a demand for arbitration to the remaining partners pursuant to American Arbitration Association rules. Ray immediately demanded that Belgum seek dismissal of OB from the Belgum suit because, as receiver, Ray was the only person authorized to bring suit on OB’s behalf, and he had not authorized the Belgum suit. The trial court ultimately assigned the Wanski and Belgum actions to one court as related actions for all purposes. The action was sent to binding arbitration and all other proceedings stayed. Ray at all times maintained that he was OB’s sole authorized representative and that he had not retained anyone to represent OB in the arbitration. Ray contended that the partners were to complete arbitration amongst themselves, without participation by the receiver. After initial liability-phase proceedings, the arbitrator issued interim findings that the withdrawing partners were jointly and severally liable to Belgum and OB for damages from breach of contract and assorted other claims. Ray advised the arbitrator that no representative of OB had been authorized to participate in the arbitration on OB’s behalf. Ray sought instructions from the court as to how to proceed with the interim arbitration award in favor of OB and remedy-phase arbitration proceedings. The court instructed Ray not to participate in the proceedings and to allow the arbitration to continue its course. The arbitrator awarded damages in favor of Belgum, OB, and associated parties. In addition, the arbitrator concluded that the withdrawing partners’ “flagrant” breaches of contractual and fiduciary duties warranted forfeiture of all rights to OB’s capital accounts. Belgum and another partner were declared liquidating administrators of OB, and Ray was instructed to disburse the remaining receivership funds accordingly. The trial court ultimately granted a motion to terminate the receivership but refused to surcharge Ray. The withdrawing partners appealed, contending in pertinent part that the arbitrator exceeded his authority by ordering forfeiture of the capital accounts and by adjudicating, over the receiver’s objection, claims which could be asserted only by the receiver. The court of appeal reversed, holding that the arbitrator exceeded his authority in ordering forfeiture of capital partnership accounts and by purporting to adjudicate OB’s rights over the objection of OB’s duly appointed receiver. The court observed that the partnership agreement’s arbitration clause restricted the arbitrator from imposing remedies prohibited by the agreement or not otherwise available in a court of law. In this instance, the forfeiture of the capital account interests was contrary to partnership law, the partnership agreement, and case law. The Uniform Partnership Act, for example, contains no provision for forfeiture of a capital account. Nor did the partnership agreement contemplate such a remedy. California law, too, rejects the notion that a partner’s wrongs result in forfeiture of the partner’s partnership interest. Rather, a partner remains entitled to his or her interest, as reduced in accordance with damages caused by a breach. This is appropriate, the court said, as a matter of public policy, as the law abhors forfeiture, and a partner’s ownership interest is distinct from performance of partnership duties. By granting a remedy not contemplated under the partnership agreement or governing law, then, the arbitrator exceeded his power and jurisdiction. Turning to the receivership issue, the court noted that a receiver appointed for a dissolved partnership has sole authority to commence an action on behalf of the former partnership. Nor may an arbitrator encroach on the jurisdiction of a receivership court. Rather, the receivership is in the hands of the receiver, which in turn is under the control and supervision of the court. Here, the arbitrator lacked jurisdiction to consider OB’s claims because Ray was the sole person with the authority or right to prosecute OB’s claims. Ray’s exclusive jurisdiction to manage OB’s affairs could not be waived by anyone other than the court. Thus, the arbitrator exceeded his jurisdiction in purporting to adjudicate OB’s claims. The adjudication could not be severed from the award, as the arbitrator’s findings concerning violations of OB’s rights were intertwined with findings related to other parties, and in turn influenced multiple aspects of the overall arbitration award. The entire award therefore had to be vacated. The court of appeal reversed the trial court’s judgment with directions that the trial court vacate the arbitration award. Justice Grignon dissented, writing that the arbitrator indeed exceeded his authority by adjudicating claims in the arbitration proceeding that properly belonged to OB without the consent of the receiver. However, because the court terminated the receivership, discharged the receiver, and transferred authority to litigate OB’s claims to the liquidating administrators, OB claims could be pursued in the partnership’s name. Therefore the party that prosecuted OB’s claims in arbitration was the same party authorized to pursue the claims. There was no indication that OB’s claims were not vigorously pursued in arbitration, and the resulting award was implicitly ratified by the court. Thus, given the absence of prejudice to any party, as well as full litigation of OB’s claims in the appropriate forum of arbitration, reversal was unwarranted. In addition, Justice Grignon said, the arbitrator was authorized to impose the award that he did, including forfeiture of the withdrawing partners’ interests in their capital accounts. Justice Grignon maintained that forfeiture of a partner’s interest was an appropriate equitable remedy that could be applied as a defense, much in the nature of the unclean hands doctrine, to defeat the statutory right to a partnership accounting. Such a remedy was not inconsistent with law or the partnership agreement, Justice Grignon concluded. Garcia v. Direct TV Second District Court of Appeal, January 28, 2004 Foundational issue as to whether arbitration agreement prohibits class arbitrations is to be determined by arbitrators, not courts . The Second Appellate District reversed a judgment. The court held that a trial court improperly ruled that it, and not an arbitrator, would determine the foundational class action issue of whether an arbitration agreement prohibited class arbitrators. DIRECTV Inc. provided home satellite television services through a network of independent dealers. One of the dealers, Robert Garcia filed a class action demand for arbitration with the American Arbitration Association to resolve his claim against DIRECTV. Garcia and DIRECTV entered into DIRECTV’s standard Sales Agency Agreement, which included an arbitration provision. Before the arbitration was heard, Garcia filed a class action lawsuit against DIRECTV and its parent corporation, which in turn moved to compel. The trial court ruled that it, and not the arbitrator, would determine the class action issues (including the threshold issue of whether classwide arbitration was prohibited by the terms of DIRECTV’s agreement). Ruling that classwide arbitration was not prohibited, the court granted DIRECTV’s motion to compel arbitration. Hearing the case previously, the court of appeal relied on Blue Cross of California v. Superior Court , (1998) 179 Cal.App.3d 935, to affirm the trial court’s order, after which the California Supreme Court denied DIRECTV’s petition for review. Thereafter, however, the U.S. Supreme Court granted DIRECTV’s petition for a writ of certiorari, vacated the appellate court’s judgment, and held this case pending a resolution of Green Tree Financial Corp. v. Bazzle , (2003) 123 S.Ct. 2402 ( Green Tree ). In Green Tree , the U.S. Supreme Court held that the foundational question — that is, whether the agreement involved in that case forbade a class arbitration — had to be decided by the arbitrator, not the court. In light of Green Tree , the high court remanded the current (Garcia’s) case back to the appellate court for reconsideration. After reconsideration, the court of appeal reversed the judgment. The court held that, in light of Green Tree , the trial court improperly ruled that it, and not the arbitrator, would determine the foundational class action issue of whether the arbitration agreement prohibited class arbitrators. The appellate court explained that the U.S. Supreme Court has spoken and Green Tree plainly mandates that this foundational issue must, henceforth, be decided by the arbitrators, not the courts. The appellate court rejected, as an “imperfect syllogism,” Garcia’s argument that a remand for decision by the arbitrator would be superfluous, because that decision would be subject to the trial court’s review to determine whether the arbitrator had committed an error of law or legal reasoning, and that trial court-which had already decided that this agreement did not forbid class action arbitrators-would necessarily vacate an arbitral decision to the contrary. The appellate court also noted that Garcia’s approach, which assumed the trial court’s review of the arbitrator’s decision would be de novo, was based on neither authority nor explanation. The appellate court remanded the matter to the trial court with directions to remand the matter to the arbitrator. Ortega, J., concurred with the result, that is, sending the matter back to the trial court so it could send it to the arbitrator, but disagreed with the way the appellate court was achieving that end. The means should not have been a reversal, Justice Ortega opined, but, rather, a dismissal, since the order “appealed” from was interlocutory, the trial court not having fully ruled on the matters that were before it. Justice Ortega also disagreed with the appellate court’s issuance of an opinion, much less a published one, in this case, he said, which called for nothing more than an issuance of an order dismissing the appeal and sending the matter back to the trial court with a citation to Green Tree. Weinberg v. Safeco Insurance Company of America Second District Court of Appeal, January 7, 2004 Insurer must timely move to vacate or correct arbitrator’s award in excess of policy limits or risk confirmation of entire award . The Second Appellate District affirmed a trial court judgment. The court held that by failing to timely seek correction or vacation of an arbitration award that exceeded policy limits, an insurer waived any claim that the arbitrator erred or exceeded his authority. Morton Weinberg held an automobile insurance policy issued by Safeco Insurance Company of America. The policy provided uninsured motorist (UM) coverage, including underinsured motorist (UIM) coverage. With respect to the UIM coverage, the policy stated that the bodily injury limits for UIM coverage were reduced by sums “[p]aid because of the bodily injury by or on behalf of persons or organizations who may be legally responsible.” Weinberg was injured in a car accident caused by an underinsured motorist. He made a bodily injury claim to the motorist’s carrier, and received a payment for his claim. Weinberg subsequently demanded UIM arbitration with Safeco pursuant to the provisions of its policy. The parties proceeded with discovery in preparation for the UIM arbitration. After the close of discovery, Weinberg served Safeco with a Code of Civ. Proc. �998 settlement offer of about $250,000. Safeco did not accept. Safeco and Weinberg participated in binding UIM arbitration. The arbitrator rendered his award in March 2000, finding that Weinberg had sustained more than $800,000 in damages as a result of the collision. Safeco issued a check representing the $250,000 UM/UIM policy limit, less the amount received by Weinberg from the underinsured motorist’s carrier. In October 2000, Weinberg and his wife sued Safeco for breach of contract based on its handling of Weinberg’s UIM claim. The trial court summarily adjudicated several causes of action in Safeco’s favor, leaving only bad faith and unfair competition causes of action. Safeco served the Weinbergs with a joint �998 offer in the amount of $150,001. The Weinbergs allowed the offer to lapse. A jury tried the bad faith cause of action, and the court concurrently tried the unfair competition cause of action. The jury and the court both found for Safeco, and judgment in Safeco’s favor was entered. Safeco submitted a timely cost bill seeking expert witness fees under � 998. The court granted the Weinbergs’ motion to tax on the ground the joint �998 offer was invalid. Safeco appealed. In January 2002, Weinberg filed a petition in the trial court seeking to confirm the arbitration award into a money judgment against Safeco. In its response, Safeco argued awards in UM/UIM arbitrations are not liability assessments against the insurer and therefore cannot be confirmed into money judgments. At the hearing, the trial court judge stated he would confirm the petition because he lacked jurisdiction to correct or vacate the award. At the court’s direction, Morton submitted a proposed judgment to which Safeco objected. The court entered judgment for Weinberg in an amount over $1,145,000, representing the full amount of the arbitration award plus costs and prejudgment interest. Safeco appealed. The court of appeal affirmed, holding that the trial court had properly confirmed the arbitration award exceeding the policy limits because Safeco failed to seek to correct or vacate the award in a timely manner pursuant to Code Civ. Proc. �1288. The primary issue in dispute at the arbitration, the court found, was the extent of Weinberg’s injuries. The arbitrator was not asked to determine the amount owed to Weinberg by Safeco. The arbitration clause in the automobile insurance policy issued to Weinberg stated that disputes concerning coverage may not be arbitrated. However, the arbitrator ruled Weinberg was entitled to significant damages and awarded him over $800,000. In its response to the petition to confirm, Safeco argued the arbitrator only established the liability of the UIM to Morton and did not establish the extent of Safeco’s obligation to pay Morton. The response did not request the court either correct or vacate the award. One possible ground for relief, the court noted, is that the arbitrator exceeded his or her power. Such relief must, however be requested within 100 days of service of the award, pursuant to �1288. Both in the trial court and on appeal, Safeco did not argue the arbitrator exceed his powers by awarding damages, but instead argued the arbitrator only issued a limited declaration of rights. Resolving such an issue of interpretation is properly done through a request for correction or vacation made to either the arbitrator or the trial court, not saved for argument on appeal. It is incumbent on the parties, the court found, to see that the arbitrator issues a declaration of liability or of rights, and does not simply award damages. If the arbitrator makes an award of damages in excess of the policy limits, then the insurer must move in a timely manner, either before the arbitrator or in court, to vacate or correct the award. The insurer otherwise risks, as here, having the court confirm the entire award on motion of the insured. The court also held that the trial court also properly denied Safeco recovery of its expert fees because Safeco’s joint settlement offer was invalid. Section 998 settlement offers must be unconditional, and thus an offer made to two parties that is contingent on acceptance by all parties is not valid under �998. A �998 offer made to multiple parties is valid only if it is expressly apportioned among the parties. Safeco made a joint, nonapportioned offer to both Weinberg and his wife, both of whom were insured under its policy. The offer, as a result, was invalid under �998. Safeco’s argument that the parties were spouses was unavailing. Even though the wife’s claim was based on Safeco’s alleged mishandling of Weinberg’s UIM claim, it was a separate, not derivative, claim. The Weinbergs did not have a single, indivisible injury. Thus, Safeco’s joint �998 offer was not valid as it was not apportioned between the Weinbergs. Gray Cary Ware & Freidenrich v. Vigilant Insurance Company Fourth District Court of Appeal, January 12, 2004 Insurer not obligated to arbitrate dispute over defense expenses incurred by Cumis counsel . The Fourth Appellate District affirmed a judgment. The court held that an insurer has no statutory obligation to arbitrate a dispute regarding the reimbursement of defense expenses incurred by Cumis counsel. Law firm Gray Cary Ware & Freidenrich was sued. The firm’s private investigator, Richard Post, was also named as a defendant. Gray Cary tendered defense of the action to its insurer, Vigilant Insurance Co. Vigilant accepted the tender under a reservation of rights. Because the reservation of rights created a conflict of interest and triggered the right to independent counsel, Gray Cary defended itself as independent Cumis counsel with Vigilant’s approval. Because of allegations that Post had acted as its agent, Gray Cary determined it was vital to its own defense to ensure that Post was represented. Without Vigilant’s prior approval, Gray Cary paid the legal fees incurred for third party counsel to represent Post. When Gray Cary sought reimbursement of these legal fees under its policy, Vigilant denied the request on the ground that Post was not a Gray Cary employee and thus not an insured under the policy. Vigilant refused Gray Cary’s request to arbitrate the dispute under Civ. Code �2860(c), which mandates arbitration of any dispute regarding reimbursement of attorney fees incurred by Cumis counsel. The trial court denied Gray Cary’s petition to compel arbitration. The court of appeal affirmed, holding that �2860 does not mandate arbitration in these circumstances. Section 2860(c), by its express terms, mandates arbitration solely of disputes regarding the “attorney[] fees” to be paid to Cumis counsel. Although the dispute at issue here regarded attorney fees, the fees at issue were not paid to Cumis counsel for any insured. Section 2860(c), strictly construed, does not apply to attorney fees paid for the representation of an uninsured third party. At issue, the court found, was whether �2860(c) applied solely to attorney fees or also to disputes regarding costs and expenses. Gray Cary maintained that it did. Vigilant argued that it did not. The court concluded that Vigilant was correct. Although parties often agree to arbitrate issues involving not only attorney fees but also expenses, the court found that such agreements were clearly beyond the mandate of �2860(c). Thus, while it may not be unusual for parties to arbitrate defense costs along with attorney fees, neither the language of the statute nor the pertinent caselaw compels such a result. Where, as here, an insurer declines to arbitrate the propriety of defense expenses incurred by Cumis counsel, it is not obligated to do so. Saint Agnes Medical Center v. PacifiCare of California California Supreme Court, December 18, 2003 Party’s repudiation of contract did not foreclose request for contractual arbitration . The California Supreme Court affirmed a judgment. The court held that a litigant did not waive his right to seek contractual arbitration by filing suit to repudiate the contract. PacifiCare of California filed a lawsuit seeking repudiation of a contract with Saint Agnes Medical Center. PacifiCare contended that the contract was void ab initio. Saint Agnes filed suit against PacifiCare seeking specific performance of the contract. PacifiCare petitioned to compel arbitration as provided in the contract. Saint Agnes objected on the basis that PacifiCare had repudiated the contract and thereby waived its right to compel arbitration. The trial court denied the petition to compel arbitration, agreeing with Saint Agnes that PacifiCare waived any rights it had under the contract by seeking to repudiate that contract. The court of appeal reversed, holding that PacifiCare’s filing of a lawsuit did not result in a waiver of its arbitration rights. The court found that the right to compel arbitration is not waived by filing a lawsuit, as it is the judicial litigation of the merits of arbitrable issues which waives a party’s right to arbitrate. The California Supreme Court affirmed, holding that PacifiCare’s legal challenge to the validity of the agreement was not inconsistent with an intent to invoke contractual arbitration. The court observed that the trial court relied upon Bertero v. Superior Court , (1963) 216 Cal.App.2d 213, in reaching its decision. Bertero held that an employer’s repudiation of an entire employment contract deprived it of any right to rely on the agreement’s arbitration clause. Thus Bertero would seem to support a finding of waiver. The court admonished, however, that the governing law has changed since Bertero was decided. Both federal and California law now hold that, in the absence of a specific attack on an arbitration agreement, such an agreement generally must be enforced even if one party asserts the invalidity of the contract that contains it. The logic of current law is that an arbitration clause is severable from other portions of an agreement, so that even fraud in the inducement regarding other contract terms does not render an arbitration clause unenforceable. In this instance, neither party challenged the validity of its assent to the contract in dispute or the arbitration clause contained in the contract. The record thus demonstrated that, in recognition of the separable nature of arbitration agreements, the arbitration clause in the contract was sufficient to mandate arbitration of Saint Agnes’ claims. The court next confirmed that the filing of a lawsuit, absent more, does not result in a waiver of the exercise of the right to arbitration. A party’s filing of a lawsuit in the face of an agreement to arbitrate is not in itself so inconsistent with that right as to constitute abandonment. Waiver generally does not occur so long as the arbitrable issues have not been litigated to judgment. PacifiCare therefore did not waive its right to seek arbitration by filing its suit for repudiation of the agreement. The court noted in closing that because PacifiCare’s litigation to date did not support an inference of waiver, the costs and expenses which Saint Agnes had incurred also were insufficient for a finding of prejudice or waiver that would negate PacifiCare’s right to insist upon arbitration. Gutierrez v. Autowest Inc. First District Court of Appeal, December 9, 2003 Contractual arbitration clause was unconscionable absent opportunity for waiver of administrative fees that exceeded consumer’s ability to pay . The First Appellate District reversed an order denying a petition to compel arbitration. The court held that consumers could challenge a contractual arbitration clause in a vehicle lease as unconscionable where it required payment of substantial administrative fees without an option for a waiver should the fees exceed the consumers’ ability to pay. The court held further that consumers pursuing unwaivable statutory claims may not be required to pay arbitration fees that exceed their ability to pay. Autowest Inc. and AutoNation USA Corp. aired a television infomercial offering to lease certain vehicles for $249 per month with “zero down.” After Ryan Gutierrez selected a vehicle to lease, an Autowest sales manager offered the vehicle for a down payment and a monthly payment that was almost double that advertised on television. According to the sales manager, Gutierrez would have to make a significantly higher down payment to receive the advertised lease price. Gutierrez executed the lease as offered. The back of the lease contained, among other provisions, an arbitration clause in small print that provided for mandatory arbitration under the Federal Arbitration Act according to the rules of the American Arbitration Association. Gutierrez and his wife sued AutoNation on behalf of themselves and similarly situated consumers, alleging “bait and switch” fraud, negligent misrepresentation, false advertising, and violation of the California Consumers Legal Remedies Act. AutoNation petitioned to compel arbitration. The Gutierrezes opposed arbitration on the ground that the arbitration fees were beyond what they could pay. The trial court denied the petition. The court found that the AAA Commercial Arbitration Rules would apply because the amount in controversy was over $10,000. The Commercial Arbitration Rules, in turn, keyed certain fees to the size of the claim, which the parties agreed had a potential value of at least $500,000. Thus, the Gutierrezes would have to expend more than $10,000, not including attorneys fees, to have their case arbitrated. The trial court reasoned that imposition of such fees would effectively prevent the Gutierrezes from vindicating their statutory rights, rendering the arbitration agreement void as against public policy. The court stated that it lacked authority to sever contractual provisions from the lease so as to render the arbitration clause enforceable because the contract lacked an independent cost provision and a severability clause. AutoNation appealed. The court of appeal reversed, holding that arbitration could go forward if the trial court exercised its authority to sever the offending cost provision, and if AutoNation agreed to pay the administrative costs that were unduly burdensome for the Gutierrezes. The court of appeal observed that a petition to compel arbitration is subject to two distinct defenses: An arbitration fee provision may be found unconscionable, and an arbitration clause will not be enforced where it is a private agreement that effectively impairs the exercise of unwaivable statutory rights enacted for a public purpose. Turning to the issue of unconscionability, the court explained that an arbitration clause is unenforceable when it is both procedurally and substantively unconscionable. In this instance, the disputed arbitration clause was fatally unconscionable in each regard. The clause was procedurally unconscionable because the lease executed by Gutierrez was adhesive. The agreement was presented on a “take it or leave it” basis and included an arbitration clause that was particularly inconspicuous, being on the back page of the agreement and in small print. The court admonished that where a consumer enters into an adhesive contract that mandates arbitration, it is substantively unconscionable to condition that process on the consumer posting fees that the consumer cannot pay. Such a provision shocks the conscience as a harsh and one-sided agreement that defeats the expectations of the non-drafting party. Here, the Gutierrezes were supposed to pay an initial filing fee and case service fee, referred to collectively as administrative fees, which far exceeded their ability to pay. Despite potentially imposing a substantial administrative fee, the court said, the arbitration agreement offered no procedure for a consumer to obtain a fee waiver or reduction. Absent any form of safety valve, the agreement was substantively unconscionable and thus could not be enforced. The court concluded, however, that the trial court did retain authority to sever the contract’s arbitration costs provision. Where a contractual illegality is collateral to the agreement’s purpose, the illegal provision can be eliminated by means of severance or restriction. The purpose of the arbitration clause at issue was not to regulate costs, but to provide a method of dispute resolution. Therefore severance was available to the trial court. The court explained further that the Gutierrezes also were entitled to contest the arbitration clause as a private agreement in contravention of public rights. It is well-established in the employment context, for instance, that an employee may not be compelled to pay costs to participate in employer-mandated arbitration that would not be required if the employer were to seek judicial relief. That is, arbitral costs may not be imposed in a manner that would impair vindication of statutory rights. For purposes of consumers required to arbitrate unwaivable public rights asserted under statutes such as the CLRA, the court said, the issue must be decided on a case-by-case basis according to whether arbitration would impose unaffordable fees exceeding the consumer’s ability to pay. The court of appeal reversed the trial court’s denial of AutoNation’s petition to compel arbitration and remanded for reconsideration of severance in keeping with the court’s directions. Harper v. Ultimo Fourth District Court of Appeal, December 5, 2003 Contractor’s arbitration agreement was unconscionable where clause imposed restrictive arbitration remedies by stealth . The Fourth Appellate District affirmed an order denying a motion to compel arbitration. The court held that a contractor’s arbitration clause was unconscionable where it mandated proceedings under the Better Business Bureau’s arbitration rules without giving homeowners notice of the significantly restricted remedies that those rules afford. Laurence and Michaelyn Harper hired Frank Ultimo and Ultimo Organization to stabilize soil and perform other work on their property. The parties’ pre-printed project contracts contained arbitration provisions that required settlement of all controversies according to the Uniform Rules for Better Business Bureau Arbitration. According to the Harpers, Ultimo broke a sewer pipe during the work, thereby allowing concrete to enter and form blocks in their home’s plumbing. The Harpers also believed that Ultimo misled them about the amount of work to be performed. The Harpers then discovered that the BBB’s arbitration rules significantly limited dissatisfied customers’ damages and remedies. In particular, customers were barred from recovery for personal injuries absent a written agreement to the contrary. The BBB rules further limited customers to full or partial refund, completion of work, costs of repair, or any out of pocket loss or property damage, subject to a $2,500 cap. Customers could not obtain tort damages, punitive damages, or any other damages normally provided under law. The Harpers sued Ultimo for negligence, fraud, and breach of contract. Ultimo moved to compel arbitration, but the trial court denied relief on the ground that the arbitration clauses in Ultimo’s contracts were unconscionable and therefore unenforceable. Ultimo appealed. The court of appeal affirmed, holding that the arbitration provisions were unconscionable. The court of appeal observed that an arbitration clause may be deemed unenforceable when it is both procedurally and substantively unconscionable. Procedural and substantive unconscionability do not need to be present in equal amounts, the court explained, but rather play against one another on sliding scale. Thus where there is significant procedural unconscionability, the less evidence is needed of substantive unconscionability, and vice versa. The court admonished that Ultimo’s contracts were blatantly unconscionable both procedurally and substantively. In terms of procedural unconscionability, the contracts subjected Ultimo’s customers to both surprise and oppression. Surprise was evident in the shocking discovery that no relief was available which would fully compensate for damaged property, let alone perpetration of a fraud. Oppression was present because the lack of full relief was artfully hidden by the inclusion of a mere reference to the BBB arbitration rules, without attaching the rules for customer review. Additional oppression existed because the specific version of the arbitration rules referenced in the agreement were not identified. A customer therefore might be bound by even less favorable BBB arbitration rules if such rules were put into place after the customer signed the agreement. There existed substantive unconscionability because the arbitration provisions were egregiously one-sided against Ultimo’s customers. In essence there was no possibility that a customer damaged by Ultimo’s work could obtain full relief. Despite the apparent unconscionability of the arbitration terms of Ultimo’s contracts, the court concluded that his appeal was not frivolous. The trial court noted, for instance, that the Harpers’ agreement was not one of adhesion because they could have contracted with any number of other construction firms. The comment was pertinent because some authority would seem to indicate that a contract must be adhesive in order to be unconscionable. The court of appeal thus took the opportunity to declare that adhesion is not a prerequisite for unconscionability. In addition, an issue existed as to whether the trial court should have sent the dispute to arbitration while allowing the Harpers’ tort claims to go to trial. Although a trial court may have discretion whether to sever an unconscionable provision from an agreement, rather than “throwing out” the entire agreement itself, the trial court faced a different issue, namely whether to split substantive claims between arbitral and judicial forums. In this case, the prospect made no sense because all of the Harpers’ claims were bound up together. Severing claims would require, as a practical matter, that all claims be dealt with in both forums. In addition to being inefficient, this would create the possibility of inconsistent adjudications. As a result, it was appropriate for the trial court to reject arbitration in its entirety and permit the action to go forward in one judicial proceeding.

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