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California courts face tough arbitration questions.

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Alternatives
TO THE HIGH COST OF LITIGATION
INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION
Alternatives
TO THE HIGH COST OF LITIGATION
Publisher:
Susan E. Lewis
John Wiley & Sons, Inc.
Editor:
Russ Bleemer
VOL. 24 NO. 10 NOVEMBER 2006
Jossey-Bass Editor:
David Famiano
Production Editor:
Chris Gage
Alternatives to the High Cost of Litigation (Print ISSN 1549-4373, Online ISSN 1549-4381) is a newsletter published 11 times a year by the International Institute for
Conflict Prevention & Resolution and Wiley Periodicals, Inc., a Wiley Company, at Jossey-Bass. Jossey-Bass is a registered trademark of John Wiley & Sons, Inc.
Editorial correspondence should be addressed to Alternatives, International Institute for Conflict Prevention & Resolution, 575 Lexington Avenue, 21st Floor, New York,
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VOL. 24 NO. 10 NOVEMBER 2006
ALTERNATIVES 171
ADR BRIEF • ADR BRIEF • ADR BRIEF
It’s likely that the California Supreme
Court will get a shot at two red-hot arbitration law issues in the near future—contracting for judicial review, and classaction authorization.
Satellite television provider DirecTV
Inc. was mulling a petition to the Court at
press time, after losing its California state
appellate court bid to uphold a lower court
ruling that overturned an award permitting a class action arbitration against the
company.
But the unsettled law in the 31-page
opinion in Cable Connection Inc, et al. v.
DirecTV Inc., No. B188278 (Cal.App.
2d Dist. Sept. 22, 2006) (available at
http://www.courtinfo.ca.gov/opinions/documents/B188278.PDF), as well as the
contentious of the litigation between
DirecTV and dealers that once sold and
installed the service and its products, make
a certification petition a natural next step.
The arbitration agreement in the case
is silent on class arbitration. The dealers
initially brought a nationwide class action
in an Oklahoma state court, which the
appeals court opinion says “apparently
directed” the dealers to file an arbitration
demand in California state court.
The appellate court decision emphasizes that it is not authorizing a class, but
merely interpreting the arbitration provision in the dealer agreements as permitting
them.
As a result, the opinion highlights the
extensive procedural process needed to
accommodate class requests—and the litigation that inevitably follows—long
before the arbitration’s substantive issues
are examined.
The dealers claim that they are owed
tens of millions of dollars in unpaid sales
commissions. Now that the appeals panel
has allowed a class to be formed, the dealers will ask the arbitrators to certify a
class—which will result in rulings that are
almost certain to be back in court before
the arbitrators get to the merits.
That is, if a Supreme Court petition to
review the current decision permitting the
class doesn’t delay the arbitration panel’s
consideration of the class certification
issue even longer.
Cable Connection has an additional layer
of arbitration law controversy. The appellate decision also concludes that an arbitration agreement provision withholding from
the arbitrators “the power to make errors of
law,” and subjecting errors to judicial
review, is void and unenforceable.
The unanimous appellate panel, in an
opinion written by Second District,
Fourth Division Court of Appeal Associate
Justice Thomas L. Willhite Jr., concludes
that the parties cannot contractually
expand trial court jurisdiction to permit
review of arbitration awards for legal error.
The opinion turns back DirecTV’s challenges to the award—reversing a Nov. 11,
2005, trial court decision—based on the
arbitrators’ exceeding their powers.
It cites Crowell v. Downey Community
Hospital Foundation, 95 Cal.App.4th 730
(2002), which found that contract language allowing court review to strike an
arbitration award where it “is not supported by substantial evidence or is based
upon an error of law” is void and unenforceable, because the Californian Legisla-
ture had “clearly set forth” trial court arbitration award review jurisdiction.
The Crowell holding relies on a seminal state Supreme Court arbitration jurisdiction case, Moncharsh v. Heily & Blase, 3
Cal.4th 1, 11 (1992), which limits trial
court review on private arbitration awards.
Moncharsh holds that arbitrators’ decisions
generallly aren’t reviewable for errors of
fact or law—the power apparently designated to the court by the DirecTV dealer
agreement.
“At some point the California Supreme
Court will have to tackle the seeming conflict between the Moncharsh rule of limited
reviewability and the fact that one of the
statutory grounds of review is that the
arbitrators exceed their powers,” notes veteran Menlo Park, Calif., solo attorney and
neutral, James R. Madison, a former California Dispute Resolution Council president, in an E-mail to Alternatives.
“Whether the Court will choose to use this
case as a vehicle for addressing that issue is
another matter,” he adds.
The Cable Connection appellate panel
severed the judicial review provision. It
concludes that the arbitrators didn’t violate
(continued on next page)
Cartoon by John Chase
CALIFORNIA COURTS
FACE TOUGH
ARBITRATION QUESTIONS
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
172 ALTERNATIVES
VOL. 24 NO. 10 NOVEMBER 2006
ADR BRIEF • ADR BRIEF • ADR BRIEF
(continued from previous page)
“any express provisions” of the parties’
agreement. The panel asked the trial court
to enter a new order confirming the award
the trial court previously set aside.
For now, DirecTV attorney Michael E.
Baumann, a partner in the Los Angeles
office of Kirkland & Ellis LLP, says that his
client is considering filing a petition for certification with the California Supreme
Court. Under California rules, the petition
would have to be filed by early November.
Says Baumann, “I think this is a case
which should be of interest to people in the
community for a lot of reasons.” But he
declines further comment, citing DirecTV
policy during pending litigation.
Former Kirkland partner Andrew E.
Paris, now a partner in Reed Smith’s Los
Angeles office, who also represents
DirectTV, also declined to comment, via
E-mail.
The dealers will push for the arbitration, to consider class certification as permitted by Cable Connection, to begin
immediately. The dealers’ attorney, Daniel
A. Osborn, name partner in New York’s
Beatie and Osborn, says, “Our intention is
to write to the arbitrators for a scheduling
conference. We’re doing it knowing that
DirecTV will appeal and ask them to stay.”
DirecTV’s stay request before the current matter was successful. But this time,
Osborn says, he believes the American
Arbitration Association panel administering the case will rule differently. Referring
to the first stay granted while the case was
before the appeals court, Osborn asks,
“Why should the plaintiffs wait another
16 months, especially since the appeal
isn’t automatic?”
Osborn says he expected to contact
the arbitrators on the plaintiffs’ behalf as
Alternatives went to press in the third
week of October, and that the potential
class has 6,000 to 10,000 satellite television dealers nationwide.
[The AAA maintains a class-action arbitration page with links to each of the cases
it is administering. Cable Connection
demands, notices, court orders, and an
award and its amendment are available at
www.adr.org/sp.asp?id=22316.]
The delay, in fact, is what Osborn says
was at the root of the appellate court decision. “It came down to [the panel’s] view
that the case was filed in February 2004,”
says Osborn, “and we are now only in ‘Stage
One’ for the procedure in handling class
actions.” He adds that, even though class
certification is the next step, “you can’t get
there until you finish at the state Supreme
Court.”
Worse, says Osborn, is that once the
parties are in the certification process, there
probably will be discovery, motions, and
rulings that will be subject to appeal,
“depending on who wins.”
This defeats the process’s purposes, he
says, concluding, “What got to [the appeals
panel] is that it has been two-and-a-half
years.”
The opinion didn’t emphasize the
delay strongly, covering instead plenty of
legal points. In addition to the class and
review issues, the opinion rejected
•
•
•
the trial court ruling that the arbitrators exceeded their power because they
disregarded express provisions of the
arbitration agreement,
DirectTV’s argument that the arbitrators exceeded their power by relying
on cases that assert class arbitration is
procedural law, while the dealers’
agreement requires the application of
federal procedural law and California
substantive law,
DirectTV’s contention that the arbitrators ignored “relevant extrinsic
evidence,”
The appellate panel also asked for
supplemental briefing on severability. It
ultimately removed the invalid review
standard, upheld the arbitration agreement, and reinstated the award overturned by the trial court.
On the class issue, Cable Connection
already is at least partly an anachronism.
The dealers’ contracts are from the second
half of the 1990s. The U.S. Supreme Court
in Green Tree Financial Corp. v. Bazzle, 539
U.S. 444 (2003), gives arbitrators the
power to permit class consolidation in arbi-
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
tration in a contract that was silent on the
issue. At the same time, the case makes it
extremely likely that post-Bazzle contracts
will exclude provisions eliminating class or
collective actions, preventing this issue
from arising.
But, like with DirecTV’s dealer agreements, older “silent” contracts remain, and
more potential class situations could arise
that have to deal with the contract silence.
Moreover, the California panel also
invokes the recent state Supreme Court
decision in Discover Bank v. Superior
Court, 36 Cal.4th 148 (2005). The case
holds that “class actions and arbitrations
are, particularly in the consumer context,
often inextricably linked to the vindication of substantive rights.”
The appeals court, therefore, disagreed
that permitting classwide arbitration was
only a procedural decision. It notes that
holdings in two other class action cases
constitute substantive law, not, as
DirecTV contended, only procedural
rules. Blue Cross of Calif. v. Superior Court,
67 Cal.App.4th 42 (Cal. App. 2d Dist.
1998), and Keating v. Superior Court, 31
Cal.3d 584 (Cal. S. Ct. 1982), give “arbitrators discretion to order classwide arbitration even where the arbitration agreement is silent on that issue,” writes Associate Justice Willhite in Cable Connection,
“in divergence from the general rules of
contract interpretation that terms are not
to be inserted into contracts.”
Even dealers’ attorney Osborn is
unsure about the reach of the substantive
rights ruling. “I don’t know how many
courts will agree with that,” he says,
adding, “Fortunately, there are a number
of other grounds in the opinion that support the decision.”
***
Contract drafters also are at the center of
the judicial review controversy. Commercial
arbitration is governed by private contracts
that deal with arbitration’s subject and
scope. And from a drafter’s perspective—as
well as courts’—the contract covers the
scope of the arbitration award rulings.
That sets up a clash between the parties’ intent when they contract on the sub-
VOL. 24 NO. 10 NOVEMBER 2006
ALTERNATIVES 173
ADR BRIEF • ADR BRIEF • ADR BRIEF
ject of arbitrators’ powers, and statutes
such as California Code of Civil Procedure
sections 1286.2 and 1286.6, which establish grounds for arbitration judicial review
on, respectively, vacating and correcting
awards. The Moncharsh case points out
that “[a]n error of law is not one of the
grounds” for altering an award, according
to the Cable Connection appellate decision.
This leads to the source of the need to
reverse the trial court, according to the
Willhite opinion: The contract language
that the arbitrators “‘shall not have the
power to commit errors of law or legal reasoning,’ has no effect on the availability of
judicial review for errors of law.”
The opinion notes that the agreement couldn’t invoke “a court of competent jurisdiction” to correct errors. Wrote
Willhite, “we are in accord with the
appellate courts that have previously
considered the effect of similar language
and concluded that parties cannot contractually expand the jurisdiction of the
trial courts to permit review of arbitration awards for legal error.”
The panel’s additional federal court
analysis, looking to the Ninth U.S. Circuit
Court of Appeals for support, provides a
look into the depth of the difference of
opinion on the issue. Noting that the
Cable Connection agreement is governed
by the FAA, the state panel discusses a circuit split on whether parties can contract
for expanded judicial review of arbitration
awards under the FAA. It adopts the Ninth
Circuit holding that private powers have
no power to expand the FAA in Kyocera v.
Prudential-Bache, 341 F.3d 987 (9th Cir.
2003)(en banc).
Kyocera, like the state court Crowell
ruling, found that parties can’t expand the
court’s jurisdiction. But the panel notes
that while the Seventh and Tenth Circuits
have found similarly, four other circuit
courts ruled that the FAA doesn’t prevent
parties from agreeing to expanded judicial
review standards.
The divergence provides a classic theory argument for practitioners who claim
that their clauses merely remove arbitrators’ authority to do certain things, and do
not confer jurisdiction on courts.
The immediate issue for practitioners, says plaintiffs’ attorney Daniel
Osborn, is to take even greater care at the
drafting stage. “All states have restrictions and/or parameters on what is a permissible basis for challenging an arbitration provision,” he says. “If you allow
broad review, you are frustrating the
objective of arbitration.”
***
At press time, the California Supreme
Court already was considering a Moncharsh reviewability issue in another case.
On Oct. 5, the employers in Baize v.
Eastridge Cos., et al., No. B185823
(Cal.App.4th Aug 25, 2006), asked the
state Supreme Court to reconsider their
losing appellate court argument, which
says that an arbitrator incorrectly applied
California law.
A unanimous Second District, Division Three appeals panel opinion found
that while “the arbitration agreement
expressly limited the arbitrator to the
application of California law, it did not
expressly expand the scope of judicial
review. The parties in this case contracted
only for a binding arbitration in which the
arbitrator applied California law. This is
what they received. . . . There is no suggestion in the record that the arbitrator
purported to apply any law other than that
of California. It is simply claimed that he
did not do so correctly. . . . Therefore, the
rule of Moncharsh applies, and the arbitrator’s decision is not reviewable.”
The employers—related private companies that worked on public education
projects—lost an arbitration matter to a
former employee. The arbitrator found the
former employee was wrongfully terminated under his employment agreement,
and awarded him nearly $900,000 plus
interest and costs.
In its papers asking the Court to take
the case, the defendants state that the
appeals court flatly misses Moncharsh’s
point. They asked the Court to reassert
Moncharsh’s reviewability standard to
reemphasize parties’ contractual freedom
to determine their own processes.
The defendants’ petition brief argues
that, given the law on judicial review, the
Baize clause would be voidable and unenforceable under Moncharsh, but not
under Cable Connection and Crowell. It
asks the Court to clarify the situation,
noting that Cable Connection, Crowell,
and others interfere with parties’ freedom
to contract.
“Our position is that the law is well
settled,” counters the plaintiff ’s attorney,
Michael M. Hernandez, of the Law
Offices of Lyle F. Greenberg in Woodland
Hills, Calif. “All of the cases . . . cited say
it is not reviewable,” he says, claiming
that Cable Connection and Crowell support his client’s case. The Cable Connection panel cites Baize to support the point
that the arbitrators applied their law in
accordance with the arbitration agreement terms.
Hernandez contends that the Baize
plaintiff’s employment agreement arbitration provision is only a choice-of-law clause.
“It’s very frustrating,” says name partner Lyle Greenberg, noting that the
plaintiff was terminated in August 2003,
and the arbitration conducted in November 2004. “The plaintiff thought at the
very least he was contracting to an expeditious and less expensive process. It
turned out it was not expeditious and not
less expensive.”
At press time, Hernandez and Greenberg were preparing a response to the
Court petition and supporting brief.
Michael R. Palumbo, a partner in the
Phoenix office of Jennings, Strouss &
Salmon, who represents the employer and
worked on the petition, declined comment, citing the continuing litigation.
***
CPR Intern Ongmu Tshering originated CPR’s reporting on Cable
Connection in a Sept. 29 item on the
Recent News feature at www.
cpradr.org. This article, written by
Alternatives editor Russ Bleemer,
adapts some of the Cable Connection
facts from the Web site article.
DOI 10.1002/alt.20153
(For bulk reprints of this article,
please call (201) 748-8789.)
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
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