No appeal from order vacating partial arbitration award

One of the frustrations for parties forced to arbitrate their claims rather than pursue them in court is the unavailability of a direct route of appeal from the arbitration award. Generally, the only way to get out from under an adverse award is to petition the superior court to vacate the award (Code Civ. Proc., § 1285 et seq.), and then only on very limited grounds such as fraud, corruption, or misconduct by the arbitrator, generally unrelated to the substantive merits of the decision. If you’re on the other side — i.e., you were the prevailing party in the arbitration — you can take some comfort from the fact that if the loser in arbitration successfully gets the award vacated, you can appeal that order, unless it includes an order for a rehearing in arbitration. (Code Civ. Proc., § 1294, subd. (c).)

But that’s not always the case. In a decision late last year, Judge v. Nijjar Realty, Inc. (2014) 232 Cal.App.4th 619, the Court of Appeal held that when the arbitration award that is vacated fails to dispose of all arbitrable issues, the order vacating the partial award is not appealable. The appellant had procured a “clause construction award” that construed the arbitration clause to allow arbitration of class and representative claims but left the merits of those claims to later hearings. Respondent successfully petitioned the trial court to vacate the award, and the appeal followed.

After some interesting discussion about the degree to which the Federal Arbitration Act (9 U.S.C. § 1 et seq.) governs California arbitration procedure, the court finds that appealability of the order is governed by California state law rather then the FAA, and turns next to to the language in the California Arbitration Act. (Code Civ. Proc., § 1280 et seq.) Noting the plain language of Code of Civil Procedure section 1294, subdivision (c), that an aggrieved party may appeal from an “order vacating an award unless a rehearing in arbitration is ordered,” and further noting that no rehearing was ordered, the court notes that the issue presented  is “whether the trial court’s order in this case vacated an arbitration ‘award.’ ”

If that seems like a slam dunk, think again. The CAA provides that an “award” must “include a determination of all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy.” Since the order in this case concerned only clause construction and left other issues for future hearings, there was no appeal from the order vacating the “award.”

This closely parallels the requirement that a superior court judgment be “final,” resolving all issues among the parties, in order to be appealable. The court notes that the same policy reasons underscoring this “one final judgment” rule also support requiring a final arbitration award as a condition of appeal from an order vacating it. Without such a limitation, the court reasons, all manner of interim arbitration awards could result in appeal from orders vacating them, defeating arbitration’s intended role as “a quick and efficient form of alternative dispute resolution.” Moreover, says the court, it would be anomalous to allow appeal from orders vacating arbitration awards when no appeal would lie from their counterparts in a civil action.

The obvious question left unanswered by Judge is whether the superior court has jurisdiction to hear a petition to confirm or vacate an interim award in the first place. The court explicitly noted the issue was left hanging, since it had no occasion to decide it, but opined that a superior court’s jurisdiction in such a case is doubtful, and implicitly encouraged the appellant to file a motion fore reconsideration in the trial court upon remand. (232 Cal.App.4th at p. 634, fn. 12.) From what I can tell from the somewhat cryptic online docket for the superior court, it looks like the appellant did just that, and the motion is still under consideration as of this writing. Another trip to the Court of Appeal in the near future seems likely.

Supreme Court denies review in Burlage v. Superior Court

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The Supreme Court denied review today in Burlage v. Superior Court, leaving intact the decision that, by speculation of some (including yours truly), will increase the number of legal challenges to arbitration decisions. I won’t go so far as to say that it will “open the floodgates,” but it certainly opens an avenue to judicial review that many would not have tried before the decision was published.

Expect to see many challenges that assert, though not in so many words, that the legal error that occurred in their case is grounds for vacating an award if the error led the arbitrator to exclude evidence. The challenge for these litigants will be to squeeze the history of their arbitration proceedings into the confines of Burlage, and its interpretation of Code of Civil Procedure section 1286.2, subdivision (a)(5). There will be plenty of fights over what those confines are.

The section headed “Uncertainty and a Little History” at the outset of Justice Gilbert’s opinion in Burlage certainly seemed to tee the case up for Supreme Court review:

We look to legal precedent in deciding cases. We believe the law is predictable and provides litigants and counsel a reasonable degree of certainty. True, but not always.

In 1991, we wrote what we thought was a routine arbitration opinion. (Moncharsh v. Heily & Blase (Apr. 2, 1991, B048936) [nonpub. opn.].) We relied on decades of precedent in our unpublished decision to affirm the arbitration award because no error appeared on the face of the award. In dicta, we noted that had the error appeared on the face of the award and created substantial prejudice, we would have reversed.

To our surprise, our Supreme Court granted review. Our holding was affirmed, but our dicta “reversed.” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1.) Oh well, nobody’s perfect. Moncharsh held that judicial review of an arbitrator’s decision regarding questions of fact or law is extremely limited. Thus, even though an error of law appears on the face of an arbitration award and causes substantial injustice, it is not subject to judicial review in the absence of a limiting clause or as provided by statute. (Id. at p. 25.)

For the next decade, courts have wrestled with the question of when and under what circumstances judicial review of an arbitration award is proper.

Though we have no Supreme Court review this time, we’re about to witness another round of wrestling. As more and more courts consider the question, significant judicial discord may develop, and Justices Baxter and Corrigan — the two justices who were in favor of review — might sway their colleagues to grant review in a similar case.

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Arbitration challenges get a big boost — but maybe not for long

If you’re a litigation or appellate lawyer, you’ve probably already read about Burlage v. Superior Court, case no. B211431 (2d Dist. Oct. 20, 2009 [opinion after rehearing]), and you’re probably not surprised to learn that the petitioners filed their petition for review in the California Supreme Court yesterday. The case had petition for review written all over it: a contentious area of the law (arbitration), a split decision, amicus involvement, lots of attention in the legal community, and heavy-hitter appellate counsel (full disclosure: I know and have worked with one of the attorneys, Ventura appellate ace Wendy Lascher, who represents the Burlages).

Other bloggers have reported the case in detail (links later in this post), so before I get to the point of this post, I’ll just give a brief recap.

The Burlages prevailed in arbitration and were awarded damages. Respondent contended that her evidence regarding damages was improperly excluded, and moved to vacate the award based on Code of Civil Procedure section 1286.2, subdivision (a)(5), which requires a trial court to vacate an arbitration award if “[t]he rights of the party were substantially prejudiced by . . . the refusal of the arbitrators to hear evidence material to the controversy.” The trial court vacated the award.

Seems rather straightforward, until you consider why the arbitrator excluded the evidence: it was irrelevant to the measure of damages the arbitrator applied. Respondent contended the measure of damages was improper, and that the excluded evidence was relevant to the correct measure of damages (which would have yielded a much smaller award). In other words, respondent was essentially arguing that the arbitrator had applied the wrong law on damages.

The Burlages petitioned for a writ of mandate directing the trial court to vacate its order vacating the arbitration award, arguing that the motion to vacate actually sought vacation of the award on the basis of an error of law in violation of Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, in which the Supreme Court held that legal error on the face of an award “does not provide grounds for judicial review.” In a split decision, Division Six of the Second District Court of appeal rejects the Burlages’ argument.

Like the Burlages, some bloggers tended to view the respondents’ reliance on section 1286.2 as an end run around the rule that an arbitration award cannot be vacated because the arbitrator applies an inapplicable legal standard. (See., e.g., Forrester on Real Estate Law [arbitrations decisions may have “become more appealable”]; California Employment Law [claiming binding arbitration is “under attack”].) And dissenting justice Perren was not coy in his criticism of presiding justice Gilbert’s opinion, claiming that the majority’s decision “cuts the heart out of Moncharsh.”

What Burlage portends for appellate practice

Burlage will be a real boon to appellate attorneys if review is denied or if it is granted and the Supremes affirm. What Burlage arguably teaches is that you can get review of an otherwise unreviewable legal error by the arbitrator if you dress the legal error in an argument for the statutory ground of improperly excluded evidence.  Every appellate lawyer in California, yours truly included, is now more likely to give a friendly ear to prospective clients seeking  to vacate arbitration awards on the apparent ground of legal error.

The court’s faith in the arbitration process

Justice Gilbert’s majority opinion is even more entertaining than usual. But I saw some entertainment value someplace where he probably didn’t intend it. Take this (my emphasis):

We agree with the trial court’s acknowledgment that not every evidentiary ruling by an arbitrator “can or should be reviewed by a court.” We also agree with its comment, “[T]hat’s not the same as saying no evidentiary ruling can or should be reviewed by a court. . . . [I]t would have the effect of . . . deleting subsection 5 from the statute [section 1286.2, subdivision (a)(5)].” This answers the dissent’s concern that our opinion makes suspect every arbitration ruling excluding evidence. In our view, should the award be affirmed, arbitration itself would be suspect.

I think arbitration is plenty suspect already. Plenty of lawyers hate it precisely for its extremely limited judicial review. By broadening the scope of that review, Burlage is just likely to make arbitration’s fans view it with suspicion, too, as they lose confidence in whether it will be truly binding.

Business litigation attorney Bruce Nye finds Justice Gilbert downright naive. You can read why at CalBizLit.

UPDATE (1/6/10): Talk about night and day! Check out my post at The Ninth Circuit Blog of Appeals regarding a Ninth Circuit case decided earlier this week that I think demonstrates a far more conservative approach to judicial review of arbitration decisions (while not concerning quite the same point as Burlage, and in the context of a three-arbitrator panel rather than a single arbitrator.)

UPDATE (1/21/10): So much for my fortune-telling skills. The Supreme Court denied review today.

Federal Question Jurisdiction and the Federal Arbitration Act

Anyone who reads this blog regularly knows I am a jurisdiction geek, so a post about Federal Question Jurisdiction and the Federal Arbitration Act at Civil Procedure Prof Blog caught my eye. The post links to an article on the topic at Social Science Research Network (SSRN).

UPDATE (3/26/08):  Texas Appellate Law Blog has an interesting post up on the related issue of whether parties can contract for judicial review of arbitration decisions under the FAA.

ADR/Appellate Crossover

Thanks to Victoria Pynchon at Settle it Now Negotiation Blog for linking to two recent posts on this blog.  I’m announcing this in a post because the trackbacks from her posts are not showing up in the comments to my posts as they should, which may cheat her of traffic from people who might be interested in her mediator’s viewpoint on my recent posts (or who might be interested in a mediation blog generally). 

My recent comment that some justices at appellate oral argument are actively looking to have their minds changed made Victoria wonder how lessons from the appellate arena might benefit parties in mediation who need to change their opponent’s evaluation of the case.

My recent post about how a party that denies the existence of an agreement to arbitrate may not compel arbitration based solely on the plaintiff’s allegation of such an agreement also caught her eye.

Filed Under: ADR

Federal Judicial Review of Arbitration Decisions

I’m pretty sure that Judge Bea didn’t intend to give me a chuckle in the first paragraph of his opinion in Collins v. D. R. Horton, Inc., case no. 05-15737 (9th Cir. Sept. 24, 2007). But he did.

Appellants contend their motion [for summary judgment] should have been granted because the arbitrators manifestly disregarded the law when deciding not to apply offensive non-mutual collateral estoppel because judicial review of an arbitration award under the Federal Arbitration Act (“FAA”) is more limited than judicial review of a district court judgment. We hold the arbitrators did not manifestly disregard the law because no “well defined, explicit, and clearly applicable” law existed to be disregarded. [Citation.] Accordingly, we affirm.

(Footnote omitted.) At the very mention of the term “offensive non-mutual collateral estoppel,” I couldn’t help but think of the characters ordering coffee in rapid-fire succession in the movie L.A. Story:

Tom: I’ll have a decaf coffee.
Trudi: I’ll have a decaf espresso.
Morris Frost: I’ll have a double decaf cappuccino.
Ted: Give me decaffeinated coffee ice cream.
Harris: I’ll have a half double decaffeinated half-caf, with a twist of lemon.

Thus, I found it amusing that this tangle of words — “offensive non-mutual collateral estoppel” — would have no “well defined, explicit, and clearly applicable” in the context of this case. But maybe that’s just me.

On the merits, this decision is useful for its exposition on what constitutes an arbitrator’s “manifest disregard for the law” sufficient to justify vacating an arbitration award. For such “manifest disregard” to exist, mere error is insufficient; the arbitrator(s) must have understood and correctly stated the law but ignored it. A proper identification and statement of the law requires, in turn, that it be “well defined, explicit and clearly applicable.” Here, since there was no well-settled law on the issue of whether the arbitrator(s) were bound to apply collateral estopppel on the facts before it, they cannot be said to have ignored it.

Arbitration Agreement May Be Invoked by Non-Parties Sued as Alter Egos of a Party to the Agreement

A contract contains an arbitration provision.  Plaintiff sues you on the contract, even though you are not a party, on the ground that you are an alter ego of the corporation that is a party to the agreement.  Can you invoke the arbitration provision even though you are not a party to the contract?

Yes, says the Court of Appeal in Rowe v. Exline, case no.A116463 (1st Dist. July 31, 2007).  After all, reasons the court, the whole theory behind alter ego liability is that the corporation and the alter ego are one in the same.  Since the corporate party is entitled to the benefit of the provision, so must be the alter ego.  The court also finds that the plaintiff is equitably estopped by his assertion of alter ego liability to deny that the defendants are entitled to the benefits of the provision.

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Go Ahead, Challenge that Arbitration Provision!

The arbitration provision of yet another giant is struck down.  See this How Appealing post for relevant links and a summary of a Washington Supreme Court decision voiding Cingular’s arbitration provision in its subscriber agreement. 

After recent decisions in the Ninth Circuit and California’s First District Court of Appeal voiding arbitration provisions, which I blogged about here, I suspect there may be a few lawyers scattered around the West pulling late nights poring over their clients’ arbitration provisions . . . and perhaps a few plaintiffs’ lawyers tearing up their arbitration demands and drafting complaints.

American Express Waives Arbitration through Settlement Misrepresentations

Remember that case in contracts class about whether promising to do something you were already going to do constituted consideration for a promise?

The lawyers for American Express in the First District Court of Appeal case of Aviation Data, Inc. v. American Express Travel Related Services Co., Inc., case no. A111602 (July 6, 2007) apparently didn’t remember that day in contracts class.  So they promised during class action settlement negotiations to implement a computer program in exchange for a release of claims . . . even though AmEx had already been using the program for two years.  Then, as part of proceedings for court approval of the settlement, AmEx made a sworn statement to the court that AmEx was implementing the program as a result of the settlement.

The settlement fell apart after these misrepresentations came to light.  American Express moved to compel arbitration, the trial court said, “No,” and the Court of Appeal affirms. 

Evaluating AmEx’s arbitration provisions with its individual customers under the Federal Arbitration Act, the court finds that the public policy favoring settlement (which generally precludes settlement efforts from being deemed a waiver of arbitration) loses against other policy considerations:

But competing here against the public policy favoring settlement is the equally important value that settlement—and most certainly one that may affect thousands, perhaps millions of absent class members—should not be achieved through deceit upon the court and parties. Public policy concerns support the rule that parties must indeed be free to attempt to settle their disputes without losing their arbitration right if settlement fails. We perceive, however, no policy justification to extend this principle to encompass attempts to secure judicial imprimatur and finality on settlements obtained through misleading or deceptive tactics. We will not take such a remarkable step.

But the court does not rely on the misconduct alone.  Instead, it evaluates prejudice to the plaintiffs, and finds plenty of it.

An Arbitrator with Chutzpah

It takes some cheek for an arbitrator to reform a collective bargaining memorandum of understanding (“MOU”) between a state agency and  an employee bargaining unit when the MOU has already been approved by the legislature pursuant to the Dills Act.  And its reversible error, of course.

In Dept. of Personnel Administration v. Calif. Correctional Peace Officers Assn., case no. C051636 (June 29, 2007), the Third District Court of Appeal affirms the trial court’s order vacating the arbitration award.  Such employment agreements must be submitted to and approved by the legislature.  By reforming the agreement to conform to her findings regarding the parties’ intent, thus changing the provisions approved by the legislature, the arbitrator exceeded her powers by violating the Dills Act “and the important public policy of legislative oversight of employee contracts.”

Waiving Issues in Arbitration

Keep a close watch on those arbitration arguments, especially as they relate to the scope of the arbitrator’s power as defined by the arbitration agreement.  That’s the lesson of J.C. Gury Co. v. Nippon Carbide Industries (USA) Inc., case no. B194926 (June 29, 2007), in which the Second District Court of Appeal holds that Nippon waived the contractual limitation on the power of the arbitrator by its conduct during the arbitration, and thus may not petition to vacate the award on the ground the arbitrator exceeded his powers.

The agreement stated that the arbitrator “shall not have the power to change, alter or modify” any term of the parties’ agreement.  Nonetheless, J.C. Gury Co. argued in arbitration that Nippon’s warranty limitation and consequential damages exclusion were unconscionable and thus unenforceable.  Nippon addressed these arguments on the merits, and there were two days of relevant testimony.  The Court readily finds the arbitrator exceeded his power by declaring the provisions unenforceable, but affirms the judicial confirmation of the award because Nippon, by addressing the unconscionability argument on the merits without ever objecting to the lack of the arbitrator’s power to declare a provision unconscionable, waived the issue of the arbitrator’s power.

Arbitration is different from trial in a lot of ways.  But the possibility of inadvertently waiving grounds for review isn’t one of them.

Great Lawyers Can Write Unenforceable Arbitration Agreements

I’m beginning to wonder if writing the perfect arbitration provision is something like understanding the rule against perpetuities. You all remember that case from torts class, don’t you? The court holds that an attorney can’t be liable for malpractice related to the rule against perpetuities because no one understands the rule against perpetuities. Hence, the attorney could not have violated the standard of care.

A little over a month ago, the Ninth Circuit ruled in Davis v. O’Melveny & Myers, case no. 04-56039 (9th Cir. May 14, 2007) that the arbitration provision in the employment contract of a prominent, powerful L.A.-based law firm was unenforceable. Not just unenforceable, but “shock the conscience” unenforceable. The case was blogged about at Workplace Prof Blog, the Adjunct Law Prof Blog, and Settle it Now Negotiation Blog, among many others.

Just as you’re asking yourself, “If a high-powered law firm can’t draft an enforceable arbitration provision for its own contracts, then who can?” comes Gatton v. T-Mobile USA, Inc., case no. A112082 (June 22, 2007), in which the arbitration provision in T-Mobile’s customer agreement gets similar treatment in California state court. The First District Court of Appeal holds that T-Mobile’s arbitration provision in its customer agreements is unenforceable because of the minimal degree of procedural unconscionability arising from its adhesive nature and the “high degree of unconscionability arising from the class action waiver.”

I’m going to go out on a limb and say that T-Mobile probably had pretty good lawyers draft its agreement, and that the lawyers who drafted the provision for O’Melveny were no slouches, either. Who will fall next?