The Supremes Open Small Window to Arbitration Appeals
The very purpose of contractual arbitration is to avoid the courts. Therefore, the courts have long held that there is no right of appeal from an arbitrator's award; any decision is final and binding. The only exceptions are where the arbitrator clearly exceeds his authority or had a conflict of interest. In the recent decision of Cable Connections, Inc. v. DirecTV, Inc., the California Supreme Court applied a contract interpretation that recognizes one more basis for appeal from an arbitrator's award. The courts have refused to honor appeal rights in arbitration agreements that call for the right of appeal on the merits of the case.
In Cable Connections, the agreement between the parties provided for binding arbitration, but contained the unusual language that "the arbitrators shall not have the power to commit errors of law or legal reasoning, and the award my be vacated or corrected on appeal to a court of competent jurisdiction for any such error." Thus, the agreement does not permit a review on the merits, but does allow for an appeal to question the arbitrator's interpretation of the law.
The Supreme Court had no problem with that approach, and even went so far as to state that the language of the arbitration agreement would not need to be as clear as the one before it to confer such a right of appeal on the law.
You may be asking yourself, why would anyone want to proceed in this manner? After all, if the point of arbitration is to avoid court, why build in a right of appeal? The answer is that binding arbitration without the right of appeal can be very scary, and some want to plot a middle course.
In one case my client agreed to submit a case we were pursing in court to non-binding arbitration. We went before the arbitrator, and after the matter was concluded and the parties were leaving, the arbitrator asked the defendant if my client had ever made certain disclosures. The defendant lied and denied that she had received such disclosures. I objected to this impromptu questioning and asked the arbitrator to resume the arbitration so that my client could testify on the point he had raised. The arbitrator responded that would not be necessary, because defendant had never raised the disclosure issue, and therefore his decision would have nothing to do with what defendant had just said.
A few weeks later we received the arbitrator's decision, wherein he found for defendant based entirely on the alleged lack of disclosure. Since this was non-binding, I simply rejected the award and proceeded to trial, where we handily prevailed. This case showed me, however, how arbitrary an arbitrator's award can be, and why binding arbitration can be risky.
Large companies have also learned this lesson, and reason that if they throw in an opening for appeal, it is more likely to inure to the company's benefit than the other side's. Even if it means the occasional appeal, at least the issues will be limited to the law. A major motivation for large companies in selecting arbitration is to keep cases away emotional juries, and that is accomplished even with an appeal provision.
Update on Enforceability of Mandatory Arbitration Clauses in the Context of Employment Law
While arbitration successfully reduced lengthy litigation and enabled employers to avoid unpredictable juries, in recent years the doctrine of unconscionability has placed potential limitations on the enforceability of arbitration agreements. Forcing an employee to sign an arbitration agreement may render it procedurally unconscionable. Employers have responded by allowing the employee to “opt out” of the agreement. While the 9th Circuit Court of appeals has repeatedly upheld arbitration agreements as long as the employee had a meaningful opportunity to “opt out,” a recent California Supreme Court ruling has confused this issue by refusing to enforce an arbitration agreement despite the employee’s ability to “opt out.” Gentry v. Superior Court, 42 al. 4th 443 (2007).
The Gentry Court also blurred the distinction between procedural and substantive unconscionability. Pursuant to Gentry, an employer should provide the employee with the choice to accept or reject the arbitration agreement without overt or subtle pressure and, if the employee accepts the agreement, require the employee to affirmatively “opt in” (i.e. to sign it). Further, because Gentry blurs the line between procedural and substantive unconscionability, the employer must be sure to remove all unfair provisions or the court may not enforce the arbitration agreement at all, $even if the employee has opted in.
A recent California Court of Appeal decision held an arbitration agreement unconscionable, despite a provision providing the arbitrator the exclusive authority to determine enforceability of the arbitration agreement. Ontiveros v. DHL Express (USA) Inc., C.A. 1st/2 No. A114848, June 30, 2008. A t the time employee Gina Ontiveros was hired by Airbourne Express, she was provided with a binder of employment materials which included an arbitration agreement. She was advised she needed to sign it in order to start her new position, but was not provided any real time to review the documents she was provided or signed. The arbitration agreement provided that it covered all claims between the parties and that she gave her right to a jury trial.
Airbourne Express was subsequently acquired by DHL Express Inc., and Ontiveros remained an employee of DHL Express. Ontiveros filed a complaint for sexual harassment in 2005. DHL filed a motion to compel arbitration, but the trial court denied it holding that the arbitration agreement was unenforceable because, inter alia, the clause providing that the arbitrator must decide disputes relating to applicability, enforceability or formation of the agreement is not sufficient to require the Court to compel arbitration if the contract is unconscionable. The Trial Court found that it is required, as a threshold issue, to determine whether the arbitration contract is unconscionable, despite any provision requiring arbitration of issues relating to enforceability. The Trial Court then held that the agreement was unconscionable because the employee did not even know she had signed an arbitration agreement until after she filed suit and, further, the agreement was an adhesion contract in that the employee did not have the opportunity to review it or negotiate it.
The California Court of Appeals affirmed, stating that the reasoning and holding of the court, in Bruni v. Dideon, 160 Cal. App. 4th 1272 (2008) and Murphy v. Check ‘n Go of California, Inc., 156 Cal. App. 4th 138 (2007), supports the Trial Court’s conclusion that it had the authority to determine the unconscionability issues raised by the employee. The Court of Appeal also affirmed the trial court’s ruling that the arbitration agreement was unconscionable. Ontiveros v. DHL Express (USA) Inc., C.A. 1st/2 No. A114848, June 30, 2008.
Proposed Legislation re Enforceability of Mandatory Arbitration Clauses
Proposed legislation aims to curb mandatory arbitration clauses in contracts. In mid July, 2008, the House of Representatives’ Judiciary Subcommittee on Commercial and Administrative Law approved three arbitration-related bills, including the Arbitration Fairness Act which, if passed, would ban pre-dispute arbitration clauses outright. The other two bills would ban mandatory arbitration agreements in contracts involving automobile sales and nursing homes. The Senate Judiciary Committee is considering its own legislation concerning nursing home arbitration.
Enforceability of Choice of Law Provisions
A recent California Appeals case held that a out-of-state choice of law provision is not enforceable where California has a greater interest in the parties’ transaction. Since the California loans were made to California consumers, secured with collateral located in California, provided cash that was likely spent in the California, and deprived California competitors of the opportunity to make those loans, the Appeals court held that California had a greater interest in the parties’ transaction and, thus, the Nevada choice of law provision was unenforceable.
Omni Loan Company is a Nevada corporation, with its principal place of business also located in Nevada; it is in the business of providing consumer loans to members of the military. Omni opened loan offices in Oceanside and San Diego, California. Joshua Brack was a nonresident member of the military stationed at Camp Pendleton. Brack applied for a loan with Omni, and his loan agreement included the Nevada choice of law provision. Brack filed a class action suit against Omni, alleging that Omni’s practices violated the borrower’s rights under the California Finance Lenders Law. The trial court held that Nevada had a substantial relationship to the loan contracts because Omni incorporated in Nevada and the loans were approved in Nevada, entering judgment in favor of Omni. The California Appeals Court reversed. While California Courts will generally enforce a contractual choice of law if he state whose law was has an interest in the parties’ controversy, if California’s interests are materially greater than the interests of the state whose law was contractually chosen by the parties, California State law applies. Here, the Appeals Court found the Nevada choice of law provision unenforceable because the application of Nevada law conflicts with the fundamental policy set forth in the Finance Lenders Law and California has a greater interest in the parties’ transaction. Brack v. Omni Loan Company, CA Court of Appeal - 4th District, No. D049198, July 16, 2008.
