Updates on Alternative Dispute Resolution

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Leslie A. Fales

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John S. Warnlof

The following discusses recent legislative changes and court decisions impacting Alternative Dispute Resolution.

Ethical Standards for Neutral Arbitrators in Contractual Arbitration

All persons serving as arbitrators under an arbitration agreement are required to comply with ethics standards adopted by the Judicial Council.[1] The standards, which appear as an appendix to the California Rules of Court, require, inter alia, that arbitrators make certain disclosures. Effective July 1, 2014, a new disclosure requirement has been added to Standard 7. Arbitrators must now disclose the following: (1) whether they were disbarred or had their license to practice a profession or occupation revoked by a professional or occupational disciplinary agency or licensing board, (2) whether they resigned their membership in the State Bar or another professional or occupational licensing agency or board, while public or private disciplinary charges were pending, and (3) whether in the preceding 10 years, other public discipline was imposed on them by a professional or occupational disciplinary agency or licensing board.[2]

Mediation Confidentiality

Evidence Code §1119 provides, in part, that written and oral communications prepared for or made during mediation are inadmissible in any subsequent proceeding. In Cassel v. Superior Court,[3] the California Supreme Court held that communications between a client and his or her attorney during mediation are inadmissible in actions for malpractice or breach of fiduciary duty. In direct response to Cassel, AB 2025, introduced February 23, 2013, sought to create a statutory exception to mediation confidentiality, making such communications admissible in such actions. The issue was referred to the California Law Revision Commission to analyze “the relationship under current law between mediation confidentiality and attorney malpractice and other misconduct …”[4] At recent meetings in Los Angeles and Davis, the Commission received substantial public comment and is now in the early stages of working toward a tentative recommendation. Once the recommendation is drafted, public comment will be invited. If the Commission determines that changes in the mediation confidentiality statute are desirable, then an assembly member will be sought to carry the proposed legislation. It is unlikely that a recommendation would be forthcoming before late 2014 or early 2015.[5]

Significant Cases

Sonic-Calabasas Inc. v. Moreno, 57 Cal. 4th 1109 [163 Cal. Rpt. 3d 269] (2013)

On February 24, 2011, the California Supreme Court issued its opinion in Sonic I holding that an employee’s waiver of the right to a Berman hearing (Calif. Labor Code Sec. 98, et seq.) was invalid and contrary to public policy and principles of unconscionability.[6] Two months later, the U.S. Supreme Court decided AT&T Mobility, LLC v. Concepcion,[7] holding that the Federal Arbitration Act preempts state court decisions holding that arbitration agreements with class action waivers are against public policy and unconscionable.[8] On November 3, 2013, the U.S. Supreme Court granted Sonic’s request for certiorari, vacated the Sonic I judgment, and remanded the case to the California Supreme Court for further consideration in light of Concepcion.

Guided by the holding in Concepcion, the California Supreme Court held in Sonic II that the FAA preempts California state law that categorically prohibits the waiver of a Berman hearing in a pre-dispute arbitration agreement imposed on an employee as a condition of employment. However, the California Supreme Court also held that California courts may continue to enforce unconscionability rules that do not interfere with the fundamental attributes of arbitration. Accordingly, arbitration provisions containing class action or Berman hearing waivers will be examined on a case-by-case basis. If the court finds that the arbitration provision limits an employee’s accessibility to a remedy, is not affordable, speedy or effective, the court is free to find common law unconscionability based upon a determination that the arbitration agreement is unreasonably oppressive or one-sided.

Chavarria v. Ralphs Grocery Company, 733 F. 3d. 916 (9th Cir. 2013)

Applying California decisions concerning unconscionability, the 9th Circuit found that the arbitration provision in the employment contract between deli clerk Zenia Chavarria and Ralph’s Grocery Company was unenforceable. The arbitration provision provided that neither the AAA nor JAMS were permitted to administer any arbitration. The arbitration provision further provided that the arbitrator, upon commencement of the arbitration, would apportion all costs and fees and, in so doing, must disregard any potential state law regarding cost-shifting. The arbitrator would also be limited to applying only decisions of the U.S Supreme Court that directly addressed cost allocation.

In finding the provision unenforceable, the 9th Circuit favorably quoted the District Court, stating:

The court identified this provision as a model of how employers can draft fee provisions to price almost any employee out of the dispute resolution process. ‘The combination of these terms created a policy’ according to the court, that ‘lacks any semblance of fairness and eviscerates the right to seek civil redress . . . To condone such a policy would be a disservice to the legitimate practice of arbitration and a stain on the credibility of our justice system.’[9]

Strong language, indeed. The 9th Circuit concluded its decision by stating Ralph’s had “tilted” the process so far in its favor that “both in the circumstances of entering the agreement and its substantive terms, that it ‘shocks the conscience.’”[10]

Ferguson, et al, v. Corinthian Colleges, Inc., et al. [733 F. 3d. 928] (9th Cir. 2013)

The issue before the court in Ferguson concerned the validity of the Broughton-Cruz Rule. Former students at for-profit schools owned by Corinthian brought a putative class action alleging that Corinthian engaged in a deceptive scheme to entice enrollment of prospective students in violation of California law. The students included a claim for “public injunctive relief.” The District Court granted Corinthian’s motion to compel arbitration, in part, but denied the motion as to plaintiffs’ claim for public injunctive relief. This denial was based upon California Supreme Court decisions establishing the so-called Broughton-Cruz Rule that exempts claims for “public injunction” from arbitration.

In Broughton v. Cigna Healthplans of California and Cruz v. Pacificare Health Systems Inc.,[11] the California Supreme Court found that requests for public injunctive relief under the Unfair Competition law, the False Advertising law, and the Consumer Legal Remedies Act, were not subject to arbitration.However, in 2011, the U.S. Supreme Court decided the previously mentioned case, AT&T Mobility, LLC v. Concepcion.[12] There, the Supreme Court held, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straight forward: the conflicting rule was displaced by the [Federal Arbitration Act].” The decision concludes with the statement “the FAA preempts California’s Broughton-Cruz Rule that claims for injunctive relief cannot be arbitrated.”

The 9th Circuit relied on Concepcion in their decision, finding that the FAA displaced the Broughton-Cruz Rule and reversed and the District Court’s decision as to the arbitrability of the public injunction.

Peng v. First Republic Bank, 219 Cal. App. 4th 1462 [162 Cal. Rptr. 3d 545] (2013)

In Peng, the Appellate Court addressed two recurring questions. First, what happens when an agreement that contains an arbitration provision does not have the applicable arbitration rules attached to it? Second, does an employer’s unilateral authority to modify or terminate the terms of an agreement make such an agreement illusory? Plaintiff Peng entered into an employment agreement with defendant First Republic that provided, in relevant part, “all claims, except those for workers’ compensation benefits or employers insurance, would be resolved by final and binding arbitration in accordance with the rules of the American Arbitration Association, or such alternate dispute resolution service as agreed upon by the parties.” First Republic did not provide Peng with a copy of the arbitration rules, or specifically identify them to her.

Peng later filed a complaint against First Republic for gender and race discrimination and other claims. First Republic moved to compel arbitration based on the arbitration provision. The trial court denied the motion finding that the agreement was per se procedurally unconscionable because it did not include a set of arbitration rules with the agreement. The trial court further found that the agreement was substantively unconscionable based on First Republic’s unilateral ability to modify or terminate the agreement.

The Appellate Court reversed, finding that “The failure to attach the AAA Rules, standing alone, is insufficient grounds to support a finding of procedural unconscionability.”[13] With regard to First Republic’s ability to modify the agreement, the court determined that “where the contract specifies performance, the fact that one party reserves the power to vary it is not fatal if the exercise of the power is subject to prescribed or implied limitations, such as the duty to exercise it in good faith and in accordance with fair dealings.”[14] Therefore, because First Republic had not modified the arbitration agreement, the provision was not deemed unconscionable.[15]

Mt. Holyoke Homes, LP, et al. v. Jeffer Mangels Butler and Mitchell, LLP, 219 Cal. App. 4th 1299 [Cal. Rptr. 3d. 567] (2013)

This case involved an arbitration regarding a former client’s claims for legal malpractice and a law firm’s claim for unpaid fees. There, the arbitrator disclosed that counsel for the law firm had represented a party in a mediation before the arbitrator within the past five years but that the arbitrator was not aware of any relationship with any party or attorney involved in the matter that would impair his ability to act fairly or impartially. The arbitrator denied the client’s malpractice claim, awarded the law firm $18,000 in unpaid legal fees and $435,000 in fees and costs incurred in connection with the arbitration.

The adverse arbitration award prompted the client to search the Internet for evidence of arbitrator bias. The client discovered, for the first time, a previously undisclosed resume in which the arbitrator listed a named partner in the law firm as a reference. The Court of Appeal reversed the trial court’s confirmation of the award as a judgment, finding that the arbitrator’s failure to disclose the relationship with the named partner was fatal to upholding the award. The court explained:

An objective observer reasonably could conclude that the arbitrator listing a prominent litigator as a reference on his resume would be reluctant to rule against the law firm in which that attorney is a partner as a defendant in the legal malpractice action.  To entertain a doubt as to whether the arbitrator’s interest in maintaining the attorney’s high opinion of him could color his judgment in the circumstances is reasonable, it is by no means hypersensitive, and requires no reliance on speculation.  We believe that an objective observer aware of the facts could reasonably entertain such doubt.[16]

The law firm sought review by the California Supreme Court on the issue of whether parties to arbitration were chargeable with information about an arbitrator that is reasonably available on the Internet. The law firm’s request for review was denied with Justice Kennard of the opinion that review should be granted.

Failure to disclose continues to be an attractive basis to seek to vacate an arbitration award. However, if a party or its attorney is aware of a matter that should be disclosed and fails to bring the matter to the attention of the arbitrator or the arbitration provider, such party or its attorney may be estopped from asserting such matter following an unfavorable arbitration award.

In summary, FAA preemption under Concepcion continues to meet resistance in California courts and a failure to disclose remains a viable ground for a party to seek to vacate an adverse award.


John S. Warnlof is an attorney and ADR neutral with offices in San Ramon, California. His practice emphasizes construction, real property, and commercial litigation and business counseling to corporations, partnerships, and individuals. He can be reached at: jwarnlof@aol.com.

Leslie A. Fales is an associate at the Law Offices of John S. Warnlof. Her practice focuses on business, real estate, construction defect, and common interest development litigation. She can be reached at: fales.leslie@gmail.com.

Cite checking by Rebecca Harris, a law student at JFK University School of Law.


[1] Code of Civil Procedure §1281.85.

[2] This new disclosure requirement is in response to the 2010 California Supreme Court decision in Haworth v. Superior Court, 50 Cal. 4th  372 (2010).

[3] Cassel v. Superior Court, 51 Cal. 4th 113 [119 Cal. Rptr. 3d. 437] (2011).

[4] 2012 Cal. Stat. Res. Ch. 108.

[5] Conversation with CLRC Representative Barbara Gaal, January 8, 2014.

[6] See Sonic-Calabasas Inc. v. Moreno, 51 Cal. 4th 659 (2011) (Sonic I).

[7] 563 U.S. [131 S. Ct. 1790] (2011).

[8] See Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

[9] Id at. 923.

[10] Id at 926.

[11] Broughton v. Cigna Healthplans of California, 988 P. 2d. (1999) and Cruz v. Pacificare Health Systems Inc. 66 P. 3d 1173 (2003).

[12] AT&T Mobility, LLC v. Concepcion, 563 U.S. ___ [131 S. Ct. 1790] (2011).

[13] Id at 1472.

[14] Id at 1474.

[15] Compare Wisdom v. Accentcare, Inc. 202 Cal.App.4th 591 [136 Cal. Rptr.3d 188]. (Held that arbitration provision in employment contract was procedurally unconscionable in light of the fact that arbitration rules were not attached to the contract itself, as well as substantively unconscionable on the grounds that only the employee alone was required to submit disputes to arbitration.)

[16] Id at 1313.

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