Big appellate cases just keep on coming down. Here's one on arbitration, a topic affecting parties and litigators of all types.
The California Court of Appeal in Weiler v. Marcus & Millichap Real Estate Investment Services, Inc., 2018 WL 2011048 (Cal. Ct. App. 4th Dist. no. G053953 (Apr. 30, 2018)) (slip opinion linked here), just held that a party may not be forced to stay in arbitration when the party cannot afford the arbitration fees. At that point, so long as the inability to pay for the arbitration is in good faith (e.g., not a result of bad-faith intent to avoid arbitration), the other party must either pay for the arbitration or allow the matter to proceed in Superior Court.
TLDR version? Here's the key excerpt:
In sum, we hold . . . when a party who has engaged in arbitration in good faith is unable to afford to continue in such a forum, that party may seek relief from the superior court. If sufficient evidence is presented on these issues, and the court concludes the party’s financial status is not a result of the party’s intentional attempt to avoid arbitration, the court may issue an order specifying: (1) the arbitration shall continue so long as the other party to the arbitration agrees to pay, or the arbitrator orders it to pay, all fees and costs of the arbitration; and (2) if neither of those occur, the arbitration shall be deemed “had” and the case may proceed in the superior court.
Slip op. at 12.
Here's the writeup.
In Weiler, the plaintiff and her husband are an elderly couple that claim they were convinced by the defendants to invest in commercial real estate in Texas. They allegedly lost more than $2 million on the property.
The plaintiff sued the defendants for breach of fiduciary duty, elder abuse, and other claims, alleging that the defendants misrepresented the financial health of the business tenant on the property (who operated a Red Robin restaurant), among other things.
The defendants moved to compel arbitration before the American Arbitration Association under the relevant contracts between the parties, and the plaintiff did not oppose. In arbitration, the defendants insisted that the matter be heard by a panel of three AAA arbitrators under the AAA rules given the $2.8 million amount in controversy. A AAA arbitrator ordered the matter to be heard by a three-arbitrator panel at an hourly rate of $1,450. Slip op. at 4.
Nearly three years after being ordered into arbitration, the plaintiff asserted that she was unable to afford her fifty-percent share of the arbitration fees; her share had already exceeded $15,000, and she estimated that her the arbitration fees would exceed $100,000 to complete the arbitration. She argued that under Roldan v. Callahan & Blaine, 219 Cal. App. 4th 87 (2013), she requested that the arbitrators order the defendants to either pay for the entire arbitration fees or have the matter tried in the Superior Court instead. The arbitration panel concluded that it did not have jurisdiction to grant this relief and ordered the plaintiff to seek relief in the Superior Court. Slip op. at 4.
So the plaintiff filed a declaratory-relief action in Orange County Superior Court and ended up before Judge James L. Crandall.
The defendants moved for summary judgment, characterizing the plaintiff's claim as an unconscionability argument, and claimed that an unconscionability analysis is conducted only as of the time the contract was executed and not later. The plaintiff opposed, arguing that under Roldan it was her current financial condition that should be examined to determine whether the defendants should be ordered to either pay for the arbitration or allow the matter to be tried in Superior Court. Slip op. at 5.
The trial court entered summary judgment for the defendants, believing that the plaintiff was making an unconscionability argument, and ruling that such an argument must only consider the plaintiff's financial condition at the time the contract was executed (and way back when the initial contracts were executed, the plaintiff was wealthy). Slip op. at 5.
The Court of Appeal reversed. The appellate court relied on Roldan, which held that a party cannot be forced to remain in arbitration when the party can't pay for it because doing so would effectively result in depriving the plaintiff of any forum to resolve its claims against the defendant. See slip op. at 8, citing Roldan, 219 Cal. App. 4th at 94, 96. But since a court does not have the authority to order arbitrators to waive their fees, if a trial court concludes that a plaintiff cannot pay for the arbitration, then the defendant should be given the choice of either paying for the entire arbitration fee to remain in arbitration or waive its right to arbitrate and allow the matter to proceed in Superior Court. "Giving this choice to the defendant ensured the plaintiffs would have an affordable forum for resolving their claims without stripping the defendant of the ability to stay out of court if it so desired." Id. citing Roldan, 219 Cal. App. 4th at 96.
Turning to the facts before it, the appellate court noted that the plaintiff's situation was similar to that in Roldan, and "[t]the very reason plaintiff filed the underlying court action against defendants is because their alleged wrongful acts led her and her husband to lose a significant amount of money. And, in the many years of pursuing her case in arbitration, it appears defendants’ tactical decisions have further contributed to plaintiff’s ostensible financial ruin. In other words, defendants appear to have effectively hindered plaintiff’s continued performance under the arbitration provisions." Id. at 9. The appellate court was pointing to the defendants' insistence on the three-arbitrator panel as a form of hindering the plaintiff's performance of the arbitration agreement and further causing the plaintiff to be unable to pay for the arbitration: "Basic contract law dictates that 'hindrance of the other party’s performance operates to excuse that party’s nonperformance.'” Id., quoting Erich v. Granoff, 109 Cal. App. 3d 920, 930 (1980).
The appellate court also reasoned that public policy could not allow a defendant accused of wrongdoing "to avoid potential liability by forcing the matter to arbitration and subsequently making it so expensive that the plaintiff eventually has no choice but to give up." See id. at 9.
To hold otherwise would be to turn “‘“and justice for all’”” into “‘“and justice for those who can afford it’”” and “‘threaten the very underpinnings of our social contract.’” (Alan S. v. Superior Court (2009) 172 Cal.App.4th 238, 263, fn. 25.) The interest in avoiding such an outcome far outweighs the interest, however strong, in respecting parties’ agreements to arbitrate. (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 90 [preference for arbitration not served by “agreement that effectively blocks every forum for the redress of disputes, including arbitration itself”].)
Id. at 9.
What about the Federal Arbitration Act? The Court of Appeal cited to the Ninth Circuit opinion of Tillman v. Tillman, 825 F.3d 1069 (9th Cir. 2016), for the proposition that the FAA's requirement that a trial court must stay an action "until such arbitration has been had" is satisfied when an arbitration is terminated because a party cannot pay for it. See id. at 10-11, 10 n. 2. Once an arbitration is terminated due to nonpayment of fees, it has "been had," and a trial court may then lift the stay of the court proceedings. See id. at 11, citing Tillman, 825 F.3d at 1074, 1076. And if an arbitration is terminated/"been had" before the merits are reached, then the only way to adjudicate the matter on the merits is to allow the claims to be pursued in the trial court. Id. at 11, citing Tillman, 825 F.3d at 1076.
The Court of Appeal also made clear that this not an unconscionability analysis. See id. at 11-12. The plaintiff made this clear at the trial court, stating: “[Plaintiff] is not trying to claim that the arbitration clause was unconscionable when signed nor is she seeking to deprive [defendants] of their right to arbitration. Plaintiff is fine with either forum so long as she can proceed in one of them.” Id. at 12. The trial court erred in applying an unconscionability analysis. Id.
So when a party engaged in arbitration in good faith cannot afford to continue in arbitration, that party may seek relief from court. If there is sufficient evidence for it, and the court concludes that the inability to pay is not a result of an intentional effort to avoid arbitration, the court may order that either the arbitration proponent pay the continuing arbitration fees or else the arbitration has been deemed "had" and the case may proceed in court:
In sum, we hold, as we did in Roldan, when a party who has engaged in arbitration in good faith is unable to afford to continue in such a forum, that party may seek relief from the superior court. If sufficient evidence is presented on these issues, and the court concludes the party’s financial status is not a result of the party’s intentional attempt to avoid arbitration, the court may issue an order specifying: (1) the arbitration shall continue so long as the other party to the arbitration agrees to pay, or the arbitrator orders it to pay, all fees and costs of the arbitration; and (2) if neither of those occur, the arbitration shall be deemed “had” and the case may proceed in the superior court.
As our Supreme Court has explained, “[b]oth California and federal law treat the substitution of arbitration for litigation as the mere replacement of one dispute resolution forum for another, resulting in no inherent disadvantage.” (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1152.) With the rising costs of arbitration (see Toyo Tire Holdings Of Americas Inc. v. Continental Tire North America, Inc. (9th Cir. 2010) 609 F.3d 975, 980-981), our decision today ensures those compelled to arbitrate will not, as a result, be inherently disadvantaged.
Slip op. at 12-13 (footnote omitted).
Judgment reversed with directions for the trial court to deny the defendants' motion for summary judgment.
Unanimous opinion authored by Justice Thompson and joined by Justices Bedsworth and Moore.
This is an interesting opinion because, although it essentially just applies Roldan and Tillman, there has been a lot of appellate weight upholding arbitration in so many contexts over the last five years that this is something quite against the trend.
But an interesting note. The principle in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013) ("Italian Colors"), seems to be that it doesn't matter if the contractual waiver of the right to bring a class action results in an action being economically infeasible under the FAA, the contract is the contract. And, in that case, if it means that the plaintiff would have to spend possibly over $1 million in expert fees and costs just to prove up that anti-trust case, yet the maximum recovery is $38,000, too bad. The plaintiff may still have the ability to do it, but it's just not economically something it may want to do.
But within the text of Italian Colors is key language distinguishing the right to pursue a remedy, even if it is economically infeasible (which the majority held was the case there) from arbitration fees that would make it effectively impossible to proceed in arbitration rather than just not worth it economically:
“[S]o long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.” Id., at 637, 105 S.Ct. 3346. Subsequent cases have similarly asserted the existence of an “effective vindication” exception . . . [citations] but have similarly declined to apply it to invalidate the arbitration agreement at issue. [footnote]
And we do so again here. As we have described, the exception finds its origin in the desire to prevent “prospective waiver of a party's right to pursue statutory remedies,” Mitsubishi Motors, supra, at 637, n. 19, 105 S.Ct. 3346 (emphasis added). That would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable. See Green Tree Financial Corp.–Ala. v. Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) (“It may well be that the existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights”).
Italian Colors, 570 U.S. 228, 235-36 (bold italics added).
As noted in Tillman, "[n]othing in the FAA requires dismissal of the litigation" when a party cannot afford to pay the continuing arbitration fees and the arbitration is terminated. See Tillman, 825 F.3d at 1075. Instead, "[t]he FAA provides that district courts must stay pending proceedings on issues subject to arbitration until such arbitration has been had, 9 U.S.C. § 3; compel arbitration in the event of a party's “failure, neglect, or refusal” to arbitrate, 9 U.S.C. § 4; and enforce a valid award resulting from an arbitration, 9 U.S.C. §§ 9–11." Id. But where there is no basis to continue a stay of the court proceeding and where there is no arbitration award to enforce, nothing in the FAA prohibits the matter from proceeding in court. See id. Dismissing the case is error, because there is no statutory directive to do so and because "[d]istrict courts have an obligation and a duty to decide cases properly before them, absent a firm basis for declining to do so." Id. (citation and internal quotation marks omitted).