"Lessons of Litigation: Any Case Can Be Settled"
San Francisco Daily Journal
by Jill Redhage, June 13, 2008
Read Article about Paul D. Gutierrez >>

"I think it's better for people to work things out, to be rational and to try to resolve things," he said. "I think any case can be settled."

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WHEN IS AN ARBITRATION "AGREEMENT"
NOT AN "AGREEMENT" TO ARBITRATE?
By Paul D. Gutierrez

Although alternative dispute resolution is favored in California, there are instances when ostensible agreements to arbitrate claims will not be enforced. In two very recent published decisions, California courts interpreted documents, which recited that the signatories to them agree to submit any disputes to arbitration, as not actually creating enforceable agreements to arbitrate. In interpreting one case, the court held that one signatory to such an agreement could avoid being compelled to arbitrate. In the other, the court held that, even when one party concedes that it is a party to an arbitration agreement, the other party could not compel that party to arbitrate.

Parties who wish to pursue their claims through arbitration must be mindful of the factual circumstances of the two cases discussed in this article to help evaluate whether a nuance of their own arbitration provisions or legal positions could result in an unenforceable arbitration provision. Persons drafting of agreements to arbitrate should consider what happened in these cases to avoid potential voiding of the enforceability of arbitration clauses.

In one case, decided on April 1, 2008, Metters v. Ralphs Grocery Company, et al., an employee had complaints of harassment and racial discrimination against his employer, Ralphs Grocery. On an evaluation form for the employee's annual review, a standard question asked him if he had any complaints or incidents of harassment, discrimination or retaliation to report. He answered "yes" to that inquiry and later was sent a form letter enclosing a Notice of Dispute & Request for Resolution form ("dispute form") along with portions of the company's anti-discrimination, anti-harassment and anti-retaliation policy. The employee was requested to provide detailed information about his complaints and what his desired resolution was.

The employee ultimately submitted the dispute form setting out his complaints based on his race, color and national origin. However, unnoticed by the employee, the dispute form contained a provision on the bottom half of the second page entitled: Mediation & Binding Arbitration. This section recited that if the employee and the employer agreed, a one day mediation would be the first attempt to resolve the dispute. Failing that, the dispute form stated that the company's policy: requires the resolution of matters described in the dispute form exclusively by mandatory final and binding arbitration.

At the end of the dispute form was the statement that the employee, in submitting the dispute form, affirmed that he had read and understood the company's policy on dispute resolution and understood that, as to his disputes with his employer, the employee "must resolve them only through voluntary mediation and/or mandatory final and binding arbitration." In addition, the employee acknowledged that he had not "been required to complete, sign or return this form to make a complaint."

In the ensuing court case, the employee claimed that he signed and submitted the form because he believed he had to do so to get the company to investigate his complaints. The employee stated that he was unaware that he had signed an agreement to arbitrate and that he never agreed to arbitrate his claims. The company, seeking to compel arbitration of employees' complaints, pointed to the signed agreement to arbitrate and the acknowledgements attributed to the employee in it.

The court, however, was unimpressed with the method used by Ralphs to obtain the employee's signature on a document agreeing to mandatory arbitration. The trial court ruled that Ralphs' conduct appeared to be a "backdoor" effort to get an arbitration agreement. It observed that the dispute form was ambiguous, nebulous and implied that it had to be signed to have the employee's complaints investigated. This did not constitute a "meeting of the minds" -- an essential requirement of contract law.

This case, the court concluded, bore little difference from the case where an agreement to arbitrate is buried in small print on the reverse side of a receipt form. So the court observed that the employee could not be bound by "inconspicuous contractual provisions of which he was unaware contained in a document whose contractual nature is not obvious". Regardless of the language on the document signed by the employee, he did not agree to mandatory arbitration and could not be compelled to arbitrate his claims. The arbitration "agreement" was not an "agreement" to arbitrate.

What about the case where a party to a contract knowingly acknowledges that the contract contains an arbitration provision, but files a lawsuit for breach of the contract anyway? The defendant challenges the existence of the contract, but nevertheless seeks to compel arbitration pursuant to the contract that the plaintiff is suing on. This is what the court in Brodke, et al. v. Alphatec Spine, Inc. et al. was confronted with, also in April of this year.

The plaintiffs had entered into contracts with Alphatec to develop a medical product in exchange for Alphatec paying them a royalty on the net sales of the product. Alphatec, however, terminated the contracts, filed patent applications for the product the plaintiffs had created and began selling the product without paying the plaintiffs a royalty. Each contract contained an express arbitration provision, outlining how binding arbitration would proceed to resolve any contractual dispute. The plaintiffs even attached a copy of the contract to their complaint.

Alphatec petitioned to compel arbitration because the alleged agreements which the plaintiffs sought to enforce contained arbitration provisions. In California, in order to compel arbitration pursuant to a contractual arbitration provision, the petitioner must affirmatively allege the existence of an agreement to arbitrate between the parties. While at first glance Alphatec may have appeared to satisfy this requirement, the court said: "Not so fast".

Alphatec was actually disputing the enforceability of the contracts themselves, and was asserting, as a defense to the plaintiffs' lawsuit, that Alphatec "contested the existence or validity of any written agreements with the plaintiffs". Because the plaintiffs admitted and alleged in their complaint the existence of the agreements, even attaching a copy of one of them to their pleading, the trial court had granted Alphatec's petition to compel arbitration. The court of appeal took a look at the propriety of that ruling.

First, the court of appeal noted that to compel arbitration pursuant to an arbitration provision, the petitioner must, at the very outset, affirmatively allege the existence of a written agreement between the parties to arbitrate a controversy. This meant that a petition to compel arbitration was actually an action to specifically enforce the arbitration contract. If Alphatec failed to allege that it was a party to a contract to arbitrate with the plaintiffs, it could not compel an agreement to arbitrate in that contract, even if the other party is seeking at the same time to enforce the same contract.

Alphatec was in a real "Catch-22": it was in no position to compel arbitration of the plaintiffs' claims if, at the same time, Alphatec was denying the very existence or validity of that same contract. A party petitioning to enforce an arbitration clause cannot simultaneously deny the existence of the very contract sought to be enforced. If Alphatec alleged the existence of the contract to arbitrate, however, it could waive its asserted defenses to the plaintiff's lawsuit that there was no enforceable contract. Consequently, the court said that the petition to compel arbitration should not have even gotten to square one because Alphatec did not have the ability to compel arbitration of the plaintiffs' contract claims. In this case too, the arbitration "agreement" was not an "agreement" to arbitrate.

Circumstances may arise when a contract which provides for the arbitration of disputes will not be enforced even if it is signed by the parties. Such contractual arbitration provisions, although seemingly clear in the language used, may not provide the rights expressed because of situations arising from the form of the agreement itself, such as in the Metters case, or from facts that arise after a dispute has arisen, as in the Alphatec case. It may not be possible for contract drafters to anticipate every unique situation that might appear concerning arbitration clauses, but lessons can be learned from these two situations.