Ninth Circuit Issues Arbitration Vacatur Decision

Following hot on the heels of Countrywide Financial Corp. v. Bundy, which reversed an order vacating an arbitration award and which we blogged here, comes Johnson v. Gruma Corp., --- F.3d ----, 2010 WL 3194622 (9th Cir., August 13, 2010), in which the Ninth Circuit affirms a District Court decision refusing to vacate an arbitration award. The Court's description of the case is interesting:

Appellant Arnold Rosenfeld is one of two plaintiff representatives in a class action against Gruma. The plaintiff class members are drivers (“distributors”) who deliver products to Gruma's customers. Each distributor signed a “Store Door Distributor Agreement” with Gruma. The agreement states that the distributors are independent contractors.

Dennis Johnson filed a class action in California Superior Court against Gruma in 2001. The action alleged that Gruma “misrepresent[ed] to Claimants and Class Members that Claimants and Class Members were and/or are independent contractors when they were and/or are, in fact, employees.” The complaint included claims of breach of contract, labor code violations including failure to pay agreed wages and overtime pay and failure to provide meal and rest breaks, and unfair business practices. Gruma removed the suit to federal district court. Upon Gruma's motion, the district court ordered the claims submitted to binding arbitration.

The case was assigned to arbitrator Richard Neal, a retired justice of the California Court of Appeal. On August 5, 2002, the arbitrator held that the California Arbitration Act governed the proceedings. The arbitrator then stayed the arbitration to allow a judicial determination whether the arbitration agreement permitted class-wide arbitration. The district court prohibited arbitration of class-wide claims and dismissed the complaint with prejudice. We vacated and remanded to the district court in light of the Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003). See Johnson v. Gruma Corp., 123 Fed. App'x 786, 788 (9th Cir.2005). On remand, the district court returned the case to arbitration.

In March 2007, the arbitrator certified a nationwide class action, designating Johnson and Rosenfeld as class representatives. After a hearing in April 2007, the arbitrator reconsidered the certification and limited the class to Gruma distributors in California. Attorney Paul Grossman argued Gruma's case for reconsideration at the April 2007 hearing. On August 12, 2008, the arbitrator found for Gruma, concluding that the distributors “properly are classified as independent contractors” rather than employees. The district court confirmed the arbitration award.

Slip op. at 1.

As in Countrywide v. Bundy, the Court began by determining whether to apply the California Arbitration Act (CAA) or the Federal Arbitration Act (FAA) rules for vacating arbitration awards. The CAA provides that a court reviewing an arbitration award shall vacate the award if the court determines:

1. The award was procured by corruption, fraud or other undue means.
2. There was corruption in any of the arbitrators.
3. The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator.
4. The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.
5. The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.
6. An arbitrator making the award either: (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision....

The FAA, in contrast, provides that a district court may vacate an arbitration award:

1. Where the award was procured by corruption, fraud, or undue means;
2. Where there was evident partiality or corruption in the arbitrators ...;
3. Where the arbitrators were guilty of ... misbehavior by which the rights of any party have been prejudiced; or
4. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

The Court held that the CAA applied:

In this case, however, the arbitration clause is more than a general choice-of-law provision. It requires arbitration to be “conducted and subject to enforcement pursuant to the provisions of California Code of Civil Procedure sections 1280 through 1295, or other applicable law.” The arbitrator read the arbitration clause to mean that the parties intended to be governed by the CAA's rules. We agree. The clause exhibits the parties' “clear intent” that the CAA's procedures shall govern.

Slip op. at 3. Despite this, the Court held that the appellant failed to show that the district court erred in confirming the arbitration award. "First, the arbitrator did not violate California disclosure rules. Second, the arbitrator did not exceed his powers." Slip op. at 4.

The Court described the conflict issue as follows:

In March 2007, five years into the arbitration, Paul Grossman, a partner at Paul Hastings, Janofsky & Walker (“Paul Hastings”), became one of Gruma's counsel. The arbitrator's wife, Barbara A. Reeves Neal, had been a partner at Paul Hastings from 1997-1999. Grossman and Reeves were listed together as co-counsel for at least one case litigated by Paul Hastings. The arbitrator did not disclose to the parties his wife's prior relationship with Grossman.

Slip op. at 6. The Court held that this did not create an impermissible conflict of interest. As an aside, the Court noted:

We note that Rosenfeld's attorney was well aware of the relationship between the arbitrator's wife and Grossman long before he raised the issue. He informed us at oral argument that he learned of the relationship at least “a year or two” before the arbitrator decided the dispute. Rosenfeld's failure to raise the issue until after the arbitrator ruled suggests two things: First, it suggests that Rosenfeld did not himself believe that the relationship rose to a level that required disclosure under any of the applicable standards. Second, it suggests that Rosenfeld may have been sand-bagging, holding his objection in reserve in the event that he did not prevail in the arbitration. Even if disclosure had been required, we would hold that Rosenfeld waived any objection by not raising it in a timely fashion.

Slip op. at 6.

The Court made short work of the appellant's remaining contention that the arbitrator exceeded his powers. "Rosenfeld disagrees with the arbitrator's interpretation of California law, but he has not demonstrated that the arbitrator exceeded his powers."